================================================================================ 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 September 30, 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. (Exact name of registrant as specified in its charter) Delaware 94-3184303 (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 October 31, 1999, there were 77,618,034 shares of the Registrant's Common Stock issued and outstanding. ================================================================================ BROADVISION, INC. AND SUBSIDIARIES FORM 10-Q QUARTER ENDED SEPTEMBER 30, 1999 TABLE OF CONTENTS Page No. -------- PART I FINANCIAL INFORMATION Item 1. Financial Statements Consolidated Balance Sheets - September 30, 1999 and December 31, 1998 3 Consolidated Statements of Operations and Comprehensive Income - Three and nine months ended September 30, 1999 and 1998 4 Consolidated Statements of Cash Flows - Nine months ended September 30, 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 17 Item 2. Changes in Securities and Use of Proceeds 17 Item 3. Defaults upon Senior Securities 17 Item 4. Submission of Matters to a Vote of Security Holders 17 Item 5. Other Information 18 Item 6. Exhibits and Reports on Form 8-K 18 SIGNATURES 18 2 PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS BROADVISION, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (In thousands, except per share data) September 30, December 31, 1999 1998 --------- --------- ASSETS Cash and cash equivalents $ 55,323 $ 61,878 Short-term investments 24,201 -- Accounts receivable, less allowance for doubtful accounts and returns of $1,221 and $788, for 1999 and 1998, respectively 23,091 15,361 Prepaids and other 3,992 3,589 --------- --------- Total current assets 106,607 80,828 Property and equipment, net 12,830 8,034 Long-term investments 25,534 11,546 Deferred income taxes 8,036 -- Other 3,522 1,154 --------- --------- Total assets $ 156,529 $ 101,562 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY Accounts payable $ 4,602 $ 2,243 Accrued expenses 8,161 4,933 Unearned revenue 3,715 1,918 Deferred maintenance 11,601 6,157 Current portion of capital lease obligations 347 709 Current portion of long-term debt 977 548 --------- --------- Total current liabilities 29,403 16,508 Long-term debt 5,030 2,924 Other 26 321 --------- --------- Total liabilities 34,459 19,753 Commitments Stockholders' equity: Convertible preferred stock, $0.0001 par value; 10,000 shares authorized; none issued and outstanding -- -- Common stock, $0.0001 par value; 500,000 shares authorized; 77,441 and 74,389 shares issued and outstanding for 1999 and 1998, respectively 8 7 Additional paid-in capital 120,084 98,762 Deferred compensation (307) (555) Accumulated other comprehensive income, net of tax 11,141 3,198 Accumulated deficit (8,856) (19,603) --------- --------- Total stockholders' equity 122,070 81,809 --------- --------- Total liabilities and stockholders' equity $ 156,529 $ 101,562 ========= ========= <FN> See Accompanying Notes to Consolidated Financial Statements </FN> 3 BROADVISION, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (In thousands, except per share amounts) Three Months Ended Nine Months Ended September 30, September 30, --------------------------- -------------------------- 1999 1998 1999 1998 -------- -------- -------- -------- Revenues: Software licenses $ 18,954 $ 9,158 $ 47,221 $ 24,455 Services 10,877 4,273 24,550 10,439 -------- -------- -------- -------- Total Revenues 29,831 13,431 71,771 34,894 Cost of revenues: Cost of software licenses 676 237 2,460 637 Cost of services 7,241 2,553 15,114 6,264 -------- -------- -------- -------- Total cost of revenues 7,917 2,790 17,574 6,901 -------- -------- -------- -------- Gross profit 21,914 10,641 54,197 27,993 Operating expenses: Research and development 3,816 2,394 9,986 6,476 Sales and marketing 12,136 6,285 29,891 18,389 General and administrative 2,119 977 5,001 2,562 -------- -------- -------- -------- Total operating expenses 18,071 9,656 44,878 27,427 -------- -------- -------- -------- Operating income 3,843 985 9,319 566 Other income, net 891 769 2,001 1,382 -------- -------- -------- -------- Income before provision for income taxes 4,734 1,754 11,320 1,948 Provision for income taxes 240 -- 573 -- -------- -------- -------- -------- Net income $ 4,494 $ 1,754 $ 10,747 $ 1,948 ======== ======== ======== ======== Basic earnings per share $ 0.06 $ 0.02 $ 0.14 $ 0.03 ======== ======== ======== ======== Diluted earnings per share $ 0.05 $ 0.02 $ 0.13 $ 0.03 ======== ======== ======== ======== Shares used in computing: Basic earnings per share 76,335 72,792 75,306 68,772 ======== ======== ======== ======== Diluted earnings per share 86,649 80,166 84,753 75,642 ======== ======== ======== ======== Comprehensive income: Net income $ 4,494 $ 1,754 $ 10,747 $ 1,948 Other comprehensive income, net of tax: Unrealized long-term investment gains (losses) (2,102) -- 7,943 -- -------- -------- -------- -------- Total comprehensive income $ 2,392 $ 1,754 $ 18,690 $ 1,948 ======== ======== ======== ======== <FN> See