UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the Year Ended December 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number 0-28252
BROADVISION, INC.
(Exact name of registrant as specified in its charter)
Delaware 94-3184303
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
585 Broadway, Redwood City, California 94063
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(Address of principal executive offices) (Zip Code)
(650) 261-5100
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Registrant's telephone number, including area code
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange which registered
------------------- --------------------------------------
None None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.0001 par value
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(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [ X ] No [ ]
Indicate by check mark if the disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
Based on the closing sales price of March 12, 1999 the aggregate market value of
the voting stock held by nonaffiliates of the registrant was $1,148,094,481.
As of March 26, 1999, registrant had outstanding 25,065,304 shares of Common
Stock.
DOCUMENTS INCORPORATED BY REFERENCE
Parts of the Proxy Statement for Registrant's 1998 Annual Meeting of
Stockholders to be held May 5, 1999 are incorporated by reference in Part III of
this Form 10-K Report.
BROADVISION, INC.
ANNUAL REPORT ON FORM 10-K
YEAR ENDED DECEMBER 31, 1998
TABLE OF CONTENTS
Page No.
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Part I
Item 1. Business ........................................................................................................ 3
Item 2. Properties ...................................................................................................... 22
Item 3. Legal Proceedings ............................................................................................... 23
Item 4. Submission of Matters to a Vote of Security Holders ............................................................. 23
Part II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters ........................................... 23
Item 6. Selected Consolidated Financial Data ............................................................................ 24
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations ........................... 25
Item 7a. Quantitative and Qualitative Disclosure About Market Risk ...................................................... 45
Item 8. Financial Statements and Supplementary Data ..................................................................... 45
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure ............................ 61
Part III
Item 10. Directors and Executive Officers of the Registrant ............................................................. 61
Item 11. Executive Compensation ......................................................................................... 61
Item 12. Security Ownership of Certain Beneficial Owners and Management ................................................. 61
Item 13. Certain Relationships and Related Transactions ................................................................. 61
Part IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K ............................................... 61
SIGNATURES .............................................................................................................. 62
2
PART I.
ITEM 1. BUSINESS
The following discussion of the Company's business contains forward-looking
statements that involve risks and uncertainties. The Company's actual results
could differ materially from those anticipated in these forward-looking
statements as a result of certain factors, including, but not limited to, those
set forth under "Risk Factors" and elsewhere in this Form 10-K.
Overview and Background.................................................3
The BroadVision Solution................................................6
BroadVision Business Strategies.........................................6
Focus on extending relationship management............................6
Enhance targeted application solutions................................7
Expand and leverage key business alliances............................7
Maintain technological leadership.....................................8
Grow international presence...........................................8
BroadVision Products....................................................8
BroadVision One-To-One Enterprise.....................................9
BroadVision One-To-One Commerce......................................10
BroadVision One-To-One Financial.....................................10
BroadVision One-To-One Knowledge.....................................10
Key capabilities of the BroadVision total end-to-end solution........11
BroadVision One-To-One Tools.........................................11
Other products.......................................................12
BroadVision Professional Services......................................13
Strategic services...................................................13
Interactive services.................................................13
Content and creative services........................................13
Education services...................................................13
Technical support....................................................13
Customers and Markets..................................................13
Sales and marketing..................................................15
Strategic alliances..................................................15
Competition............................................................16
BroadVision Technology.................................................16
Product Development ...................................................18
Intellectual Property and Other Proprietary Rights ....................19
Employees..............................................................20
Executive officers and key personnel.................................21
Overview and Background
BroadVision(TM) develops, markets and supports application software solutions
for one-to-one relationship management for the extended enterprise. These
solutions enable businesses to use the Internet as a platform to conduct
commerce, offer online financial services, provide self-service, and deliver
targeted information to their customers, suppliers, distributors, employees, and
other constituents of their extended enterprises. The BroadVision One-To-One(TM)
product family allows businesses to tailor World Wide Web (the "Web") site
content to the needs and interests of individual users by personalizing each
visit on a real-time basis. BroadVision One-To-One applications achieve this
result by interactively capturing Web site visitor profile information,
organizing the enterprise's content, targeting that content to each visitor
based on easily constructed business rules, and executing transactions. The
Company believes the benefits of these applications include enhanced customer
satisfaction and loyalty, increased business volume, reduced costs to service
customers and execute transactions, and enhanced employee productivity.
3
Trends in One-to-One Relationship Management
To prevail in the intensely competitive global marketplace, business managers
must continually devise new strategies to market, sell, distribute, and support
their products and services. From the 1950s to the 1980s, leading businesses in
North America, Europe, and Asia advanced the sciences of mass production, mass
communication, and mass distribution to establish world markets for their
products and services. During the 1980s, these mass marketers began using new
technologies and analytical techniques to better segment and define targeted
markets in order to reach customer groups most likely to buy their products.
These new approaches helped marketers respond to increasing competition and
customer demands for improved quality, service, and product choice. The trend
toward greater specialization has continued to increase as many marketers have
used targeted marketing tools and new delivery media, such as direct mail and
telemarketing, to reach more precisely targeted market segments.
In the latter half of the 1990s, many marketing executives in both
business-to-consumer and business-to-business industries have turned their
attention to the ultimate target market segment: the market of one. One-to-one
relationship management involves a systematic, interactive approach to
developing and managing a detailed knowledge base that integrates individual
customers' product and business requirements, personal preferences, and purchase
histories with traditional demographic statistics. This information provides the
foundation for businesses to serve customers in the form of individually
tailored products, services, information, incentives, and transactions. By
focusing on individual customers and one-to-one relationship management,
business managers can develop more productive relationships with their customers
that maximize customer satisfaction, develop customer loyalty, and contain the
high costs associated with new customer acquisition.
One-to-One Relationship Management on the Internet
With the emergence of the Internet as a globally accessible, interactive, and
individually addressable communications and computing platform, businesses have
the opportunity to implement one-to-one relationship management on a mass basis.
The proliferation of inexpensive, easy-to-use Web browsers and affordable
Internet access services has made the Internet easy to navigate, accessible to
millions of homes and businesses, and readily adaptable to a broad range of
business, education, commerce, entertainment, and marketing applications.
Technologies such as Java from Sun Microsystems, Inc. ("Sun") are facilitating
the delivery of content over the Internet and accelerating adoption of the
Internet as a mainstream business and personal computing platform. In addition,
businesses are utilizing the Internet to create internal enterprise networking
environments called "intranets" or "extranets." These networks are enabling
businesses to create Internet applications that provide new ways of interacting
with employees, partners, and customers.
As Internet use has grown, industry experts have described the Internet as
the ideal platform for deploying applications that enable companies to develop
individual one-to-one relationships across their entire enterprise. Whether an
Internet application is designed primarily for delivering knowledge, conducting
commerce, or customer self-service, it offers businesses an opportunity to
extend front office services in a personalized and cost effective way to all
constituents in their extended enterprise. By recognizing the
relationship-building potential of the Internet--in particular, the ability to
interactively capture visitor profile information, observations, and feedback
and to dynamically target useful information to visitors based on this
data--business managers can utilize advanced Internet technologies to engage in
personalized dialogs with millions of customers on a one-to-one basis.
The Business Challenge on the Internet
While the Internet is increasingly becoming a global platform for providing
and accessing information, there remain significant challenges to doing business
on the Internet. The Internet is characterized by fluid and dynamic content,
where information is continually being updated and enhanced. Visitors perceive
the value of Web sites to be directly correlated to the frequency of content
updates and the dynamic behavior of the site. Creating the best Web sites
generally requires sophisticated creative and technical expertise. Although the
market has been flooded with numerous inexpensive tools for building and
updating Web sites, many of the companies producing and using these tools have
failed to take full advantage of the Internet's dynamic one-to-one relationship
potential.
4
Many Web sites today simply present text and graphics electronically in a
static format, much like a product brochure. There has recently been a dramatic
shift away from companies simply building these "brochure-ware" sites to
companies making a significant investment in building mission-critical Internet
applications. These Internet applications have the interactive capability to
capture visitor profiles, conduct personalized interactions, enable secure
transactions, remember information from one visit to the next, enable business
managers to manage the site on a real-time basis, and integrate into existing
business systems. Providing these additional capabilities is a valuable next
step for companies that plan to maximize the potential of the Internet for
relationship management across their extended enterprise.
However, most of the Web sites that have moved beyond brochure-ware to
provide electronic commerce, online financial services or knowledge management
applications still have failed to capitalize fully on the Internet's potential
for building one-to-one relationships. Sites that do support commerce often fail
to satisfy customer expectations, providing commercial experiences that are less
enjoyable and cost-effective than traditional alternatives. Most lack any form
of real-time personalization and cannot dynamically target information based on
a visitors' preferences and past histories. Others lack integration with
mainstream business systems for supporting visitors interactively or exchanging
information with corporate databases. While some of these sites use advanced
applications to support online order and payment transactions, many still
require buyers to place orders by telephone, defeating a basic objective of
online businesses.
The Technology Gap on the Internet
Web sites are generally cumbersome for business managers to operate. Business
rules and content, such as product and pricing data, financial policies,
promotions, and advertising campaigns, are often "hard-coded" into programs and
virtually impossible for non-technical managers to change dynamically. Most
applications are not scaleable and require ongoing tuning and re-engineering to
keep up with visitor growth and changes in Internet technology. Development is
often slow and defects are common due to the limitations of most productivity
tools. Generally, with currently available application servers, business
managers do not have the capability to react to market conditions with real-time
control and management of Web sites, but instead are often constrained by slow
"change request" processes that take technical specialists days or even weeks to
implement.
In part, the limited capabilities of these static Web sites are a result of
the inadequacies of the technologies used to develop Internet applications. Many
Web developers still rely on general purpose publishing tools, such as HTML
(Hypertext Mark-up Language) editors, to develop Web pages and the links between
them. Many of today's Web development tool kits that assist in Web site
development do not offer capabilities for generating personalized, dynamic Web
pages or for easily maintaining site content and page generation logic. These
tools were not designed to be used in the development of sophisticated
applications offering enterprise-scale implementations of business processes,
such as product marketing, sales, or customer support. Using low-level tool kits
and commerce and merchant servers to develop and maintain sophisticated Internet
applications, such as those for managing customer relationships, managing a high
volume of online transactions and defining dynamic business rules, is a highly
complex process requiring a breadth of expertise that is often beyond the
capabilities of in-house information technology organizations. In addition, the
cost, time, and effort of building and maintaining Internet applications in this
manner is often beyond the funding capacity of internal application development
budgets.
Application Systems for One-to-One Relationship Management
The recent trends toward one-to-one relationship management and the rapid
adoption of the Internet as a technology platform for conducting business have
fueled the need for sophisticated packaged application software that enables
companies to quickly create applications that build personalized, long-term
relationships with customers, partners, and employees. Early adopter companies
have built successful online relationship management applications, and these
online businesses are creating pressures for their competitors to come to market
quickly with online business sites. To build these sites, the Company believes
that more of these businesses are turning toward the purchase of packaged
enterprise Internet applications. These packaged applications provide an
attractive alternative to in-house or third-party custom application
development, enabling companies to get to market more quickly with a solution
that is more readily extensible and maintainable as the business evolves.
5
To realize the potential of one-to-one relationship management, Internet
applications must support the following activities:
* Attract, retain and service visitors from the casual to the sophisticated by
providing dynamic content, interactive dialogs, and communities of interest
in a friendly, easy to use Web site environment;
* Offer a consistent end-user experience across multiple customer touch
points such as interactive voice response systems and call centers;
* Develop and maintain visitor profiles, observe and remember interactions,
and engage in ongoing personalized dialogs while empowering individuals to
control the privacy of their personal data;
* Provide non-technical business managers with the ability to define and
modify the Internet application's business rules and content in real time;
* Dynamically target personalized content, products, and incentives to
correspond to profile data in order to motivate visitors to interact and
conduct transactions;
* Fulfill financial and information transactions with secure electronic
commerce processes; and
* Integrate and interact with back office systems to fully utilize a
company's data and information resources.
The BroadVision Solution
BroadVision offers a family of packaged applications for automating
relationship management throughout the extended enterprise. The BroadVision
One-To-One product family enables companies to capitalize on the Internet,
intranets and extranets for selling, marketing, and supporting all of their
business constituents: employees, customers, suppliers, distributors, and
others. The Company develops, markets, and supports the BroadVision One-To-One
family of Internet applications specifically designed for relationship
management as well as a variety of associated software tools to customize and
maintain these applications. The Company's applications are specifically
designed to allow non-technical business managers to build lasting one-to-one
customer relationships by tailoring content to the needs and interests of
individual visitors by personalizing each experience on a real-time basis.
The Company's customers use BroadVision solutions to deploy Internet
applications that engage visitors and encourage return visits through
personalized real-time interactions. These applications also allow the Company's
customer to capture marketing information from volunteered data and observed
behavior, and generate revenues from electronic commerce. The Company believes
that these capabilities are especially critical for business managers and
Internet application developers in order for them to take full advantage of the
Internet as an emerging marketplace for building long-term customer
relationships and conducting cost effective business transactions.
BroadVision Business Strategies
The Company's objective is to establish one-to-one real-time relationship
management as a standard for Web sites worldwide. Consistent with that
objective, the Company has adopted the following strategies.
Focus on Extending Relationship Management by Providing Packaged Application
Solutions
The Company is focusing exclusively on developing packaged application
solutions for electronic businesses ("e-businesses") that are developing
mission-critical Web sites as profitable business channels for managing
relationships and transactions with their customers, partners, employees, and
other constituents. The Company believes that the next major phase of Internet
growth will be driven by complete packaged application solutions that allow
businesses to capitalize more fully on the Internet as a business venue for
interacting with the constituents of their extended enterprise. Businesses will
implement these packaged applications in order to speed time to market, rely on
a vendor rather than an internal development organization to maintain and update
the technology underlying the business application, and reduce total cost and
risk of application deployment.
6
Enhance Targeted Application Solutions
The Company will continue to leverage its BroadVision One-To-One Enterprise
relationship management system to enhance its Web application products and
services focused on specific horizontal and/or vertical markets. Utilizing its
expanding libraries of reusable application objects and templates and working
closely with customers and strategic partners, the Company believes it can
deliver a targeted application solution for one-to-one relationship management
faster, of a higher quality, and at a lower cost than its competitors. The
Company has delivered targeted application solutions for business-to-consumer
and business-to-business commerce, for retail financial services and for
knowledge management. The Company intends to remain nimble and flexible in
developing other applications products in the general area of relationship
management, in response to market opportunities that may arise.
Expand and Leverage Alliances with Key Business Partners
To accelerate the acceptance of the BroadVision One-To-One products and to
promote the adoption of the Web as a commercial marketplace, the Company has
developed cooperative alliances with leading Internet technology vendors,
systems integrators, and Web site developers. The Company believes that these
alliances will provide additional marketing and sales channels for the Company's
products, enable the Company to more rapidly incorporate additional functions
and platforms into the BroadVision One-To-One products, and facilitate the
successful deployment of customer applications.
The approach of leveraging the Company's business alliances is intended to
increase the number of personnel available to perform application design and
development services for the Company's customers; enhance the Company's market
credibility, increase the potential for lead generation and access to large
customer accounts; and provide additional marketing expertise in certain
vertical industry segments while providing technical expertise in the
development of reusable objects and templates.
To date, the Company has signed business alliances with over 90 systems
integration, design, consulting, and other services organizations worldwide,
which has expanded the Company's sales and support infrastructure and post-sales
implementation capabilities while broadening market awareness for the Company.
Alliances to date include American Management Systems, Andersen Consulting LLP,
Cambridge Technology Partners, Computer Sciences Corporation, Context
Integration, Concept 5, Daimler-Benz Information Systems AG (Debis), Dimension
AB, Ernst & Young LLP, Gran Via Internet, NTT Data Corporation, Metamor
Worldwide, Sema Group plc, Siemens Business Services Gmbh and Co., and others.
The Company also places a strategic emphasis on developing technology
alliances in order to ensure that the Company's products are based on industry
standards and the Company is positioned to take advantage of current and
emerging technologies. The benefits of this approach include enabling the
Company to focus on its core competencies while reducing time to market and
simplifying the task of designing and developing applications by both the
Company and its customers.
Some of the Company's strategic technology alliances to date have included
alliances with Hewlett-Packard and Sun Microsystems, providers of enterprise
server hardware and systems software; IONA Technologies, Inc. ("IONA"), a
provider of a CORBA-compliant development platform; Oracle, Sybase, and
Informix, providers of standard RDBMSs; RSA, a provider of encryption
technology; Security First Technologies ("S1"), a provider of integrated, secure
Internet financial applications; and VeriFone, Inc. and CyberCash, Inc.,
providers of payment systems.
Specific strategic alliances of the Company include ventures with Macromedia
to jointly develop the next version of its BroadVision One-To-One Design Center
product; Hewlett-Packard to embed Web Quality of Service technologies into
BroadVision products; Cisco Systems to create a unique Cisco-BroadVision
One-To-One reference architecture, configuration guide, and performance and
scaleability benchmarks; S1 to develop and market joint products based on
Virtual Financial Manager ("VFM"), S1's suite of Internet-based financial
services applications; and Sema Group to jointly develop and market BroadVision
One-To-One applications for the telecommunications sector.
7
The Company's will continue to place an emphasis on establishing additional
such alliances as new technologies and standards emerge, although no assurance
can be given that the Company will be successful in establishing or maintaining
such alliances.
Maintain Technological Leadership
The Company believes that it offers the most complete solution available
today for extended relationship management for e-businesses. The Company intends
to maintain this leadership position by continuing to enhance its technology
through heavy investment in research and development activities, incorporating
industry-leading components into its products, and employing its own technology
and human resources as a source of ongoing technological advantage.
Having employed the Common Object Request Broker Architecture ("CORBA")
standard as a cornerstone of its product architecture, the Company has
integrated other CORBA-compatible technologies, such as the JavaScript and Java
development languages, into its products.
Utilizing in-house expertise and experiences with customers, the Company
intends to maintain its leadership position in providing a scaleable,
innovative, and open architecture.
Grow International Presence
To capitalize on the emergence of the Internet as a global network, the
Company has established worldwide distribution capabilities with direct or
distributor sales personnel in 43 cities in 34 countries.
Direct sales operations are found in Amsterdam, Basel, Hong Kong, London,
Munich, Paris, Singapore and Tokyo. The Company distributes its products through
licensed distributors, value-added resellers, and systems integrators in those
countries and in Argentina, Belgium, Brazil, China, France, Finland, Germany,
Japan, Korea, Kuwait, Mexico, South Africa, Spain, Sweden, Switzerland, Taiwan,
Turkey and the United Kingdom.
The Company intends to continue to certify providers of professional services
for BroadVision products in these and other countries. The Company's partners
include multinational systems integrators, as well as partners with a
single-country scope of operations.
The Company's product architecture is designed to support international
languages, and the Company is currently shipping versions of its BroadVision
One-To-One Enterprise relationship management system that support the display of
content in Arabic, traditional Chinese, Hebrew, Japanese, Korean, Slovakian, and
Turkish as well as all Western European languages.
The Company's strategies involves substantial risk. There can be no assurance
that the Company will be successful in implementing its strategies or that its
strategies, even if implemented, will lead to successful achievement of the
Company's objectives. If the Company is unable to implement its strategies
effectively, the Company's business, financial condition, and operating results
may be materially adversely affected.
BroadVision Products
The Company develops, markets and supports a family of extended relationship
management applications products and associated software tools for use in
customizing and maintaining solutions built with these applications.
BroadVision offers four applications products - BroadVision One-To-One
Enterprise, One-To-One Commerce, One-To-One Financial, and One-To-One Knowledge
that provide a spectrum of complementary capabilities offering numerous business
functions and supporting the needs of companies in different industries.
8
BroadVision One-To-One Enterprise is the Company's base product, providing the
technology platform on top of which the vertical-market One-To-One applications
are built. This flexible relationship management system contains cross-industry
functionality such as profile and content management; adapters to third-party
systems; and matching technologies and algorithms. It utilizes an open,
scaleable application architecture for Web session management, secure user
authentication and authorization, dynamic and personalized page generation, and
transaction handling.
BroadVision One-To-One Enterprise provides the following capabilities
designed to meet the needs of companies delivering personalized relationship
management on their Web sites:
Profiling - BroadVision One-To-One Enterprise stores and maintains
dynamic profiles of Web site visitors. Profile data can be collected
from information in existing customer information files, from
information provided explicitly by site visitors, and by observation of
visitors' behavior on the site. Visitors' session information is saved
in a transaction log and can be used to update and enrich the visitors'
profiles. Profile information is stored in any of several widely used
third-party relational databases.
Content Management - BroadVision One-To-One Enterprise delivers dynamic
content to the user in response to their interests and needs. Content
items available for display to visitors comprise one of six types:
templates (Web page designs and layouts), products, editorials,
advertisements, incentives, and discussion groups. Each of these
content types has a rich set of attributes that describe its properties
and key features. This content is managed within BroadVision One-To-One
Enterprise with tools to create, classify, organize, and publish the
content.
Highly Personalized Interactions - BroadVision One-To-One Enterprise
provides tools for business managers to create and manage "if-then"
rules and taxonomy-based matching schemes that determine which content
to deliver to Web site visitors and the conditions under which the
content should be delivered. The criteria for content selection can
include the visitor's demographic or psychographic variables,
historical behavior, current session behavior, context information such
as date and time, and marketing logic for delivering incentives,
promotions, and recommendations. This allows Web sites to personalize
product information, editorials, pricing, advertising, coupons,
incentives, and promotions for Web site visitors who fit specified
profiles or the predetermined criteria as established by the company's
business managers.
Simplicity - In an extended enterprise, Web site visitors are casual
and varied. They require applications whose use is intuitively obvious
and which are personalized for their individual information needs. For
example, a brokerage application needs to be sophisticated enough for a
professional investor yet also immediately usable by a casual investor.
BroadVision One-To-One Enterprise provides the personalized
interactions capable of servicing such a broad constituency.
Internationalization - The Company is currently shipping versions of
BroadVision One-To-One Enterprise which are capable of supporting the
display of content in Arabic, traditional Chinese, Hebrew, Japanese,
Korean, Slovakian, Turkish and all Western European languages. In
addition, BroadVision One-To-One Enterprise supports the new European
currency, the Euro, including conversions between European Monetary
Union currencies and the Euro, with on-screen prices displayed in both
the Euro and local currencies.
Open Architecture - BroadVision One-To-One Enterprise uses "open
adapters" to enable easy integration with a company's existing
infrastructure, with over 60 different third-party system integrators
completed to date.
