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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------------
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the Year Ended December 31, 1997
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 Identification No.)
incorporation or organization)
585 Broadway, Redwood City, California 94063
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(Address of principal executive offices) (Zip Code)
(650) 261-5100
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Registrant's telephone number, including area code
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class which registered
------------------- ---------------------
None None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.0001 par value
------------------------------
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if the disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
Based on the closing sales price of March 1, 1998 the aggregate market
value of the voting stock held by nonaffiliates of the registrant was
$147,002,786.
As of March 1, 1998, registrant had outstanding 20,403,996 shares of Common
Stock.
----------------
DOCUMENTS INCORPORATED BY REFERENCE
Parts of the Proxy Statement for Registrant's 1997 Annual Meeting of
Stockholders to be held May 11, 1998 are incorporated by reference in Part III
of this Form 10-K Report.
BROADVISION, INC.
ANNUAL REPORT ON FORM 10-K
YEAR ENDED DECEMBER 31, 1997
TABLE OF CONTENTS
Page No.
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Part I
Item 1. Business ............................................................... 3
Item 2. Properties ............................................................. 20
Item 3. Legal Proceedings ...................................................... 20
Item 4. Submission of Matters to a Vote of Security Holders .................... 20
Part II
Item 5. Market for the Registrant's Common Equity and Related Stockholder
Matters ................................................................ 21
Item 6. Selected Consolidated Financial Data ................................... 22
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations .................................................. 23
Item 8. Financial Statements and Supplementary Data ............................ 39
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure ............................................... 53
Part III
Item 10. Directors and Executive Officers of the Registrant .................... 53
Item 11. Executive Compensation ................................................ 53
Item 12. Security Ownership of Certain Beneficial Owners and Management ........ 53
Item 13. Certain Relationships and Related Transactions ........................ 53
Part IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K ...... 53
SIGNATURES ..................................................................... 54
2
PART I.
ITEM 1. BUSINESS
The following discussion of the Company's business contains forward-looking
statements that involve risks and uncertainties. The Company's actual results
could differ materially from those anticipated in these forward- looking
statements as a result of certain factors, including, but not limited to, those
set forth under "Risk Factors" and elsewhere in this Form 10-K.
Overview
BroadVision develops, markets and supports application software solutions
for one-to-one relationship management for the extended enterprise. These
solutions enable businesses to use the Internet as a platform to conduct
commerce, provide self-service, and deliver targeted information to their
customers, suppliers, distributors, employees, and other constituents of their
extended enterprises. The BroadVision One-To-One product family allows
businesses to tailor World Wide Web (the "Web") site content to the needs and
interests of individual users by personalizing each visit on a real-time basis.
BroadVision One-To-One applications achieve this result by interactively
capturing Web site visitor profile information, organizing the enterprise's
content, targeting that content to each visitor based on easily constructed
business rules, and executing transactions. The Company believes the benefits of
these applications include enhanced customer satisfaction and loyalty, increased
business volume, reduced costs to service customers and execute transactions,
and enhanced employee productivity.
Background
Trends in One-to-One Relationship Management
To prevail in the intensely competitive global marketplace, business
managers must continually devise new strategies to market, sell, distribute, and
support their products and services. From the 1950s to the 1980s, leading
businesses in North America, Europe, and Asia advanced the sciences of mass
production, mass communication, and mass distribution to establish world markets
for their products and services. During the 1980s, these mass marketers began
using new technologies and analytical techniques to better segment and define
targeted markets in order to reach customer groups most likely to buy their
products. These new approaches helped marketers respond to increasing
competition and customer demands for improved quality, service, and product
choice. The trend toward greater specialization has continued to increase as
many marketers have used targeted marketing tools and new delivery media, such
as direct mail and telemarketing, to reach more precisely targeted market
segments.
In the latter half of the 1990s, many marketing executives in both
business-to-consumer and business-to-business industries have turned their
attention to the ultimate target market segment: the market of one. One-to-one
relationship management involves a systematic, interactive approach to
developing and managing a detailed knowledge base that integrates individual
customers' product and business requirements, personal preferences, and purchase
histories with traditional demographic statistics. This information provides the
foundation for businesses to serve customers in the form of individually
tailored products, services, information, incentives, and transactions. By
focusing on individual customers and one-to-one relationship management,
business managers can develop more productive relationships with their customers
that maximize customer satisfaction, develop customer loyalty, and contain the
high costs associated with new customer acquisition.
One-to-One Relationship Management on the Internet
With the emergence of the Internet as a globally accessible, interactive,
and individually addressable communications and computing platform, businesses
have the opportunity to implement one-to-one relationship management on a mass
basis. The proliferation of inexpensive, easy-to-use Web browsers and affordable
Internet access services has made the Internet easy to navigate, accessible to
millions of homes and businesses, and readily adaptable to a broad range of
business, education, commerce, entertainment, and marketing applications.
Technologies such as Java from Sun Microsystems, Inc. ("Sun") are facilitating
the delivery of content over the Internet and accelerating adoption of the
Internet as a mainstream business and personal computing platform. In addition,
businesses are utilizing the Internet to create internal enterprise networking
3
environments called "intranets" or "extranets." These networks are enabling
businesses to create Internet applications that provide new ways of interacting
with employees, partners, and customers.
As Internet use has grown, industry experts have described the Internet as
the ideal platform for deploying applications that enable companies to develop
individual one-to-one relationships across their entire enterprise. Whether an
Internet application is designed primarily for delivering knowledge, conducting
commerce, or customer self-service, it offers businesses an opportunity to
extend front office services in a personalized and cost effective way to all
constituents in their extended enterprise. By recognizing the
relationship-building potential of the Internet--in particular, the ability to
interactively capture visitor profile information, observations, and feedback
and to dynamically target useful information to visitors based on this
data--business managers can utilize advanced Internet technologies to engage in
personalized dialogs with millions of customers on a one-to-one basis.
The Business Challenge on the Internet
While the Internet is increasingly becoming a global platform for providing
and accessing information, there remain significant challenges to doing business
on the Internet. The Internet is characterized by fluid and dynamic content,
where information is continually being updated and enhanced. Visitors perceive
the value of Web sites to be directly correlated to the frequency of content
updates and the dynamic behavior of the site. Creating the best Web sites
generally requires sophisticated creative and technical expertise. Although the
market has been flooded with numerous inexpensive tools for building and
updating Web sites, many of the companies producing and using these tools have
failed to take full advantage of the Internet's dynamic one-to-one relationship
potential.
Many Web sites today simply present text and graphics electronically in a
static format, much like a product brochure. There has recently been a dramatic
shift away from companies simply building these "brochureware" sites to
companies making a significant investment in building mission-critical Internet
applications. These Internet applications have the interactive capability to
capture visitor profiles, conduct personalized interactions, remember
information from one visit to the next, enable business managers to manage the
site on a real-time basis, and integrate into existing business systems.
Providing these additional capabilities is a valuable next step for companies
that plan to maximize the potential of the Internet for relationship management
across their extended enterprise.
However, most of the Web sites that have moved beyond brochureware to
provide electronic commerce or knowledge management applications still have
failed to capitalize fully on the Internet's potential for building one-to-one
relationships. Sites that do support commerce often fail to satisfy customer
expectations, providing commercial experiences that are less enjoyable and
cost-effective than traditional alternatives. Most lack any form of real-time
personalization and cannot dynamically target information based on a visitors'
preferences and past histories. Others lack integration with mainstream business
systems for supporting visitors interactively or exchanging information with
corporate databases. While some of these sites use advanced applications to
support online order and payment transactions, many still require buyers to
place orders by telephone, defeating a basic objective of online businesses.
The Technology Gap on the Internet
Web sites are generally cumbersome for business managers to operate.