Accompanying Notes to Consolidated Financial Statements </FN> 4 BROADVISION, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) Nine Months Ended September 30, ---------------------------- 1999 1998 -------- -------- Cash flows from operating activities: Net income $ 10,747 $ 1,948 Adjustments to reconcile net income to net cash provided by (used for) operating activities: Depreciation and amortization 2,994 2,074 Amortization of deferred compensation 248 269 Allowance for doubtful accounts and returns 433 403 Revenue recognized from non-monetary transactions -- (2,917) Amortization of prepaid royalties 250 167 Changes in operating assets and liabilities: Accounts receivable (8,163) (2,442) Prepaids and other (429) (995) Accounts payable and accrued expenses 5,587 1,018 Unearned revenue and deferred maintenance 7,241 237 -------- -------- Net cash provided by (used for) operating activities 18,908 (238) Cash flows from investing activities: Additions to property and equipment (7,790) (2,932) Purchase of long-term investments (750) (1,500) Other assets (2,618) (161) Purchase of short-term investments (24,201) -- Maturity of short-term investments -- 796 -------- -------- Net cash used for investing activities (35,359) (3,797) Cash flows from financing activities: Net change in restricted cash -- 1,400 Proceeds from issuance of common stock, net 7,993 55,947 Proceeds from borrowings, net 2,535 958 Capital lease payments (632) (633) -------- -------- Net cash provided by financing activities 9,896 57,672 Net (decrease) increase in cash and cash equivalents (6,555) 53,637 Cash and cash equivalents at beginning of period 61,878 8,277 -------- -------- Cash and cash equivalents at end of period $ 55,323 $ 61,914 ======== ======== Supplemental disclosures of cash flow information: Cash paid for interest $ 267 $ 294 ======== ======== Cash paid for income taxes $ 511 $ 159 ======== ======== Non-cash investing and financing activities: Unrealized gain on long-term investments (net of taxes of $5,295) $ 7,943 $ -- ======== ======== Contributed capital - Income tax benefits from stock option exercises $ 13,330 $ -- ======== ======== Other current and noncurrent assets acquired in non-monetary transaction $ -- $ 5,275 ======== ======== Unearned revenue and deferred maintenance - non-monetary transaction $ -- $ 2,358 ======== ======== Acquisition of equipment under capital lease $ -- $ 247 ======== ======== Deferred compensation forfeited due to voluntary terminations $ -- $ 693 ======== ======== <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 application software solutions for one-to-one relationship management across the extended enterprise. These solutions enable businesses to use the Internet as a platform to conduct electronic commerce, offer online customer self-service and support, deliver targeted information and provide online financial services. Each of these capabilities can be provided to all constituents of the extended enterprise, including customers, suppliers, partners, distributors and employees. 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 September 30, 1999 and for the three and nine months ended September 30, 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 of the 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 Form 10-K and other documents that have been 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. Stock Split - The Company's Board of Directors declared a three-for-one common stock split in the form of a stock dividend for Stockholders of record as of October 11, 1999. The stock dividend payment date was October 25, 1999 and the Company's common stock traded ex-dividend starting October 26, 1999, reflecting the three-for-one stock split. The accompanying consolidated financial statements and related financial information contained herein have been retroactively restated to give effect for the three-for-one stock split. Net Loss Per Share - Statement of Financial Accounting Standard ("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 the 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 basic and diluted earnings per share computational data for the periods presented (in thousands, except per share amounts): Three Months Ended Nine Months Ended September 30, September 30, ---------------------- ---------------------- 1999 1998 1999 1998 ------- ------- ------- ------- Net income $ 4,494 $ 1,754 $10,747 $ 1,948 ======= ======= ======= ======= Weighted-average common shares outstanding utilized for basic earnings per share 76,335 72,792 75,306 68,772 Weighted-average common equivalent shares outstanding: Employee common stock options 10,242 7,308 9,362 6,816 Common stock warrants 72 66 85 54 ------- ------- ------- ------- Total weighted-average common and common equivalent shares outstanding utilized for diluted earnings per share 86,649 80,166 84,753 75,642 ======= ======= ======= ======= Basic earnings per share $ 0.06 $ 0.02 $ 0.14 $ 0.03 ======= ======= ======= ======= Diluted earnings per share $ 0.05 $ 0.02 $ 0.13 $ 0.03 ======= ======= ======= ======= 6 New Accounting Pronouncements - The Financial Accounting Standards Board ("FASB") issued SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, as amended by SFAS No. 137. 