9
Core Features of BroadVision One-To-One Enterprise
- ------------------------------ ------------------------ ------------------------ --------------------------------
PROFILING CONTENT MATCHING OPEN ADAPTERS
- --------- ------- -------- -------------
Demographics Product Alerts Data warehouses
Preferences Information Attribute search ERP systems
Interests Editorials Collaborative filtering Line-of-business applications
Usage history Advertising Community rating Call centers
Observation Incentives Email targeting Payment processors
Permissions Discussion groups Entitlements Shipping & handling systems
Support for external Page templates Event-based matching Configurations
content and profiles Full Text search Tax systems
Matching agents Fulfillment systems
Observation LDAP
Rule-based matching Middleware
User profile Search engines
Customer service
Data feeds
Security
Other third-party systems
- ------------------------------ ------------------------ ------------------------ --------------------------------
BroadVision One-To-One Commerce is an enterprise-class application solution for
the rapid deployment and dynamic personalization of high transaction Internet
commerce sites. This extensible and flexible electronic commerce application
helps businesses sell more efficiently to their online customers, whether these
customers are consumers, businesses or channel partners.
With its advanced, instant personalization capabilities, BroadVision
One-To-One Commerce enables fast-moving, high transaction companies to
immediately change the products, prices, promotions and other content to better
meet user needs - even on a user's first visit to a Web site. Full commerce
transaction capabilities include persistent shopping carts, shopping lists,
real-time pricing, automatic tax calculation, shipping and handling cost
computation, payment processing, order fulfillment and management and more.
BroadVision One-To-One Financial is an enterprise-class financial services
solution that enables banks, brokerages, mutual fund companies, and other
financial institutions to rapidly deploy personalized financial services
applications that enable customers to access their account information and
perform a rich set of secure transactions within and between accounts using the
Internet.
BroadVision One-To-One Financial provides customers with a Web site that
offers customized interactions that enable financial institutions to
differentiate themselves while forging closer relationships with customers. When
customers spend more time on a bank's site, the bank has the opportunity to
build a more profitable relationship with the customer.
BroadVision One-To-One Knowledge is an enterprise-class application designed to
dramatically increase the productivity of corporate knowledge workers, including
sales and marketing professionals, channel business partners and executive
management.
Optimized for rapid deployment over corporate intranets and extranets, this
agent-based application enables individuals and work groups to organize
information into flexible, interactive knowledge channels accessible through Web
browsers. These interactive channels automate the intelligent distribution of
information for employees and partners on a one-to-one, just-in-time basis
throughout an enterprise. BroadVision One-To-One Knowledge provides an immediate
solution to the problems faced by enterprises around the world: information
accessibility, overload, awareness and high cost.
10
Key Capabilities of the BroadVision Total End-to-End Soultion
The Company designed all of these applications products for use in
mission-critical, high-performance environments by customers with demanding
architecture, deployment, and maintenance requirements. Some of the key
capabilities of the applications include:
* Broad applicability - robust functionality to support business-to-business,
business-to-consumer, and business-to-employee relationship management,
including personalized marketing and communications, selling and commerce
transaction handling, and customer self-service.
* Scaleability - architected for high performance and fast response while
supporting large numbers of simultaneous users accessing the system over
the public Internet or private intranets or extranets.
* Open and standard - object-oriented application code written in C++, Java
and JavaScript allows developers and system integrators to use, modify,
adapt, or extend the applications to create a rapidly customized product
that meets the specific business requirements of a particular corporate
customer. Support for the CORBA standard for object-oriented computing
permits distribution of the application across multiple processors. This
design enables high-volume performance, flexible application deployment,
and easy integration with other third party or legacy applications.
* Transaction processing - handles a wide-range of commerce and financial
services transactions including order pricing and discount/incentive
handling, tax computation, shipping and handling charges, payment
authorization, credit card charge processing, order tracking, news and
stock feeds -- through a combination of built-in functionality and
integration with other products.
* Platform independence - versions available for multiple operating systems,
including Sun Solaris, Microsoft Windows NT, and HP-UX. Databases supported
include Oracle, Sybase, Informix, and Microsoft SQL Server.
* Multi-lingual - content display available in Arabic, traditional Chinese,
Hebrew, Japanese, Korean, Slovakian, Turkish and all Western European
languages.
BroadVision One-To-One Tools
BroadVision applications are customized and maintained using tools that are
licensed to customers separately from the applications products. Inherent to the
functionality of the Company's applications is a set of building blocks
comprised of customizable "components," "application templates," and "rule sets"
that are instrumental in rapidly building and easily maintaining
One-To-One-based applications. A description of the Company's tools products are
as follows.
BroadVision One-To-One Design Center. BroadVision One-To-One Design Center,
integrated with Macromedia(R)'s Dreamweaver(TM) 2, is a PC-based tool that
offers Web authors and Internet application developers faster time to market by
shortening the development cycle. It also requires fewer specialized skills and
reduces overall development and maintenance costs. The BroadVision One-To-One
Design Center with Dreamweaver 2 gives the Web author direct access to
BroadVision's powerful personalization and functional components through a
series of wizards in the Dreamweaver visual development environment. These
wizards generate server-side JavaScript, which is the primary programming
language for BroadVision applications. By making simple point and click choices,
the Web author can visually construct a complete, dynamic application without
having to write HTML or JavaScript. In addition, because the wizards directly
access information on the BroadVision development server, the code is generated
correctly the first time, without human error. The net result is increased
productivity and accuracy.
BroadVision One-To-One Command Center. BroadVision One-To-One Command Center is
a PC-based tool that allows non-technical business managers to make rapid
changes to the Web site without programmer intervention. With the BroadVision
One-To-One Command Center, business managers can define rules incorporating
"if-then" relationships to match content to users based on profile information,
transaction history, session behavior, and other data. They can also develop
business rules that evaluate user information gathered during previous
interactions and use it to target products and services during subsequent
interactions. Also, business managers can make real-time changes to content and
generate management reports that monitor the activity on their Web site,
enabling the evaluation of the effectiveness of content and services being
offered on the site.
11
BroadVision One-To-One Publishing Center. BroadVision One-To-One Publishing
Center is a Java- and Web-based tool that allows a distributed and remote team
of non-technical content experts to collaboratively manage every aspect of site
content, including creation, editing, staging, production, and archiving. The
BroadVision One-To-One Publishing Center provides personal and shared in-boxes
that enable teams of content creators to collaborate in developing content. A
programming calendar facilitates staging, scheduling, and coordination of
content publishing. This tool provides the ability to preview content prior to
publishing, to control access to publishing, and to capture content taxonomy
information. It supports content created with HTML editors, Microsoft Office
products, and Lotus Domino. An associated tool, the BroadVision One-To-One
Instant Publisher, is designed for casual content contributors. It provides
simple, personalized publishing forms, so that casual contributors can leverage
the functionality of the BroadVision One-To-One Publishing Center without
becoming expert users.
Other Products
In addition to its proprietary products, the Company has entered into
agreements which enable it to resell third-party software products from
CyberSource Corporation, Verity, Inc., Oracle Corporation ("Oracle"), Macromedia
("Macromedia"), IONA, NetPerceptions ("NetPerceptions") and Sybase, Inc.
("Sybase"). These are sublicensed to end users and either incorporated in or
sold as options to the Company's own products. License revenue from these
third-party products was insignificant and constituted less than 1% of total
software product license revenues in each of the years for 1998, 1997 and 1996.
The table below summarizes certain features of the Company's products:
- ------------------------------------ ------------------------------------------ -----------------------------------
Product Product Operating Platforms/RDBMS
Name Description
- ------------------------------------ ------------------------------------------ -----------------------------------
Relationship Management System: Full object-oriented environment for Sun Solaris, HP-UX, Microsoft
One-To-One Enterprise developing, testing, and tuning Windows NT operating systems
horizontal applications. One-To-One
Enterprise is sold with one
development-only One-To-One Command Oracle, Sybase, Informix,
Center and One-To-One Design Center Microsoft SQL Server RDBMS
- ------------------------------------ ------------------------------------------ -----------------------------------
Applications Products: Packaged applications offering vertical Sun Solaris, HP-UX, Microsoft
One-To-One Commerce functionality for electronic commerce, Windows NT operating systems
One-To-One Financial online financial services and knowledge
One-To-One Knowledge management
Oracle, Sybase, Informix,
Microsoft SQL Server RDBMS
- ------------------------------------ ------------------------------------------ -----------------------------------
Deployment System: Full environment for deployment of Sun Solaris, HP-UX, Microsoft
One-To-One Enterprise production application Windows NT operating systems
Oracle, Sybase, Informix,
Microsoft SQL Server RDBMS
- ------------------------------------ ------------------------------------------ -----------------------------------
Deployment System: Full environment for deployment of Sun Solaris, HP-UX, Microsoft
One-To-One Applications production applications Windows NT operating systems
Oracle, Sybase, Informix,
Microsoft SQL Server RDBMS
- ------------------------------------ ------------------------------------------ -----------------------------------
One-To-One Design Center PC-based application enabling Windows 95 operating system
application developers and Web authors
to quickly and easily build dynamic Web
page templates
- ------------------------------------ ------------------------------------------ -----------------------------------
One-To-One Command Center PC-based application enabling business Windows 95 operating system
managers to monitor state of Web
applications, interactively change
business rules in real time, and
generate reports
- ------------------------------------ ------------------------------------------ -----------------------------------
One-To-One Publishing Center Browser-based Any browser on the client; Sun
application enabling content developers Solaris, HP-UX, Microsoft Windows
and editors to manage the publishing NT on the server
One-To-One Instant Publisher of new content to the Web site; optional
tool for causal publishers
- ------------------------------------ ------------------------------------------ -----------------------------------
12
BroadVision Professional Services
The Company's Worldwide Professional Services Organization ("WPSO") provides
a broad range of consulting services in support of BroadVision's total product
line. The Company's WPSO provides comprehensive business application expertise,
technical know-how, and product knowledge to complement its products and to
provide total solutions to customer business requirements. A summary of the
consulting services provided by the Company is as follows.
Strategic Services provides business strategy and process consulting, assisting
customers in defining and planning profitable online businesses. Services
include in-depth needs analysis, customer segmentation, site story boarding, and
preparing detailed plans and procedures necessary to achieve timely and
successful implementations of the Company's software products. Strategic
Services consulting is generally offered on a time and materials basis.
Interactive Services provides technical services for development of customized
BroadVision-based applications, custom interfaces, data conversions, and system
integration. These consultants participate in a wide range of activities,
including requirements definition and application design, development and
implementation. These consultants also provide advanced technology services
focused on application development for custom objects and templates and database
administration and tuning. Interactive Services consulting is generally offered
on a time and materials basis.
Content and Creative Services is a group specializing in content management,
sourcing, workflow processes, and user-interface design. The group is made up of
One-To-One design experts and a variety of leading design houses. This unique
team combines years of interactive design and marketing experience to build
purposeful user-interfaces that meet customers pre-defined goals. Content and
Creative Services consulting is generally offered on a time and materials basis.
Education Services are offered to customers either at the Company's education
facilities or at the customers' locations, as either standard or customized
classes. These classes are priced at either fixed daily rates or on a per-class
basis.
Technical Support includes telephone support and upgrade rights to new releases
(inclusive of patch releases as necessary) and product enhancements, as provided
under the Company's standard maintenance agreement. The annual maintenance fee
for these services is based upon a percentage of the then-current list price for
the licensed software fee, payable annually in advance.
Customers and Markets
The Company has licensed its product to over 250 customers, including
approximately 70 partners worldwide. The types of applications being developed
by licensees using BroadVision software include product merchandising, retail
financial services, and corporate knowledge management for employees, partners,
and customers. As of December 31, 1998, BroadVision products were commercially
deployed in over 110 live web sites. The Company's target customers include
Global 2000 organizations that are at the forefront of building innovative
Internet applications to increase revenues and reduce operational costs. During
1998, no customer accounted for more than 10% of the Company's total revenues.
In 1997, software license and service revenues from one customer accounted for
approximately 11% of the Company's total revenues and during 1996 one customer
accounted for 10% of the Company's total revenues.
The market for the Company's products and services continues to evolve
rapidly. As is typical for new and rapidly evolving industries, demand and
market acceptance for recently introduced products and services are subject to a
high level of uncertainty, especially where, as is true of the Company's
product, acquisition of the product requires a large capital commitment or other
significant commitment of resources. With respect to the Company, this
uncertainty is compounded by the risks that consumers and enterprises will not
adopt electronic commerce and knowledge management and that an appropriate
infrastructure necessary to support increased commerce and communication on the
Internet will fail to develop, in each case, to a sufficient extent and within
an adequate time frame to permit the Company to succeed.
13
Adoption of electronic commerce and knowledge management, particularly by
those individuals and enterprises that have historically relied upon traditional
means of commerce and communication, will require a broad acceptance of new and
substantially different methods of conducting business and exchanging
information. Moreover, the Company's products and services involve a new
approach to the conduct of online business and, as a result, intensive marketing
and sales efforts may be necessary to educate prospective customers regarding
the uses and benefits of the Company's products and services in order to
generate demand for the Company's systems. For example, enterprises that have
already invested substantial resources in other methods of conducting business
may be reluctant or slow to adopt a new approach that may replace, limit, or
compete with their existing systems. Similarly, individuals with established
patterns of purchasing goods and services may be reluctant to alter those
patterns or may otherwise be resistant to providing the personal data which is
necessary to support the Company's consumer profiling capability.
The Company has targeted a number of markets that it believes to be
especially conducive to one-to-one relationship management applications. These
markets, identified in the table below, have historically been characterized by
early adoption of online technology or could otherwise benefit from providing
significant interactive service to their end-user customers.
- ---------------------- -------------------------- ---------------------- ---------------------------------------------
Target Industry Sample Applications Sample Customers Benefits of BroadVision Solutions
- ---------------------- -------------------------- ---------------------- ---------------------------------------------
Financial services Home banking Argentaria Investment and insurance content targeted
and insurance Online brokerage Credit Suisse based on profiles of visitors
Obtaining information on Hartford Nationwide service can be locally targeted
and selecting: USAA Low-cost distribution channel
- Loans Tremendous cross-selling and up selling
- Mutual funds opportunity.
- Insurance Secure and high performance online
transactions
- ---------------------- -------------------------- ---------------------- ---------------------------------------------
High technology & Knowledge management The Baan Company Ability to disseminate large amounts of
manufacturing Business-to-business Hewlett-Packard knowledge/information in a personalized way
purchasing Macromedia based on purchaser's profile
Oracle Maintain and make available up-to-date
Xerox information related to complex purchasing
decisions
Supports purchase orders, Visa purchasing
cards, volume discounts, price locks, custom
pricing schedules
- ---------------------- -------------------------- ---------------------- ---------------------------------------------
Retail and Online shopping Cyberian Outpost Creation of branded communities based on
Distribution Interactive catalogues Electronic Arts profiles of visitors
Fingerhut Online, real-time control of business
The Good Guys rules, such as pricing and promotions by
RS Components content providers
Reduced transaction costs of direct
purchases
- ---------------------- -------------------------- ---------------------- ---------------------------------------------
Travel and leisure Reservations Air Miles Provide travel planning advice and
Travel planning American Airlines transaction services without agents or
Brand projection, Thomas Cook other intermediaries
loyalty programs, and Opportunity to cross-sell or up sell
affinity marketing services in addition to basic travel
reservations based on user profiles
- ---------------------- -------------------------- ---------------------- ---------------------------------------------
Telecommunications Commerce: Belgacom Selective sharing of visitor profiles
Business-to-business and Hong Kong Telecom between aggregators and content providers
business-to-consumer JiangSu Telecom Online, real-time control of business
Online services Telus Advanced rules, such as pricing and promotions.
Self-service (call Communications
centers) Vodafone
- ---------------------- -------------------------- ---------------------- ---------------------------------------------
Media and publishing Purchasing digital media Grolier Ability to price digital products and
Knowledge management Meta Group services in real time
Milwaukee Journal Dynamically target relevant information to
Sentinel individuals
Singapore Post
Virgin.net
- ---------------------- -------------------------- ---------------------- ---------------------------------------------
Application Service Hosting services Debis Systemhaus Extend BroadVision solutions to mid-tier
Providers bundling packaged Metronet market
application software and Servi Banca BroadVision publishing tools enable remote
complex Web site Usinternetworking publication to hosted Web sites
management as turnkey US Web
service
- ---------------------- -------------------------- ---------------------- ---------------------------------------------
14
Sales and Marketing
The Company markets its products primarily through a direct sales
organization with operations in North America, Europe, and Asia/Pacific. On
December 31, 1998, the Company's direct sales organization included 95 sales
representatives, managers, applications consultants, and pre-sales support and
post-sales support personnel. The Company has a sales office at its headquarters
in Redwood City, California and has North American sales offices in Atlanta,
Boston, Chicago, Dallas, Los Angeles, Minneapolis, and New York City, and
established a sales and service office in Washington DC for the US Federal
Government. The Company has subsidiaries in France, Germany, the Netherlands,
Switzerland, the United Kingdom, Japan, and Hong Kong and a sales office in
Singapore.
A component of the Company's strategy is continued expansion of its
international activities. The Company intends to broaden its presence in
international markets by expanding its international sales force and by entering
into additional distribution agreements. The Company also contracts with
resellers and commissioned agents in North America, South America, Europe, and
Asia. Although the Company generates leads from many sources, the majority of
the Company's leads have come from press articles discussing the Company's
products and customers implementing one-to-one relationship management
applications. Initial sales activities typically include a demonstration of
BroadVision One-To-One capabilities at the prospect's site, followed by one or
more detailed technical reviews, often presented at the Company's headquarters.
The sales process usually involves a collaboration with the prospective customer
in order to specify the scope of the application. The Company's professional
services organization typically plays a key role in helping customers to design,
and then develop, their applications.
The Company's marketing efforts are targeted at product strategy development
and product management; building market awareness through press and analysts;
producing and maintaining marketing information and sales tools; generating and
developing customer leads; and sourcing and managing relationships with systems
integrators, value-added resellers, creative design and advertising agencies,
and technology partners. As of December 31, 1998, 26 employees were engaged in a
variety of marketing activities, including preparing marketing research, product
planning, and collateral marketing materials, managing press coverage and other
public relations, identifying potential customers, attending trade shows,
seminars, and conferences, establishing and maintaining close relationships with
recognized industry analysts, and maintaining the Company's Web site.
The license of the Company's software products is often an enterprise-wide
decision by prospective customers, requiring the Company to engage in a lengthy
sales cycle to provide a significant level of education to prospective customers
regarding the use and benefits of the Company's products. In addition, the
implementation of the Company's products involves a significant commitment of
resources by the customers or by the Company's WPSO consultants over an extended
period of time. As a result, the Company's sales and customer implementation
cycles are subject to a number of significant delays over which the Company has
little or no control. Delays in license transactions as a result of the lengthy
sales cycle or delays in customer production or deployment of a system could
have a material adverse effect on the Company's business, financial condition,
and operating results, and can be expected to cause the Company's operating
results to vary significantly from quarter to quarter.
Strategic Alliances
A significant element of the Company's sales strategy is to engage in
strategic business alliances to assist the Company in marketing, selling, and
developing customer applications. This approach is intended to increase the
number of personnel available to perform application design and development
services for the Company's customers; enhance the Company's market credibility,
increase the potential for lead generation and access to large customer
accounts; and provide additional marketing expertise in certain vertical
industry segments while providing technical expertise in the development of
reusable objects and templates. To date the Company has developed key strategic
business alliances with over 90 systems integration, design, consulting, and
other services organizations, including American Management Systems, Andersen
Consulting, Cambridge Technology Partners, Computer Sciences Corporation,
Context Integration, Concept 5, Daimler-Benz Information Systems AG (Debis),
Ernst & Young LLP, Gran Via Internet, NTT Data Corporation, Metamor Worldwide,
Sema Group plc, Siemens Business Services Gmbh and Co., and others.
15
Competition
The market for online interactive relationship management applications is
rapidly evolving, and intensely competitive. The Company expects competition to
persist and intensify in the future. The Company's primary competition comes
from in-house development efforts by potential customers or partners. The
Company's competitors also include other vendors of application software
directed at interactive commerce and financial services and Web content
developers engaged to develop custom software or to integrate other application
software into custom solutions. The Company currently encounters direct
competition from Edify Corporation ("Edify"), InterWorld Corporation
("InterWorld"), International Business Machines Inc. ("IBM"), Microsoft
Corporation ("Microsoft"), Open Market Inc. ("OMI"), and Vignette Corporation
("Vignette"), among others. Some of these competitors have longer operating
histories, and significantly greater financial, technical, marketing, and other
resources than the Company and thus may be able to respond more quickly to new
or changing opportunities, technologies, and customer requirements.
Also, current and potential competitors may have greater name recognition and
more extensive customer bases that could be leveraged, thereby gaining market
share to the Company's detriment. Such competitors may be able to undertake more
extensive promotional activities, adopt more aggressive pricing policies, and
offer more attractive terms to purchasers than the Company. Moreover, certain of
the Company's current and potential competitors, such as IBM and Microsoft, may
bundle their products in a manner that may discourage users from purchasing
products offered by the Company.
In addition, current and potential competitors have established or may
establish cooperative relationships among themselves or with third parties to
enhance their products. Accordingly, it is possible that new competitors or
alliances among competitors may emerge and rapidly acquire significant market
share.
The principal competitive factors affecting the market for the Company's
products are depth and breadth of functionality offered, ease of application
development, time required for application development, reliance on industry
standards, reliability, scaleability, maintainability, personalization and other
features, product quality, price, and customer support.
The Company believes it presently competes favorably with respect to each of
these factors. However, the Company's market is still evolving, and there can be
no assurance that the Company will be able to compete successfully with current
or future competitors, or that competitive pressures faced by the Company will
not have a material adverse effect on the Company's business, financial
condition, and operating results.
BroadVision Technology
The Company believes its advanced technology enables the delivery of robust,
scaleable, and innovative Internet relationship management solutions into the
market faster and at a lower cost than alternatives. The Company's technology
consists of the following key elements:
Architectural Design
The Company believes that the technical demands of interactive one-to-one
relationship management on the Internet require an architectural design that
stresses standards, openness, interoperability, and flexibility. The Company has
designed its current application system as an architectural solution for
building dynamic, scaleable, and extensible Internet applications. By
emphasizing reusable methods, separation of application logic, business rules,
and data, and adherence to open standards, the BroadVision One-To-One
applications family provides an efficient architecture for customers and
partners to build, modify, and control applications, as well as to integrate
them with external business systems. The Company believes this architecture also
provides a robust foundation on which the Company can rapidly develop new
products.
16
Adherence to Industry Standards
The Company has invested substantially in developing its architecture to
comply with CORBA, a standard for applications software design and development
widely adopted in the commercial software industry. Applications that are
CORBA-compliant can run on either single computers with one or more processors
or across large networks, allow replication and relocation of object servers to
improve system performance, are platform independent, and have strongly defined
Application Programming Interfaces through the use of the Interface Definition
Language specified by CORBA.
Through CORBA compliance, the Company's products are fully compatible with
other CORBA-based technologies, such as Java and JavaScript. In addition to
CORBA, the Company uses other widely accepted standards in developing its
products, including SQL (Structured Query Language) for accessing relational
database management systems ("RDBMSs"), CGI (Common Gateway Interface), and HTTP
(Hypertext Transfer Protocol) for Internet access, NSAPI (Netscape Application
Programming Interface) for access to Netscape's Internet servers, SSL (Secure
Socket Layer) for secure transmissions over networks, and the RC2 and MD5
encryption algorithms supplied by RSA Data Security, Inc. ("RSA"). BroadVision
One-To-One Enterprise can be operated in conjunction with RDBMSs provided by
Oracle, Informix Corporation ("Informix"), Microsoft, and Sybase.