Business rules and content, such as product and pricing data, financial
policies, promotions, and advertising campaigns, are often "hard-coded" into
programs and virtually impossible for non-technical managers to change
dynamically. Most applications are not scalable and require ongoing tuning and
re-engineering to keep up with visitor growth and changes in Internet
technology. Development is often slow and defects are common due to the
limitations of most productivity tools. Generally, with currently available
application servers, business managers do not have the capability to react to
market conditions with real-time control and management of Web sites, but
instead are often constrained by slow "change request" processes that take
technical specialists days or even weeks to implement.
In part, the limited capabilities of these static Web sites are a result of
the inadequacies of the technologies used to develop Internet applications. Many
Web developers still rely on general purpose publishing tools, such as HTML
(Hypertext Mark-up Language) editors, to develop Web pages and the links between
them. Many
4
of today's Web development toolkits that assist in Web site development do not
offer capabilities for generating personalized, dynamic Web pages or for easily
maintaining site content and page generation logic. These tools were not
designed to be used in the development of sophisticated applications offering
enterprise-scale implementations of business processes, such as product
marketing, sales, or customer support. Using low-level toolkits and commerce
and merchant servers to develop and maintain sophisticated Internet
applications, such as managing customer relationships and defining dynamic
business rules, is a highly complex process requiring a breadth of expertise
that is often beyond the capabilities of in-house information technology
organizations. In addition, the cost, time, and effort of building and
maintaining Internet applications in this manner is often beyond the funding
capacity of internal application development budgets.
Application Systems for One-to-One Relationship Management
The recent trends toward one-to-one relationship management and the rapid
adoption of the Internet as a technology platform for conducting business have
fueled the need for sophisticated packaged application software that enables
companies to create applications that build personalized, long-term
relationships with customers, partners, and employees. Early adopting companies
have built successful online relationship management applications and these
online businesses are creating pressures for their competitors to come to market
quickly with online business sites. To build these sites, the Company believes
that more of these companies are turning toward the purchase of packaged
enterprise Internet applications. These packaged applications provide an
attractive alternative to in-house or third-party custom application
development, enabling companies to get to market more quickly with a solution
that is more readily extensible and maintainable as the business evolves.
To realize the potential of one-to-one relationship management, Internet
applications must support the following activities:
* Attract and retain visitors by providing dynamic content, interactive
dialogs, and communities of interest
* Develop and maintain visitor profiles, observe and remember
interactions, and engage in ongoing personalized dialogs while
empowering individuals to control the privacy of their personal data
* Provide business managers the ability to define and modify the Internet
application's business rules and content in real time
* Dynamically target personalized content, products, and incentives to
correspond to profile data in order to motivate visitors to interact
and conduct transactions
* Fulfill financial and information transactions with secure electronic
commerce processes
The BroadVision Solution
BroadVision offers a family of packaged applications for automating
relationship management in the extended enterprise. The BroadVision One-To-One
product family enables companies to use the Internet for selling, marketing, and
supporting all of their business constituents: employees, customers, suppliers,
distributors, and others.
The Company develops, markets, and supports its BroadVision One-to-One
family of Internet applications for relationship management and associated
software tools that are used to customize and maintain these applications. These
applications are designed to allow non-technical business managers to build
relationships by tailoring content to the needs and interests of individual
visitors, personalizing each experience on a real-time basis. The Company's
customers use BroadVision solutions to deploy Internet applications that engage
visitors and encourage return visits through personalized interactions, capture
marketing information from volunteered data and observed behavior, and generate
revenues from electronic commerce. The Company believes that these capabilities
are needed by business managers and Internet application developers to take full
advantage of the potential of the Internet as a marketplace for conducting
business and for building long-term relationships with customers.
5
Strategy
The Company's objective is to establish one-to-one relationship management
as a standard feature of Web sites worldwide. To achieve this objective, the
Company has adopted the following strategies:
Focus on Extended Enterprise Relationship Management ("EERM") by Providing
Packaged Application Solutions
The Company is focusing exclusively on developing packaged application
solutions for businesses developing Web sites as profitable business channels
for managing relationships with their customers, partners, employees, and other
constituents. The Company believes that the next major phase of Internet growth
will be driven by complete packaged application solutions that allow businesses
to capitalize more fully on the Internet as a business venue for interacting
with the constituents of their extended enterprise. Businesses will implement
these packaged applications in order to speed time to market, rely on a vendor
rather than an internal development organization to maintain and update the
technology underlying the business application, and reduce total cost and risk
of application deployment.
Enhance Targeted Application Solutions
The Company will continue to leverage its BroadVision One-To-One
Application System to enhance its Web application products and services focused
on specific horizontal and/or vertical markets. Utilizing its expanding
libraries of reusable application objects and templates and working closely with
customers and strategic partners, the Company believes it can deliver a targeted
application solution for one-to-one relationship management faster, of a higher
quality, and at a lower cost than its competitors. The Company has delivered
targeted application solutions for business-to-consumer and business-to-business
commerce, for retail financial services and for knowledge management. The
Company intends to remain nimble and flexible at developing other applications
products in the general area of relationship management, in response to market
opportunities that may arise.
Expand and Leverage Alliances with Key Business Partners
To accelerate the acceptance of the BroadVision One-To-One products and to
promote the adoption of the Web as a commercial marketplace, the Company has
developed cooperative alliances with leading Internet technology vendors,
systems integrators, and Web site developers. The Company believes that these
alliances will provide additional marketing and sales channels for the Company's
products, enable the Company to more rapidly incorporate additional functions
and platforms into the BroadVision One-To-One products, and facilitate the
successful deployment of customer applications. The Company has signed nearly 50
partnerships to date worldwide, which has expanded the Company's sales and
support infrastructure and post-sales implementation capabilities, and broadened
market awareness for the Company.
Maintain Technology Leadership
The Company believes that it offers the most complete EERM solution
available today. The Company intends to maintain this leadership position by
continuing to enhance its technology through heavy investment in research and
development activities, incorporating industry-leading components into its
products, and employing its own technology and human resources as a source of
ongoing technological advantage. Having employed the Common Object Request
Broker Architecture ("CORBA") standard as a cornerstone of its product
architecture, the Company has integrated other CORBA-compatible technologies,
such as the Java development language, into its products. Utilizing in-house
expertise and experiences with customers, the Company intends to maintain its
leadership position in providing a scalable, innovative, and open architecture.
Grow International Presence
To capitalize on the emergence of the Internet as a global network, the
Company has established sales operations in Amsterdam, Basel, Hong Kong, London,
Munich, Paris, and Tokyo. In addition, the Company distributes its products in
these and additional countries through licensed distributors, value-added
resellers, and systems integrators in Brazil, Finland, Korea, South Africa,
Spain, and Sweden. The Company intends to continue to certify providers of
professional services for BroadVision products in these and other countries. The
Company's partners include multinational systems integrators, as well as
partners with single-country scope of
6
operations. The Company's product architecture is designed to support
international languages, and the Company is currently shipping localized
versions of its BroadVision One-To-One Application System in English, German,
Japanese, Korean, and Chinese.
The Company's strategy involves substantial risk. There can be no assurance
that the Company will be successful in implementing its strategy or that its
strategy, even if implemented, will lead to successful achievement of the
Company's objectives. If the Company is unable to implement its strategy
effectively, the Company's business, financial condition, and operating results
would be materially adversely affected.
Products and Services
The Company develops, markets and supports a family of EERM applications
products and associated software tools for use in customizing and maintaining
solutions built with these applications.
Applications
BroadVision offers four applications products--the BroadVision One-To-One
Application System, One-To-One Commerce, One-To-One Financial, and One-To-One
Knowledge--that provide a spectrum of capabilities that offer numerous business
functions and support the needs of companies in different industries.
