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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Quarter Ended March 31, 1999
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number 0-28252
BROADVISION, INC.
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(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
incorporation or organization) Identification Number)
585 Broadway, Redwood City, California 94063
-------------------------------------- -----
(Address of principal executive offices) (Zip code)
(650) 261-5100
--------------
(Registrant's telephone number, including area code)
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
--- ---
As of April 30, 1999 there were 25,289,572 shares of the Registrant's
Common Stock issued and outstanding.
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BROADVISION, INC. AND SUBSIDIARIES
FORM 10-Q
QUARTER ENDED MARCH 31, 1999
TABLE OF CONTENTS
Page No.
--------
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets -
March 31, 1999 and December 31, 1998 3
Consolidated Statements of Operations -
Three months ended March 31, 1999 and 1998 4
Consolidated Statements of Cash Flows -
Three months ended March 31, 1999 and 1998 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 9
Item 3. Quantitative and Qualitative Disclosures About Market Risk 16
PART II OTHER INFORMATION
Item 1. Legal Proceedings 16
Item 2. Changes in Securities and Use of Proceeds 16
Item 3. Defaults upon Senior Securities 16
Item 4. Submission of Matters to a Vote of Security Holders 16
Item 5. Other Information 16
Item 6. Exhibits and Reports on Form 8-K 16
SIGNATURES 17
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
BROADVISION, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except per share data)
March 31, December 31,
1999 1998
--------- ---------
ASSETS
Cash and cash equivalents $ 66,932 $ 61,878
Accounts receivable, less allowance for doubtful accounts and returns
of $938 and $788, for 1999 and 1998, respectively 16,264 15,361
Prepaids and other 4,030 3,589
--------- ---------
Total current assets 87,226 80,828
Property and equipment, net 8,233 8,034
Long-term investments 23,593 11,546
Prepaids and other 1,121 1,154
--------- ---------
Total assets $ 120,173 $ 101,562
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable $ 2,119 $ 2,243
Accrued expenses 4,859 4,933
Unearned revenue 2,308 1,918
Deferred maintenance 7,768 6,157
Current portion of capital lease obligations 622 709
Current portion of long-term debt 548 548
--------- ---------
Total current liabilities 18,224 16,508
Capital lease obligations 141 270
Long-term debt 2,729 2,924
Deferred income taxes 594 --
Other 44 51
--------- ---------
Total liabilities 21,732 19,753
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; 25,214 and
24,796 shares issued and outstanding for 1999 and 1998, respectively
3 2
Additional paid-in capital 105,147 98,767
Deferred compensation (470) (555)
Accumulated other comprehensive income, net of tax 10,427 3,198
Accumulated deficit (16,666) (19,603)
--------- ---------
Total stockholders' equity 98,441 81,809
--------- ---------
Total liabilities and stockholders' equity $ 120,173 $ 101,562
========= =========
<FN>
See Accompanying Notes to Consolidated Financial Statements
</FN>
3
BROADVISION, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
Three Months
Ended March 31,
---------------------
1999 1998
-------- --------
Revenues:
Software licenses $ 12,783 $ 7,279
Services 5,681 2,800
-------- --------
Total revenues 18,464 10,079
Cost of revenues:
Cost of software licenses 747 187
Cost of services 3,322 1,620
-------- --------
Total cost of revenues 4,069 1,807
-------- --------
Gross profit 14,395 8,272
Operating expenses:
Research and development 2,901 2,033
Sales and marketing 7,664 5,861
General and administrative 1,271 824
-------- --------
Total operating expenses 11,836 8,718
-------- --------
Operating income (loss) 2,559 (446)
Other income (expense), net 516 (53)
-------- --------
Income (loss) before provision for income taxes 3,075 (499)
Provision for income taxes 138 --
-------- --------
Net income (loss) $ 2,937 $ (499)
======== ========
Basic earnings (loss) per share $ 0.12 $ (0.02)
======== ========
Diluted earnings (loss) per share $ 0.11 $ (0.02)
======== ========
Shares used in computing
basic earnings (loss) per share 24,670 20,456
======== ========
Shares used in computing
diluted earnings (loss) per share 27,780 20,456
======== ========
See Accompanying Notes to Consolidated Financial Statements
4
BROADVISION, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Three Months Ended
March 31,
1999 1998
-------- --------
Cash flows from operating activities:
Net income (loss) $ 2,937 $ (499)
Adjustments to reconcile net income (loss) to net cash provided by (used for)
operating activities:
Depreciation and amortization 907 608
Amortization of deferred compensation 85 92
Allowance for doubtful accounts and returns 150 245
Amortization of prepaid royalties 83 --
Changes in operating assets and liabilities:
Accounts receivable (1,053) (1,451)
Prepaids and other (447) (418)
Accounts payable and accrued expenses (198) 310
Unearned revenue and deferred maintenance 2,001 867