Most of the Company's programs are written in C++ and Java, widely accepted
standard programming languages for developing object-oriented applications.
Application templates are written in JavaScript. Adherence to industry standards
provides compatibility with existing applications, enables ease of modification,
and reduces the need for software to be rewritten, thus protecting the
customer's investment.
N-Tier Architecture
BroadVision One-To-One Enterprise utilizes an N-tier architecture that
logically separates application presentation, business rules, and data. Between
each of these tiers are session manager and project adapter interface
technologies, described below, that establish seamless interoperability between
application components. This architecture partitions applications across:
* A front-end tier that manages the application presentation and interface to
Web site visitors;
* Application engine tier(s) that manage the one-to-one life cycle
activities--community, profiling, targeting, and transactions--and the
business rules that define the interactive characteristics and behavior of
one-to-one relationship management applications. Due to the
object-oriented design of this code and the reliance on CORBA, this code
can be distributed across multiple logical and physical processors, thus
enabling the N-tier design of the application; and
* A back-end tier that integrates underlying database management systems for
storing BroadVision One-To-One data with external business systems that
perform specialized relationship management functions, such as online
credit card authorization and payment handling, sales tax and shipping
computation, online and off-line order fulfillment, inventory management,
visitor demographic analysis, and data mining.
The Company believes this N-tier architecture offers significant advantages over
alternative approaches, including:
* Bandwidth, database, and platform independence;
* Modularity, to enable changes to be made to one area of an application with
minimal impact on other areas;
* The ability for business managers to define and control business rules in
real time without requiring programming changes to application logic; and
* The ability to support specialized "object adapters" that reduce time and
cost to integrate BroadVision One-To-One applications with existing
business systems, the ability to perform such integration with a minimum of
programming, and the ability to localize applications to different language
and currency requirements.
17
Session Manager
The Company has developed proprietary "session manager" technology designed
to manage the high volume of dynamic interactions that occur in online sessions
between many concurrent Web site visitors and a relationship management
application. The session manager enables three key activities:
* Maintaining context, or "state," between visitors and sites so that each
current and future interaction can trigger a response appropriate to the
objectives of both visitor and site provider;
* Interpreting application objects and templates at runtime, and retrieving
profile data and business rules to dynamically generate HTML that creates
content, Web pages, and interactions tailored to the needs and interests of
individual Web site visitors; and
* Enabling application scaleability by allowing Web site providers to add
additional software processes or hardware processors to their Web systems
to support more concurrent Web site visitors without incurring performance
degradation or additional overhead in application maintenance.
Components and Application Templates
The Company believes that the costs and time associated with Internet
application development and maintenance can be substantially reduced with its
technology for object-oriented application development. This technology consists
primarily of customizable components and application templates. Utilized in
combination with the Company's structured development methodology, these
technologies are designed to help customers and partners create libraries of
reusable program components that increase application quality and reduce cost
and time-to-market of new and maintained applications. In addition, application
templates, written in JavaScript, enable business managers to define and
implement business rules through the BroadVision One-To-One Command Center on a
real-time basis. The Company's consultants currently use these technologies to
develop application solutions for customers, and the Company's Education
Services Group offers training classes to customers and partners on the use of
components and application templates.
Product Development
The Company believes that its future success will depend in large part on its
ability to enhance the BroadVision One-To-One product family, develop new
products, maintain technological leadership, and satisfy an evolving range of
customer requirements for large-scale interactive online relationship management
applications. The Company's product development organization is responsible for
product architecture, core technology, product testing and quality assurance,
writing product user documentation, and expanding the ability of BroadVision
One-To-One products to operate with the leading hardware platforms, operating
systems, database management systems, and key electronic commerce transaction
processing standards. Since inception, the Company has made substantial
investments in product development and related activities. Certain technologies
have been acquired and integrated into BroadVision One-To-One products through
licensing arrangements.
As of December 31, 1998, there were 73 employees in the Company's product
development organization. The Company's research and development expenses were
$9,227,000, $7,392,000 and $4,985,000, for the years ended December 31, 1998,
1997 and 1996, respectively. To date, the Company has not capitalized any
software development costs as products are made available for general release
relatively concurrent with the establishment of technological feasibility. The
Company expects to continue to devote substantial resources to its product
development activities.
The information services, software, and communications industries are
characterized by rapid technological change, changes in customer requirements,
frequent new product and service introductions and enhancements, and emerging
industry standards. The introduction of products and services embodying new
technologies and the emergence of new industry standards and practices can
render existing products and services obsolete and unmarketable.
18
The Company's future success will depend, in part, on its ability to develop
leading technologies, enhance its existing products and services, develop new
products and services that address the increasingly sophisticated and varied
needs of its prospective customers, and respond to technological advances and
emerging industry standards and practices on a timely and cost-effective basis.
There can be no assurance that the Company will be successful in effectively
using new technologies, adapting its products to emerging industry standards,
developing, introducing, and marketing product and service enhancements, or new
products and services, or that it will not experience difficulties that could
delay or prevent the successful development, introduction, or marketing of these
products and services, or that its new product and service enhancements will
adequately meet the requirements of the marketplace and achieve market
acceptance.
If the Company is unable, for technical or other reasons, to develop and
introduce new products and services or enhancements of existing products and
services in a timely manner in response to changing market conditions or
customer requirements, or if new products and services do not achieve market
acceptance, the Company's business, financial condition, and operating results
will be materially adversely affected.
Intellectual Property and Other Proprietary Rights
The Company's success and ability to compete are dependent to a significant
degree on its proprietary technology. The Company provides its products to end
users generally under nonexclusive, nontransferable licenses during the term of
the agreement, which is usually in perpetuity. Under the general terms and
conditions of the Company's standard license agreement, the licensed software
may be used solely for internal operations pursuant to BroadVision's published
licensing practices.
The Company holds a patent on its core technology for personalized business
on the Internet. The United States Patent Office issued Patent 5,710,887 on
January 20, 1998 to the Company, covering certain elements of the BroadVision
One-To-One Application System. There can be no assurance that this patent would
survive a legal challenge to its validity or provide significant protection. On
December 11, 1998, in the Northern District of California, BroadVision filed a
lawsuit against Art Technology Group, Inc. ("ATG") . The complaint alleges that
ATG is infringing BroadVision's U.S. Patent No. 5,710,887 and seeks injunctive
relief and unspecified damages. On February 3, 1999, ATG filed an answer and
counterclaim against BroadVision in which ATG seeks declaratory judgment for
non-interference and declaratory judgment for invalidity of the patent.
The Company has registered "BroadVision" and applied for registration of
"BroadVision One-To-One" as trademarks in the United States. Although the
Company takes steps to protect its trade secrets, there can be no assurance that
misappropriation will not occur or that copyright and trade secret protection
will be available in certain countries.
The source code for the Company's proprietary software is protected both as a
trade secret and as a copyrighted work. The Company makes source code available
for certain portions of its products. In addition, some of the Company's
agreements with its customers contain provisions requiring release of source
code for limited, non-exclusive use by the customer in the event that the
Company ceases to do business or the Company fails to support its products.
The provision of source code may increase the likelihood of misappropriation by
third parties.
The Company's policy is to enter into confidentiality and assignment
agreements with its employees, consultants, and vendors and generally to control
access to and distribution of its software, documentation, and other proprietary
information. Notwithstanding these precautions, it may be possible for a third
party to copy or otherwise obtain and use the Company's software or other
proprietary information without authorization or to develop similar software
independently. Policing unauthorized use of the Company's products is difficult,
particularly because the global nature of the Internet makes it difficult to
control the ultimate destination or security of software or other data
transmitted. The laws of other countries may afford the Company little or no
effective protection of its intellectual property.
19
There can be no assurance that the steps taken by the Company will prevent
misappropriation of its technology or that agreements entered into for that
purpose will be enforceable. In addition, litigation such as the lawsuit against
ATG, may be necessary in the future to enforce the Company's intellectual
property rights, to protect the Company's trade secrets, to determine the
validity and scope of the proprietary rights of others, or to defend against
claims of infringement or invalidity. Such litigation, whether successful or
unsuccessful, could result in substantial costs and diversions of resources,
either of which could have a material adverse effect on the Company's business,
financial condition, and operating results.
The Company may, in the future, receive notices of claims of infringement of
other parties' trademark, copyright, and other proprietary rights. There can be
no assurance that claims for infringement or invalidity (or claims for
indemnification resulting from infringement claims) will not be asserted or
prosecuted against the Company. In particular, claims could be asserted against
the Company for violation of trademark, copyright, or other laws as a result of
the use by the Company, its customers, or other third parties of the Company's
products to transmit, disseminate, or display information over or on the
Internet.
Any such claims, with or without merit, could be time consuming to defend,
result in costly litigation, divert management's attention and resources, cause
product shipment delays, or require the Company to enter into royalty or
licensing agreements.
There can be no assurance that such licenses would be available on reasonable
terms, if at all, and the assertion or prosecution of any such claims could have
a material adverse effect on the Company's business, financial condition, and
operating results.
The Company relies upon certain software that it licenses from third parties,
including RDBMSs from Oracle and Sybase, object request broker software from
IONA, database access technology from Rogue Wave Software, Inc. ("Rogue Wave"),
and other software which is integrated with internally developed software and
used in the Company's software to perform key functions. In this regard, all of
the Company's services incorporate data encryption and authentication technology
licensed from RSA.
There can also be no assurance that the Company's third-party technology
licenses will continue to be available to the Company on commercially reasonable
terms, if at all. The loss or inability to maintain any of these technology
licenses could result in delays in introduction of the Company's products and
services until equivalent technology, if available, is identified, licensed, and
integrated, which could have a material adverse effect on the Company's
business, financial condition, and operating results.
Employees
As of December 31, 1998, the Company employed a total of 271 full-time
employees, including 121 in sales and marketing, 73 in product development, 50
in professional services and client support, and 27 in finance, administration,
and operations.
The Company believes that its future success is dependent on attracting and
retaining highly skilled personnel. Competition for such personnel is intense,
and there can be no assurance that the Company will continue to be able to
attract and retain high-caliber employees.
The Company's employees are not represented by any collective bargaining
unit. The Company has never experienced a work stoppage and considers its
employee relations to be good.
20
Executive Officers and Key Personnel
The executive officers and key personnel of the Company and their ages at
February 28, 1999 are as follows:
Name Age Position
---- --- --------
Pehong Chen...................... 41 Chairman of the Board, Chief Executive Officer and President
Randall C. Bolten................ 46 Chief Financial Officer and Vice President, Operations
Clark W. Catelain................ 51 Vice President, Engineering
Eric J. Golin.................... 39 Vice President of Worldwide Professional Services
Michael A. Kennedy............... 36 Vice President of Global Strategic Alliances
Giuseppe Kobayashi............... 43 Vice President and General Manager of Japan/Asia-Pacific Operations
Francois Stieger................. 49 Vice President and General Manager of European Operations
James W. Thanos.................. 50 Vice President and General Manager, Americas
Perry W. Thorndyke............... 49 Vice President, Business Development
Sandra J. Vaughan ............... 33 Vice President of Marketing
Pehong Chen has served as Chairman of the Board, Chief Executive Officer and
President of the Company since its incorporation in May 1993. From 1992 to 1993,
Dr. Chen served as the Vice President of Multimedia Technology at Sybase, a
supplier of client-server software products. Dr. Chen founded and, from 1989 to
1992, served as President of Gain Technology ("Gain"), a provider of multimedia
applications development systems, which was acquired by Sybase. He received a
B.S. in Computer Science from National Taiwan University, an M.S. in Computer
Science from Indiana University, and a Ph.D. in Computer Science from the
University of California at Berkeley.
Randall C. Bolten has served as Chief Financial Officer and Vice President,
Operations, of the Company since September 1995. From 1994 to 1995, Mr. Bolten
served as a financial consultant to various entrepreneurial enterprises. From
1992 to 1994, Mr. Bolten served as Chief Financial Officer of BioCad
Corporation, a supplier of drug discovery software products. From 1990 to 1992,
Mr. Bolten served as Chief Financial Officer, Business Development Unit, and
then Vice President, Finance of Teknekron Corporation, a company engaged in the
management of various high technology companies. He received an A.B. in
Economics from Princeton University and an M.B.A. from Stanford University.
Clark W. Catelain has served as Vice President, Engineering, of the Company
since June 1995. From 1989 to May 1995, Mr. Catelain served as the Senior Vice
President, Engineering of Gupta Corporation, a supplier of client/server
database products. Mr. Catelain received a B.S. in Mathematics and Computer
Science from Purdue University.
Eric J. Golin has served as Vice President of Worldwide Professional Services
of the Company since September 1997. From September 1994 to September 1997, Dr.
Golin served as Senior Architecture Engineer and later as Senior Director,
Engineering of the Company. From September 1993 to September 1994, Dr. Golin was
a principal architect for OpenVision Technology. From September 1989 to
September 1993, Dr. Golin was Assistant Professor of Computer Science at the
University of Illinois at Champaign-Urbana. Dr. Golin received an B.S., M.S.,
and a Ph.D. in Computer Science from Brown University.
Michael A. Kennedy has served as Vice President, Global Strategic Alliances,
since September 1997. From September 1995 to August 1997, Mr. Kennedy served as
Senior Director, Marketing of the Company. From August 1993 to August 1995, Mr.
Kennedy served as Director, New Media Business Development for Oracle
Corporation, supplier of database software. From December 1989 to July 1993, Mr.
Kennedy served as Senior Product Marketing Manager for Oracle Corporation. Mr.
Kennedy received a B.Sc. in Computer Science from the Aberdeen University,
Scotland.
21
Giuseppe Kobayashi has served as Vice President and General Manager of
Japan/Asia-Pacific Operations of the Company since January 1995. From 1994 to
the present, Mr. Kobayashi has also served as consultant to Wind River Systems,
Inc., a supplier of software development systems. During 1993, Mr. Kobayashi was
General Manager, Japan Operations, Gain Group at Sybase. During 1992, Mr.
Kobayashi was General Manager of Operations at Gain. From 1990 to 1992, Mr.
Kobayashi served as Managing Director of Asia Pacific Operations at Teradata
Corporation, a supplier of database software. Mr. Kobayashi holds a B.S. in
Computer Science from the University of San Francisco.
Francois Stieger has served as Vice President and General Manager of European
Operations of the Company since January 1996. From July 1994 to December 1995,
Mr. Stieger was employed as Senior Vice President, Europe and Middle East, for
OpenVision Technologies, Inc., a supplier of distributed systems management
products and services. From 1993 to 1994, Mr. Stieger served as Vice President,
Europe of the Gain Division of Sybase. From 1987 to 1992, Mr. Stieger served as
Vice President, Europe, Central and Southern region of Oracle, a supplier of
relational database software. Mr. Stieger holds a Diplome Universitaire De
Technologie in Mathematics and Mechanics from the University of Strasbourg.
James W. Thanos has served as Vice President and General Manager, Americas of
the Company since January 1998. From January 1995 to January 1998, Mr. Thanos
served as Vice President of North American Operations of Aurum Software, a sales
force automation company. . From May 1994 to January 1995, Mr. Thanos served as
Vice President of Sales of Digital. From January 1993 to May 1994, Mr. Thanos
served as Vice President of Sales of Harvest Software, an optical character
recognition software company. From December 1988 to January 1993, Mr. Thanos
served as Vice President of Sales Operations of Metaphor, Inc., a decision
support software company. Mr. Thanos holds a B.A. in International Relations
from Johns Hopkins University.
Perry W. Thorndyke has served as Vice President, Business Development for the
Company since May, 1998. From July 1997 to May 1998, Dr. Thorndyke served as
Vice President, Marketing of the Company. From August 1996 to July 1997, Dr.
Thorndyke served as Vice President, Business and Channel Development of the
Company. From February 1995 to January 1996, Dr. Thorndyke served as a
management consultant to the Vice President, Marketing for Quintus Corporation,
a supplier of client/server solutions for customer information management. From
February 1994 to January 1995, Dr. Thorndyke served as a management consultant
on technology strategy for customer information management systems to
independent software vendors and user organizations. From May 1992 to January
1994, Dr. Thorndyke served as Vice President and Division Manager for retail
banking systems at Wells Fargo Bank. From 1990 to May 1992, Dr. Thorndyke served
as Director of Marketing and Business Development at Metaphor Computer Systems,
a supplier of client/server software applications for PC-based support decision
products. Dr. Thorndyke received a B.A. in Computer and Information Sciences
from Yale University and a Ph.D. in Cognitive Psychology from Stanford
University.
Sandra J. Vaughan has served as Vice President, Marketing for the Company
since May, 1998. From June 1996 to April 1998, Ms. Vaughn served as Senior
Director and later as Vice President, Corporate Marketing of the Company. From
1993 to 1996, Ms. Vaughan served as Group Director, North America Field
Marketing of Sybase. From 1989 to 1993, Ms. Vaughn served as Director, Customer
Programs of Oracle Corporation. Ms. Vaughan received a BS Degree from the
University of California, Davis.
ITEM 2. PROPERTIES
The Company's principal administration, research and development, sales,
consulting, and support facilities are located in Redwood City, California,
where the Company occupies approximately 60,000 square feet pursuant to a lease
that expires in 2007. During March 1999, the Company entered into an operating
lease agreement through December 2007 for an additional 55,000 square feet of
office space adjacent to its corporate headquarters building in Redwood City,
California.
22
The Company also rents space in various cities to support its sales and field
support activities, including Atlanta, GA; Newton, MA; Schaumburg, IL; Dallas,
TX; Ashburn, VA; Irvine, CA; Bethesda, MD; New York, NY; Amersfoort, The
Netherlands; Courbevoie, France; Munich, Germany; WanChai, Hong Kong; Tokyo,
Japan; Wheellock Place, Singapore; Bottmingen, Switzerland; Berkshire, England;
Madrid, Spain; and Koeln, Germany. The Company believes that its existing
facilities are adequate to meet its needs for the foreseeable future.
ITEM 3. LEGAL PROCEEDINGS
On December 11, 1998, BroadVision filed a lawsuit against Art Technology
Group, Inc. ("ATG") in the Northern District of California. The complaint
alleges that ATG is infringing BroadVision's U.S. Patent No. 5,710,887 and seeks
injunctive relief and unspecified damages. On February 3, 1999, ATG filed an
answer and counterclaim against BroadVision in which ATG seeks declaratory
judgment for non-interference and declaratory judgment for invalidity of the
patent.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
The Company's Common Stock is traded on the Nasdaq National Market under the
symbol "BVSN." Public trading of the Common Stock commenced on June 26, 1996.
Prior to that, there was no public market for the Common Stock. As of March 12,
1999, there were approximately 9,845 holders of record of the Company's Common
Stock. For the periods indicated, the following table sets forth the Nasdaq
National Market high and low sale price per share of BVSN Common Stock.
High Low
--------------- ----------------
1998
Fourth Quarter $44.25 $9.25
Third Quarter $29.50 $10.06
Second Quarter $25.13 $14.75
First Quarter $19.00 $6.00
1997
Fourth Quarter $8.69 $5.88
Third Quarter $7.38 $5.00
Second Quarter $9.13 $4.38
First Quarter $10.38 $7.50
1996
Fourth Quarter $9.06 $6.56
Third Quarter $8.38 $5.38
Second Quarter (from June 26, 1996) $7.13 $6.88
The Company has never declared or paid cash dividends on its Common Stock,
and it is the Company's present intention to retain earnings to finance the
expansion of its business. In addition, the Company's credit facility with its
commercial lender contains certain covenants which may limit the Company's
ability to pay cash dividends.
23
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated financial data set forth below should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations," the Consolidated Financial Statements of the Company
and Notes thereto, and other financial information included elsewhere in this
Form 10-K. Historical results are not necessarily indicative of the results to
be expected in the future.
Years Ended December 31,
-----------------------------------------------------------------------------------
1998 1997 1996 1995 1994
-----------------------------------------------------------------------------------
Statement of Operations Data: (in thousands, except per share data)
Revenues:
Software licenses $ 36,067 $ 18,973 $ 7,464 $ - $ -
Services 14,844 8,132 3,418 540 -
------------------ --------------- --------------- --------------- ---------------
Total revenues 50,911 27,105 10,882 540 -
Cost of revenues:
Cost of license revenues 1,001 1,664 330 - -
Cost of services revenues 8,704 4,284 2,164 249 -
------------------ --------------- --------------- --------------- ---------------
Total cost of revenues 9,705 5,948 2,494 249 -
------------------ --------------- --------------- --------------- ---------------
Gross profit 41,206 21,157 8,388 291 -
Operating expenses:
Research and development 9,227 7,392 4,985 2,575 748
Sales and marketing 26,269 18,413 12,066 1,348 512
General and administrative 3,786 2,990 2,034 846 511
Total operating ------------------ --------------- --------------- --------------- ---------------
expenses 39,282 28,795 19,085 4,769 1,771
------------------ --------------- --------------- --------------- ---------------
Operating income (loss) 1,924 (7,638) (10,697) (4,478) (1,771)
Other income and taxes, net 2,115 265 552 160 101
================== =============== =============== =============== ===============
Net income (loss) $ 4,039 $ (7,373) $ (10,145) $ (4,318) $ (1,670)
================== =============== =============== =============== ===============
Basic earnings (loss) per $ 0.17 $ (0.36) $ (0.54) $ (0.36)
share
=============================== ================================== =============== ===============
Diluted earnings (loss) per $ 0.16 $ (0.36) $ (0.54) $ (0.36)
share
=============================== ================================== =============== ===============
Shares used in per share computations:
================================== =============== ===============
Basic 23,346 20,208 18,815 11,976
================================== =============== ===============
Diluted 25,653 20,208 18,815 11,976
================================== =============== ===============
December 31,
-----------------------------------------------------------------------------------
1998 1997 1996 1995 1994
-----------------------------------------------------------------------------------
Balance Sheet Data: (in thousands)
Cash and cash equivalents $ 61,878 $ 8,277 $ 17,608 $ 4,311 $ 808
Working capital 64,320 11,485 18,258 3,916 2,208
Total assets 101,562 26,539 26,714 5,857 2,640
Long-term obligations 3,245 3,081 587 593 -
Accumulated deficit (19,603) (23,642) (16,269) (6,124) (1,806)
Total stockholders' equity 81,809 15,121 21,016 4,254 2,526
24
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Except for historical information contained or incorporated by reference herein,
the following discussion contains forward-looking statements that involve risks
and uncertainties. The Company's actual results could differ significantly from
those discussed herein. Factors that could cause or contribute to such
differences include, but are not limited to, those discussed below under the
caption "Risk Factors" and elsewhere in this Form 10-K. Any such forward-looking
statements speak only as of the date such statements are made.