BroadVision One-To-One Application System is the Company's core product. It
is a flexible, generic yet robust application for deploying relationship
management processes on the Internet. It utilizes an open, scalable application
architecture for Web session management, secure user authentication and
authorization, dynamic and personalized page generation, user profiling, content
management, and transaction handling. The BroadVision One-To-One Application
System provides the following capabilities designed to meet the needs of
companies delivering personalized relationship management on their Web sites:
Profiling -- BroadVision One-To-One applications store and maintain
dynamic profiles of Web site visitors. Profile data can be collected from
information in existing customer information files, from information
provided explicitly by site visitors, and by observation of visitors'
behavior on the site. Visitors' session information is saved in a
transaction log and can be used to update and enrich the visitors'
profiles. Profile information is stored in any of several widely used
third-party relational databases.
Content Management -- BroadVision One-To-One applications deliver
dynamic content to the user in response to their interests and needs.
Content items available for display to visitors comprise one of six types:
templates (Web page designs and layouts), products, editorials,
advertisements, incentives, and discussion groups. Each of these content
types has a rich set of attributes that describe its properties and key
features. This content is managed within a BroadVision One-To-One
application with tools to create, classify, organize, and publish the
content.
Matching -- BroadVision One-To-One applications provide tools for
business managers to create and manage "if-then" rules and taxonomy-based
matching schemes that determine which content to deliver to Web site
visitors and the conditions under which the content should be delivered.
The criteria for content selection can include the visitor's demographic or
psychographic variables, historical behavior, current session behavior,
context information such as date and time, and marketing logic for
delivering incentives, promotions, and recommendations. This allows Web
sites to personalize product information, editorials, pricing, advertising,
coupons, incentives, and promotions for Web site visitors who fit specified
profiles or the predetermined criteria as established by the company's
business managers.
Transactions -- BroadVision One-To-One applications incorporate a
number of transactional capabilities required for merchandising and
financial services applications. These capabilities include electronic
wallets, order tracking, persistent shopping cart, taxing and shipping
charge computation, discount and coupon handling, payment authorization,
between- and within-account exchanges, and news and stock feeds.
7
Features of the Broadvision One-To-One Solution
[GRAPHIC OMITTED]
During 1997, the Company expanded its product line by introducing three new
applications products in the BroadVision One-To-One family: One-To-One Commerce,
One-To-One Financial, and One-To-One Knowledge. These three additional
applications products are built upon and extend the functionality of the
flagship BroadVision One-To-One Application System. They are designed to meet
the needs of customers in certain industries and the needs of customers with
more specific one-to-one relationship management requirements for product
merchandising, retail financial services, or knowledge management.
One-To-One Commerce is a turnkey application solution for rapid deployment
and dynamic personalization of high-end Internet commerce services. Companies
implementing One-To-One Commerce can rapidly implement an end-to-end commerce
solution offering a personalized storefront to visitors and full commerce
transaction capabilities at the back end. The application includes rich
functionality for product catalog management, electronic wallets, ordering, tax
and shipping charge computation, payment handling, and discount and incentive
tracking. One-To-One Commerce provides businesses with a sample commerce
application (including reusable objects), business rules, and templates that can
be easily customized to meet critical time-to-market demands.
One-To-One Financial enables banks and other financial institutions to
rapidly deploy secure, personalized, retail relationship management Internet
sites to their financial services customers. The product delivers a financial
transaction framework and a set of core financial services that allows customers
to access account information and a rich set of transactions within and between
accounts.
One-To-One Knowledge is designed to increase the productivity of a
knowledge-intensive extended enterprise in its management of information
delivery to employees, customers, channels, and other partners. The product
enables a repository of corporate information (e.g., sales and marketing
information, technical information, human resources information) to be organized
into customizable channels accessible through Web browsers. Documents in the
content archive are "tagged" with attributes that describe their subject matter,
content category, viewing permissions, and other factors pertinent to
determining how to target readers. Business rules used in conjunction with
visitors' self-declared preferences determine the selection, filtering, and
display of "tagged" information presented to the visitors on each trip to the
Web site.
The Company designed all of these applications products for use in
mission-critical, high-performance environments by customers with demanding
architecture, deployment, and maintenance requirements. The key capabilities of
the applications include:
* Broad applicability -- robust functionality to support
business-to-business, business-to-consumer, and business-to-employee
relationship management, including personalized marketing and
communications, selling and commerce transaction handling, and customer
self-service.
8
* Scalability -- architected for high performance and fast response while
supporting large numbers of simultaneous users accessing the system
over the public Internet or private intranets or extranets.
* Component-based, reusable application code -- object-oriented
application code written in C++, which allows developers and
integrators to use, modify, adapt, or extend the dynamic objects to
rapidly customize products to meet the specific business requirements
of a particular corporate customer.
* Support for industry standards -- supports the CORBA standard for
object-oriented computing, to permit distribution of the application
across multiple processors. This design enables high-volume
performance, flexible application deployment, and easy integration with
other third party or legacy applications.
* Transaction processing -- handles a wide-range of commerce and
financial services transactions -- including order pricing and
discount/incentive handling, tax computation, shipping and handling
charges, payment authorization, credit card charge processing, order
tracking, news and stock feeds--through a combination of built-in
functionality and integration with other products.
* Platform independence -- versions available for multiple operating
systems, including Sun Solaris, Windows NT, and HP-UX. Databases
supported include Oracle, Sybase, Informix, and Microsoft SQL Server.
* Multi-lingual -- available in English, German, Japanese, Korean, and
Chinese.
Tools
BroadVision applications are customized and maintained using tools that are
licensed to customers separately from the applications products. Inherent to the
functionality of the Company's applications is a set of building blocks called
"dynamic objects," "application templates," and "rule sets" that are
instrumental in rapidly building and easily maintaining One-To-One-based
applications. A description of the Company's tools products follows.
Visual Development Center. The BroadVision One-To-One Visual Development
Center (the "VDC") provides advanced Web site development tools rich in
object-oriented features for building BroadVision One-To-One applications.
Because most businesses have little time for application development, the
BroadVision One-To-One VDC supports visual, point-and-click application
construction; default templates for basic business functions (order entry,
payment clearing) for rapid application creation and deployment; and browser-
independent, dynamic Web page generation. In addition, there is an extensive
library of dynamic objects that provide access to One-To-One services, including
profile management, electronic commerce services such as virtual shopping carts
and order processing, targeted content, and ad insertion. These features enhance
existing templates and provide an extensive amount of sub-classes, which can be
used to build new objects. Furthermore, the VDC supports HTML, Java, and
JavaScript as well as any third-party HTML editor.
Dynamic Command Center. The BroadVision One-To-One Dynamic Command Center
(the "DCC") is a Windows 95 client application for editorial, advertising,
marketing, and merchandising business managers. The DCC offers managers the
ability to define and manage the customer segments, the content organization,
and the matching rules of a Web site in real time using familiar, non-technical
concepts. For example, a business manager can initiate a sale or promotion, send
coupons to specifically targeted consumers, or change prices dynamically. The
rules editor of the DCC enables the business manager to define in English the
"if-then" relationships that determine the selection and presentation of various
types of content to the site visitor, based on profile attributes or session
information. The DCC also provides a means for managers to monitor the activity
on Web sites, enabling them to evaluate the effectiveness of content and
services being offered on the site.
Content Management Center. The BroadVision One-To-One Content Management
Center (the "CMC") provides workflow tools to automate the content creation and
classification process. The CMC is a Java-based Web application that enables
business people to easily manage the process of developing, indexing, tagging,
staging, publishing, and updating content. This content can then be effectively
targeted and matched based on user preferences and profiles. Site administrators
can control who can create and update specific areas in the
9
Web site. Editors can track the overall efficiency and quality of the content
while carefully managing a content calendar. The CMC also enables a process of
collaboration between all authors, editors, and Web site administrators working
from remote locations.