-------- --------
Net cash provided by (used for) operating activities 4,465 (246)
Cash flows from investing activities:
Additions to property and equipment (1,106) (1,254)
Other assets (50) (77)
Maturity of short-term investments -- 796
-------- --------
Net cash used for investing activities (1,156) (535)
Cash flows from financing activities:
Net change in restricted cash -- 1,400
Proceeds from issuance of common stock 2,156 47,243
Borrowings, net proceeds (repayments) (195) 1,187
Capital lease payments (216) (197)
-------- --------
Net cash provided by financing activities 1,745 49,633
Net increase in cash and cash equivalents 5,054 48,852
Cash and cash equivalents at beginning of period 61,878 8,277
-------- --------
Cash and cash equivalents at end of period $ 66,932 $ 57,129
======== ========
Supplemental disclosures of cash flow information:
Cash paid for interest $ 92 $ 63
======== ========
Cash paid for income taxes $ 159 $ 42
======== ========
Non-cash investing and financing activities:
Unrealized gain on long-term investments, net of tax of $4,819 $ 7,228 $ --
======== ========
Contributed capital - Income tax benefits from stock option exercises $ 4,225 $ --
======== ========
<FN>
See Accompanying Notes to Consolidated Financial Statements
</FN>
5
BROADVISION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Organization and Summary of Significant Accounting Policies
Nature of Business - BroadVision, Inc. ("BroadVision" or the "Company")
develops, markets and supports fully integrated application software solutions
exclusively designed to manage one-to-one relationships for the extended
enterprise. The Company's total end-to-end solutions empower a business to
capitalize on the Internet as a unique platform to enhance commerce, provide
critical self-service functions or deliver targeted personalized information to
customers, suppliers, distributors, employees, or any other constituent of their
extended enterprise on a real-time interactive basis.
Basis of Presentation - The accompanying consolidated financial statements
include the accounts of BroadVision and its wholly owned subsidiaries. They have
been prepared in accordance with the established guidelines for interim
financial information as provided by the instructions to Form 10-Q and Article
10 of Regulation S-X. All significant intercompany transactions have been
eliminated in consolidation. The financial results and related information as of
March 31, 1999, and for the three months ended March 31, 1999, and 1998 are
unaudited. The balance sheet at December 31, 1998, has been derived from the
audited consolidated financial statements at that date but does not necessarily
reflect all informational disclosures previously reported in accordance with
Generally Accepted Accounting Principles. In the Company's opinion, the
consolidated financial statements presented herein include all necessary
adjustments, consisting of normal recurring adjustments, to fairly state the
Company's financial position, results of operations, and cash flows for the
periods indicated. The accompanying consolidated financial statements should be
read in conjunction with the consolidated financial statements and notes thereto
included with the Company's annual report on Form 10-K and other documents filed
with the Securities and Exchange Commission. The results of the Company's
operations for the interim periods presented are not necessarily indicative of
operating results for the full fiscal year or any future interim periods.
Net Loss Per Share - SFAS No. 128, Earnings Per Share, requires the presentation
of basic and diluted earnings per share. Earnings per share is calculated by
dividing net income applicable to common stockholders by a weighted average
number of shares outstanding for the period. Basic earnings per share are
determined solely on common shares, whereas, diluted earnings per share includes
common equivalent shares, as determined under the treasury stock method. The
following table sets forth the basic and diluted earnings (loss) per share
computational data for the periods presented.
Three Months Ended March 31,
----------------------------------
(In thousands, except per share amounts) 1999 1998
-------- --------
Net income (loss) $ 2,937 $ (499)
======== ========
Weighted average common shares outstanding utilized for basic
earnings (loss) per share 24,670 20,456
Weighted average common equivalent shares outstanding:
Employee common stock options 3,061 -- [1]
Common stock warrant 49 -- [1]
-------- --------
Total weighted average common and common equivalent shares
outstanding utilized for diluted earnings (loss) per share 27,780 20,456
======== ========
Basic earnings (loss) per share $ 0.12 $ (0.02)
======== ========
Diluted earnings (loss) per share $ 0.11 $ (0.02)
======== ========
<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>
Other Comprehensive Income - For the three months ended March 31, 1999, other
comprehensive income was $7.2 million which consisted of unrealized gains on
long-term investments, and total comprehensive income was $10.1 million. For the
three months ended March 31, 1998, total comprehensive loss did not differ from
net loss.