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 record and carry all derivative instruments at fair value as either assets or liabilities. The accounting for changes in fair value (i.e., gains or losses) of a derivative instrument depends on whether it qualifies as part of a hedging relationship, has been so designated as such and the underlying reason for holding it. The Company must adopt SFAS No. 133, as amended, by January 1, 2001, and does not expect such adoption will have any 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 January 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): September 30, December 31, 1999 1998 -------- -------- Furniture and fixtures $ 1,218 $ 1,001 Computers and software 16,108 8,662 Leasehold improvements 3,852 3,725 -------- -------- 21,178 13,388 Less accumulated depreciation and amortization (8,348) (5,354) -------- -------- $ 12,830 $ 8,034 ======== ======== Accrued expenses consisted of the following (in thousands): September 30, December 31, 1999 1998 ------ ------ Employee benefits $1,129 $ 678 Commissions and bonuses 2,991 2,013 Taxes payable 1,674 785 Royalties payable 639 138 Other 1,728 1,319 ------ ------ $8,161 $4,933 ====== ====== Note 3. Commercial Credit Facilities The Company has outstanding borrowings with a commercial lender totaling $6.0 million as of September 30, 1999 and a revolving line of credit that provides for up to $5.0 million of additional borrowings based on eligible accounts receivable (no outstanding borrowings as of September 30, 1999). As of September 30, 1999, the Company had total outstanding commitments of $2.8 million in the form of standby letters of credit under its revolving line 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 September 30, 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 methodology for determining what information is reported is based on the organization of operating segments and the related information that the Chief Operating Decision Maker ("CODM") uses for operational decisions and financial performance assessments. The Company's Chief Executive Officer ("CEO") is considered its CODM. The CEO reviews financial information presented on a consolidated basis accompanied by disaggregated information for products and services and revenues by geographic region for purposes of making operating decisions and assessing financial performance. 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. Disaggregated financial information regarding the Company's products and services and revenues by geographic region is as follows (in thousands): Three Months Ended Nine Months Ended September 30, September 30, ------------------------ ------------------------ 1999 1998 1999 1998 ------- ------- ------- ------- Software licenses: One-To-One Enterprise $ 2,965 $ 6,491 $ 7,602 $17,494 One-To-One WebApps 15,989 2,667 39,619 6,964 Services 7,260 2,894 16,323 7,160 Maintenance 3,617 1,379 8,227 3,276 ------- ------- ------- ------- Total Revenues $29,831 $13,431 $71,771 $34,894 ======= ======= ======= ======= Revenues: Americas $20,266 $ 7,790 $50,012 $19,605 Europe 7,807 4,668 15,444 11,471 Asia/Pacific 1,758 973 6,315 3,818 ------- ------- ------- ------- Total Company $29,831 $13,431 $71,771 $34,894 ======= ======= ======= ======= September 30, December 31, 1999 1998 -------- -------- Identifiable assets: Americas $153,154 $ 99,343 Europe 2,808 1,754 Asia/Pacific 567 465 -------- -------- Total Company $156,529 $101,562 ======== ======== During the three months ended September 30, 1999, and the three and nine months ended September 30, 1998, no single customer accounted for more than 10% of the Company's total revenues. During the nine months ended September 30, 1999, one customer accounted for 11% of the Company's total revenues. Note 5. Subsequent Events On October 5, 1999, the Company's Board of Directors increased the authorized shares of common stock and convertible preferred stock to 500 million and 10 million, respectively. In addition, the Board of Directors increased the aggregate number of shares of common stock available to be issued under the Company's Equity Incentive Plan by 3 million shares. During November 1999, the Company completed a follow on common stock offering and issued 3.1 million shares for net proceeds to the Company of approximately $209.4 million. In connection with the stock offering, the Company has been listed on the Neuer Markt segment of the Frankfurt Stock Exchange under the symbol "BDN". 