Overview..............................................................25
Statement of Operations as a Percent of Total Revenues................26
Results Of Operations.................................................26
Revenues............................................................26
Cost of revenues....................................................29
Operating expenses and other income, net............................30
Income taxes........................................................32
Liquidity and capital resources.....................................33
Quarterly Results of Operations.......................................34
Recent Accounting Pronouncements......................................35
Risk Factors..........................................................36
Overview
BroadVision, Inc. develops, markets and supports fully integrated large scale
application software solutions exclusively designed to manage one-to-one
relationships for the extended enterprise. The Company's total end-to-end
solutions provide businesses with a competitive advantage by enabling them to
capitalize on the Internet as a unique platform to enhance commerce, provide
critical self-service functions, and deliver highly specialized information to
customers, suppliers, distributors, employees, or any other constituent of the
extended enterprise through real-time interactive one-to-one relationships.
The BroadVision One-To-One product family allows businesses to tailor Web
site content to the needs and interests of individual users by personalizing
each visit on a real-time basis. BroadVision One-To-One applications achieve
this result by interactively capturing Web site visitor profile information and
targeting organized enterprise content to each visitor based on easily
constructed business rules.
The Company believes the benefits of these applications include enhanced
customer satisfaction and loyalty, increased business volumes, reduced costs to
service customers and execute transactions, as well as enhanced employee
productivity.
The Company sells its products and services worldwide through a direct sales
force, independent distributors, value-added resellers, and system integrators.
It also has a global network of strategic business relationships with key
industry platform and Web developer partners. To date, the Company has signed
business alliances with over 90 systems integration, design, consulting, and
other services organizations worldwide, which has expanded the Company's sales
and support infrastructure and post-sales implementation capabilities while
broadening market awareness for the Company.
The Company also places a strategic emphasis on developing technology
alliances in order to ensure that the Company's products are based on industry
standards and the Company is positioned to take advantage of current and
emerging technologies. The benefits of this approach include enabling the
Company to focus on its core competencies while reducing time to market and
simplifying the task of designing and developing applications by both the
Company and its customers.
25
STATEMENT OF OPERATIONS AS A PERCENT OF TOTAL REVENUES
The following table sets forth certain items reflected in the Company's
consolidated statements of operations expressed as a percent of total revenues
for the periods indicated.
Years Ended December 31,
-------------------------------------------
1998 1997 1996
-------------- -------------- --------------
Revenues:
Software licenses 70.8% 70.0% 68.6%
Services 29.2 30.0 31.4
-------------- -------------- --------------
Total revenues 100.0 100.0 100.0
Cost of revenues:
Cost of license revenues 2.0 6.1 3.0
Cost of services revenues 17.1 15.8 19.9
-------------- -------------- --------------
Total cost of revenues 19.1 21.9 22.9
-------------- -------------- --------------
Gross profit 80.9 78.1 77.1
Operating expenses:
Research and development 18.1 27.3 45.8
Sales and marketing 51.6 67.9 110.9
General and administrative 7.4 11.1 18.7
-------------- -------------- --------------
Total operating expenses 77.1 106.3 175.4
-------------- -------------- --------------
Operating income (loss) 3.8 (28.2) (98.3)
Other income, net 4.0 1.0 5.1
-------------- -------------- --------------
Income (loss) before income taxes 7.8 (27.2) (93.2)
Income tax benefit 0.1 - -
-------------- -------------- --------------
Net income (loss) 7.9% (27.2)% (93.2)%
============== ============== ==============
RESULTS OF OPERATIONS
Revenues
The Company's revenues are derived from software license fees and fees
charged for its services.
The Company recognizes software license revenues when a non-cancelable
license agreement has been signed and the customer acknowledges an unconditional
obligation to pay, the software product has been delivered, there are no
uncertainties surrounding product acceptance, the fees are fixed and
determinable, and collection is considered probable.
Revenues allocated to software license fees, in general, are recognized upon
consummation of the sale and the portion allocated to maintenance and support is
recognized over the contracted period, which is typically one year.
The Company's professional services include its Strategic Services Group, its
Interactive Services Group, its Content and Creative Services Group, its
Education Services Group, and its Technical Support Group. Maintenance fees
relating to technical support and upgrades are recognized ratably over the
contracted period. Consulting related services are typically recognized as
services are performed.
26
A summary of the Company's software and services revenues by geographic
region for the periods indicated is as follows :
(in thousands)
-----------------------------------------------------------------------------------------------------
Years Ended
December 31, Software % Services % Total %
-----------------------------------------------------------------------------------------------------
1998: Americas $ 19,301 54% $ 10,029 67% $ 29,330 58%
Europe 13,879 38 3,065 21 16,944 33
Asia/Pacific 2,887 8 1,750 12 4,637 9
------------------------------------------------------------------------------------------------
Total $ 36,067 100% $ 14,844 100% $ 50,911 100%
================================================================================================
1997: Americas $ 8,584 45% $ 4,288 53% $ 12,872 48%
Europe 8,835 47 2,015 25 10,850 40
Asia/Pacific 1,554 8 1,829 22 3,383 12
------------------------------------------------------------------------------------------------
Total $ 18,973 100% $ 8,132 100% $ 27,105 100%
================================================================================================
1996: Americas $ 3,071 41% $ 1,335 39% $ 4,406 41%
Europe 2,257 30 1,023 30 3,280 30
Asia/Pacific 2,136 29 1,060 31 3,196 29
------------------------------------------------------------------------------------------------
Total $ 7,464 100% $ 3,418 100% $ 10,882 100%
================================================================================================
1998 versus 1997
For the year ended December 31, 1998, total revenues increased $23.8 million
or 88% on a year-over-year basis which consisted of software license revenue
increases of $17.1 million or 90% and professional services revenue increases of
$6.7 million or 83%.
The increase in software license revenues is attributable to continued strong
market acceptance of the Company's core technology (BroadVision One-To-One
Enterprise), expanding sales volumes of its three complementary WebApp packaged
solutions (BroadVision One-To-One Commerce, BroadVision One-To-One Financial,
and BroadVision One-To-One Knowledge), increasingly higher deployment license
revenues; and to a lesser extent, product pricing increases that were effective
October 1, 1998. The WebApp packaged solutions were first introduced in 1997 and
have become an integral part of the Company's total applications solution which
has proven to be a successful strategy for a highly evolving and intensely
competitive marketplace. Application license related revenues for the Company's
WebApp systems increased to $10.2 million in 1998 as compared to $2.4 million in
1997 which represents a 325% increase year over year. Deployment related license
revenues increased to $14.8 million in 1998 as compared to $8.1 million in 1997,
which represents a 83% increase year over year and is a result of repeat
business and an increasingly higher number of live site customers.
Throughout 1998, the Company made available newly enhanced applications and
associated tools specifically designed for certain industries that require
unique one-to-one relationship management functionality for product
merchandising, retail financial services, and knowledge management. During May
1998, the Company expanded its product line by introducing a new application to
the BroadVision One-To-One family of products: One-To-One Knowledge. In
addition, the One-To-One Enterprise application product was significantly
enhanced with Version 4, which shipped during September 1998 and enhanced
versions of One-To-One Commerce and One-To-One Financial Version 4 application
products were shipped during December 1998. Also during 1998, the Company
enhanced its associated One-To-One tools which included the One-To-One Command
Center (used by non-technical business managers to make rapid changes to their
Web site without a programmer's intervention); the One-To-One Publishing Center
(which allows a distributed team of non-technical content experts to
collaboratively manage every aspect of content management), and the One-To-One
Instant Publisher (a tool designed for casual content contributors).
27
Although the Company has experienced revenue growth in recent periods,
historical growth rates may not be sustained and may not be indicative of future
operating results. The Company anticipates that international revenues will
continue to account for a significant amount of total revenues, and management
expects to continue to commit significant time and financial resources to the
maintenance and ongoing development of direct and indirect international sales
and support channels. The Company's Asia Pacific operations have experienced
reduced growth rates over the past year as a result of the generally weak
economic conditions of that region. As a result, the Company would expect that
any significant growth in international revenues would most likely come from its
European operations. There can be no assurance, however, that the Company will
be able to maintain or increase international market acceptance for its family
of products.
During the year ended December 31, 1998, the Company continued to expand its
strategic alliances with key industry partners to develop additional highly
specialized applications. The Company expects to introduce these additional
specialized applications products during 1999 and beyond.
Some of the Company's strategic alliances to date include ventures with
Macromedia to jointly develop the next version of its BroadVision One-To-One
Design Center product; Hewlett-Packard to embed Web Quality of Service
technologies into BroadVision products; Cisco Systems to create unique
Cisco-BroadVision One-To-One reference architecture, configuration guides, and
performance / scaleability benchmarks; S1 to jointly develop and market products
based on VFM, S1's suite of Internet-based financial services applications; and
Sema Group to jointly develop and market BroadVision One-To-One applications for
the telecommunications sector.
The increase in professional services revenue is a result of a higher level
of consulting related services associated with the increased business volumes
and a higher level of customer support revenues derived from an increasingly
larger installed customer base. Maintenance revenues were $5.1 million in 1998
as compared to $2.1 million in 1997. During the year ended December 31, 1998,
the Company licensed approximately 121 new customers (including system
integration / distributor partners) which compares with approximately 104 during
the year ended December 31, 1997. As of December 31, 1998, the Company had a
total installed license base of over 250 customers which compares with
approximately 153 as of December 31, 1997. The Company's professional services
revenues as a percentage of total revenues may decline to the extent the
Company's strategy of developing business alliances with third parties, such as
system integrators, continues to expand.
In June 1998, the Company re-negotiated an existing royalty arrangement with
one of its software vendors. As a result of the re-negotiation, the Company paid
the vendor a fixed fee of $1.25 million for royalties through 2001 and certain
internal development rights through 1999. Previously, the Company had an
existing arrangement with this vendor whereby the Company made quarterly royalty
payments based on a percentage of product revenues. Concurrent with the
re-negotiation, the Company sold this vendor an end-use software license
totaling $1.25 million, inclusive of maintenance and support. The sale to this
vendor resulted in software license revenues of approximately $1.0 million
during the quarter ended June 30, 1998.
In July 1998, the Company finalized a strategic alliance with S1, an Internet
virtual financial services company. Accordingly, BroadVision sold S1 specified
software licenses including certain re-seller rights in exchange for 181,610
shares of restricted S1 common stock that had a fair value of approximately $4.0
million. As part of the agreement, the companies also agreed to jointly develop
and market a suite of Internet-based products based on S1's Internet banking
products and BroadVision's One-to-One Financial WebApp. As a result of the
transaction, the Company recognized license revenues of approximately $1.9
million and deferred revenues of approximately $2.1 million during the quarter
ended September 30, 1998. The $2.1 million of deferred revenues consisted of
$1,015,000 of deferred software license fees and joint development services,
$949,000 for three years of maintenance and support, and $175,000 of specified
training services. The deferred software license fees and joint development
services revenue will be recognized as revenue as the joint development services
are performed. The deferred maintenance will be recognized as revenue ratably
over the maintenance term, and the deferred training services will be recognized
as the training is performed.
28
In addition to the strategic alliance to jointly develop product, the Company
entered into a $3.5 million license and maintenance agreement with Sema Group in
December 1998. As part of the agreement, Sema Group purchased licenses to resell
the Company's existing software products and received expanded territorial
rights. The licensing agreement with this reseller resulted in software license
revenues of approximately $2.75 million during the quarter ended December 31,
1998.
1997 versus 1996
Total annual revenues for the Company were $27.1 million in 1997 as compared
to $10.9 million in 1996, which represents an increase of 149% year-over-year.
Annual software license revenues were $19.0 million in 1997 as compared to $7.5
million in 1996, which represents an increase of 154% year-over-year. Annual
professional services revenues were $8.1 million in 1997 as compared to $3.4
million in 1996, which represents an increase of 138% year-over-year.
The increase in license revenues is a result of strong market acceptance of
the Company's cornerstone product, the BroadVision One-to-One Enterprise, which
was augmented by the introduction in 1997 of new complementary WebApp packaged
solutions; One-To-One Commerce, One-To-One Financial, and One-To-One Knowledge.
The increase in professional services revenue is a result of higher business
volumes, greater utilization of the Company's professional consultants and an
expanding installed customer base under maintenance contracts. Maintenance
revenues were $2.1 million in 1997 as compared to $599,000 in 1996.
Cost of Revenues
Cost of license revenues includes royalties payable to third parties for
software that is either embedded in, or bundled and sold with, the Company's
products; commissioned agent fees paid to distributors; and the costs of product
media, duplication, packaging and other associated manufacturing costs.
Cost of services consists primarily of employee-related costs, third-party
consultant fees incurred on consulting projects, post contract customer support,
and instructional training services.
Years Ended December 31,
---------------------------------------------------------------
(in thousands) 1998 % 1997 % 1996 %
-------------- ---- - ---- - ---- -
Cost of license revenues [1] $1,001 3% $1,664 9% $ 330 4%
Cost of services revenues [2] 8,704 59 4,284 53 2,164 63
------ -- ------ --- ------ --
Total cost of revenues [3] $9,705 19% $5,948 22% $2,494 23%
====== == ====== == ====== ==
<FN>
[1] -- Percentage is calculated based on total software license revenues for the period indicated
[2] -- Percentage is calculated based on total services revenues for the period indicated
[3] -- Percentage is calculated based on total revenues for the period indicated
</FN>
1998 versus 1997
For the year ended December 31, 1998, cost of license revenues decreased
$663,000 or 40% on a year-over-year basis. Cost of software licenses as a
percent of license revenues was 3% in 1998 as compared to 9% in 1997. Cost of
services revenues during 1998 increased $4.4 million or 103% on a year-over-year
basis. Cost of services as a percent of services revenues was 59% in 1998 as
compared to 53% in 1997.
The decrease in cost of license revenues, in both absolute dollar and
relative percentage terms, was principally a result of lower commissioned agent
fees and third party royalty rates. The Company continues to expand its in-house
sales force capabilities and during 1998 Company-generated direct sales were
higher and commissioned agent sales were lower relative to 1997.
29
In addition, royalty costs relative to total license revenues decreased as a
result of the Company renegotiating a previously existing percentage based
royalty arrangement into a prepaid fixed fee royalty for a period through 2001.
The increase in cost of services revenues in absolute dollar terms during
1998 as compared to 1997 is a result of expanded business volumes as evidenced
by increased services revenues. Overall costs increased as a result of additions
to the Company's professional services staff and the employment of outside
consultants to meet short-term consulting demands.
The increase in cost of services as a percentage of services revenues is a
result of higher utilization of outside consultants in relation to the extent
previously utilized during the prior year period. The Company expects that
services costs will continue to increase in absolute dollar terms as the Company
continues to expand its services organization to support higher business
volumes.
1997 versus 1996
Cost of license revenues on an annual basis was $1.7 million or 9% of related
software license revenues in 1997 as compared to $330,000 or 4% of related
software license revenues in 1996.
Cost of license revenues increased in both absolute dollar and relative
percentage terms during 1997 as compared to 1996 due to expanded sales volumes
and higher commissioned agent fees as a result of increased distributor sales
volume. Commissioned agent fees were $703,000 in 1997 as compared to $80,000 in
1996. To a lesser extent, an increased number of third-party products bundled
with or embedded in the Company's products also contributed to the increases.
Cost of services revenues on an annual basis was $4.3 million or 53% of
related services revenues in 1997 as compared to $2.2 million or 63% of related
services revenue in 1996.
Cost of services revenues increased 98% in absolute dollar terms during 1997
as compared to 1996 due to expanded business volumes, as represented by the 138%
increase in total services revenues. The higher level of costs in absolute
dollar terms are attributable to additions to the Company's consulting staff,
the employment of outside consultants to meet short-term consulting demands, an
increasing number of licenses with support or maintenance components, and a
higher level of fixed costs resulting from the Company's expansion of its
services organization to meet higher business volumes. The decrease in cost of
services revenues as a percentage of total services revenues during 1997 as
compared to 1996 is principally a result of increased utilization of
professional staff.
Operating Expenses and Other Income, net
Research and development expenses consist primarily of salaries,
employee-related benefit costs, and consulting fees incurred in association with
the development of the Company's products. Costs incurred for the research and
development of new software products are expensed as incurred until such time
that technological feasibility, in the form of a working model, is established
at which time such costs are capitalized subject to recoverability. The costs
incurred by the Company subsequent to the establishment of a working model but
prior to general release have not been significant. To date, the Company has not
capitalized any software development costs.
Sales and marketing expenses consist primarily of salaries, employee-related
benefit costs, commissions and other incentive compensation, travel and
entertainment, and marketing program related expenditures such as collateral
materials, trade shows, public relations, and creative services.
General and administrative expenses consist primarily of salaries,
employee-related benefit costs, and professional service fees.
30
A summary of the Company's operating expenses and net other income for the
periods indicated is as follows:
Years Ended December 31,
---------------------------------------------------------------
(in thousands) 1998 % [1] 1997 % [1] 1996 % [1]
-------------- -------------------- -------------------- --------------------
Research and Development $ 9,227 18% $ 7,392 27% $ 4,985 46%
Sales and Marketing 26,269 52 18,413 68 12,066 111
General and Administrative 3,786 7 2,990 11 2,034 19
-------------------- -------------------- --------------------
Total Operating Expenses $ 39,282 77% $ 28,795 106% $ 19,085 176%
==================== ==================== ====================
Other income, net $ 2,036 4% $ 265 1% $ 552 5%
==================== ==================== ====================
<FN>
[1] -- Expressed as a percent of total revenues for the period indicated
</FN>
1998 versus 1997
Research and development expenses for the year were $9.2 million in 1998 as
compared to $7.4 million in 1997 which represents an increase of 25%
year-over-year.
Sales and marketing expenses for the year were $26.3 million in 1998 as
compared to $18.4 million in 1997 which represents an increase of 43%
year-over-year.
General and administrative expenses for the year were $3.8 million in 1998 as
compared to $3.0 million in 1997 which represents an increase of 27%
year-over-year.
Net other income for the year was $2.0 million in 1998 as compared to
$265,000 in 1997 which represents an increase of 668% year-over-year.
The increase in research and development expenses in absolute dollar terms is
primarily attributable to personnel costs for added headcount within those
operations involved in the enhancement of existing applications and the
development of the Company's next generation of products. Research and
development expenses, as a percentage of total revenues, decreased because
revenues have increased at a higher rate relative to expenses. The Company
expects research and development expenses will continue to increase in absolute
dollars terms.
The increases in sales and marketing expenses in absolute dollar terms
reflects the cost of hiring additional sales and marketing personnel, the
continued development of sales distribution channels, and the expansion of
promotional activities and marketing related programs. In addition, commission
rates were higher during 1998 as result of sales people exceeding their sales
quotas. Sales and marketing expenses, as a percentage of total revenues,
decreased because revenues have increased at a higher rate relative to expenses.
The Company expects sales and marketing expenses will continue to increase in
absolute dollar terms.
The increase in general and administrative expenses in absolute dollar terms
is attributable to additional administrative and management personnel, higher
professional fees and additional infrastructure to support the expansion of the
Company's operations. General and administrative expenses, as a percentage of
total revenues, decreased because revenues have increased at a higher rate
relative to expenses. The Company expects general and administrative expenses
will continue to increase in absolute dollar terms.
The increase in net other income is attributable to a higher level of
investment income during the year as a result of earnings on proceeds received
from a follow-on public stock offering in March 1998.
31
1997 versus 1996
Research and development expenses for the year were $7.4 million in 1997 as
compared to $5.0 million in 1996 which represents an increase of 48%
year-over-year.
Sales and marketing expenses for the year were $18.4 million in 1997 as
compared to $12.1 million in 1996 which represents an increase of 53%
year-over-year.
General and administrative expenses for the year were $3.0 million in 1997 as
compared to $2.0 million in 1996 which represents an increase of 47%
year-over-year.
Net other income for the year was $265,000 in 1997 as compared to $552,000 in
1996 which represents a decrease of 52% year-over-year.
The increase in research and development expenses is primarily attributable
to costs associated with additional personnel within those operations for the
enhancement of existing products and the development of new products.
The overall increases in sales and marketing expenditures reflect the cost of
hiring additional sales and marketing personnel, developing and expanding sales
distribution channels, new product introductions, and expanding promotional
activities.
The increases in general and administrative expenses are attributable to the
hiring of additional administrative and management personnel, increased
professional fees, additional provision for doubtful accounts, and additional
infrastructure to support the expansion of the Company's operations.
Income Taxes
For the year ended December 31, 1998, the Company recorded a net income tax
benefit of $79,000, comprised of a deferred tax benefit of $700,000 and current
tax expense of $621,000.
The Company recorded a deferred tax benefit during 1998 due to the reversal
of a portion of the valuation allowance previously provided against its deferred
tax assets after evaluation of all available evidence about the realizability of
the deferred tax assets. In determining that it is more likely than not that the
net deferred tax assets as of December 31, 1998 will be realized, the Company
assumed a limited amount of future taxable income considering all available
evidence and the Company's profitability during 1998. The Company assumed only a
limited amount of future taxable income after considering such factors as a
history of operating losses prior to the second quarter of 1998, the nature of
the Company's deferred tax assets, the lack of significant firm sales backlog
and the length of the sales cycle, the competitive market in which the Company
operates, and the lack of carryback capacity to realize the deferred tax assets.
The Company recorded current tax expense during 1998 primarily related to
foreign withholding and alternative minimum taxes. During 1997 and 1996, the
Company generated pre-tax losses of $7.4 million and $10.1 million,
respectively. Due to the uncertainty about the realizability of the deferred tax
assets, the Company recorded a full valuation allowance to reduce the net
deferred tax assets to zero as of both December 31, 1997 and 1996.
As of December 31, 1998, the Company had federal and state net operating loss
carryforwards of approximately $12,973,000 and $5,539,000, respectively,
available to offset future regular and alternative minimum taxable income. In
addition, the Company had federal and state research and development credit
carryforwards of approximately $790,000 and $666,000, respectively, available to
offset future tax liabilities. The Company's federal net operating loss and tax
credit carryforwards expire in the years 2010 through 2012, if not utilized. The
state net operating loss carryforwards expire in the years 2000 through 2002.
32
The state research and development credits can be carried forward
indefinitely. As of December 31, 1998, the Company's foreign subsidiaries had
net operating loss carryforwards in foreign jurisdictions of approximately
$5,400,000 that can be used to offset future foreign income. Of these losses,
approximately $1,600,000 expire in the years 2001 through 2003. Approximately
$3,800,000 of these losses can be carried forward indefinitely. Federal and
state tax laws limit the use of net operating loss carryforwards in certain
situations where changes occur in the stock ownership of a company. The Company
believes such an ownership change, as defined, may have occurred and,
accordingly, certain of the Company's federal and state net operating loss
carryforwards may be limited in their annual usage.