6
New Accounting Pronouncements - The Financial Accounting Standards Board
("FASB") recently issued SFAS No. 133, Accounting for Derivative Instruments and
Hedging Activities. SFAS No. 133 addresses the accounting for derivative
instruments, including certain derivative instruments embedded in other
contracts. Under SFAS No. 133, entities are required to carry all derivative
instruments in the balance sheet at fair value. 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 relationship
and, if so, the reason for holding it. The Company must adopt SFAS No. 133 by
January 1, 2000. The Company does not expect that the adoption of SFAS No. 133
will have a material effect on its financial statements.
In December 1998, the Accounting Standards Executive Committee
("AcSEC") of the American Institute of Certified Public Accountants issued
Statement of Position ("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 will adopt SOP
98-9 on Janurary 1, 2000. The Company does not expect a material change to its
revenue accounting as a result of the provisions of SOP 98-9.
Note 2. Selective Balance Sheet Detail
Property and Equipment consisted of the following (in thousands):
March 31, December 31,
1999 1998
-------- --------
Furniture and fixtures $ 1,041 $ 1,001
Computers and software 9,688 8,662
Leasehold improvements 3,765 3,725
-------- --------
14,494 13,388
Less accumulated depreciation and amortization (6,261) (5,354)
-------- --------
$ 8,233 $ 8,034
======== ========
Accrued expenses consisted of the following (in thousands):
March 31, December 31,
1999 1998
------ ------
Employee benefits $ 849 $ 678
Commissions and bonuses 1,554 2,013
Taxes payable 712 785
Other 1,744 1,457
------ ------
$4,859 $4,933
====== ======
Note 3. Commercial Credit Facilities
As of March 31, 1999, the Company has a credit facility with a
commercial lender which includes outstanding borrowings of $3.3 million under a
note payable and a revolving line of credit that provides for up to $2.3 million
of total borrowings (based on eligible accounts receivable). As of March 31,
1999, the Company had outstanding commitments totaling $2.7 million in the form
of standby letters of credit.
The Company's credit facilities include covenants that impose certain
restrictions on the payment of dividends and other distributions and require 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. As of
March 31, 1999 the Company was in compliance with its commercial credit facility
covenants.
7
Note 4 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):
Three Months Ended
March 31,
-------------------------
1999 1998
------- -------
Software licenses
One-To-One Enterprise $ 3,827 $ 3,969
One-To-One WebApps 8,956 3,310
Services 3,731 2,012
Maintenance 1,950 788
------- -------
Total Company $18,464 $10,079
======= =======
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:
Three Months Ended
March 31,
-------------------------
(In thousands) 1999 1998
-------- --------
Revenues
Americas $ 11,340 $ 6,061
Europe 3,962 2,779
Asia/Pacific 3,162 1,239
-------- --------
Total Company $ 18,464 $ 10,079
======== ========
Identifiable assets: March 31, December 31,
1999 1998
-------- --------
Americas $117,818 $ 99,343
Europe 1,844 1,754
Asia/Pacific 511 465
-------- --------
Total Company $120,173 $101,562
======== ========
During the three months ended March 31, 1999, one customer accounted
for approximately 15% of the Company's revenues. During the three months ended
March 31, 1998, two customers accounted for approximately 15% and 10% of the
Company's revenues, respectively.
8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
EXCEPT FOR THE HISTORICAL INFORMATION CONTAINED 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 HEREIN WITH this
QUARTERLY REPORT ON Form 10-Q, the Company's annual report ON Form 10-k, and
other documents filed with the securities and exchange commission. Any such
forward-looking statements speak only as of the date such statements are made.
OVERVIEW
BroadVision develops, markets and supports real time interactive fully
integrated application software solutions exclusively designed to manage
one-to-one relationships for the extended enterprise. The Company's total
end-to-end solutions allow a business to capitalize on the Internet as a unique
platform and take full advantage of emerging technologies. By utilizing
BroadVision products and technology, a business is empowered to enhance
commerce, provide critical self-service functions, and deliver targeted
personalized information to their customers, suppliers, distributors, employees,
or any other constituent of their extended enterprise.