Other Products
In addition to its proprietary products, the Company has entered into
agreements which enable it to resell third-party software products from
CyberSource Corporation, Verity, Inc., Oracle Corporation ("Oracle"), and
Sybase, Inc. ("Sybase"). These are sublicensed to end users and either
incorporated in or sold as options to the Company's own products. License
revenue from these third-party products was insignificant and constituted less
than 1% of total software product license revenues in 1997 and 1996.
The table below summarizes certain features of and price information for
each of the Company's products:
U.S. List Price for
Product Description Perpetual License
- -------------------------------------------------------------------------------------------------------
Application Products: Full object-oriented environ- * $25,000 and up per
ment for developing, testing, developer seat
* BroadVision One-To-One and tuning EERM applications
Application System
* One-To-One Commerce
* One-To-One Financial
* One-To-One Knowledge
- -------------------------------------------------------------------------------------------------------
Deployment System Full environment for deploying * License fee based on num-
production EERM applications ber of profiled users tracked
by application and number
of services accessing profiled
user base.
* Ranges from $30,000 mini-
mum configuration to more
than $1 million for large
complex configurations
- -------------------------------------------------------------------------------------------------------
Visual Development Center PC-based application enabling * One copy included with
applications developers to development license
quickly and easily build dynamic
Web page templates * Additional copies start at
$600 per seat
- -------------------------------------------------------------------------------------------------------
Dynamic Control Command PC-based application enabling * $5,000 per seat
Center business managers to monitor
state of Web applications, inter-
actively change business rules in
real time, and generate reports
- -------------------------------------------------------------------------------------------------------
Content Management Center Browser-based application en- * Starts at $2,500 per seat
abling content developers and
editors to manage the publish-
ing of new content to the Web
site
- -------------------------------------------------------------------------------------------------------
10
Professional Services
The Company's Worldwide Professional Services Organization ("WPSO")
provides a broad range of consulting services in support of BroadVision's total
product line. The Company's WPSO provides comprehensive business application
expertise, technical know-how, and product knowledge to complement its products
and to provide total solutions to customer business requirements. A summary of
the consulting services provided by the Company follows.
Strategic Services provides business strategy and process consulting,
assisting customers in defining and planning profitable online businesses.
Services include in-depth needs analysis, customer segmentation, site
storyboarding, and preparing detailed plans and procedures necessary to achieve
timely and successful implementations of the Company's software products.
Strategic Services consulting is generally offered on a time and materials
basis.
Interactive Services provides technical services for development of
customized BroadVision-based applications, custom interfaces, data conversions,
and system integration. These consultants participate in a wide range of
activities, including requirements definition and application design,
development and implementation. These consultants also provide advanced
technology services focused on application development for custom objects and
templates and database administration and tuning. Interactive Services
consulting is generally offered on a time and materials basis.
Content and Creative Services is a group specializing in content
management, sourcing, workflow processes, and user-interface design. The group
is made up of One-To-One design experts and a variety of leading design houses.
This unique team combines years of interactive design and marketing experience
to build purposeful user-interfaces that meet customers pre-defined goals.
Content and Creative Services consulting is generally offered on a time and
materials basis.
Education Services are offered to customers either at the Company's
education facilities or at the customers' locations, as either standard or
customized classes. These classes are priced at either fixed daily rates or on a
per-class basis.
Technical Support
The Company provides technical support, including telephone support,
upgrade rights to new releases, including patch releases as necessary, and
product enhancements, under the Company's standard maintenance agreements, which
all of the Company's licensed customers have entered into. The annual
maintenance fee for these services is based upon a percentage of the
then-current list price for the perpetual licensed software fee, payable
annually in advance.
Customers and Markets
The Company has licensed its product to over 150 customers, including
approximately 50 partners worldwide. The types of applications being developed
by licensees using BroadVision software include product merchandising, retail
financial services, and corporate knowledge management for employees, partners,
and customers. Over 30 customers have commercially deployed applications using
BroadVision products. The Company's target customers include Global 2000
organizations that are at the forefront of building innovative Internet
applications to increase revenues and reduce operational costs. In 1997,
software license and service revenues from Metronet, Kommunikationsdienste Gmbh
& Co.KG. ("Metronet") accounted for approximately 11% of the Company's total
revenues.
11
The Company has targeted a number of markets that it believes to be
especially conducive to one-to-one relationship management applications. These
markets, identified in the table below, have historically been characterized by
early adoption of online technology or could otherwise benefit from providing
significant interactive service to their end-user customers.
- --------------------------------------------------------------------------------------------------------------
Target Sample
Industry Sample Applications Benefits of BroadVision Solutions Customers
- --------------------------------------------------------------------------------------------------------------
Telecom- * Commerce: Business- * Selectively share visitor profiles Hongkong Telecom
munications to-business and between aggregators and content TELUS Advanced
business-to-consumer providers Communications
US West Communications
* Online services * Online, real-time control of
business rules, such as pricing and
promotions
* Self-service
(e.g., call centers)
- --------------------------------------------------------------------------------------------------------------
Retail and * Online shopping * Create branded communities Eastman Kodak
distribution based on visitor profiles The Good Guys
* Interactive Metronet
catalogues * Online, real-time control of Phillips Electronics
business rules, such as pricing and RS Components
promotions, by content providers
* Reduce ransaction costs of direct
purchases
- --------------------------------------------------------------------------------------------------------------
Travel and * Reservations * Provide travel planning advice and American Airlines
leisure transaction services without agents Thomas Cook
* Travel planning or other intermediaries
* Brand projection, * Opportunity, based on user profiles,
loyalty programs, and to cross-sell or up-sell services in
affinity addition to basic travel reservations
marketing
- --------------------------------------------------------------------------------------------------------------
Media and * Purchasing digital * Price digital products and Grolier
publishing media services in real time Metromail
Milwaukee Journal
* Knowledge * Dynamically target relevant Virgin.net
management information to individuals
- --------------------------------------------------------------------------------------------------------------
Financial * Home banking * Target investment content based Banco Santander
services on profiles of visitors Citibank
* Obtaining information JP Morgan
on and * Nationwide service can be locally Liberty Financial
selecting: targeted Quick & Reilly
--Loans * Low-cost distribution channel
--Mutual funds * Tremendous cross-selling and
--Insurance up-selling opportunity
- --------------------------------------------------------------------------------------------------------------
High * Knowledge * Disseminate large amounts Baan Company
technology management of knowledge/information in a Hewlett-Packard
and personalized way based on IBM
manufacturing purchaser's profile Micron Technology
Siemens-Nixdorf
* Business-to-business * Maintain and make available
purchasing up-to-date information related to
complex purchasing decisions
- --------------------------------------------------------------------------------------------------------------
12
The market for the Company's products and services is at an early stage of
development and is rapidly evolving. As is typical for new and rapidly evolving
industries, demand and market acceptance for recently introduced products and
services are subject to a high level of uncertainty, especially where, as is
true of the Company, acquisition of the product requires a large capital
commitment or other significant commitment of resources. With respect to the
Company, this uncertainty is compounded by the risks that consumers and
enterprises will not adopt electronic commerce and knowledge management and that
an appropriate infrastructure necessary to support increased commerce and
communication on the Internet will fail to develop, in each case, to a
sufficient extent and within an adequate time frame to permit the Company to
succeed.
Adoption of electronic commerce and knowledge management, particularly by
those individuals and enterprises that have historically relied upon traditional
means of commerce and communication, will require a broad acceptance of new and
substantially different methods of conducting business and exchanging
information. Moreover, the Company's products and services involve a new
approach to the conduct of online business and, as a result, intensive marketing
and sales efforts may be necessary to educate prospective customers regarding
the uses and benefits of the Company's products and services in order to
generate demand for the Company's systems. For example, enterprises that have
already invested substantial resources in other methods of conducting business
may be reluctant or slow to adopt a new approach that may replace, limit, or
compete with their existing systems. Similarly, individuals with established
patterns of purchasing goods and services may be reluctant to alter those
patterns or may otherwise be resistant to providing the personal data which is
necessary to support the Company's consumer profiling capability. Moreover, the
security and privacy concerns of existing and potential users of the Company's
products and services may inhibit the growth of online business generally and
the market's acceptance of the Company's products and services in particular.