Liquidity and Capital Resources
The Company's liquidity along with selected ratios are set forth below:
Years Ended December 31,
-------------------------------------
(Dollars in thousands) 1998 1997 1996
--------- --------- -------
Cash and cash equivalents $ 61,878 $ 8,277 $17,608
========= ========= =======
Working capital $ 64,320 $ 11,485 $18,258
========= ========= =======
Working capital ratio 4.9 : 1 2.4 : 1 3.5 : 1
========= ========= =======
At December 31, 1998, the Company had $61.9 million in cash and cash
equivalents which represents an increase of $53.6 million as compared to
December 31, 1997. The Company currently has no significant capital commitments
other than obligations under equipment and operating leases and $3.5 million
outstanding under a term debt credit facility with its commercial bank. The
Company has funded its operations by cash generated from operations, the private
placement of Common and Preferred Stock and public offerings of its Common Stock
(through May 1996, private placements provided net proceeds totaling $15.5
million and public stock offerings during June 1996 and March 1998 netted the
Company proceeds of $20.7 million and $53.7 million, respectively).
Cash provided by operating activities was $1.4 million in 1998 and cash used
for operating activities was $8.7 million and $8.4 million in 1997 and 1996,
respectively. Cash used for investing activities was $6.6 million, $3.6 million
and $4.4 million in 1998, 1997 and 1996, respectively, and was primarily for
capital expenditures and the acquisition of long-term strategic investments.
Cash provided by financing activities was $58.8 million, $2.9 million and $26.1
million in 1998, 1997, and 1996, respectively, and consists primarily of
proceeds from the issuance of stock and, to a lesser extent, proceeds from
borrowings.
The Company believes that its available cash resources, cash generated from
operations and amounts available under its commercial credit facilities will be
sufficient to meet its expected working capital and capital expenditure
requirements for at least the next 12 months. This estimate is a forward-looking
statement that involves risks and uncertainties, and actual results may vary as
a result of a number of factors, including those discussed under "Risk Factors"
and elsewhere herein. The Company may need to raise additional funds in order to
support more rapid expansion, develop new or enhanced services, respond to
competitive pressures, acquire complementary businesses or technologies, or
respond to unanticipated requirements. The Company may seek to raise additional
funds through private or public sales of securities, strategic relationships,
bank debt, financing under leasing arrangements, or otherwise. If additional
funds are raised through the issuance of equity securities, the percentage
ownership of the stockholders of the Company will be reduced, stockholders may
experience additional dilution, or such equity securities may have rights,
preferences, or privileges senior to those of the holders of the Company's
Common Stock. There can be no assurance that additional financing will be
available on acceptable terms, if at all. If adequate funds are not available or
are not available on acceptable terms, the Company may be unable to develop or
enhance its products, take advantage of future opportunities, or respond to
competitive pressures or unanticipated requirements, which could have a material
adverse effect on the Company's business, financial condition, and operating
results.
33
QUARTERLY RESULTS OF OPERATIONS
Statement of Operations
--------------------------------------------------------------------------------------
1998 Quarter Ended 1997 Quarter Ended
------------------------------------------ ------------------------------------------
(in thousands) Dec 31 Sept 30 June 30 Mar 31 Dec 31 Sept 30 June 30 Mar 31
---------- -------------------- ---------- ---------- -------------------- ----------
Revenues:
Software licenses $11,612 $ 9,158 $ 8,018 $ 7,279 $ 6,213 $ 5,513 $ 4,098 $ 3,148
Services 4,404 4,273 3,367 2,800 2,420 1,641 1,929 2,143
---------- -------------------- ---------- ---------- -------------------- ----------
Total revenues 16,016 13,431 11,385 10,079 8,633 7,154 6,027 5,291
Cost of revenues:
Cost of software licenses 364 237 213 187 566 460 425 214
Cost of services 2,439 2,553 2,092 1,620 1,130 1,010 1,001 1,143
---------- -------------------- ---------- ---------- -------------------- ----------
Total cost of revenues 2,803 2,790 2,305 1,807 1,696 1,470 1,426 1,357
---------- -------------------- ---------- ---------- -------------------- ----------
Gross profit 13,213 10,641 9,080 8,272 6,937 5,684 4,601 3,934
Operating expenses:
Research and development 2,751 2,394 2,049 2,033 1,797 2,113 1,802 1,680
Sales and marketing 7,880 6,285 6,243 5,861 5,323 4,630 4,257 4,204
General and administrative 1,225 977 760 824 780 763 700 746
---------- -------------------- ---------- ---------- -------------------- ----------
Total operating expenses 11,856 9,656 9,052 8,718 7,900 7,506 6,759 6,630
---------- -------------------- ---------- ---------- -------------------- ----------
Operating income (loss) 1,357 985 28 (446) (963) (1,822) (2,158) (2,696)
Other income (expense), net 655 769 665 (53) (123) 131 49 209
---------- -------------------- ---------- ---------- -------------------- ----------
Income (loss) before tax 2,012 1,754 693 (499) (1,086) (1,691) (2,109) (2,487)
Income tax benefit 79 - - - - - - -
---------- -------------------- ---------- ---------- -------------------- ----------
Net income (loss) $ 2,091 $ 1,754 $ 693 $ (499) $(1,086) $(1,691) $(2,109) $(2,487)
========== ==================== ========== ========== ==================== ==========
As a Percentage of Revenues
Revenues:
Software licenses 72.5% 68.2% 70.4% 72.2% 72.0% 77.1% 68.0% 59.5%
Services 27.5 31.8 29.6 27.8 28.0 22.9 32.0 40.5
---------- -------------------- ---------- ---------- -------------------- ----------
Total revenues 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0
Cost of revenues:
Cost of software licenses 2.3 1.8 1.8 1.8 6.6 6.4 7.1 4.0
Cost of services 15.2 19.0 18.4 16.1 13.1 14.1 16.6 21.6
---------- -------------------- ---------- ---------- -------------------- ----------
Total cost of revenues 17.5 20.8 20.2 17.9 19.6 20.5 23.7 25.6
---------- -------------------- ---------- ---------- -------------------- ----------
Gross profit 82.5 79.2 79.8 82.1 80.4 79.5 76.3 74.4
Operating expenses:
Research and development 17.2 17.8 18.0 20.2 20.8 29.5 29.9 31.8
Sales and marketing 49.2 46.8 54.8 58.1 61.7 64.7 70.6 79.4
General and administrative 7.6 7.3 6.7 8.2 9.0 10.7 11.6 14.1
---------- -------------------- ---------- ---------- -------------------- ----------
Total operating expenses 74.0 71.9 79.5 86.5 91.5 104.9 112.1 125.3
---------- -------------------- ---------- ---------- -------------------- ----------
Operating income (loss) 8.5 7.3 0.3 (4.4) (11.1) (25.4) (35.8) (50.9)
Other income (expense), net 4.1 5.8 5.8 (0.6) (1.4) 1.8 0.8 3.9
---------- -------------------- ---------- ---------- -------------------- ----------
Income (loss) before tax 12.6 13.1 6.1 (5.0) (12.6) (23.6) (35.0) (47.0)
Income tax benefit 0.5 - - - - - - -
---------- -------------------- ---------- ---------- -------------------- ----------
Net income (loss) 13.1% 13.1% 6.1% (5.0)% (12.6)% (23.6)% (35.0)% (47.0)%
========== ==================== ========== ========== ==================== ==========
The above tables set forth certain unaudited consolidated statement of
operations data for the eight quarters ended December 31, 1998, as well as such
data expressed as a percentage of the Company's total revenues for the period
indicated. This data has been derived from unaudited consolidated financial
statements that, in the opinion of management, include all adjustments
(consisting only of normal recurring adjustments) necessary for a fair
presentation of such information when read in conjunction with the Consolidated
Financial Statements and Notes thereto.
34
The unaudited quarterly information above should be read in conjunction with
the Consolidated Financial Statements of the Company and Notes thereto included
elsewhere in this Form 10-K. The Company believes that period-to-period
comparisons of its financial results are not necessarily indicative of future
results and should not be relied upon as an indication of future performance.
The Company expects to experience significant fluctuations in future quarterly
operating results that may be caused by many factors including, among others,
the timing of introductions or enhancements of products and services by the
Company or its competitors, the length of the Company's sales cycle, market
acceptance of new products, the pace of development of the market for online
commerce, the mix of the Company's products sold, the size and timing of
significant orders and the timing of customer production or deployment, demand
for the Company's products, changes in pricing policies by the Company or its
competitors, changes in the Company's sales incentive plans, budgeting cycles of
its customers, customer order deferrals in anticipation of new products or
enhancements by the Company or its competitors, nonrenewal of service
agreements, product life cycles, software defects and other product quality
problems, changes in strategy, changes in key personnel, the extent of
international expansion, seasonal trends, the mix of distribution channels
through which the Company's products are sold, the mix of international and
domestic sales, changes in the level of operating expenses to support projected
growth, and general economic conditions.
The Company anticipates that a significant portion of its revenues will be
derived from a limited number of orders, and the timing of receipt and
fulfillment of any such orders is expected to cause material fluctuations in the
Company's operating results, particularly on a quarterly basis. As with many
software companies, the Company anticipates that it will make the major portion
of each quarter's deliveries near the end of each quarter and, as a result,
short delays in delivery of products at the end of a quarter could adversely
affect operating results for that quarter. In addition, the Company intends, in
the near term, to increase significantly its personnel, including its domestic
and international direct sales force. The timing of such expansion and the rate
at which new sales people become productive could also cause material
fluctuations in the Company's quarterly operating results.
Due to the foregoing factors, quarterly revenues and operating results are
difficult to forecast, and the Company believes that period-to-period
comparisons of its operating results will not necessarily be meaningful and
should not be relied upon as any indication of future performance. It is likely
that the Company's future quarterly operating results from time to time will not
meet the expectations of market analysts or investors, which may have an adverse
effect on the price of the Company's Common Stock.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standard ("SFAS") No. 133, Accounting for
Derivative Instruments and Hedging Activities, effective for all fiscal quarters
of fiscal years beginning after June 15, 1999. Accordingly, the Company will
adopt SFAS No. 133 beginning on January 1, 2000. SFAS No. 133 establishes
standards for the accounting and reporting of derivative instruments and hedging
activities, including certain derivative instruments embedded in other
contracts. Under SFAS No. 133, entities are required to carry all derivative
instruments at fair value on their balance sheets. The accounting for changes in
the fair value (i.e., gains or losses) of a derivative instrument depends on
whether it has been designated and qualifies as part of a hedging activity and
the underlying purpose for it. The Company does not believe that the adoption of
SFAS No. 133 will have a significant impact on the Company's consolidated
financial statements or related disclosures.
In March 1998, the American Institute of Certified Public Accountants
("AICPA") issued Statement of Position ("SOP") 98-1, Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use. SOP 98-1 requires that
certain costs related to the development or purchase of internal-use software be
capitalized and amortized over the estimated useful life of the software. SOP
98-1 is effective for fiscal years beginning after December 15, 1998.
Accordingly, the Company will adopt SOP 98-1 beginning on January 1, 1999. The
Company does not believe that the adoption of SOP 98-1 will have a significant
impact on the Company's consolidated financial statements or related
disclosures.
35
In December 1998, the Accounting Standards Executive Committee ("AcSEC") of
the AICPA issued SOP 98-9 Software Revenue Recognition, With Respect to Certain
Transactions, which requires recognition of revenue using the "residual method"
in a multiple-element arrangement when fair value does not exist for one or more
of the delivered elements in the arrangement. Under the "residual method", the
total fair value of the undelivered elements is deferred and subsequently
recognized in accordance with SOP 97-2. The Company does not expect a material
change to its revenue accounting as a result of the provisions of SOP 98-9.
RISK FACTORS
This Form 10-K contains forward-looking statements that involve risks and
uncertainties. The Company's actual results may differ materially from the
results discussed in the forward-looking statements. Factors that might cause
such a difference include, but are not limited to, those discussed below and
elsewhere in this Form 10-K.
Limited Operating History; Fluctuations in Quarterly Operating Results
The Company's limited operating history makes the prediction of future
results of operations difficult and, accordingly, there can be no assurance that
the Company will achieve or sustain revenue growth or profitability. In
addition, the Company has only limited historical financial data for quarterly
periods on which to base planned operating expenses. The Company's expense
levels are based in part on its product development requirements as well as its
expectations as to future revenues. The Company anticipates that its operating
expenses will increase substantially for the foreseeable future as the Company
continues to develop and market its initial products, increase its sales and
marketing activities, create and expand the distribution channels for its
products, and broaden its customer support capabilities.
The Company expects to experience significant fluctuations in future
quarterly operating results that may be caused by many factors including, among
others, the timing of introductions or enhancements of products and services by
the Company or its competitors, the length of the Company's sales cycle, market
acceptance of new products, the pace of development of the market for online
commerce, the mix of the Company's products sold, the size and timing of
significant orders and the timing of customer production or deployment, demand
for the Company's products, changes in pricing policies by the Company or its
competitors, changes in the Company's sales incentive plans, budgeting cycles of
its customers, customer order deferrals in anticipation of new products or
enhancements by the Company or its competitors, nonrenewal of service
agreements, product life cycles, software defects and other product quality
problems, changes in strategy, changes in key personnel, the extent of
international expansion, seasonal trends, the mix of distribution channels
through which the Company's products are sold, the mix of international and
domestic sales, changes in the level of operating expenses to support projected
growth, and general economic conditions. The Company anticipates that a
significant portion of its revenues will be derived from a limited number of
orders, and the timing of receipt and fulfillment of any such orders is expected
to cause material fluctuations in the Company's operating results, particularly
on a quarterly basis. As with many software companies, the Company anticipates
that it will make the major portion of each quarter's deliveries near the end of
each quarter and, as a result, short delays in delivery of products at the end
of a quarter could adversely affect operating results for that quarter. In
addition, the Company intends, in the near term, to increase significantly its
personnel, including its domestic and international direct sales force. The
timing of such expansion and the rate at which new sales people become
productive could also cause material fluctuations in the Company's quarterly
operating results.
Due to the foregoing factors, quarterly revenues and operating results are
difficult to forecast, and the Company believes that period-to-period
comparisons of its operating results will not necessarily be meaningful and
should not be relied upon as any indication of future performance. It is likely
that the Company's future quarterly operating results from time to time will not
meet the expectations of market analysts or investors, which may have an adverse
effect on the price of the Company's Common Stock. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations."
36
Early Stage of Market Development; Dependence on the Internet
The Company's products and services facilitate online communication and
commerce over public and private networks. The market for the Company's products
and services is in its early stages of development and is rapidly evolving. As
is typical for new and rapidly evolving industries, demand and market acceptance
for recently introduced products and services are subject to a high level of
uncertainty, especially where, as is true of the Company, acquisition of the
product requires a large capital commitment or other significant commitment of
resources. With respect to the Company, this uncertainty is compounded by the
risks that consumers and enterprises will not adopt electronic commerce and
knowledge management and that an appropriate infrastructure necessary to support
increased commerce and communication on the Internet will fail to develop, in
each case, to a sufficient extent and within an adequate time frame to permit
the Company to succeed. Adoption of electronic commerce and knowledge
management, particularly by those individuals and enterprises that have
historically relied upon traditional means of commerce and communication, will
require a broad acceptance of new and substantially different methods of
conducting business and exchanging information. Moreover, the Company's products
and services involve a new approach to the conduct of online business and, as a
result, intensive marketing and sales efforts may be necessary to educate
prospective customers regarding the uses and benefits of the Company's products
and services in order to generate demand for the Company's systems. For example,
enterprises that have already invested substantial resources in other methods of
conducting business may be reluctant or slow to adopt a new approach that may
replace, limit, or compete with their existing systems.
Similarly, individuals with established patterns of purchasing goods and
services may be reluctant to alter those patterns or may otherwise be resistant
to providing the personal data which is necessary to support the Company's
consumer profiling capability. Moreover, the security and privacy concerns of
existing and potential users of the Company's products and services may inhibit
the growth of online business generally and the market's acceptance of the
Company's products and services in particular. Accordingly, there can be no
assurance that a viable market for the Company's products will emerge or be
sustainable. Sales of most of the Company's products and services will depend
upon the adoption of the Internet as a widely used medium for commerce and
communication. The Internet has experienced, and is expected to continue to
experience, significant growth in the number of users and amount of traffic.
There can be no assurance that the Internet infrastructure will continue to be
able to support the demands placed on it by this continued growth. In addition,
the Internet could lose its viability due to delays in the development or
adoption of new standards and protocols to handle increased levels of Internet
activity or due to increased governmental regulation. Moreover, certain issues
concerning the commercial use of the Internet (such as, security, reliability,
cost, ease of use, accessibility, and quality of service) and the subsequent
outcomes of such issues may negatively affect the growth of Internet use or the
attractiveness of commerce and communication on the Internet. Because global
commerce and online exchange of information on the Internet and other similar
open wide area networks are relatively new and evolving, there can be no
assurance that the Internet will prove to be a viable commercial marketplace. If
critical issues concerning the commercial use of the Internet are not favorably
resolved, if the necessary infrastructure and complementary products are not
developed, or if the Internet does not become a viable commercial marketplace,
the Company's business, financial condition, and operating results will be
materially adversely affected.
Potential Impact of Privacy Concerns
One of the principal features of the BroadVision One-To-One applications
products is the ability to develop and maintain profiles for use by business
managers in determining the nature of the content to be provided to that
customer. Typically, profile information is often captured when consumers,
business customers, and employees visit a site on the Web and volunteer
information in response to survey questions concerning their backgrounds,
interests, and preferences. Profiles are augmented over time through the
collection of usage data. Although BroadVision One-To-One products are designed
to enable the development of applications that permit Web site visitors to
prevent the distribution of any of their personal data beyond that specific Web
site, privacy concerns may nevertheless cause visitors to be resistant to
providing the personal data necessary to support this profiling capability.
Moreover, even the perception of substantial security and privacy concerns,
whether or not valid, may indirectly inhibit market acceptance of the Company's
products. In addition, such concerns may be heightened by legislative or
regulatory requirements that require notification to Web site users that the
data captured as a result of visitation of certain Web sites may be used by
marketing entities to unilaterally address product promotion and advertising to
that user.
37
While the Company is not aware of any such legislation or regulatory
requirements currently in effect in the United States, certain other countries
and political entities, such as the European Community, have adopted such
legislation or regulatory requirements, and no assurance can be given that
similar legislation or regulator requirements will not be adopted in the United
States. If the privacy concerns of consumers are not adequately addressed, the
Company's business, financial condition, and operating results could be
materially adversely affected.
Competition
The market for online interactive relationship management applications is
rapidly evolving, and intensely competitive. The Company expects competition to
persist and intensify in the future. The Company's primary competition comes
from in-house development efforts by potential customers or partners. The
Company's competitors also include other vendors of application software
directed at interactive commerce and financial services and Web content
developers engaged to develop custom software or to integrate other application
software into custom solutions. The Company currently encounters direct
competition from Edify Corporation ("Edify"), InterWorld Corporation
("InterWorld"), International Business Machines Inc. ("IBM"), Microsoft
Corporation ("Microsoft"), Open Market Inc. ("OMI"), and Vignette Corporation
("Vignette"), among others. Some of these competitors have longer operating
histories, and significantly greater financial, technical, marketing, and other
resources than the Company and thus may be able to respond more quickly to new
or changing opportunities, technologies, and customer requirements. Also,
current and potential competitors may have greater name recognition and more
extensive customer bases that could be leveraged, thereby gaining market share
to the Company's detriment. Such competitors may be able to undertake more
extensive promotional activities, adopt more aggressive pricing policies, and
offer more attractive terms to purchasers than the Company. Moreover, certain of
the Company's current and potential competitors, such as IBM and Microsoft, may
bundle their products in a manner that may discourage users from purchasing
products offered by the Company. In addition, current and potential competitors
have established or may establish cooperative relationships among themselves or
with third parties to enhance their products. Accordingly, it is possible that
new competitors or alliances among competitors may emerge and rapidly acquire
significant market share.
The principal competitive factors affecting the market for the Company's
products are depth and breadth of functionality offered, ease of application
development, time required for application development, reliance on industry
standards, reliability, scaleability, maintainability, personalization and other
features, product quality, price, and customer support. The Company believes it
presently competes favorably with respect to each of these factors. However, the
Company's market is still evolving, and there can be no assurance that the
Company will be able to compete successfully with current or future competitors,
or that competitive pressures faced by the Company will not have a material
adverse effect on the Company's business, financial condition, and operating
results.
Product and Customer Concentration
To date, substantially all of the Company's revenues have been attributable
to sales of licenses of the BroadVision One-To-One Enterprise and related WebApp
packaged solutions and associated services. The Company currently expects the
BroadVision One-To-One Applications Products and related services to account for
most of its future revenues. Accordingly, if any of the Company's customers are
not able to successfully develop and deploy an online marketplace using
BroadVision One-To-One Applications Products, the Company's reputation could be
damaged, which could have a material adverse effect on the Company's business,
financial condition, and operating results. In addition, factors adversely
affecting the pricing of or demand for the BroadVision One-To-One Applications
Products, such as competition or technological change, could have a material
adverse effect on the Company's business, financial condition, and operating
results. The Company's future financial performance will depend, in significant
part, on the successful development, introduction, and customer acceptance of
new and enhanced versions of the BroadVision One-To-One Applications Products
and other new products the Company may develop. There can be no assurance that
the Company will be successful in upgrading and continuing to market the
BroadVision One-To-One Applications Products or that the Company will
successfully develop new products or that any new products will achieve market
acceptance.
38
During 1998, no customer accounted for more than 10% of the Company's total
revenues. In 1997, software license and service revenues from one customer
accounted for approximately 11% of the Company's total revenues and during 1996
one different customer accounted for 10% of the Company's total revenues.
Lengthy Sales and Implementation Cycles
The license of the Company's software products is often an enterprise-wide
decision by prospective customers, requiring the Company to engage in a lengthy
sales cycle to provide a significant level of education to prospective customers
regarding the use and benefits of the Company's products. In addition, the
implementation of the Company's products involves a significant commitment of
resources by customers or by the Company's Worldwide Professional Services
Organization consultants over an extended period of time.
As a result, the Company's sales and customer implementation cycles are
subject to a number of significant delays over which the Company has little or
no control. In many cases, the Company expects to recognize a substantial
portion of the revenue related to the sale of its products upon deployment or
production by the customer of the products. As a result, delays in license
transactions due to lengthy sales cycles or delays in customer production or
deployment of a product could have a material adverse effect on the Company's
business, financial condition, and operating results and can be expected to
cause the Company's operating results to vary significantly from quarter to
quarter.
Risks Associated with Expanding Distribution
To date, the Company has sold its products primarily through its direct sales
force. The Company's ability to achieve significant revenue growth in the future
will depend in large part on its success in recruiting and training sufficient
direct sales personnel and establishing and maintaining relationships with
distributors, resellers, systems integrators, and other third parties.
Although the Company is currently investing, and plans to continue to invest,
significant resources to expand its sales force and to develop distribution
relationships with third-party distributors and resellers, the Company may at
times experience difficulty in recruiting qualified sales personnel and in
establishing necessary third-party alliances. There can be no assurance that the
Company will be able to successfully expand its direct sales force or other
distribution channels or that any such expansion will result in an increase in
revenues. Any failure by the Company to expand its direct sales force or other
distribution channels would materially adversely affect the Company's business,
financial condition, and operating results.