BroadVision's product line provides a competitive advantage for
businesses by allowing them to specifically tailor Web site content to the
personalized needs and interests of individual visitors on a real-time
interactive basis. The BroadVision One-To-One(TM) applications accomplish this
by capturing Web site visitor profiles, dynamically organizing enterprise
information, targeting content to each individual visitor based on easily
constructed business rules, and by providing the means to facilitate the
execution of secure transactions. The Company believes the competitive
advantages of these applications include, among other things, enhanced customer
satisfaction and loyalty, increased business volumes, lower costs to service
customers and execute transactions, as well as significantly enhanced employee
productivity.
The Company's core product, BroadVision One-To-One Enterprise, was
first made commercially available in December 1995. The Company's latest
commercially available version, Version 4.0, was made available for general
release on September 30, 1998 and supports five languages (English, German,
Japanese, Chinese, and Korean) and four major client server databases (Oracle,
Sybase, Informix, and Microsoft SQL Server). A complementary family of packaged
application products (One-To-One Commerce, One-To-One Financial, and One-To-One
Knowledge) were first introduced in 1997 and are built upon and tightly
integrated with the Company's core technology. These complementary application
products provide specifically enhanced functionality for the distinct customer
requirements involved in managing one-to-one relationships within product
merchandising, financial services, and knowledge management. The Company sells
its products and services worldwide through direct sales forces, 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.
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.
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. Consulting related
services are typically recognized as services are performed. Maintenance fees
relating to technical support and upgrades are recognized ratably over the
contracted period, which is typically one year.
9
Total Company revenues increased 83% during the current quarter ended
March 31, 1999 to $18.5 million as compared to $10.1 million for the quarter
ended March 31, 1998. A summary of the Company's revenues by geographic region
is as follows:
(In thousands) Software % Services % Total %
------------- ----------- -------------- ----------- ---------------- ----------
Quarter Ended:
March 31, 1999
Americas $ 7,457 58% $ 3,883 69% $ 11,340 61%
Europe 2,467 19 1,495 26 3,962 22
Asia/Pacific 2,859 23 303 5 3,162 17
- ----------------------------------------------------------------------------------------------------------------------
Total $ 12,783 100% $ 5,681 100% $ 18,464 100%
======================================================================================================================
March 31, 1998
Americas $ 4,110 56% $ 1,951 70% $ 6,061 60%
Europe 2,253 31 526 19 2,779 28
Asia/Pacific 916 13 323 11 1,239 12
- ----------------------------------------------------------------------------------------------------------------------
Total $ 7,279 100% $ 2,800 100% $ 10,079 100%
======================================================================================================================
Software product license revenues increased 76% during the current
quarter ended March 31, 1999 to $12.8 million as compared to $7.3 million for
the quarter ended March 31, 1998.
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.
Total services revenues increased 103% during the current quarter ended
March 31, 1999 to $5.7 million as compared to $2.8 million for the quarter ended
March 31, 1998.
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 $2.0 million for the
quarter ended March 31, 1999 as compared to $788,000 for the quarter ended March
31, 1998. During the quarter ended March 31, 1999, the Company licensed
approximately 43 new customers (including system integration/distributor
partners), which compares with approximately 32 during the quarter ended March
31, 1998. As of March 31, 1999, the Company had a total installed license base
of over 300 customers which compares with over 250 as of December 31, 1998 and
over 175 as of March 31, 1998. 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.
The Company continues to make available newly enhanced applications and
associated tools for industries that require unique one-to-one relationship
management functionality, such as 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 BroadVision
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).
10
The Company continues to place an emphasis on expanding its strategic
alliances with key industry partners and has entered into various arrangements
to develop highly specialized applications and reduce the development time cycle
associated with Web applications. The Company expects to introduce these
additional specialized products during 1999 and beyond.
During the quarter ended March 31, 1999, the Company entered into a strategic
alliance with Hewlett-Packard Company ("HP") to jointly develop and brand a new
generation of e-commerce and knowledge-management solutions. The alliance
includes the resale and support of existing and future BroadVision products; and
the joint development, sale, and support of integrated business-portal solutions
to act as interfaces for the next-generation of enterprise customer e-services.