Accordingly, there can be no assurance that a viable market for the Company's
products will emerge or be sustainable.
Sales and Marketing
The Company markets its products primarily through a direct sales
organization with operations in North America, Europe, and Asia/Pacific. On
December 31, 1997, the Company's direct sales organization included 63 sales
representatives, managers, applications consultants, and pre-sales support and
post-sales support personnel. The Company has a sales office at its headquarters
in Redwood City, California and has North American sales offices in Atlanta,
Chicago, Dallas, and New York. The Company has subsidiaries in France, Germany,
Japan, the Netherlands, Switzerland, and the United Kingdom and has an
established sales office in Hong Kong. A component of the Company's strategy is
continued planned expansion of its international activities. The Company intends
to broaden its presence in international markets by expanding its international
sales force and by entering into additional distribution agreements. The Company
also contracts with commissioned agents in the Republic of Korea, Spain, and in
selected portions of the Japanese market.
Although the Company generates leads from many sources, the majority of the
Company's early leads have come from businesses seeking partners to develop
one-to-one relationship management applications. Initial sales activities
typically include a demonstration of BroadVision One-To-One capabilities at the
prospect's site, followed by one or more detailed technical reviews, often
presented at the Company's headquarters. The sales process usually involves a
collaboration with the prospective customer in order to specify the scope of the
application. The Company's professional services organization typically plays a
key role in helping customers to design, and then develop, their applications.
The Company's marketing efforts are targeted at product strategy
development and product management; building market awareness through press and
analysts; producing and maintaining marketing information and sales tools;
generating and developing customer leads; and sourcing and managing
relationships with systems integrators, value-added resellers, creative design
and advertising agencies, and technology partners. As of December 31, 1997, 20
employees were engaged in a variety of marketing activities, including preparing
marketing research, product planning, and collateral marketing materials,
managing press coverage and other public relations, identifying potential
customers, attending trade shows, seminars, and conferences, establishing and
maintaining close relationships with recognized industry analysts, and
maintaining the Company's Web site.
The license of the Company's software products is often an enterprise-wide
decision by prospective customers, requiring the Company to engage in a lengthy
sales cycle to provide a significant level of education
13
to prospective customers regarding the use and benefits of the Company's
products. In addition, the implementation of the Company's products involves a
significant commitment of resources by the customers or by the Company's WPSO
consultants over an extended period of time. As a result, the Company's sales
and customer implementation cycles are subject to a number of significant
delays over which the Company has little or no control. Delays in license
transactions as a result of the lengthy sales cycle or delays in customer
production or deployment of a system could have a material adverse effect on
the Company's business, financial condition, and operating results, and can be
expected to cause the Company's operating results to vary significantly from
quarter to quarter.
To date, the Company has primarily derived sales through its direct sales
force. The Company's ability to achieve significant revenue growth in the future
will depend in large part on its success in recruiting and training sufficient
direct sales personnel and establishing and maintaining relationships with
distributors, resellers, system integrators, and other third parties.
Strategic Business Alliances
A critical element of the Company's sales strategy is to engage in
strategic business alliances to assist the Company in marketing, selling, and
developing customer applications. This approach is intended to increase the
number of personnel available to perform application design and development
services for the Company's customers; enhance the Company's market credibility,
potential for lead generation, and access to large accounts; and provide
additional marketing expertise in certain vertical industry segments and
technical expertise in the development of reusable objects and templates. The
Company has developed business alliances with approximately 50 systems
integration, design, consulting, and other services organizations, including
Andersen Consulting, LLP, Cambridge Technology Partners, Cap Gemini U.K. plc,
Computer Sciences Corporation, Daimler-Benz Information Systems AG (Debis),
Dimension AB, Gran Via, NTT Data Corporation, Sage IT Partners, Inc., Sema Group
plc, Siemens-Nixdorf Information System AG, Silicon Valley Internet Partners,
and others.
Competition
The market for online interactive relationship management applications is
new, rapidly evolving, and intensely competitive. The Company expects
competition to persist and intensify in the future. The Company's primary
competition comes from in-house development efforts by potential customers or
partners. The Company's competitors also include other vendors of application
software directed at interactive commerce and financial services and Web content
developers engaged to develop custom software or to integrate other application
software into custom solutions. The Company currently encounters direct
competition from Edify Corporation ("Edify"), InterWorld Corporation
("InterWorld"), Microsoft Corporation ("Microsoft"), Netscape Communications
Corporation ("Netscape"), and Open Market Inc. ("OMI"), among others. Many of
these competitors have longer operating histories, and significantly greater
financial, technical, marketing, and other resources than the Company and thus
may be able to respond more quickly to new or changing opportunities,
technologies, and customer requirements. Also, many current and potential
competitors have greater name recognition and more extensive customer bases that
could be leveraged, thereby gaining market share to the Company's detriment.
Such competitors may be able to undertake more extensive promotional activities,
adopt more aggressive pricing policies, and offer more attractive terms to
purchasers than the Company. Moreover, certain of the Company's current and
potential competitors, such as Netscape and Microsoft, are likely to bundle
their products in a manner that may discourage users from purchasing products
offered by the Company. In addition, current and potential competitors have
established or may establish cooperative relationships among themselves or with
third parties to enhance their products. Accordingly, it is possible that new
competitors or alliances among competitors may emerge and rapidly acquire
significant market share.
The principal competitive factors affecting the market for the Company's
products are depth and breadth of functionality offered, ease of application
development, time required for application development, reliance on industry
standards, reliability, scalability, maintainability, personalization and other
features, product quality, price, and customer support. The Company believes it
presently competes favorably with respect to each of these factors. However, the
Company's market is still evolving, and there can be no assurance that the
Company will be able to compete successfully with current or future competitors,
or that competitive pressures faced by the Company will not have a material
adverse effect on the Company's business, financial condition, and operating
results.
14
Technology
The Company believes its advanced technology enables the delivery of
robust, scalable, and innovative Internet relationship management solutions into
the market faster and at a lower cost than alternatives. The Company's
technology consists of the following key elements:
Architectural Design
The Company believes that the technical demands of interactive one-to-one
relationship management on the Internet require an architectural design that
stresses standards, openness, interoperability, and flexibility. The Company has
designed its current application system as an architectural solution for
building dynamic, scalable, and extensible Internet applications. By emphasizing
reusable methods, separation of application logic, business rules, and data, and
adherence to open standards, the BroadVision One-To-One applications family
provides an efficient architecture for customers and partners to build, modify,
and control applications, as well as to integrate them with external business
systems. The Company believes this architecture also provides a robust
foundation on which the Company can rapidly develop new products.
Adherence to Industry Standards
The Company has invested substantially in developing its architecture to
comply with CORBA, a standard for applications software design and development
widely adopted in the commercial software industry. Applications that are
CORBA-compliant can run on either single computers with one or more processors
or across large networks, allow replication and relocation of object servers to
improve system performance, are platform independent, and have strongly defined
Application Programming Interfaces through the use of the Interface Definition
Language specified by CORBA. Through CORBA compliance, the Company's products
are fully compatible with other CORBA-based technologies, such as Java.
In addition to CORBA, the Company uses other widely accepted standards in
developing its products, including SQL (Structured Query Language) for accessing
relational database management systems ("RDBMSs"), CGI (Common Gateway
Interface), and HTTP (Hypertext Transfer Protocol) for Internet access, NSAPI
(Netscape Application Programming Interface) for access to Netscape's Internet
servers, SSL (Secure Socket Layer) for secure transmissions over networks, and
the RC2 and MD5 encryption algorithms supplied by RSA Data Security, Inc.