Dependence on Systems Integrators
The Company's potential customers may rely on third-party systems integrators
to develop, deploy, and manage online marketplaces. If the Company were unable
to adequately train a sufficient number of systems integrators or if, for any
reason, a large number of such integrators were to adopt a different product or
technology instead of the BroadVision One-To-One Applications Products, the
Company's business, financial condition, and operating results could be
materially and adversely affected.
Rapid Technological Change; New Product Delays
The information services, software, and communications industries are
characterized by rapid technological change, changes in customer requirements,
frequent new product and service introductions and enhancements, and emerging
industry standards. The introduction of products and services embodying new
technologies and the emergence of new industry standards and practices can
render existing products and services obsolete and unmarketable. The Company's
future success will depend, in part, on its ability to develop leading
technologies, enhance its existing products and services, develop new products
and services that address the increasingly sophisticated and varied needs of its
prospective customers, and respond to technological advances and emerging
industry standards and practices on a timely and cost-effective basis.
39
There can be no assurance that the Company will be successful in effectively
using new technologies, adapting its products to emerging industry standards,
developing, introducing, and marketing product and service enhancements, or new
products and services, or that it will not experience difficulties that could
delay or prevent the successful development, introduction, or marketing of these
products and services, or that its new product and service enhancements will
adequately meet the requirements of the marketplace and achieve market
acceptance. If the Company is unable, for technical or other reasons, to develop
and introduce new products and services or enhancements of existing products and
services in a timely manner in response to changing market conditions or
customer requirements, or if new products and services do not achieve market
acceptance, the Company's business, financial condition, and operating results
will be materially and adversely affected.
Risks of Product Defects
Sophisticated software products, such as those of the Company, may contain
undetected errors or failures that become apparent when the products are
introduced or when the volume of services provided increases. There can be no
assurance that, despite testing by the Company and potential customers, errors
will not be found in the Company's products, resulting in loss of revenues,
delay in market acceptance, diversion of development resources, damage to the
Company's reputation, or increased service and warranty costs, which would have
a material adverse effect on the Company's business, financial condition, and
operating results.
Year 2000 Compliance
Background and Risks - Many currently installed computer systems and software
and devices with imbedded technology are coded to two digits for time sensitive
dating purposes. Beginning with the year 2000, these date code fields will need
to be four digit functional in order to distinguish between 21st century dates
and 20th century dates. For example, computer programs that have date sensitive
software may incorrectly recognize a date using "00" as the year 1900 rather
than the year 2000. As a result, in less than a year, computer systems, software
products and devices with imbedded technology used by many companies may need to
be upgraded to comply with such "Year 2000" requirements. This type of Year 2000
error could potentially cause system failures or miscalculations that could
disrupt operations, including among other things a temporary inability to
process transactions, issue invoices or engage in similar normal business
activities. The most likely worst case scenarios could include hardware failure
and the failure of infrastructure services provided by government agencies and
other third parties (e.g., electricity, telephone service, water transport,
Internet services, etc.).
Although the Company's products are Year 2000 compliant, the Company believes
that the purchasing patterns of customers could potentially be affected by Year
2000 issues as companies expend significant resources to correct or patch their
current software systems for Year 2000 compliance. These expenditures may result
in reduced funds available to purchase software products such as those offered
by the Company, which could have a material adverse effect on the Company's
business, financial condition, and operating results. In addition, even if the
Company's products are Year 2000 compliant, other systems or software used by
the Company's customers may not be Year 2000 compliant. The failure of such
noncompliant third-party software or systems could affect the perceived
performance of the Company's products, which could have a material adverse
effect on the Company's business, financial condition, and operating results.
State of Readiness - The Company utilizes various financial and managerial
information systems within its operations in the United States, Europe and Asia
which the Company believes to be or will be Year 2000 compliant. As part of its
normal course of business, the Company analyzes its information system
requirements in relation to its business operating goals and strategic
objectives and expects to implement new systems during 1999 that will be Year
2000 compliant. The Company is also analyzing its other systems to identify any
potential Year 2000 issues and will take appropriate corrective action based on
the results of such analysis. Such other systems include non-information
technology systems and services utilized by the Company in its business
operations, such as power, telecommunications, security and general facilities.
The Company is in the process of assessing whether its material suppliers and
vendors are Year 2000 compliant. The Company expects to complete its analysis of
these other systems and the assessment of its third party vendor readiness by
June 30, 1999.
40
Costs for Year 2000 Compliance - Costs that may be incurred by the Company
pertaining to Year 2000 compliance issues include identification, assessment,
remediation and testing efforts, as well as potential costs to be incurred by
the Company with respect to Year 2000 issues of third parties. To date, the
costs incurred by the Company directly related to Year 2000 issues have been
minimal, even in cases where non-compliant information technology systems were
redeployed or replaced. Although the Company has not completed its assessment of
all specific costs, if any, related to achieving complete Year 2000 compliance,
management believes such costs will not be material to the Company's financial
condition or results of operations based on its analysis to date.
Contingency Plans - The Company continues to assess certain of its Year 2000
exposure areas in order to determine what additional steps, beyond those
identified by the Company's internal review to date, are advisable. The Company
is currently in the process of developing a contingency plan for handling Year
2000 problems that are not detected and corrected prior to their occurrence. The
Company expects to complete its plan by June 30, 1999. The Company presently
believes that the Year 2000 issue will not pose significant operational problems
for the Company. However, any failure of the Company to adequately address any
unforeseen Year 2000 issue could adversely affect the Company's business,
financial condition, and results of operations. In addition, if all of the Year
2000 issues are not properly identified, or adequate assessment, remediation and
testing are not effected timely with respect to Year 2000 problems that are
identified, there can be no assurance that the Year 2000 issue would not have a
material adverse impact on the Company's results of operations or adversely
affect the Company's relationships with customers, vendors, partners or others.
Additionally, there can be no assurance that the Year 2000 issues of other
entities will not have a material adverse impact on the Company's systems or
results of operations.
Risks Associated with Encryption Technology
A significant barrier to online commerce and communication is the secure
exchange of value and confidential information over public networks. The Company
relies on encryption and authentication technology, including public key
cryptography technology licensed from RSA, to provide the security and
authentication necessary to effect the secure exchange of value and confidential
information. There can be no assurance that advances in computer capabilities,
new discoveries in the field of cryptography or other events or developments
will not result in a compromise or breach of the RSA or other algorithms used by
the Company to protect customer transaction data. If any such compromise of the
Company's security were to occur, it could have a material adverse effect on the
Company's business, financial condition, and operating results.
Dependence on Intellectual Property Rights
The Company's success and ability to compete are dependent to a significant
degree on its proprietary technology. Although the Company holds a patent,
issued in January 1998, on elements of its BroadVision One-To-One Application
System, there can be no assurance as to the degree of intellectual property
protection the patent will provide. Such as with the lawsuit filed by
BroadVision against ATG on December 11, 1998. The complaint filed by BroadVision
alleges that ATG is infringing BroadVision's U.S. Patent No. 5,710,887 and seeks
injunctive relief and unspecified damages. On February 3, 1999, ATG filed an
answer and counterclaim against BroadVision in which ATG seeks declaratory
judgment for non-interference and declaratory judgment for invalidity of the
patent.
The Company has relied primarily on copyright, trade secret, and trademark
law to protect its technology and has registered "BroadVision" and applied for
registration of "BroadVision One-To-One" as trademarks in the United States. It
is possible that competitors of the Company or others will adopt product names
similar to "One-To-One," thereby impeding the Company's ability to build brand
identity and possibly leading to customer confusion. The Company provides its
products to end users generally under nonexclusive, nontransferable licenses
during the term of the relevant agreement, which is usually in perpetuity. Under
the general terms and conditions of the Company's standard license agreement,
the licensed software may be used solely for internal operations pursuant to
BroadVision's published licensing practices. The Company makes source code
available for certain portions of its products. The source code for the
Company's proprietary software is protected both as a trade secret and as a
copyrighted work. The provision of source code may increase the likelihood of
misappropriation by third parties.
41
The Company's policy is to enter into confidentiality and assignment
agreements with its employees, consultants, and vendors and generally to control
access to and distribution of its software, documentation, and other proprietary
information. Notwithstanding these precautions, it may be possible for a third
party to copy or otherwise obtain and use the Company's software or other
proprietary information without authorization or to develop similar software
independently. Policing unauthorized use of the Company's products is difficult,
particularly because the global nature of the Internet makes it difficult to
control the ultimate destination or security of software or other data
transmitted. The laws of other countries may afford the Company little or no
effective protection of its intellectual property. There can be no assurance
that the steps taken by the Company will prevent misappropriation of its
technology or that agreements entered into for that purpose will be enforceable.
In addition, litigation such as the lawsuit against ATG, may be necessary in the
future to enforce the Company's intellectual property rights, to protect the
Company's trade secrets, to determine the validity and scope of the proprietary
rights of others, or to defend against claims of infringement or invalidity.
Such litigation, whether successful or unsuccessful, could result in substantial
costs and diversions of resources, either of which could have a material adverse
effect on the Company's business, financial condition, and operating results.
See "Business--Intellectual Property and Other Proprietary Rights."
Risk of Infringement
The Company may, in the future, receive notices of claims of infringement of
other parties' trademark, copyright, and other proprietary rights. There can be
no assurance that claims for infringement or invalidity (or claims for
indemnification resulting from infringement claims) will not be asserted or
prosecuted against the Company. In particular, claims could be asserted against
the Company for violation of trademark, copyright, or other laws as a result of
the use by the Company, its customers, or other third parties of the Company's
products to transmit, disseminate, or display information over or on the
Internet. Any such claims, with or without merit, could be time consuming to
defend, result in costly litigation, divert management's attention and
resources, cause product shipment delays, or require the Company to enter into
royalty or licensing agreements. There can be no assurance that such licenses
would be available on reasonable terms, if at all, and the assertion or
prosecution of any such claims could have a material adverse effect on the
Company's business, financial condition, and operating results. See
"Business--Intellectual Property and Other Proprietary Rights."
Dependence on Certain Licenses
The Company relies in part on certain technology which it licenses from third
parties, including RDBMSs from Oracle and Sybase, object request broker software
from IONA, database access technology from Rogue Wave, and other software, which
is integrated with internally developed software and used in the Company's
software to perform key functions. In this regard, all of the Company's services
incorporate data encryption and authentication technology licensed from RSA.
There can be no assurance that the Company's third-party technology licenses
will continue to be available to the Company on commercially reasonable terms,
if at all. The loss or inability to maintain any of these technology licenses
could result in delays in introduction of the Company's products and services
until equivalent technology, if available, is identified, licensed, and
integrated, which could have a material adverse effect on the Company's
business, financial condition, and operating results.
Dependence on Key Personnel
The Company's performance is substantially dependent on the performance of
its executive officers and key employees. The Company is dependent on its
ability to retain and motivate highly qualified personnel, especially its
management and highly skilled development teams. The Company does not have "key
person" life insurance policies on any of its employees. The loss of the
services of any of its key employees, particularly its founder and Chief
Executive Officer, Pehong Chen, could have a material adverse effect on the
Company's business, financial condition, and operating results. The Company's
future success also depends on its continuing ability to identify, hire, train,
and retain other highly qualified technical and managerial personnel.
Competition for such personnel is intense. There can be no assurance that the
Company will be able to attract, assimilate, or retain qualified technical and
managerial personnel in the future, and the failure of the Company to do so
would have a material adverse effect on the Company's business, financial
condition, and operating results. See "Business--Executive Officers and Key
Personnel."
42
Risks Associated with International Strategy
In 1998, approximately 42% of the Company's total revenues were derived from
sales outside of North America. A component of the Company's strategy is its
planned expansion of its international activities. The Company's Asia Pacific
operations have experienced reduced growth rates over the past year as a result
of the generally weak economic conditions of that region. As a result, the
Company would expect that any significant growth in international revenues would
most likely come from its European operations. There can be no assurance that
the Company will be able to maintain and expand its activities in international
markets. In addition, there are certain risks inherent in doing business in
international markets, such as unexpected changes in regulatory requirements,
export controls relating to encryption technology and other export restrictions,
tariffs and other trade barriers, difficulties in staffing and managing foreign
operations, political instability, fluctuations in currency exchange rates,
reduced protection for intellectual property rights in some countries, seasonal
reductions in business activity during the summer months in Europe and certain
other parts of the world, and potentially adverse tax consequences, any of which
could adversely impact the success of the Company's international operations.
There can be no assurance that one or more of such factors will not have a
material adverse effect on the Company's current or future international
operations and, consequently, on the Company's business, financial condition,
and operating results.
Government Regulation
There can be no assurance that a federal, state, or foreign agency will not
attempt to regulate the Company's activities. The Company anticipates that it
may be required to comply with additional regulations, if enacted by federal or
state authorities, as the market for online commerce evolves. The Company also
may be subject to foreign laws and state and foreign sales and use tax laws. If
enacted or deemed applicable to the Company, such laws, rules, or regulations
could be imposed on the Company's activities or its business, thereby rendering
the Company's business or operations more costly or burdensome, less efficient,
or impossible, any of which could have a material adverse effect on the
Company's business, financial condition, and operating results. Due to the
increasing popularity of the Internet, it is possible that laws and regulations
may be enacted with respect to the Internet, covering issues such as user
privacy, pricing, content, and quality of products and services. For example,
because the Company's products involve the solicitation of personal data
regarding individual consumers, the Company's business could be adversely
affected by laws regulating the solicitation, collection, or processing of such
data. The Telecommunications Act of 1996 (the "Telecommunications Act"), which
was enacted in January 1996, prohibits the transmission over the Internet of
certain types of information and content. The scope of the prohibition and
liability associated with any violation of the Telecommunications Act are
currently unsettled. The imposition upon the Company and other software and
service providers of potential liability for information carried on or
disseminated through its application systems could require the Company to
implement measures to reduce its exposure to such liability, which may require
the expenditure of substantial resources, or to discontinue certain services.
The increased attention focused upon these liability issues as a result of the
Telecommunications Act could adversely affect the growth of Internet and private
network use. Any costs incurred by the Company as a result of such liability or
asserted liability could have a material adverse effect on the Company's
business, financial condition, and operating results. In addition, the adoption
of other laws or regulations may reduce the rate of growth of the Internet,
which could in turn decrease the demand for the Company's services and increase
the Company's cost of doing business, or could otherwise have a material adverse
effect on the Company's business, financial condition, and operating results.
The Company's software utilizes encryption technology, the export of which is
regulated by the United States government. There can be no assurance that export
regulations, either in their current form or as may be subsequently enacted,
will not limit the Company's ability, to distribute its software outside the
United States. Moreover, federal or state legislation or regulation may further
limit levels of encryption or authentication technology that the Company is able
to utilize in its software. While the Company takes precautions against unlawful
exportation of its software, the global nature of the Internet makes it
difficult to effectively control the distribution of software. Any revocation or
modification of the Company's export authority, unlawful exportation of the
Company's software, or adoption of new legislation or regulation relating to
exportation of software and encryption technology could have a material adverse
effect on the Company's business, financial condition, and operating results.
43
Future Capital Needs; Uncertainty of Additional Financing
The Company currently anticipates that its available cash resources, cash
generated from operations, and amounts available under its commercial credit
facilities will be sufficient to meet its presently anticipated working capital
and capital expenditure requirements for at least the next 12 months.
The Company may need to raise additional funds in order to support more rapid
expansion, develop new or enhanced services, respond to competitive pressures,
acquire complementary businesses or technologies, or respond to unanticipated
requirements. If additional funds are raised through the issuance of equity
securities, the percentage ownership of the stockholders of the Company will be
reduced, stockholders may experience additional dilution, or such equity
securities may have rights, preferences, or privileges senior to those of the
holders of the Company's Common Stock. There can be no assurance that additional
financing will be available when needed on terms favorable to the Company, if at
all. If adequate funds are not available or are not available on acceptable
terms, the Company may be unable to develop or enhance its products, take
advantage of future opportunities, or respond to competitive pressures or
unanticipated requirements, which could have a material adverse effect on the
Company's business, financial condition, and operating results. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources."
Management of a Changing Business
The Company has experienced substantial change and expansion in its business
and operations since its inception in 1993 and expects to continue to experience
periods of rapid change. The Company's past expansion has placed, and any future
expansion would place, significant demands on the Company's administrative,
operational, financial, and other resources. The Company expects operating
expenses and staffing levels to increase substantially in the future. In
particular, the Company intends to hire a significant number of additional
personnel in 1999 and later years. Competition for such personnel is intense,
and there can be no assurance that the Company will be able to attract,
assimilate, or retain additional highly qualified personnel in the future. The
Company also expects to expend resources with respect to future expansion of its
accounting and internal management systems and the implementation of a variety
of new systems and procedures. In addition, the Company expects that future
expansion will continue to challenge the Company's ability to train, motivate,
and manage its employees and to attract and retain qualified senior managers and
technical persons, such as programmers and software architects. If the Company's
revenues do not increase in proportion to its operating expenses, the Company's
management systems do not expand to meet increasing demands, the Company fails
to attract, assimilate, and retain qualified personnel, or the Company's
management otherwise fails to manage the Company's expansion effectively, there
would be a material adverse effect on the Company's business, financial
condition, and operating results.
Volatility of Stock Price
The market price of the Company's Common Stock is highly volatile and subject
to wide fluctuations in response to quarterly variations in operating results,
announcements of technological innovations or new software or services by the
Company or its competitors, changes in financial estimates by securities
analysts, or other events or factors, many of which are beyond the Company's
control.
In addition, the stock market has experienced significant price and volume
fluctuations that have particularly affected the market prices of equity
securities of many high technology companies and that often have been unrelated
to the operating performance of such companies. These broad market fluctuations
may adversely affect the market price of the Company's Common Stock. In the
past, following periods of volatility in the market price for a company's
securities, securities class action litigation has often been instituted. Such
litigation could result in substantial costs and a diversion of management
attention and resources, which could have a material adverse effect on the
Company's business, financial condition, and operating results. It is likely
that the Company's future quarterly operating results from time to time will not
meet the expectations of market analysts or investors, which may have an adverse
effect on the price of the Company's Common Stock.
44
ITEM 7(a). QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The Company's exposure to market risk for changes in interest rates relates
primarily to its investment portfolio. The Company had no derivative financial
instruments as of December 31, 1998 and 1997. The Company places its investments
in instruments that meet high credit quality standards and the amount of credit
exposure to any one issue, issuer and type of instrument is limited. The Company
does not expect any material loss with respect to its investment portfolio.
The Company's financial instrument holdings as of December 31, 1998 were
analyzed to determine their sensitivity to interest rate changes. In our
sensitivity analysis, we assumed an adverse change in interest rates of 500
basis points and the expected effect on net income was insignificant.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
BroadVision, Inc.:
We have audited the accompanying consolidated balance sheets of BroadVision,
Inc. and subsidiaries as of December 31, 1998 and 1997, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
each of the years in the three-year period ended December 31, 1998. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of BroadVision, Inc.
and subsidiaries as of December 31, 1998 and 1997, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 1998, in conformity with generally accepted accounting
principles.