HP has committed up to $35.5 million in quarterly installments over the next
three and half years which consists of approximately $24.5 million for licenses
and approximately $11 million for services. To date, approximately $2.5 million
of the total arrangement has been recognized as revenue during the quarter ended
March 31, 1999.
Some of the Company's other strategic alliances to date include ventures with
Macromedia to jointly develop the next version of its BroadVision One-To-One
Design Center product; 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.
To date the Company has achieved good market acceptance for its products and
has experienced continued revenue growth. 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. There can be no assurance,
however, that the Company will be able to maintain or increase international
market acceptance for its family of products.
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.
Three Months Ended March 31,
---------------------------------------
(in thousands) 1999 % 1998 %
------ ---- ------ ----
Cost of software licenses [1] $ 747 5.8% $ 187 2.6%
Cost of services [2] 3,322 58.5 1,620 57.9
------ ------
Total cost of revenues [3] $4,069 22.0 $1,807 17.9
====== ======
[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
Cost of software licenses increased 300% in absolute dollar terms
during the current quarter ended March 31, 1999 to $747,000 as compared to
$187,000 for the quarter ended March 31, 1998.
The increase in cost of software licenses, in both absolute dollar and
relative percentage terms, was principally a result of fees and royalties paid
to third party vendors for software that was bundled with the Company's product.
The higher third party software sales add incremental revenues to the Company's
own product sales but carry a higher cost of license factor in relation to the
Company's own product sales. Royalty costs for third party software embedded in
the Company's product decreased in relative percentage terms as a result of the
Company renegotiating a previously existing percentage based royalty arrangement
into a prepaid fixed fee royalty for the period through 2001.
11
Cost of services increased 105% during the current quarter ended March
31, 1999 to $3.3 million as compared to $1.6 million for the quarter ended March
31, 1998.
The increase in cost of services in absolute dollar terms 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 arrangements. The increase in cost of services as a percentage of
services revenues for the quarter ended March 31, 1999 is a result of higher
utilization of outside consultants in relation to the extent previously utilized
during the prior period. The Company expects that services costs will continue
to increase in absolute dollars as the Company continues to expand its services
organization to support higher business volumes.
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.
Three Months Ended March 31,
---------------------------------------
(in thousands) 1999 % [1] 1998 % [1]
------- ---- ------- ----
Research and Development $ 2,901 15.7% $ 2,033 20.2%
Sales and Marketing 7,664 41.5 5,861 58.1
General and Administrative 1,271 6.9 824 8.2
------- ---- ------- ----
Total Operating Expenses $11,836 64.1% $ 8,718 86.5%
======= ==== ======= ====
[1] -- Expressed as a percent of total revenues for the period indicated
Research and development expenses increased 43% during the current
quarter ended March 31, 1999 to $2.9 million as compared to $2.0 million for the
quarter ended March 31, 1998. The increase in research and development expenses
in absolute dollars 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 dollar terms.
Sales and marketing expenses increased 31% during the current quarter
ended March 31, 1999 to $7.7 million as compared to $5.9 million for the quarter
ended March 31, 1998. The increases in sales and marketing expenses in absolute
dollar terms reflect the cost of hiring additional sales and marketing
personnel, developing and expanding its sales distribution channels, and
expanding promotional activities and marketing related programs. 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.
General and administrative expenses increased 54% during the current
quarter ended March 31, 1999 to $1.3 million as compared to $824,000 for the
quarter ended March 31, 1998. 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.
12
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.
Income Taxes
During the quarter ended March 31, 1999, the Company recognized tax
expense of $138,000 for an effective tax rate of approximately 4.5%. Due to the
Company's continuing trend of positive earnings, the Company reversed a portion
of its valuation allowance against the previously established deferred tax
assets for which realization is considered more likely than not. As of December
31, 1998, the Company has 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.
LIQUIDITY AND CAPITAL RESOURCES
(dollars in thousands) March 31, December 31,
1999 1998
--------- ---------
Cash and cash equivalents $ 66,932 $ 61,878
========= =========
Working capital $ 69,002 $ 64,320
========= =========
Working capital ratio 4.8 : 1 4.9 : 1
========= =========
At March 31, 1998, the Company had $66.9 million in cash and cash equivalents
which represents an increase of $5.1 million as compared to December 31, 1998.
The Company currently has no significant capital commitments other than
obligations under equipment and operating leases and $3.3 million of outstanding
term debt under its existing credit facility with a commercial bank.