("RSA"). BroadVision One-To-One can be operated in conjunction with RDBMSs
provided by Oracle, Informix Corporation ("Informix"), Microsoft, and Sybase.
Most of the Company's programs are written in C++, a widely accepted standard
programming language for developing object-oriented applications. Adherence to
industry standards provides compatibility with existing applications, enables
ease of modification, and reduces the need for software to be rewritten, thus
protecting the customer's investment.
N-Tier Architecture
The BroadVision One-To-One application system utilizes an N-tier
architecture that logically separates application presentation, business rules,
and data. Between each of these tiers are session manager and project adapter
interface technologies, described below, that establish seamless
interoperability between application components. This architecture partitions
applications across:
* A front-end tier that manages the application presentation and
interface to Web site visitors
* Application engine tier(s) that manage the one-to-one life cycle
activities--community, profiling, targeting, and transactions--and the
business rules that define the interactive characteristics and behavior
of one-to-one relationship management applications. Due to the
object-oriented design of this code and the reliance on CORBA, this
code can be distributed across multiple logical and physical
processors, thus enabling the N-tier design of the application.
* A back-end tier that integrates underlying database management systems
for storing BroadVision One-To-One data with external business systems
that perform specialized relationship management functions, such as
online credit card authorization and payment handling, sales tax and
shipping computation, online and off-line order fulfillment, inventory
management, visitor demographic analysis, and data mining.
15
The Company believes this N-tier architecture offers significant
advantages over alternative approaches, including:
* Bandwidth, database, and platform independence
* Modularity, to enable changes to be made to one area of an application
with minimal impact on other areas
* The ability for business managers to define and control business rules
in real time without requiring programming changes to application logic
* The ability to support specialized "object adapters" that reduce time
and cost to integrate BroadVision One-To-One applications with existing
business systems, the ability to perform such integration with a
minimum of programming, and the ability to localize applications to
different language and currency requirements
Session Manager
The Company has developed proprietary "session manager" technology designed
to manage the high volume of dynamic interactions that occur in online sessions
between many concurrent Web site visitors and a relationship management
application. The session manager enables three key activities:
* Maintaining context, or "state," between visitors and sites so that
each current and future interaction can trigger a response appropriate
to the objectives of both visitor and site provider
* Interpreting application objects and templates at runtime, and
retrieving profile data and business rules to dynamically generate HTML
that creates content, Web pages, and interactions tailored to the needs
and interests of individual Web site visitors
* Enabling application scalability by allowing Web site providers to add
additional software processes or hardware processors to their Web
systems to support more concurrent Web site visitors without incurring
performance degradation or additional overhead in application
maintenance
Dynamic Objects and Application Templates
The Company believes that the costs and time associated with Internet
application development and maintenance can be substantially reduced with its
technology for object-oriented application development. This technology consists
of two primary components, dynamic objects and application templates. Utilized
in combination with the Company's structured development methodology, these
technologies are designed to help customers and partners create libraries of
reusable program components that increase application quality and reduce cost
and time-to-market of new and maintained applications. In addition, the dynamic
object technology enables business managers to define and implement business
rules through the BroadVision One-To-One DCC on a real-time basis. The Company's
consultants currently use these technologies to develop application solutions
for customers, and the Company's Education Services Group offers training
classes to customers and partners on the use of dynamic objects and application
templates.
Product Development
The Company believes that its future success will depend in large part on
its ability to enhance the BroadVision One-To-One product family, develop new
products, maintain technological leadership, and satisfy an evolving range of
customer requirements for large-scale interactive online relationship management
applications. The Company's product development organization is responsible for
product architecture, core technology, product testing and quality assurance,
writing product user documentation, and expanding the ability of BroadVision
One-To-One products to operate with the leading hardware platforms, operating
systems, database management systems, and key electronic commerce transaction
processing standards.
Since inception, the Company has made substantial investments in product
development and related activities. Certain technologies have been acquired and
integrated into BroadVision One-To-One products through licensing arrangements.
As of December 31, 1997, there were 52 employees in the Company's product
development organization. The Company's research and development expenses were
$7.4 million, $5.0 million,
16
and $2.6 million in 1997, 1996, and 1995, respectively. To date, the Company
has not capitalized any software development costs. The Company expects to
continue to devote substantial resources to its product development activities.
The information services, software, and communications industries are
characterized by rapid technological change, changes in customer requirements,
frequent new product and service introductions and enhancements, and emerging
industry standards. The introduction of products and services embodying new
technologies and the emergence of new industry standards and practices can
render existing products and services obsolete and unmarketable. The Company's
future success will depend, in part, on its ability to develop leading
technologies, enhance its existing products and services, develop new products
and services that address the increasingly sophisticated and varied needs of its
prospective customers, and respond to technological advances and emerging
industry standards and practices on a timely and cost-effective basis. There can
be no assurance that the Company will be successful in effectively using new
technologies, adapting its products to emerging industry standards, developing,
introducing, and marketing product and service enhancements, or new products and
services, or that it will not experience difficulties that could delay or
prevent the successful development, introduction, or marketing of these products
and services, or that its new product and service enhancements will adequately
meet the requirements of the marketplace and achieve market acceptance. If the
Company is unable, for technical or other reasons, to develop and introduce new
products and services or enhancements of existing products and services in a
timely manner in response to changing market conditions or customer
requirements, or if new products and services do not achieve market acceptance,
the Company's business, financial condition, and operating results will be
materially adversely affected.
Strategic Technology Alliances
In order to ensure that the Company's products are based on industry
standards and take advantage of current and emerging technologies, the Company
emphasizes strategic technology alliances. The benefits of this approach include
enabling the Company to focus on its core competencies, reducing time to market,
and simplifying the task of designing and developing applications by both the
Company and its customers. Key strategic technology alliances to date have
included alliances with Sun, Hewlett-Packard Company, and Silicon Graphics,
Inc., providers of enterprise server hardware and systems software; IONA
Technologies, Inc. ("IONA"), a provider of a CORBA-compliant development
platform; Oracle, Sybase, and Informix, providers of standard RDBMSs; RSA, a
provider of encryption technology; and VeriFone, Inc. and CyberCash, Inc.,
providers of payment systems. The Company's strategy is to establish additional
such alliances as new technologies and standards emerge, although no assurance
can be given that the Company will be successful in establishing or maintaining
such alliances.
Intellectual Property and Other Proprietary Rights
The Company's success and ability to compete are dependent to a significant
degree on its proprietary technology. The Company provides its products to end
users generally under nonexclusive, nontransferable licenses during the term of
the agreement, which is usually in perpetuity. Under the general terms and
conditions of the Company's standard license agreement, the licensed software
may be used solely for internal operations pursuant to BroadVision's published
licensing practices.
The Company holds a patent on its core technology for personalized business
on the Internet. The United States Patent Office issued Patent 5,710,887 on
January 20, 1998 to the Company, covering certain elements of the BroadVision
One-To-One(TM) Application System. There can be assurance that this patent would
survive a legal challenge to its validity or provide significant protection.
The Company has registered "BroadVision" and applied for registration of
"BroadVision One-To-One" as trademarks in the United States. Although the
Company takes steps to protect its trade secrets, there can be no assurance that
misappropriation will not occur or that copyright and trade secret protection
will be available in certain countries.
The source code for the Company's proprietary software is protected both as
a trade secret and as a copyrighted work. The Company makes source code
available for certain portions of its products. In addition, some of the
Company's agreements with its customers contain provisions requiring release of
source code for
17
limited, non-exclusive use by the customer in the event that the Company ceases
to do business or the Company fails to support its products. The provision of
source code may increase the likelihood of misappropriation by third parties.