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 application software solutions for one-to-one relationship management across the extended enterprise. These solutions enable businesses to use the Internet as a platform to conduct electronic commerce, offer online customer self-service and support, deliver targeted information and provide online financial services. Each of these capabilities can be provided to all constituents of the extended enterprise, including: customers, suppliers, partners, distributors and employees. The BroadVision One-To-One product suite allows business to tailor their Web site content to the needs and interests of individual users by personalizing each visit on a real-time basis. BroadVision's applications interactively capture Web site visitor profile information, organize the enterprise's content, target that content to each visitor based on easily constructed business rules, and execute transactions. BroadVision believes the benefits of these applications include enhanced customer satisfaction and loyalty, increased business volume, greater brand awareness, reduced costs to service customers and to execute transactions, and enhance employee productivity. The Company's core product, BroadVision One-To-One Enterprise, was first made commercially available in December 1995. A complementary family of targeted application products was first introduced as early as 1997. These complementary application products (BroadVision One-To-One Retail Commerce, BroadVision One-To-One Business Commerce, BroadVision One-To-One Financial, and BroadVision One-To-One Knowledge) are built upon and tightly integrated with the Company's core technology and provide specifically enhanced functionality for the distinct customer requirements involved in managing one-to-one relationships within business-to-consumer, business-to-business, financial services, and knowledge management. BroadVision intends to remain nimble and flexible in developing other packaged application products in the general area of one-to-one relationship management in response to market opportunities that may arise. The Company sells its products and services worldwide through direct sales forces, independent distributors, resellers, and system integrators. It also has a global network of strategic business relationships with key industry platform and Web developer partners. The Company also engages in strategic business alliances to assist in the marketing, selling and developing of customer applications. The Company places a strategic emphasis on developing technology alliances in order to ensure that its products are based on industry standards and that it 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 for itself and its customers. 9 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. Software license revenues, 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. Total Company revenues increased 122% during the quarter ended September 30, 1999 to $29.8 million as compared to $13.4 million for the quarter ended September 30, 1998. For the nine months ended September 30, 1999, total Company revenues increased 106% to $71.8 million as compared to $34.9 million for the comparable period during 1998. A summary of the Company's revenues by geographic region is as follows: (In thousands) Software % Services % Total % ------- ------- ------- ------- ------- ------- Three Months Ended: September 30, 1999 Americas $11,610 61% $ 8,656 80% $20,266 68% Europe 6,063 32 1,744 16 7,807 26 Asia/Pacific 1,281 7 477 4 1,758 6 ------- ------- ------- ------- ------- ------- Total $18,954 100% $10,877 100% $29,831 100% ======= ======= ======= ======= ======= ======= September 30, 1998 Americas $ 4,777 52% $ 3,013 71% $ 7,790 58% Europe 3,897 43 771 18 4,668 35 Asia/Pacific 484 5 489 11 973 7 ------- ------- ------- ------- ------- ------- Total $ 9,158 100% $ 4,273 100% $13,431 100% ======= ======= ======= ======= ======= ======= Nine Months Ended: September 30, 1999 Americas $31,229 66% $18,783 77% $50,012 70% Europe 10,893 23 4,551 18 15,444 21 Asia/Pacific 5,099 11 1,216 5 6,315 9 ------- ------- ------- ------- ------- ------- Total $47,221 100% $24,550 100% $71,771 100% ======= ======= ======= ======= ======= ======= September 30, 1998 Americas $12,278 50% $ 7,327 70% $19,605 56% Europe 9,628 39 1,843 18 11,471 33 Asia/Pacific 2,549 11 1,269 12 3,818 11 ------- ------- ------- ------- ------- ------- Total $24,455 100% $10,439 100% $34,894 100% ======= ======= ======= ======= ======= ======= Software product license revenues increased 107% during the quarter ended September 30, 1999 to $19.0 million as compared to $9.2 million for the quarter ended September 30, 1998. For the nine months ended September 30, 1999, license revenues increased 93% to $47.2 million as compared to $24.5 million for the comparable period during 1998. 10 The increase in software license revenues is attributable to continued strong demand for the Company's core competencies and technologies within a growing market using the Internet for commerce and communication; the Company's expanding range of products; the continually increasing levels of application functionality within its products; the Company's strategic focus of leveraging its partner relationships; and to a lesser extent, product pricing increases that were effective October 1, 1998. As a result, the Company is attracting new customers and our existing customer base is generating additional revenues through increased use of established web sites as well as the introduction of additional web sites within an existing customer's organization. During the quarter ended September 30, 1999, the Company signed approximately 56 new end user customers and 16 new partners which compares to approximately 19 new end user customers and 10 new partners during the quarter ended September 30, 1998. As of September 30, 1999, Broadvision had licensed over 335 end user customers and 115 partners, which compares with over 195 end user customers and 75 partners as of December 31, 1998 and 165 end user customers and 65 partners as of September 30, 1998. 