KPMG LLP
Mountain View, California
January 26, 1999
45
BROADVISION, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except per share data)
December 31,
-----------------------------------------
1998 1997
-------------------- --------------------
ASSETS
Current assets:
Cash, and cash equivalents $ 61,878 $ 8,277
Restricted cash - 1,400
Restricted short-term investments - 796
Accounts receivable, less allowance for doubtful accounts
of $788 and $671 for 1998 and 1997, respectively 15,361 8,783
Prepaids and other 3,589 566
-------------------- --------------------
Total current assets 80,828 19,822
Property and equipment, net 8,034 6,467
Long-term investments 11,546 -
Other assets 1,154 250
==================== ====================
Total assets $ 101,562 $ 26,539
==================== ====================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 2,243 $ 1,863
Accrued expenses 4,933 2,168
Unearned revenue 1,918 532
Deferred maintenance 6,157 2,552
Current portion of capital lease obligations 709 773
Current portion of long-term debt 548 449
-------------------- --------------------
Total current liabilities 16,508 8,337
Capital lease obligations 270 803
Long-term debt 2,924 2,202
Other liabilities 51 76
-------------------- --------------------
Total liabilities 19,753 11,418
Commitments
Stockholders' equity:
Convertible preferred stock, $0.0001 par value; 5,000 shares
authorized; none issued and outstanding
Common stock, $0.0001 par value; 50,000 shares authorized; 24,796
and 20,343 shares issued and outstanding in 1998 and 1997, 2 2
respectively
Additional paid-in capital 98,767 40,366
Deferred compensation (555) (1,605)
Accumulated other comprehensive income 3,198 -
Accumulated deficit (19,603) (23,642)
-------------------- --------------------
Total stockholders' equity 81,809 15,121
-------------------- --------------------
Total liabilities and stockholders' equity $ 101,562 $ 26,539
-------------------- --------------------
<FN>
See accompanying notes to consolidated financial statements
</FN>
46
BROADVISION, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
Years Ended December 31,
--------------------------------------------
1998 1997 1996
-------- -------- --------
Revenues:
Software licenses $ 36,067 $ 18,973 $ 7,464
Services 14,844 8,132 3,418
-------- -------- --------
Total revenues 50,911 27,105 10,882
Cost of revenues:
Cost of license revenues 1,001 1,664 330
Cost of services revenues 8,704 4,284 2,164
-------- -------- --------
Total cost of revenues 9,705 5,948 2,494
-------- -------- --------
Gross profit 41,206 21,157 8,388
Operating expenses:
Research and development 9,227 7,392 4,985
Sales and marketing 26,269 18,413 12,066
General and administrative 3,786 2,990 2,034
-------- -------- --------
Total operating expenses 39,282 28,795 19,085
-------- -------- --------
Operating income (loss) 1,924 (7,638) (10,697)
Other income, net 2,036 265 552
-------- -------- --------
Income (loss) before income taxes 3,960 (7,373) (10,145)
Income tax benefit 79 -- --
======== ======== ========
Net income (loss) $ 4,039 $ (7,373) $(10,145)
======== ======== ========
Basic earnings (loss) per share $ 0.17 $ (0.36) $ (0.54)
======== ======== ========
Diluted earnings (loss) per share $ 0.16 $ (0.36) $ (0.54)
======== ======== ========
Shares used in computing basic earnings (loss) per share 23,346 20,208 18,815
======== ======== ========
Shares used in computing diluted earnings (loss) per share 25,653 20,208 18,815
======== ======== ========
<FN>
See accompanying notes to consolidated financial statements
</FN>
47
BROADVISION, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(in thousands, except per share amounts)
Convertible Common Accumulated
Preferred Stock Stock Additional Other
------------------ ----------------- Paid-in Deferred Comprehensive
Shares Amount Shares Amount Capital Compensation Income
-------------------------------------------------------------------------------
Balances as of December 31, 1995 8,601 $ 1 6,308 $ 1 $ 11,412 $ (1,036) $ -
Net loss and comprehensive loss - - - - - - -
Issuance of Series C convertible preferred ($2.00 3 - - - 6 - -
per share)
Issuance of Series E convertible preferred ($8.00 634 - - - 5,055 - -
per share)
Conversion of Series A, B, C and E preferred to (9,238) (1) 9,258 1 - - -
common stock
Issuance of common stock from public offering, - - 3,360 - 20,755 - -
net of costs
Issuance of stock under employee stock purchase - - - - 394 - -
plan
Issuance of common stock from exercise of options - - 1,112 - 205 - -
Common stock repurchased - - (130) - (21) - -
Deferred compensation on stock options - - - - 1,510 (1,510) -
Amortization of deferred compensation - - - - - 513 -
------------------------------------------------------------------------------
Balances as of December 31, 1996 - - 19,908 2 39,316 (2,033) -
Net loss and comprehensive loss - - - - - - -
Issuance of stock under employee stock purchase - - 242 - 979 - -
plan
Issuance of common stock from exercise of options - - 255 - 81 - -
Common stock repurchased - - (62) - (10) - -
Amortization of deferred compensation - - - - - 428 -
-----------------------------------------------------------------------------
Balances as of December 31, 1997 - - 20,343 2 40,366 (1,605) -
Comprehensive income:
Net income
Unrealized gain on equity securities 3,198
Total comprehensive income
Issuance of common stock from public offering, - - 3,456 - 53,745 - -
net of costs
Issuance of common stock for long-term investments - - 123 - 1,322 - -
Issuance of common stock from exercise of warrants - - 29 - - - -
Issuance of stock under employee stock purchase - - 228 - 1,599 - -
plan
Issuance of common stock from exercise of options - - 633 - 2,190 - -
Common stock repurchased - - (16) - (2) - -
Deferred compensation forfeited due to voluntary - - - - (693) 693 -
terminations
Deferred compensation on stock options - - - - 240 (240) -
Amortization of deferred compensation - - - - - 597 -
==============================================================================
Balances as of December 31, 1998 - - 24,796 $ 2 $98,767 $ (555) $ 3,198
==============================================================================
Total
Accumulated Comprehensive Stockholders'
Deficit Income (loss) Equity
---------------------------------------------
Balances as of December 31, 1995 $ (6,124) $ 4,254
Net loss and comprehensive loss (10,145) $ (10,145) (10,145)
==============
Issuance of Series C convertible preferred ($2.00 - 6
per share)
Issuance of Series E convertible preferred ($8.00 - 5,055
per share)
Conversion of Series A, B, C and E preferred to - ---
common stock
Issuance of common stock from public offering, - 20,755
net of costs
Issuance of stock under employee stock purchase - 394
plan
Issuance of common stock from exercise of options - 205
Common stock repurchased - (21)
Deferred compensation on stock options - ---
Amortization of deferred compensation - 513
---------------------------------------------
Balances as of December 31, 1996 (16,269) 21,016
Net loss and comprehensive loss (7,373) $ (7,373) (7,373)
==============
Issuance of stock under employee stock purchase - 979
plan
Issuance of common stock from exercise of options - 81
Common stock repurchased - (10)
Amortization of deferred compensation - 428
---------------------------------------------
Balances as of December 31, 1997 (23,642) 15,121
Comprehensive income:
Net income 4,039 $ 4,039 4,039
Unrealized gain on equity securities 3,198 3,198
==============
Total comprehensive income $ 7,237
==============
Issuance of common stock from public offering, - 53,745
net of costs
Issuance of common stock for long-term investments - 1,322
Issuance of common stock from exercise of warrants - ---
Issuance of stock under employee stock purchase - 1,599
plan
Issuance of common stock from exercise of options - 2,190
Common stock repurchased - (2)
Deferred compensation forfeited due to voluntary - ---
terminations
Deferred compensation on stock options - ---
Amortization of deferred compensation - 597
================ =================
Balances as of December 31, 1998 $ (19,603) $ 81,809
================ =================
<FN>
See accompanying notes to consolidated financial statements
</FN>
48
BROADVISION, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Years Ended December 31,
--------------------------------------------------
1998 1997 1996
--------------- --------------- ----------------
Cash flows from operating activities:
Net income (loss) $ 4,039 $ (7,373) $(10,145)
Adjustments to reconcile net income (loss) to net cash
provided by (used for) operating activities:
Depreciation and amortization 2,947 1,613 753
Amortization of deferred compensation 597 428 513
Provision for doubtful accounts and returns 458 515 196
Revenue resulting from non-monetary transactions (2,917) - -
Amortization of prepaid royalties 250 - -
Changes in operating assets and liabilities:
Accounts receivable (7,036) (3,750) (3,133)
Prepaid expenses and other (2,716) (194) (536)
Accounts payable and accrued expenses 3,145 547 2,996
Unearned revenue and deferred maintenance 2,633 (465) 978
--------------- --------------- ----------------
Net cash provided by (used for) operating activities 1,400 (8,679) (8,378)
Cash flows from investing activities:
Purchase of property and equipment (4,198) (4,878) (2,529)
Purchase of long-term investments (3,000) - -
Increase other assets (237) - -
Purchase of short-term investments - (796) (2,112)
Maturity of short-term investments 796 2,112 196
--------------- --------------- ----------------
Net cash used for investing activities (6,639) (3,562) (4,445)
Cash flows from financing activities:
Proceeds from sale/leaseback - 987 -
Net change in restricted cash 1,400 (1,400) -
Proceeds from borrowings, net 821 2,651 -
Payments on capital lease obligations (913) (378) (274)
Proceeds from issuance of common stock, net 57,532 1,050 21,333
Proceeds from issuance of preferred stock - - 5,061
--------------- --------------- ----------------
Net cash provided by financing activities 58,840 2,910 26,120
Net increase (decrease) in cash and cash equivalents 53,601 (9,331) 13,297
Cash and cash equivalents, beginning of year 8,277 17,608 4,311
=============== =============== ================
Cash and cash equivalents, end of year $ 61,878 $ 8,277 $ 17,608
=============== =============== ================
Supplemental cash flow disclosures:
Prepaids and other assets acquired through non-monetary $ 1,250 $ - $ -
transactions
=============== =============== ================
Investments acquired through non-monetary transactions $ 4,025 $ - $ -
=============== =============== ================
Unearned revenue and deferred maintenance from non-monetary $ 2,358 $ - $ -
transactions
=============== =============== ================
Cash paid for interest $ 394 $ 108 $ 86
=============== =============== ================
Cash paid for income taxes $ 428 $ 156 $ 66
=============== =============== ================
Equipment acquired under capital leases $ 316 $ 1,165 $ 380
=============== =============== ================
Long-term investment acquired in exchange for common stock $ 1,322 $ - $ -
=============== =============== ================
Deferred compensation on stock options $ 240 $ - $ 1,510
=============== =============== ================
Deferred compensation forfeited due to voluntary terminations $ 693 $ - $ -
=============== =============== ================
Unrealized gain on long-term investments $ 3,198 $ - $ -
=============== =============== ================
<FN>
See accompanying notes to consolidated financial statements
</FN>
49
BROADVISION, INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998, 1997, and 1996
NOTE 1--ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Business
BroadVision, Inc. (the "Company") develops, markets and supports fully
integrated large scale application software solutions exclusively designed to
manage one-to-one relationships for the extended enterprise. The Company's total
end-to-end solutions enable businesses to capitalize on the Internet as a unique
platform which empowers businesses to enhance commerce, provide critical
self-service functions, and deliver highly specialized information to customers,
suppliers, distributors, employees, or any other constituent of the extended
enterprise through real-time interactive one-to-one relationships. The
BroadVision One-To-One product family allows businesses to tailor Web site
content to the needs and interests of individual users by personalizing each
visit on a real-time basis. BroadVision One-To-One applications achieve this
result by interactively capturing Web site visitor profile information and
targeting organized enterprise content to each visitor based on easily
constructed business rules.
Basis of Presentation and Use of Estimates
The accompanying consolidated financial statements include the accounts of the
Company and its wholly-owned subsidiaries. All significant intercompany accounts
and transactions have been eliminated in consolidation. The preparation of
consolidated financial statements in conformity with generally accepted
accounting principles requires management to make certain assumptions and
estimates that affect reported amounts of assets and liabilities as of the date
of the financial statements and the reported amounts of revenues and expenses
during the reporting period. The actual results could differ from those
estimates.
Revenue Recognition
The Company's revenue recognition policies are in accordance with Statement of
Position ("SOP") 97-2, Software Revenue Recognition, which was adopted by the
Company effective January 1, 1998. There was no material change to the Company's
accounting for revenues as a result of the adoption of SOP 97-2. In general,
software license revenues are recognized when a non-cancelable license agreement
has been signed and the customer acknowledges an unconditional obligation to
pay, the software product has been delivered, there are no uncertainties
surrounding product acceptance, the fees are fixed and determinable, and
collection is considered probable; professional services revenues are recognized
as such services are performed; and maintenance revenues, including revenues
bundled with software agreements which entitle the customers to technical
support and future unspecified enhancements to the Company's products, are
deferred and recognized ratably over the related contract period, generally
twelve months. Revenues recognized from multiple-elemnet software arrangements
are allocated to each element of the arrangement based on the fair values of the
elements, such as software products, upgrades, enhancements, post contract
customer support, installation, or training. The determination of fair value is
based on objective evidence which is specific to the Company. If such evidence
of fair value for each element of the arrangement does not exist, all revenue
from the arrangement is deferred until such time that evidence of fair value
does exist or until all elements of the arrangement are delivered.
The Company records unearned revenue for software arrangements when cash has
been received from the customer and the arrangement does not qualify for revenue
recognition under the Company's revenue recognition policy. The Company records
accounts receivable for software arrangements when the arrangement qualifies for
revenue recognition and cash or other consideration has not been received from
the customer.
In February 1998, the Accounting Standards Executive Committee ("AcSEC") of the
American Institute of Certified Public Accountants ("AICPA") issued SOP 98-4,
Deferral of the Effective Date of SOP 97-2. The SOP defers the effective date
for applying the provisions regarding vendor-specific objective evidence
("VSOE") of fair value until AcSEC can reconsider what constitutes such VSOE.
There was no material change to the Company's accounting for revenues as a
result of the adoption of SOP 98-4.
50
In December 1998, AcSEC issued SOP 98-9 Software Revenue Recognition, With
Respect to Certain Transactions, which requires recognition of revenue using the
"residual method" in a multiple-element arrangement when fair value does not
exist for one or more of the delivered elements in the arrangement. Under the
"residual method", the total fair value of the undelivered elements is deferred
and subsequently recognized in accordance with SOP 97-2. The Company does not
expect a material change to its accounting for revenues as a result of the
provisions of SOP 98-9.
Research and Development and Software Development Costs
Development costs incurred in the research and development of new software
products are expensed as incurred until technological feasibility in the form of
a working model has been established at which time such costs are capitalized,
subject to recoverability. Products are made available for limited release,
concurrent with the achievement of technological feasibility. Accordingly,
software development costs incurred subsequent to the establishment of
technological feasibility have not been significant, and the Company has not
capitalized any software development costs to date.
Prepaid Royalties
Prepaid royalties relating to purchased software to be incorporated and sold
with the Company's software products are amortized as a cost of revenue either
on a straight-line basis over the remaining term of the royalty agreement or on
the basis of projected product revenues, whichever results in greater
amortization.
Cash Equivalents
The Company considers all debt securities with remaining maturities of three
months or less at the date of purchase to be cash equivalents. The Company's
cash equivalents as of December 31, 1998, consisted of approximately $48,900,000
of money market funds and $11,000,000 of commercial paper. The Company's cash
equivalents as of December 31, 1997, consisted of $7,708,000 of money market
funds.
Short-term Investments
Short-term investments as of December 31, 1997 consisted of a one-year
certificate of deposit maintained with the Company's commercial bank as a
guarantee for a standby letter of credit issued by the bank in favor of the
Company's landlord. The short-term investments were classified as
available-for-sale, had maturities of one year or less and were carried at
amortized cost which approximates fair value.
Concentrations of Credit Risk and
Financial assets that potentially subject the Company to significant
concentrations of credit risk consist principally of cash, cash equivalents,
short-term investments, and trade accounts receivable. The Company's cash, cash
equivalents and short-term investments are held with a commercial bank. The
Company markets and sells its product throughout the world and performs ongoing
credit evaluations of its customers. The Company generally does not require
collateral on accounts receivable as the majority of its customers are large,
well-established companies. The Company maintains reserves for potential credit
losses but historically has not experienced any significant losses related to
individual customers or groups of customers in any particular industry or
geographic area.
Fair Value of Financial Instruments
The Company's financial instruments consist of cash equivalents, short-term
investments, accounts receivable, accounts payable and debt. The Company does
not have any derivative financial instruments.
The Company believes the reported carrying amounts of its financial instruments
approximates fair value, based upon the short maturity of cash equivalents,
short-term investments, accounts receivable and payable, and based on the
current rates available to the Company on similar debt issues.
51
Property and Equipment
Property and equipment are stated at cost and depreciated on a straight-line
basis over their estimated useful lives (two to five years). Leasehold
improvements are amortized over the corresponding lease term or their estimated
useful lives, whichever is shorter.
The Company evaluates long-lived assets and certain identifiable intangibles for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. Recoverability of assets is
measured by a comparison of the carrying amount of an asset to future net cash
flows expected to be generated by the asset. If such assets are considered to be
impaired, the impairment to be recognized is measured by the amount by which the
carrying amount of the property and equipment exceeds its fair market value.
Long-term Investments
As of December 31, 1998, the Company's long-term investments consisted of
investments in nonmarketable equity securities and an investment in marketable
equity securities. The Company currently has no plans or intentions to dispose
of the investments during 1999. Accordingly, the investments have been
classified as long term.
The Company accounts for its investments in nonmarketable equity securities
based on the cost method as the Company does not have the ability to
significantly influence the operating and financial policies of the investees.
Any decline in value, which is other than a temporary decline, is charged
immediately to earnings in the period in which the impairment occurs. The
carrying value of the investments in nonmarketable equity securities amounted to
$3,000,000 at December 31, 1998. The Company classifies its investment in
marketable equity securities as available for sale. Accordingly, the investment
is recorded at its fair value with any unrealized gains or losses reported as
accumulated other comprehensive income in stockholders' equity and changes in
the unrealized gain or loss are reported as other comprehensive income. Any
decline in value, which is other than a temporary decline, is charged
immediately to earnings in the period in which the impairment occurs. As of
December 31, 1998, the Company's investment in marketable equity securities had
a fair value of $8,546,000, a cost basis of $5,348,000, and an unrealized gain
of $3,198,000.
Income Taxes
The Company utilizes the asset and liability method of accounting for income
taxes. Under the asset and liability method, deferred tax assets and liabilities
are established to recognize the future tax consequences attributable to
differences between the financial statement carrying amounts of existing assets
and liabilities and their respective tax bases. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply in the years
in which temporary differences are expected to be recovered or settled. The
effects on deferred tax assets and liabilities of a change in tax rates is
recognized in income in the period that includes the enactment date.
Employee Stock Option and Purchase Plans
The Company accounts for employee stock-based awards in accordance with the
provisions of Accounting Principles Board (APB) Opinion No. 25, Accounting for
Stock Issued to Employees, and related interpretations. As such, compensation
expense is recorded on the date of grant only if the current market price of the
underlying stock exceeded the exercise price. Pursuant to Statement of Financial
Accounting Standard ("SFAS") No. 123, Accounting for Stock-Based Compensation,
the Company discloses the pro forma effects of using the fair value method of
accounting for stock-based compensation arrangements.
Per Share Information
Basic earnings (loss) per share is computed using the weighted-average number of
shares of common stock outstanding. Diluted earnings (loss) per share is
computed using the weighted-average number of shares of common stock outstanding
and, when dilutive, common equivalent shares from outstanding stock options and
warrants using the treasury stock method.
52
Excluded from the computation of diluted earnings per share for 1997 are options
to acquire 3,702,000 shares of Common Stock with a weighted-average exercise
price of $4.41 and warrants to acquire 93,750 shares of Common Stock with a
weighted-average exercise price of $6.16 because their effects would be
anti-dilutive. Excluded from the computation of diluted earnings per share for
1996 are options to acquire 1,522,000 shares of Common Stock with a
weighted-average exercise price of $1.13 and warrants to acquire 13,000 shares
of Common Stock with a weighted-average exercise price of $2.00 because their
effects would be anti-dilutive. The following table sets forth the basic and
diluted earnings (loss) per share computational data for the periods presented.
Years Ended December 31,
--------------------------------------------------
(In thousands, except per share amounts) 1998 1997 1996
-------- -------- --------
Net income (loss) for basic and diluted
earnings (loss) per share $ 4,039 $ (7,373) $(10,145)
======== ======== ========
Weighted-average common shares outstanding
utilized for basic earnings (loss) per share 23,346 20,208 18,815
Weighted-average common equivalent shares
outstanding:
Employee common stock options 2,288 -[1] -[1]
Common stock warrant 19 -[1] -[1]
-------- -------- --------
Total weighted-average common and common
equivalent shares outstanding utilized for
diluted earnings (loss) per share 25,653 20,208 18,815
======== ======== ========
Basic earnings (loss) per share $ 0.17 $ (0.36) $ (0.54)
======== ======== ========
Diluted earnings (loss) per share $ 0.16 $ (0.36) $ (0.54)
======== ======== ========
<FN>
[1] The Company incurred a net loss for the indicated period. Accordingly, common equivalent shares are excluded from the diluted
loss per share calculation because they are antidilutive.
</FN>
Foreign Currency Transactions
The functional currency of the Company's foreign subsidiaries is the U.S.
dollar. Resulting foreign exchange gains and losses are included in the
consolidated results of operations and, to date, have not been significant.
Comprehensive Income (Loss)
The Company adopted SFAS No. 130, Reporting Comprehensive Income effective
January 1, 1998. SFAS No. 130 establishes standards for the reporting and
disclosure of comprehensive income (loss) and its components. Comprehensive
income (loss) includes all changes in equity during a period except those
resulting from investments by or distributions to owners.
Comprehensive income for the year ended December 31, 1998 was $7,237,000. The
Company's only component of accumulated other comprehensive income and other
comprehensive income as of and for the year ended December 31, 1998 related to
the unrealized gain on available-for-sale investments. As a result of
unrecognized tax benefits represented by a valuation allowance for deferred tax
assets, no incremental tax effects were attributed to unrealized gain.
Accordingly, the unrealized gain is the same on a pre-tax and net of tax basis.
The Company did not have any significant components of other comprehensive loss
for the years ended December 31, 1997 and 1996 and, thus, the comprehensive loss
is the same as net loss for those periods.
Reclassifications
Certain prior period amounts have been reclassified to conform to the current
period presentation.
53
Recent Accounting Pronouncements
In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities, effective for all fiscal quarters of fiscal
years beginning after June 15, 1999. Accordingly, the Company will adopt SFAS
No. 133 beginning on January 1, 2000. SFAS No. 133 establishes standards for the
accounting and reporting of derivative instruments and hedging activities,
including certain derivative instruments embedded in other contracts. Under SFAS
No. 133, entities are required to carry all derivative instruments at fair value
on their balance sheets. The accounting for changes in the fair value (i.e.,
gains or losses) of a derivative instrument depends on whether it has been
designated and qualifies as part of a hedging activity and the underlying
purpose for it. The Company does not believe that the adoption of SFAS No. 133
will have a significant impact on the Company's consolidated financial
statements or related disclosures.
In March 1998, the AICPA issued SOP 98-1, Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use. SOP 98-1 requires that certain
costs related to the development or purchase of internal-use software be
capitalized and amortized over the estimated useful life of the software. SOP
98-1 is effective for fiscal years beginning after December 15, 1998.
Accordingly, the Company will adopt SOP 98-1 beginning on January 1, 1999. The
Company does not believe that the adoption of SOP 98-1 will have a significant
impact on the Company's consolidated financial statements or related
disclosures.
NOTE 2--PROPERTY AND EQUIPMENT (in thousands):
December 31,
----------------------
1998 1997
-------- --------
Furniture and fixtures $ 1,001 $ 636
Computer and software 8,662 5,458
Leasehold improvements 3,725 2,780
-------- --------
13,388 8,874
Less accumulated depreciation and amortization (5,354) (2,407)
-------- --------
$ 8,034 $ 6,467
======== ========
As of December 31, 1998 and 1997, leased equipment totaled approximately
$2,572,000 and $2,256,000 respectively. Accumulated depreciation for leased
equipment totaled approximately $1,750,000 and $927,000 as of December 31, 1998
and 1997, respectively.
NOTE 3--ACCRUED EXPENSES (in thousands):
December 31,
-----------------------
1998 1997
------ ------
Employee benefits $ 678 $ 420
Commissions and bonuses 2013 833
Taxes payable 785 366
Other 1,457 549
------ ------
$4,933 $2,168
====== ======
NOTE 4--UNEARNED REVENUE (in thousands):
December 31,
-----------------------
1998 1997
------ ------
Software licenses $1,023 $ --
Services 895 532
------ ------
$1,918 $ 532
====== ======
54
NOTE 5--DEBT
As of December 31, 1998, the Company has a credit facility with a commercial
lender which includes outstanding borrowings of $3.5 million under a note
payable. Borrowings bear interest at the bank's prime rate (7.75% as of December
31, 1998). Principal and interest is due in consecutive monthly payments through
maturity based on the term of the facility. Principal payments of $548,000 are
due annually from 1999 through 2004 with a final payment of $183,000 due in
2005. The credit facility includes covenants which impose certain restrictions
on the payment of dividends and other distributions and requires the Company to
maintain monthly financial covenants, including a minimum quick ratio, tangible
net worth ratio and minimum cash reserves. The minimum cash reserves covenant is
replaced with a minimum debt service coverage ratio upon six consecutive
quarters of profitability. Borrowings are collateralized by a security interest
in substantially all of the Company's owned assets. The Company was in
compliance with all of its financial covenants as of December 31, 1998.
Available credit under the Company's credit facilities include an available term
debt credit facility of $1.0 million and a revolving line of credit that
provides for up to $2.3 million of total borrowings (based on eligible accounts
receivable). As of December 31, 1998, the Company has outstanding commitments
totaling $2.2 million in the form of standby letters of credit under its
revolving line of credit (see Note 7).