The Company's policy is to enter into confidentiality and assignment agreements
with its employees, consultants, and vendors and generally to control access to
and distribution of its software, documentation, and other proprietary
information. Notwithstanding these precautions, it may be possible for a third
party to copy or otherwise obtain and use the Company's software or other
proprietary information without authorization or to develop similar software
independently. Policing unauthorized use of the Company's products is
difficult, particularly because the global nature of the Internet makes it
difficult to control the ultimate destination or security of software or other
data transmitted. The laws of other countries may afford the Company little or
no effective protection of its intellectual property. There can be no assurance
that the steps taken by the Company will prevent misappropriation of its
technology or that agreements entered into for that purpose will be
enforceable. In addition, litigation may be necessary in the future to enforce
the Company's intellectual property rights, to protect the Company's trade
secrets, to determine the validity and scope of the proprietary rights of
others, or to defend against claims of infringement or invalidity. Such
litigation, whether successful or unsuccessful, could result in substantial
costs and diversions of resources, either of which could have a material
adverse effect on the Company's business, financial condition, and operating
results.
The Company may, in the future, receive notices of claims of infringement
of other parties' trademark, copyright, and other proprietary rights. There can
be no assurance that claims for infringement or invalidity (or claims for
indemnification resulting from infringement claims) will not be asserted or
prosecuted against the Company. In particular, claims could be asserted against
the Company for violation of trademark, copyright, or other laws as a result of
the use by the Company, its customers, or other third parties of the Company's
products to transmit, disseminate, or display information over or on the
Internet. Any such claims, with or without merit, could be time consuming to
defend, result in costly litigation, divert management's attention and
resources, cause product shipment delays, or require the Company to enter into
royalty or licensing agreements. There can be no assurance that such licenses
would be available on reasonable terms, if at all, and the assertion or
prosecution of any such claims could have a material adverse effect on the
Company's business, financial condition, and operating results.
The Company relies upon certain software that it licenses from third
parties, including RDBMSs from Oracle and Sybase, object request broker software
from IONA, database access technology from Rogue Wave Software, Inc. ("Rogue
Wave"), and other software which is integrated with internally developed
software and used in the Company's software to perform key functions. In this
regard, all of the Company's services incorporate data encryption and
authentication technology licensed from RSA. There can also be no assurance that
the Company's third-party technology licenses will continue to be available to
the Company on commercially reasonable terms, if at all. The loss or inability
to maintain any of these technology licenses could result in delays in
introduction of the Company's products and services until equivalent technology,
if available, is identified, licensed, and integrated, which could have a
material adverse effect on the Company's business, financial condition, and
operating results.
Employees
As of December 31, 1997, the Company employed a total of 188 full-time
employees, including 83 in sales and marketing, 52 in product development, 34 in
professional services and client support, and 19 in finance, administration, and
operations.
The Company believes that its future success is dependent on attracting and
retaining highly skilled engineering, sales and marketing, and senior management
personnel. Competition for such personnel is intense, and there can be no
assurance that the Company will continue to be able to attract and retain
high-caliber employees. The Company's employees are not represented by any
collective bargaining unit. The Company has never experienced a work stoppage
and considers its employee relations to be good.
18
Executive Officers and Key Personnel
The executive officers and key personnel of the Company and their ages at
February 28, 1998 are as follows:
Name Age Position
- ---------------------------- ----- --------------------------------------------------------------------
Pehong Chen ................ 40 Chairman of the Board, Chief Executive Officer and President
Randall Bolten ............. 45 Chief Financial Officer and Vice President, Operations
Clark W. Catelain .......... 50 Vice President, Engineering
Eric J. Golin .............. 38 Vice President of Worldwide Professional Services
Michael A. Kennedy ......... 35 Vice President of Global Strategic Alliances
Giuseppe Kobayashi ......... 42 Vice President and General Manager of Japan/Asia-Pacific Operations
Francois Stieger ........... 48 Vice President and General Manager of European Operations
James W. Thanos ............ 49 Vice President and General Manager, Americas
Perry W. Thorndyke ......... 48 Vice President, Marketing
Pehong Chen has served as Chairman of the Board, Chief Executive Officer
and President of the Company since its incorporation in May 1993. From 1992 to
1993, Dr. Chen served as the Vice President of Multimedia Technology at Sybase,
a supplier of client-server software products. Dr. Chen founded and, from 1989
to 1992, served as President of Gain Technology ("Gain"), a provider of
multimedia applications development systems, which was acquired by Sybase. He
received a B.S. in Computer Science from National Taiwan University, an M.S. in
Computer Science from Indiana University, and a Ph.D. in Computer Science from
the University of California at Berkeley.
Randall Bolten has served as Chief Financial Officer and Vice President,
Operations, of the Company since September 1995. From 1994 to 1995, Mr. Bolten
served as a financial consultant to various entrepreneurial enterprises. From
1992 to 1994, Mr. Bolten served as Chief Financial Officer of BioCad
Corporation, a supplier of drug discovery software products. From 1990 to 1992,
Mr. Bolten served as Chief Financial Officer, Business Development Unit, and
then Vice President, Finance of Teknekron Corporation, a company engaged in the
management of various high technology companies. He received an A.B. in
Economics from Princeton University and an M.B.A. from Stanford University.
Clark W. Catelain has served as Vice President, Engineering, of the Company
since June 1995. From 1989 to May 1995, Mr. Catelain served as the Senior Vice
President, Engineering of Gupta Corporation, a supplier of client/server
database products. Mr. Catelain received a B.S. in Mathematics and Computer
Science from Purdue University.
Eric J. Golin has been employed at the Company since September 1994 and has
served as Vice President of Worldwide Professional Services of the Company since
September 1997. From September 1993 to September 1994, Mr. Golin was a principal
architect for OpenVision Technology. From September 1989 to September 1993, Mr.
Golin was Assistant Professor of Computer Science at the University of Illinois
at Champaign-Urbana. Mr. Golin received an Sc.B., Sc.M., and a Ph.D. in Computer
Science from Brown University.
Michael A. Kennedy has served as Vice President, Global Strategic
Alliances, since September 1997. From September 1995 to August 1997, Mr. Kennedy
served as Senior Director, Marketing of the Company. From August 1993 to August
1995, Mr. Kennedy served as Director, New Media Business Development for Oracle
Corporation, supplier of database software. From December 1989 to July 1993, Mr.
Kennedy served as Senior Product Marketing Manager for Oracle Corporation. Mr.
Kennedy received a B.Sc. in Computer Science from the Aberdeen University,
Scotland.
Giuseppe Kobayashi has served as Vice President and General Manager of
Japan/Asia-Pacific Operations of the Company since January 1995. From 1994 to
the present, Mr. Kobayashi has also served as consultant to Wind River Systems,
Inc., a supplier of software development systems. During 1993, Mr. Kobayashi was
General Manager, Japan Operations, Gain Group at Sybase. During 1992, Mr.
Kobayashi was General Manager
19
of Operations at Gain. From 1990 to 1992, Mr. Kobayashi served as Managing
Director of Asia Pacific Operations at Teradata Corporation, a supplier of
database software. Mr. Kobayashi holds a B.S. in Computer Science from the
University of San Francisco.
Francois Stieger has served as Vice President and General Manager of
European Operations of the Company since January 1996. From July 1994 to
December 1995, Mr. Stieger was employed as Senior Vice President, Europe and
Middle East, for OpenVision Technologies, Inc., a supplier of distributed
systems management products and services. From 1993 to 1994, Mr. Stieger served
as Vice President, Europe of the Gain Division of Sybase. From 1987 to 1992, Mr.
Stieger served as Vice President, Europe, Central and Southern region of Oracle,
a supplier of relational database software. Mr. Stieger holds a Diplome
Universitaire De Technologie in Mathematics and Mechanics from the University of
Strasbourg.