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. The Company's Asia/Pacific operations have experienced reduced growth rates over recent years as a result of the generally weak economic conditions of that region. As a result, the Company expects that any significant growth in international revenues will most likely come from European operations. There can be no assurance, however, that the Company will be able to maintain or continue to increase international or domestic market acceptance for its family of products. Total services revenues increased 155% during the quarter ended September 30, 1999 to $10.9 million as compared to $4.3 million for the quarter ended September 30, 1998. For the nine months ended September 30, 1999, services revenues increased 135% to $24.6 million as compared to $10.4 million for the comparable period during 1998. The increase in professional services revenue is a result of the Company's increased business volumes and a higher level of customer support revenues derived from a larger installed customer base. The Company continues to maintain its emphasis on leveraging its partner integrator relationships and has continued to add internal headcount within its professional services organizations to support the higher business volumes. Increasingly sophisticated and customer-specific use of the Company's products has recently caused accelerated demand for our professional services. However, our strategy of developing business alliances with system integrators and other third-party professional services organizations to support our products may in the future result in a decline in professional services revenues as a percentage of total revenues. Maintenance revenues continue to increase and were $8.2 million for the nine months ended September 30, 1999, as compared to $3.3 million for the nine months ended September 30, 1998. Cost of Revenues Cost of license revenues include 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. 11 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. A summary of the cost of revenues for the periods presented is as follows: Three Months Ended September 30, Nine Months Ended September 30, ---------------------------------------- ---------------------------------------- (In thousands) 1999 % 1998 % 1999 % 1998 % ------- ---- ------- ---- ------- ---- ------- ---- Cost of software licenses [1] $ 676 3.6% $ 237 2.6% $ 2,460 5.2% $ 637 2.6% Cost of services [2] 7,241 66.6% 2,553 59.7% 15,114 61.6% 6,264 60.0% ------- ------- ------- ------- Total cost of revenues [3] $ 7,917 26.5% $ 2,790 20.8% $17,574 24.5% $ 6,901 19.8% ======= ======= ======= ======= <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> Cost of software licenses increased 185% during the quarter ended September 30, 1999 to $676,000 as compared to $237,000 for the quarter ended September 30, 1998. For the nine months ended September 30, 1999, cost of software licenses increased 286% to $2.5 million as compared to $637,000 for the comparable period during 1998. The increases in cost of software licenses, in both absolute dollar and relative percentage terms, is primarily a result of the increased business volumes and the mix of Company proprietary software in relation to third party vendor software that is bundled and sold with the Company's products. The higher third party software sales add incremental revenues to the Company's product sales but carry a higher cost of license factor in the form of royalties. Although aggregate costs were higher, royalty costs for third party software embedded in the Company's product decreased on a percentage basis as a result of the Company renegotiating a previously existing percentage based royalty arrangement into a prepaid fixed fee royalty for a period that has been extended through 2004. Cost of services increased 184% during the quarter ended September 30, 1999 to $7.2 million as compared to $2.6 million for the quarter ended September 30, 1998. For the nine months ended September 30, 1999, cost of services increased 141% to $15.1 million as compared to $6.3 million for the comparable period during 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 percent of services revenues is a result of the effect of assimilating higher numbers of new internal consulting staff and higher utilization of outside consultants in relation to the extent previously utilized during the prior period. Operating Expenses 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. 