NOTE 6--INCOME TAXES
Income before taxes includes losses from foreign operations of approximately
$2,906,000, $1,567,000 and $986,000 for the years ended December 31, 1998, 1997
and 1996 respectively. The components of income tax expense (benefit) are as
follows (in thousands):
Years Ended December 31,
------------------------------------
1998 1997 1996
----- ---- ----
Current:
Federal $ 192 $-- $--
State 13 -- --
Foreign 416 -- --
----- ---- ----
Total current $ 621 $-- $--
Deferred:
Federal (600) -- --
State (100) -- --
----- ---- ----
Total deferred $(700) $-- $--
===== ==== ====
$ (79) $-- $--
===== ==== ====
The differences between the income tax expense (benefit) computed at the federal
statutory rate of 34% and the Company's actual income tax expense (benefit) for
the periods presented are as follows (in thousands):
Years Ended December 31,
--------------------------------
1998 1997 1996
------- ------- -------
Expected income tax expense $ 1,346 $(2,507) $(3,449)
State income taxes,
net of federal tax benefit (58) -- --
Foreign taxes 416 -- --
Alternative minimum tax 97 -- --
Utilization of net operating loss -- --
carryforwards (2,471)
Decrease in beginning of year
valuation allowance (600)
Foreign losses not benefited 988 -- --
Net operating losses not benefited -- 2,507 3,449
Other 203 -- --
------- ------- -------
Income tax benefit $ (79) $ -- $ --
======= ======= =======
55
The individual components of the Company's deferred tax assets and liabilities
are as follows (in thousands):
December 31,
---------------------
1998 1997
-------- --------
Deferred Tax Assets:
Depreciation and amortization $ 766 $ 401
Accrued liabilities 723 887
Capitalized research and development 721 1,024
Net operating losses 6,737 6,408
Tax credits 2,180 1,258
-------- --------
Total deferred tax assets 11,127 9,978
Less valuation allowance (9,153) (9,978)
-------- --------
1,974 --
Deferred tax liabilities-unrealized gain on
marketable securities (1,274) --
-------- --------
Net deferred tax assets $ 700 $ --
======== ========
The total deferred tax assets as of December 31, 1998 include approximately $1.9
million relating to the tax benefit arising from the exercise of stock options,
which will be credited to stockholders' equity when recognized in the form of a
reduction of the valuation allowance. In addition, as a result of the
intraperiod income tax allocation provisions of SFAS No. 109, the deferred tax
liability related to the unrealized gain on marketable securities decreased the
valuation allowance for the deferred tax assets and was not charged to
accumulated other comprehensive income in stockholders' equity. The Company has
provided a valuation allowance for a significant portion of its deferred tax as
of December 31, 1998. The total valuation allowance decreased $825,000 from 1997
to 1998, of which $700,000 relates to a change in the beginning-of-the-year
valuation allowance.
As of December 31, 1998, the Company had federal and state net operating loss
carryforwards of approximately $12,973,000 and $5,539,000, respectively,
available to offset future regular and alternative minimum taxable income. In
addition, the Company had federal and state research and development credit
carryforwards of approximately $790,000 and $666,000, respectively, available to
offset future tax liabilities. The Company's federal net operating loss and tax
credit carryforwards expire in the years 2010 through 2012, if not utilized. The
state net operating loss carryforwards expire in the years 2000 through 2002.
The state research and development credits can be carried forward indefinitely.
As of December 31, 1998, the Company's foreign subsidiaries had net operating
loss carryforwards in foreign jurisdictions of approximately $5,400,000 that can
be used to offset future foreign income. Of these losses, approximately
$1,600,000 expire in the years 2001 through 2003. Approximately $3,800,000 of
these losses can be carried forward indefinitely.
Federal and state tax laws limit the use of net operating loss carryforwards in
certain situations where changes occur in the stock ownership of a company. The
Company believes such an ownership change, as defined, may have occurred and,
accordingly, certain of the Company's federal and state net operating loss
carryforwards may be limited in their annual usage.
NOTE 7-- COMMITMENTS
Leases
The Company entered into its headquarters facility lease during 1997. The
Company leases this and its other facilities under noncancelable operating lease
agreements expiring through the year 2007. Under the terms of the agreements,
the Company is required to pay property taxes, insurance and normal maintenance
costs. The Company also leases certain equipment under capital leases expiring
through the year 2000.
Subsequently, during March 1999, the Company entered into an operating lease
agreement through December 2007 for an additional 55,000 square feet of office
space adjacent to its corporate headquarters building in Redwood City,
Californi with annual rental payments of approximately $1.5 million.
56
A summary of future minimum lease payments is as follows (in thousands):
Capital Operating
Year Ended December 31, leases leases
------- -------
1999 $ 849 $ 2,236
2000 330 1,734
2001 -- 1,297
2002 -- 1,346
2003 -- 1,426
Thereafter -- 6,018
------- -------
Total minimum lease payments 1,179 $14,057
=======
Less amount representing imputed interest 200
-------
Present value of net minimum capital lease payments 979
Less current portion (709)
-------
Capital leases, excluding current portion $ 270
=======
Rental expense relating to operating leases was approximately $1,101,000,
$1,161,000, and $571,000 for the years ended December 31, 1998, 1997 and 1996,
respectively. Total minimum sublease payments to be received in the future under
noncancelable subleases total $1,093,000 through May, 2000.
Standby Letter of Credit Commitments
As of December 31, 1998, the Company had outstanding commitments in the form of
two standby letters of credit. A letter for $1,400,000 was issued in favor of
the Company's equipment leasing financier on November 12, 1997; with provisions
for automatic annual renewals not to extend beyond April 10, 2000. A letter for
$794,000 was issued in favor of the Company's corporate facility landlord to
secure obligations under the Company's corporate headquarters facility lease.
Subsequently, during March 1999, a standby letter of credit in the amount of
$498,000 was issued in favor of the Company's corporate facility landlord to
secure obligations relating to a lease for additional facility office space.
NOTE 8--STOCKHOLDERS' EQUITY
Convertible Preferred Stock
All outstanding convertible preferred stock and warrants to purchase convertible
preferred stock were converted to common stock and warrants to purchase common
stock at the time of the Company's initial public offering in June 1996.
Warrants
As of December 31, 1998, there were warrants outstanding to acquire 60,000
shares of common stock at $8.50 per share related to a facilities lease. At the
date these warrants were granted, the fair value of these warrants was not
significant.
Common Stock
The Company applies APB Opinion No. 25 and related interpretations in accounting
for its stock option and stock purchase plans. Accordingly, the Company has
recorded deferred compensation of $240,000 and $1,510,000, in 1998 and 1996,
respectively, for the difference between the exercise price and the fair value
of the common stock underlying options granted. The deferred compensation is
being amortized to expense over the vesting period of the individual options,
generally five years.
57
The Company has reserved 5,975,000 shares of common stock for issuance under its
Equity Incentive Plan. In May, 1998, The Board of Directors increased the total
shares authorized and available for grant under the Equity Incentive Plan by
975,000 shares.
Under this plan, the Board of Directors may grant incentive or nonqualified
stock options at prices not less than 100% or 85%, respectively, of the fair
market value of the Company's common stock, as determined by the Board of
Directors, at the date of grant. The vesting of individual options may vary but
in each case at least 20% of the total number of shares subject to options will
become exercisable per year. These options generally expire ten years after the
grant date. When an employee option is exercised prior to vesting, any unvested
shares so purchased are subject to repurchase by the Company at the original
purchase price of the stock upon termination of employment. The Company's right
to repurchase lapses at a minimum rate of 20% per year over five years from the
date the option was granted or, for new employees, the date of hire. Such right
is exercisable only within 90 days following termination of employment.
Approximately 16,000 unvested shares of stock were repurchased by the Company
during the year ended December 31, 1998. As of December 31, 1998, 235,515 shares
were subject to repurchase at a weighted-average price of $0.44.
The Company's President and Chief Executive Officer holds an option to purchase
500,000 shares of common stock at an exercise price of $4.00 per share. The
shares subject to option vest ratably on a monthly basis over a 60-month period
commencing April 1, 1995. As of December 31, 1998, approximately 367,000 shares
were vested.
Activity in the Company's stock option plan is as follows:
1998 1997 1996
--------------------------- --------------------------- ----------------------------
Weighted- Weighted- Weighted-
Shares Average Shares Average Shares Average
Fixed Options (000's) Exercise Price (000's) Exercise Price (000's) Exercise Price
- -------------------------------- ------- -------------- ------- -------------- ------- --------------
Outstanding at beginning of year 2,907 $ 4.50 2,393 $ 2.75 1,924 $ 0.13
Granted 1,588 13.67 1,346 6.69 1,849 3.98
Exercised (577) 3.62 (255) 0.31 (1,092) 0.18
Forfeited (420) 5.73 (577) 4.19 (288) 2.83
----- ----- -----
Outstanding at end of year 3,498 8.66 2,907 4.50 2,393 2.75
===== ===== =====
Options vested at end of year 803 $ 4.28 641 2.64 309 0.22
===== ===== =====
Weighted-average fair value
of options granted
during the year $ 8.89 $ 6.70 $ 2.29
========= ======== ========
The following table summarizes stock options outstanding as of December 31, 1998:
Options Outstanding Options Vested
---------------------------------------- -----------------------------
Weighted-Avg.
Number Remaining Number
Outstanding Contractual Exercisable
Range of At 12/31/98 Life Weighted-Avg. At 12/31/98 Weighted-Avg.
Exercise Prices (000's) In Years Exercise Price (000's) Exercise Price
--------------- ------- -------- -------------- ------- --------------
$ 0.06 - $ 5.31 646 7.15 $0.93 348 $0.65
5.50 - 6.94 788 7.40 5.99 206 5.90
7.00 - 7.81 762 8.25 7.42 192 7.24
7.88 - 12.63 623 9.05 11.28 48 8.25
12.94 - 27.81 679 9.57 18.09 9 24.18
----- ----
$ 0.06 - $27.81 3,498 8.25 $8.66 803 $4.28
===== ====
58
The Company grants options outside of the Company's stock option plan. A summary
of options outside of the plan is presented below:
1998 1997 1996
------------------------ --------------------- ---------------------
Weighted- Weighted- Weighted-
Shares Average Shares Average Shares Average
Performance Options (000's) Exercise Price (000's) Exercise Price (000's) Exercise Price
- ----------------------------- ------- -------------- ------- -------------- ------- --------------
Outstanding at beginning of year 795 $4.07 711 $3.52 20 $0.20
Granted -- -- 154 5.50 727 3.46
Exercised (56) 1.87 --- --- (20) 0.20
Forfeited -- -- (70) 0.80 (16) 0.80
--- --- ---
Outstanding at end of year 739 4.23 795 4.07 711 3.52
=== === ===
Options vested at year-end 497 4.01 395 3.60 197 4.35
=== === ===
Weighted-average fair value
of options granted during --- $5.50 $2.03
the year === ===== =====
The 739,000 options outstanding as of December 31, 1998 have exercise prices
ranging from $0.80 to $7.00 and a weighted-average contractual life of 6.22
years. As of December 31, 1998, no shares were subject to repurchase.
Employee Stock Purchase Plan
The Board of Directors has reserved 800,000 shares for issuance under the
Company's Employee Stock Purchase Plan (the "Purchase Plan"). In May, 1998, The
Board of Directors increased the total shares authorized and available for grant
under the Purchase Plan by 200,000 shares. The Purchase Plan permits eligible
employees to purchase common stock equivalent to a percentage of the employee's
earnings, not to exceed 15%, at a price equal to 85% of the fair market value of
the common stock at dates specified by the Board of Directors as provided in the
Plan. Under the Purchase Plan, the Company issued 228,000 shares and 242,000
shares to employees in 1998 and 1997, respectively.
Under SFAS No. 123, compensation cost is recognized for the fair value of the
employees' purchase rights, which was estimated using the Black-Scholes model
with the following assumptions in 1998, 1997, and 1996: an expected life of
seven months; expected volatility of 112%, 67%, and 60%, respectively; risk-free
interest rate of 4.48%, 5.05%, and 6.5%; and no dividend yield. The
weighted-average fair value of the purchase rights granted in 1998, 1997, and
1996 was $4.18, $2.16, and $2.61, respectively.
Pro Forma Disclosure
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option-pricing model with the following weighted-average
assumptions for grants in 1998, 1997, 1996: no dividend yield; expected
volatility of 112% in 1998, 67% in 1997, and 60% in 1996; risk-free interest
rate of 4.70 % in 1998, 5.91% in 1997, and 6.50% in 1996; and expected life of 3
years in 1998, 2.8 years in 1997, and 5 years in 1996.
Had compensation cost for the Company's stock option plan and stock purchase
plan been determined consistent with SFAS No. 123, the Company's reported net
income of $4,039,000 and diluted earnings per share of $0.16 for the year ended
December 31, 1998, would have been decreased to a net loss $1,885,000 and a net
loss of $0.08 per share, respectively, on a pro forma basis. The Company's
reported net loss of $7,373,000 and net loss per share of $0.36 for the year
ended December 31, 1997, would have been increased to $9,551,000 and $0.47,
respectively, on a pro forma basis. The Company's reported net loss of
$10,145,000 and net loss per share of $0.54 for the year ended December 31,
1996, would have been increased to $11,270,000 and $0.60, respectively, on a pro
forma basis. The effects of these pro forma disclosures are not representative
of the pro forma effects on future periods because they only include options
granted in 1995 and subsequent years.
59
NOTE 9--EMPLOYEE BENEFIT PLAN
In November 1994, the Company adopted a 401(k) employee retirement plan under
which eligible employees may contribute up to 20% of their annual compensation,
subject to a limitation of $10,000 in 1998. Employees vest immediately in their
contributions and earnings thereon. The plan allows for, but does not require,
Company matching contributions. As of December 31, 1998, the Company has not
made any such matching contributions.
NOTE 10--GEOGRAPHIC, SEGMENT AND SIGNIFICANT CUSTOMER INFORMATION
The Company adopted the provisions of SFAS No. 131, Disclosure about Segments of
an Enterprise and Related Information, during 1998. SFAS No. 131 establishes
standards for the reporting by public business enterprises of information about
operating segments, products and services, geographic areas, and major
customers. The method for determining what information to report is based on the
way that management organizes the operating segments within the Company for
making operational decisions and assessments of financial performance. The
Company's chief operating decision maker is considered to be the Company's Chief
Executive Officer ("CEO"). The CEO reviews financial information presented on a
consolidated basis accompanied by disaggregated information about revenues by
geographic region and by product for purposes of making operating decisions and
assessing financial performance.
The disaggregated financial information on a product basis reviewed by the CEO
is as follows (in thousands):
1998 1997 1996
------- ------- -------
Software licenses
One-To-One Enterprise $17,799 $14,479 $ 7,464
One-To-One WebApps 18,268 4,494 --
Services 9,739 5,981 2,819
Maintenance 5,105 2,151 599
======= ======= =======
Total Company $50,911 $27,105 $10,889
======= ======= =======
The Company sells its products and provides services worldwide through a direct
sales force, independent distributors, value-added resellers, and system
integrators. It currently operates in three primary regions, the Americas which
includes North and South America, Europe which includes Eastern and Western
Europe and the Middle East, and Asia/Pacific which includes the Pacific Rim and
the Far East. Information regarding the business operations of these regions are
as follows:
(In thousands) 1998 1997 1996
-------- -------- --------
Revenues
Americas $ 29,330 $ 12,872 $ 4,406
Europe 16,944 10,850 3,280
Asia/Pacific 4,637 3,383 3,196
-------- -------- --------
Total Company $ 50,911 $ 27,105 $ 10,882
======== ======== ========
Identifiable assets:
Americas $ 99,343 $ 25,362
Europe 1,754 822
Asia/Pacific 465 355
-------- --------
Total Company $101,562 $ 26,539
======== ========
In 1998, no customer accounted for 10% or more of the Company's revenues. In
1997 , approximately 11% of the Company's revenues were attributable to one
customer and approximately 10% of the Company's revenues during 1996 were
attributable to a different customer.
60
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
Not applicable
PART III
Certain information required by Part III is incorporated by reference in this
Report from the Company's definitive proxy statement for its 1999 Annual Meeting
of Stockholders to be filed pursuant to Regulation 14A (the "Proxy Statement").
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information with respect to the Company's directors and compliance with
Section 16(a) of the Securities Exchange Act of 1934, as amended required by
this Item is incorporated by reference from the Proxy Statement. The information
for the Company's executive officers required by this Item appears under the
caption "Executive Officers and Key Personnel" at Item 1 of this report.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item is incorporated by reference from the
Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The
information required by this Item is incorporated by reference from the Proxy
Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item is incorporated by reference from the
Proxy Statement.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a)
The following documents are filed as a part of this Report.
1. Consolidated Financial Statements. The following Consolidated
Financial Statements of the Company are included at Part II, Item 8,
of this Annual Report on Form 10-K.
Independent Auditors' Report
Consolidated Balance Sheets as of December 31, 1998 and 1997
Consolidated Statements of Operations for each of the years in the
three-year period ended December 31, 1998.
Consolidated Statements of Stockholders' Equity for each of the years in
the three-year period ended December 31, 1998.
Consolidated Statements of Cash Flows for each of the years in the
three-year period ended December 31, 1998.
Notes to Consolidated Financial Statements
2. Financial Statement Schedule. Attached to this Annual Report on Form
10-K. Report on Financial Statement Schedule and Consent of
Independent Auditors Schedule II -- Valuation and Qualifying
Accounts
3. Exhibits. The exhibits listed on the accompanying Index to Exhibits
immediately following the consolidated financial statement schedule
are filed as part of, or incorporated by reference into, this Annual
Report on Form 10-K.
(b)Reports on Form 8-K.
No reports on Form 8-K were filed by the Company during the quarter
ended December 31, 1998.
61
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this Report to be signed on its
behalf by the undersigned, thereunto duly authorized, in Redwood City, State of
California, on this 29th day of March 1999.
BroadVision, Inc.
By: /s/ Pehong Chen
-------------------------
Pehong Chen
Chairman of the Board and
Chief Executive Officer
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below
constitutes and appoints Pehong Chen and Randall C. Bolten his attorney-in-fact,
with the power of substitution, for him in any and all capacities, to sign any
amendments to this Report on Form 10-K, and to file the same, with exhibits
thereto and other documents in connection therewith, with the Securities and
Exchange Commission, hereby ratifying and confirming all that the said
attorneys-in-fact, or his substitute or substitutes, may do or cause to be done
by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
/s/ Pehong Chen Chairman of the Board and March 29, 1999
---------------
Pehong Chen Chief Executive Officer
(Principal Executive Officer)
/s/ Randall C. Bolten Vice President, Operations, March 29, 1999
---------------------
Randall C. Bolten Chief Financial Officer
(Principal Financial
and Accounting Officer)
/s/ David L. Anderson Director March 29, 1999
---------------------
David L. Anderson
/s/ Yogen K. Dalal Director March 29, 1999
------------------
Yogen K. Dalal
/s/ Koh Boon Hwee Director March 29, 1999
-----------------
Koh Boon Hwee
/s/ Carl Pascarella Director March 29, 1999
-----------------
Carl Pascarella
/s/ Todd A. Garrett Director March 29, 1999
-------------------
Todd A. Garrett
62
REPORT ON FINANCIAL STATEMENT SCHEDULE AND
CONSENT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders
BroadVision, Inc.:
The audits referred to in our report dated January 26, 1999, included the
related financial statement schedule as of December 31, 1998 and 1997, and for
each of the years in the three-year period ended December 31, 1998, included in
the annual report on Form 10-K for the year ended December 31, 1998. This
financial statement schedule is the responsibility of the Company's management.
Our responsibility is to express an opinion on this financial statement schedule
based on our audits. In our opinion, such financial statement schedule, when
considered in relation to the basic consolidated financial statements taken as a
whole, presents fairly, in all material respects, the information set forth
therein.
We consent to incorporation by reference in the registration statements (No.
333-62619 and No. 333-3844) on Form S-8 of BroadVision, Inc. of our reports
dated January 26, 1999, relating to the consolidated balance sheets of
BroadVision, Inc. and subsidiaries as of December 31, 1998 and 1997, and the
related consolidated statements of operations, stockholders' equity, and cash
flows for each of the years in the three-year period ended December 31, 1998,
and the related schedule, which reports appear in the December 31, 1998, annual
report on Form 10-K of BroadVision, Inc.
KPMG LLP
Mountain View, California
March 26, 1999
63
BROADVISION, INC. AND SUBSIDIARIES
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
(in thousands)
Balance at Charged to
Beginning of Costs and Balance at
Period Expenses Deductions (1) End of Period
--------------- --------------- --------------- ---------------
Year Ended December 31, 1996 $ - $ 196 $ 5 $ 191
=============== =============== =============== ===============
Year Ended December 31, 1997 $ 191 $ 515 $ 35 $ 671
=============== =============== =============== ===============
Year Ended December 31, 1998 $ 671 $ 458 $ 341 $ 788
=============== =============== =============== ===============
<FN>
(1) Represents net charge-offs of specific receivables.
</FN>
64
BROADVISION, INC.
ANNUAL REPORT ON FORM 10-K
DECEMBER 31, 1998
INDEX TO EXHIBITS
Exhibit Description
------- -----------
3.1* Amended and Restated Certificate of Incorporation.
3.2* Amended and restated Bylaws.
4.1* References are hereby made to Exhibits 3.1 to 3.2.
4.3* Second Amended and restated Investor's Rights Agreement dated April 15, 1997 among
the Company and certain of its stockholders.
10.1* (1) Form of Indemnity Agreement between the Company and each of its directors.
10.2* (1) Equity Incentive Plan (the "Equity Incentive Plan").
10.3* (1) Form of Incentive Stock Option under the Equity Incentive Plan.
10.4* (1) Form of Nonstatutory Stock Option under the Equity Incentive Plan.
10.5* (1) Form of Nonstatutory Stock Option (Performance-Based).
10.6* (1) 1997 Employee Stock Purchase Plan (the "Employee Stock Purchase Plan").
10.7* (1) Employee Stock Purchase Plan Offering (Initial Offering).
10.8* (1) Employee Stock Purchase Plan Offering (Subsequent Offering).
10.9* Master Equipment Lease Agreement dated May 23, 1997 between the Company and
Lighthouse Capital Partners, L.P.
10.10*+ Terms and Conditions dated January 1, 1997 between IONA Technologies LTD and the
Company.
10.11* Series D Preferred Stock Option Agreement dated February 27, 1997 between the
Company and Pehong Chen.
10.12* Standard Office Lease dated February 8, 1996 between the Company and GVE Distel
Associates, a California General Partnership.
10.13*(1) Stock Option Plan.
10.14*(1) Form of Incentive Stock Option under the Stock Option Plan.
10.15*(1) Form of Nonstatutory Stock Option under the Stock Option Plan.
10.16* Lease dated February 5, 1997 between the Company and Martin/Campus Associates, L.P.
10.17** Loan and Security, dated July 2, 1997, between Silicon Valley Bank and the Company.
10.18*** First Amendment to Loan and Security Agreement, dated as of February 5, 1998 between
the Company and Silicon Valley Bank.
21.1 Subsidiaries of the Company.
23.1 Consent of KPMG LLP. Reference is hereby made to page 55.
24.1 Power of Attorney. Reference is hereby made to page 54.
27.1 Financial Data Schedule.
<FN>
* Incorporated by reference to the Company's Registration Statement on Form S-1 filed on April 19, 1996, as amended on May
9,1996, May 29, 1996 and June 17, 1996.
** Incorporated by reference to the Company's 10-Q for the quarter ended September 30, 1997 filed on November 12, 1997.
*** Incorporated by reference to the Company's Registration Statement on Form S-3 filed on March 4, 1998.
(1) Represents a management contract or compensatory plan or arrangement.
+ Confidential treatment requested.
</FN>
65