Cash provided by operating activities was $4.5 million for the quarter ended
March 31, 1999 as compared to cash used for operating activities of $246,000 for
the quarter ended March 31, 1998. Cash used for investing activities was $1.2
million and $535,000 for the quarters ended March 31, 1999 and 1998,
respectively, and was primarily for capital expenditures. Cash provided by
financing activities was $1.7 million and $49.6 million for the quarters ended
March 31, 1999 and 1998, respectively, and consists primarily of proceeds from
the issuance of common stock.
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.
13
FACTORS AFFECTING QUARTERLY OPERATING RESULTS
The Company expects to experience significant fluctuations in quarterly
operating results that may be caused by many factors including, but not limited
to, those discussed below and herein with this quarterly report on Form 10-Q, as
contained in the Company's annual report on Form 10-K under the caption "Risk
Factors" and elsewhere therein, and as disclosed in other documents filed with
the Securities and Exchange Commission.
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 maintenance 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. The Company anticipates that
its operating expenses will continue to be substantial in relation to total
revenues as it continues the development of its technology, increases its sales
and marketing activities, and creates and expands its distribution channels. In
addition, 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 be able to sustain its revenue growth or profitability.
The Company's limited operating history also requires that its prospects be
evaluated in light of the risks and uncertainties frequently encountered by a
company in its early stages of development. Some of these risks and
uncertainties relate to the new and rapidly evolving nature of the markets in
which the Company operates. These related market risks include, among other
things, the early stage of the developing online commerce market, the dependence
of online commerce on the development of the Internet and its related
infrastructure, the uncertainty pertaining to widespread adoption of online
commerce, and the risk of government regulation of the Internet. Other risks and
uncertainties facing the Company relate to the Company's ability to, among other
things, successfully implement its marketing strategies, respond to competitive
developments, continue to develop and upgrade its products and technologies more
rapidly than its competitors, and commercialize its products and services by
incorporating these enhanced technologies. There can be no assurance that the
Company will succeed in addressing any or all of these risks. A more complete
description of these and other risks relating to the Company's business is set
forth in the Company's annual report on Form 10-K under the caption "Risk
Factors" and elsewhere therein and other documents filed with the Securities and
Exchange Commission. It is also 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.
14
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 by the end of
1999. 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 completing its analysis as to
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.
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.
15
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's exposure to market risk for interest rate changes relates
primarily to its investment portfolio. The Company had no derivative financial
instruments as of March 31, 1999 or December 31, 1998. The Company places its
investment portfolio in high credit quality instruments 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 investment portfolio holdings as of March 31, 1999 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.
The Company is subject to market risk relating to equity price changes with
regards to its long-term investment holdings which consist of marketable and
non-marketable equity securities. As of March 31, 1999, the Company's long-term
investment holdings had a carrying value of $23.6 million, a historical cost of
value of $8.3 million and associated unrealized gains of $15.3 million.
PART II. OTHER INFORMATION
ITEM 1. 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 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Not applicable
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable
ITEM 5. OTHER INFORMATION
Not applicable
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Item Description
---- -----------
10.1* Equity Incentive Plan, as amended
10.2* Employee Stock Purchase Plan, as amended
10.19 Lease dated February 10, 1999 between the Company and
Martin/Campus Associates, L.P.
27 Financial Data Schedule
* Filed as an annex to the Company's Proxy Statement filed on
April 12, 1999 and incorporated herein by reference
16
SIGNATURES
Pursuant to the requirements 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.
BROADVISION, INC
Date: May 14, 1999 /s/ Pehong Chen
--------------------- -----------------------------------------
Pehong Chen
President and Chief Executive Officer
(Principal Executive Officer)
Date: May 14, 1999 /s/ Randall C. Bolten
--------------------- -----------------------------------------
Randall C. Bolten
Vice President, Operations and Chief
Financial Officer
(Principal Financial and Accounting
Officer)
17
INDEX TO EXHIBITS
Exhibit
No. Description
- ------- -----------
10.1* Equity Incentive Plan, as amended
10.2* Employee Stock Purchase Plan, as amended
10.19 Lease dated February 10, 1999 between the Company and
Martin/Campus Associates, L.P.
27 Financial Data Schedule
* Filed as an annex to the Company's Proxy Statement filed on April 12, 1999 and
incorporated herein by reference
18