12 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 September 30, Nine Months Ended September 30, ----------------------------------------- ----------------------------------------- (In thousands) 1999 % [1] 1998 % [1] 1999 % [1] 1998 % [1] ------- ---- ------- ---- ------- ---- ------- ---- Research and Development $ 3,816 12.8% $ 2,394 17.8% $ 9,986 13.9% $ 6,476 18.6% Sales and Marketing 12,136 40.7 6,285 46.8 29,891 41.6 18,389 52.7 General and Administrative 2,119 7.1 977 7.3 5,001 7.0 2,562 7.3 ------- ---- ------- ---- ------- ---- ------- ---- Total Operating Expenses $18,071 60.6% $ 9,656 71.9% $44,878 62.5% $27,427 78.6% ======= ==== ======= ==== ======= ==== ======= ==== <FN> [1] - Expressed as a percent of total revenues for the period indicated </FN> Research and development expenses increased 59% during the quarter ended September 30, 1999 to $3.8 million as compared to $2.4 million for the quarter ended September 30, 1998. For the nine months ended September 30, 1999, research and development expenses increased 54% to $10.0 million as compared to $6.5 million for the comparable period during 1998. 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 dollar terms. Sales and marketing expenses increased 93% during the quarter ended September 30, 1999 to $12.1 million as compared to $6.3 million for the quarter ended September 30, 1998. For the nine months ended September 30, 1999, sales and marketing expenses increased 63% to $29.9 million as compared to $18.4 million for the comparable period during 1998. The increases in sales and marketing expenses in absolute dollar terms reflect the cost of hiring additional sales and marketing personnel, increased commission payments resulting from higher revenues, developing and expanding 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 117% during the quarter ended September 30, 1999 to $2.1 million as compared to $977,000 for the quarter ended September 30, 1998. For the nine months ended September 30, 1999, general and administrative expenses increased 95% to $5.0 million as compared to $2.6 million for the comparable period during 1998. The increase in general and administrative expenses in absolute dollar terms is attributable to additional administrative and management personnel, higher professional services 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. Income Taxes During the quarter ended September 30, 1999, the Company's provision for income taxes was $240,000 for an effective tax rate of approximately 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 a result, the Company's effective tax rate differs from the statutory rate. 13 LIQUIDITY AND CAPITAL RESOURCES September 30, December 31, (In thousands) 1999 1998 ---- ---- Cash, cash equivalents and liquid short-term investments $79,524 $61,878 ======= ======= Working capital $77,204 $64,320 ======= ======= Working capital ratio 3.6:1 4.9:1 ======= ======= At September 30, 1999, the Company had $79.5 million of cash, cash equivalents and liquid short-term investments, which represents an increase of $17.6 million as compared to December 31, 1998. The Company currently has no significant capital commitments other than obligations under operating leases, commitments of $2.8 million in the form of standby letters of credit and $6.0 million of outstanding term debt under its existing credit facilities with a 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 netted proceeds for the Company of $20.7 million and $53.7 million in June 1996 and March 1998, respectively. During November 1999, the Company completed a follow on common stock offering and issued 3.1 million shares for net proceeds to the Company of approximately $209.4 million. In connection with the stock offering, the Company has been listed on the Neuer Markt segment of the Frankfurt Stock Exchange under the symbol "BDN". Cash provided by and used for operating activities was $18.9 million and $238,000, respectively, for the nine months ended September 30, 1999 and 1998. Cash used for investing activities was $35.4 million and $3.8 million for the nine months ended September 30, 1999 and 1998, respectively, and was primarily for capital expenditures and purchase of short-term investments. Cash provided by financing activities was $9.9 million and $57.7 million for the nine months ended September 30, 1999 and 1998, respectively, and consists primarily of proceeds from the issuance of common stock. The Company believes that its available cash and short-term investment 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. 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. 14 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 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, market acceptance of new products, the mix of the Company's products sold, 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 (which generally automatically renew for one year terms unless earlier terminated by either party upon 90-days notice), product life cycles, changes in strategy, seasonal trends, the mix of distribution channels through which the Company's products are sold, the mix of international and domestic sales, the rate at which new sales people become productive, 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 fluctuations in the Company's operating results, particularly on a quarterly basis. 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. 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. 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. 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, computer systems, software products and devices with imbedded technology used by many companies 15 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. Although the Company believes that its products are Year 2000 compliant, undetected Year 2000 error or defects could result in delay or loss of revenue, diversion of development resources, damage to the Company's reputation and increased service and warranty costs. 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. 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 noncompliant third-party software or systems could affect the perceived performance of the Company's products. State of Readiness - The Company uses 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 is implementing new systems during 1999 that will be Year 2000 compliant. The Company has also analyzed its other systems and its material suppliers and vendors for Year 2000 issues which it believes to be or will be Year 2000 compliant by the end of 1999. 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. 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. Contingency Plans - The Company has a contingency plan for handling Year 2000 problems that are not detected and corrected prior to their occurrence and continues to assess 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's contingency plan includes adequate internal resources that would be available to analyze, assess and direct remediation efforts to address potential issues, back up systems that do not rely on computers, and alternative sources of supply. 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. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company's market risk exposure for interest rate changes relates primarily to its investment portfolio. The Company has not invested in derivative financial instruments as of September 30, 1999. The Company places its investment portfolio in high 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 16 September 30, 1999 were analyzed to determine their sensitivity to interest rate changes. As part of our sensitivity analysis, we assumed an adverse change in interest rates of between 50 and 250 basis points and the expected effect was not material. The Company is also subject to market risk relating to equity price changes concerning its long-term investment holdings, which consist of marketable and non-marketable equity securities. As of September 30, 1999, the Company's long-term investment holdings had a carrying value of $25.5 million, a historical cost of value of $9.1 million and associated unrealized gains of $16.4 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. Trial is set for October 16, 2000. 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 (a) A Special Meeting of Stockholders of the Company was held on September 29, 1999. (b) Not applicable (c) The matters voted upon and the voting of the stockholders with respect thereto are as follows: (i) To approve an amendment to the Company's Amended and Restated Certificate of Incorporation to increase the authorized number of shares of Common Stock to 500,000,000 shares and Preferred Stock to 10,000,000 shares: (ii) For: 13,347,559 Against: 4,087,046 Abstain: 10,524 Broker Non-Vote: 6,600 (iii) To approve the Company's Equity Incentive Plan, as amended, to increase the aggregate number of shares of Common Stock authorized for issuance under such plan by 3,000,000 shares: (iv) For: 12,479,569 Against: 4,951,681 Abstain: 20,479 Broker Non-Vote 0 17 ITEM 5. OTHER INFORMATION Not applicable ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits Item Description ---- ----------- 3.1 Certificate of Amendment of Amended and Restated Certificate of Incorporation 10.1* Equity Incentive Plan as amended September 29, 1999 27.1 Financial Data Schedule * Filed as 5 an exhibit to the Company's Proxy Statement filed on September 13, 1999 and incorporated herein by reference . 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: November 12, 1999 /s/ Pehong Chen --------------------- ----------------------------------------- Pehong Chen President and Chief Executive Officer (Principal Executive Officer) Date: November 12, 1999 /s/ Randall C. Bolten --------------------- ----------------------------------------- Randall C. Bolten Vice President, Operations and Chief Financial Officer (Principal Financial and Accounting Officer) 18 INDEX TO EXHIBITS Exhibit No. Description - ------- ----------- 3.1 Certificate of Amendment of Amended and Restated Certificate of Incorporation 10.1* Equity Incentive Plan as amended September 29, 1999 27.1 Financial Data Schedule * Filed as an exhibit to the Company's Proxy Statement filed on September 13, 1999 and incorporated herein by reference . 19