James W. Thanos has served as Vice President and General Manager, Americas
of the Company since January 1998. From January 1995 to January 1998, Mr. Thanos
served as Senior Vice President of Worldwide Operations of Aurum Software, a
sales force automation company. From January 1993 to December 1994, Mr. Thanos
served as Vice President of Sales of Harvest Software, an optical character
recognition software company. From December 1988 to January 1993, Mr. Thanos
served as Vice President of Sales Operations of Metaphor, Inc., a decision
support software company. Mr. Thanos holds a B.A. in International Relations
from Johns Hopkins University.
Perry W. Thorndyke has served as Vice President, Marketing, of the Company
since August 1996. From February 1995 to January 1996, Dr. Thorndyke served as a
management consultant to and then Vice President, Marketing for Quintus
Corporation, a supplier of client/server solutions for customer information
management. From February 1994 to January 1995, Dr. Thorndyke served as an
management consultant on technology strategy for customer information management
systems to independent software vendors and user organizations. From May 1992 to
January 1994, Dr. Thorndyke served as Vice President and Division Manager for
retail banking systems at Wells Fargo Bank. From 1990 to May 1992, Dr. Thorndyke
served as Senior Manager of Marketing and Business Development at Metaphor
Computer Systems. a supplier of client/server software applications for PC-based
support decision products. Dr. Thorndyke received a B.A. in Computer and
Information Sciences from Yale University and a Ph.D. in Cognitive Psychology
from Stanford University.
ITEM 2. PROPERTIES
The Company's principal administration, research and development, sales,
consulting, and support facilities are located in Redwood City, California,
where the Company occupies approximately 60,000 square feet pursuant to a lease
that expires in 2007. The Company also rents space in various cities to support
its sale and field support activities. The Company believes that its existing
facilities are adequate to meet its needs for the foreseeable future.
ITEM 3. LEGAL PROCEEDINGS
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
20
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The Company's Common Stock is traded on the Nasdaq National Market under
the symbol "BVSN." Public trading of the Common Stock commenced on June 26,
1996. Prior to that, there was no public market for the Common Stock. As of
March 2, 1998, there were approximately 254 holders of record of the Company's
Common Stock.
The following table sets forth, for the periods indicated, the high and low
sale price per share of the Common Stock on the Nasdaq National Market.
1996 High Low
---- ---- ---
Second Quarter (from June 26, 1996) ........... $ 7.13 $ 6.88
Third Quarter ................................. $ 8.38 $ 5.38
Fourth Quarter ................................ $ 9.06 $ 6.56
1997
----
First Quarter ................................. $ 10.38 $ 7.50
Second Quarter ................................ $ 9.13 $ 4.38
Third Quarter ................................. $ 7.38 $ 5.00
Fourth Quarter ................................ $ 8.69 $ 5.88
1998
----
First Quarter (through March 3, 1998) ......... $ 15.38 $ 6.00
The Company has never declared or paid cash dividends on its Common Stock
and it is the Company's present intention to retain earnings to finance the
expansion of its business. In addition, the Company's credit facility with its
commercial lender contains certain covenants which limit the Company's ability
to pay cash dividends.
21
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated financial data set forth below should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations," the Consolidated Financial Statements of the Company
and Notes thereto, and other financial information included elsewhere in this
Form 10-K. Historical results are not necessarily indicative of the results to
be expected in the future.
Period from
May 13, 1993
(Inception) to Year Ended December 31,
December 31, ------------------------------------------------------
1993 1994 1995 1996 1997
--------------- ----------- ----------- ------------ -----------
(in thousands, except per share data)
Statement of Operations Data:
Revenues:
Software licenses .............................. $ -- $ -- $ -- $ 7,464 $ 18,973
Services ....................................... -- -- 540 3,418 8,132
------ -------- -------- --------- --------
Total revenues ............................... -- -- 540 10,882 27,105
------ -------- -------- --------- --------
Cost of revenues:
Cost of software licenses ...................... -- -- -- 330 1,664
Cost of services ............................... -- -- 249 2,164 4,284
------ -------- -------- --------- --------
Total cost of revenues ....................... -- -- 249 2,494 5,948
------ -------- -------- --------- --------
Gross profit .................................... -- -- 291 8,388 21,157
------ -------- -------- --------- --------
Operating expenses:
Research and development ....................... 12 748 2,575 4,985 7,392
Sales and marketing ............................ 31 512 1,348 12,066 18,413
General and administrative ..................... 100 511 846 2,034 2,990
------ -------- -------- --------- --------
Total operating expenses ..................... 143 1,771 4,769 19,085 28,795
------ -------- -------- --------- --------
Operating loss .................................. (143) (1,771) (4,478) (10,697) (7,638)
Other income, net ............................... 7 101 160 552 265
------ -------- -------- --------- --------
Net loss ........................................ $ (136) $ (1,670) $ (4,318) $ (10,145) $ (7,373)
====== ======== ======== ========= ========
Basic and diluted net loss per share(1) ......... $ (0.36) $ (0.54) $ (0.36)
========= ========= =========
Shares used in per share computation(1) ......... 11,976 18,815 20,208
========= ========= =========
December 31,
--------------------------------------------------------
1993 1994 1995 1996 1997
-------- -------- -------- -------- --------
(in thousands)
Balance Sheet Data:
Cash and cash equivalents $ 1,503 $ 808 $ 4,311 $ 17,608 $ 8,277
Working capital .......... 2,358 2,208 3,916 18,258 11,485
Total assets ............. 2,634 2,640 5,857 28,930 27,342
Long-term obligations .... -- -- 593 587 3,081
Accumulated deficit ...... (136) (1,806) (6,124) (16,269) (23,642)
Total stockholders' equity 2,478 2,526 4,254 21,016 15,121
- ------------
(1) See Note 1 of Notes to Consolidated Financial Statements for information
concerning the computation of per share amounts.
22
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Except for historical information contained or incorporated by reference
herein, the following discussion contains forward-looking statements that
involve risks and uncertainties. The Company's actual results could differ
significantly from those discussed herein. Factors that could cause or
contribute to such differences include, but are not limited to, those discussed
below under the caption "Risk Factors" and elsewhere in this Form 10-K. Any such
forward-looking statements speak only as of the date such statements are made.
Overview
BroadVision develops, markets and supports application software solutions
for one-to-one relationship management for the extended enterprise. These
solutions enable businesses to use the Internet as a platform to conduct
commerce, provide self-service, and deliver targeted information to their
customers, suppliers, distributors, employees, and other constituents of their
extended enterprises. The BroadVision One-To-One product family allows
businesses to tailor Web site content to the needs and interests of individual
users by personalizing each visit on a real-time basis. BroadVision One-To-One
applications achieve this result by interactively capturing Web site visitor
profile information, organizing the enterprise's content, targeting that content
to each visitor based on easily constructed business rules, and executing
transactions. The Company believes the benefits of these applications include
enhanced customer satisfaction and loyalty, increased business volume, reduced
costs to service customers and execute transactions, and enhanced employee
productivity.
The Company's core product, the BroadVision One-To-One Application System,
was first made commercially available in December 1995. Version 3.0, the
Company's latest version, was released during the fourth quarter of 1997 and
supports five languages (English, German, Japanese, Chinese, and Korean) and
four major client/server databases (Oracle, Sybase, Informix and Microsoft SQL
Server). In 1997, the Company released a complementary family of three packaged
application products: One-To-One Commerce, One-To-One Financial, and One-To-One
Knowledge. These products are built upon and tightly integrated with the
Company's core technology and provide specifically enhanced functionality. They
are designed to address the distinct customer requirements for managing
one-to-one relationships with product merchandising, financial services, and
knowledge management.
The Company sells its products and services worldwide through a direct
sales force, independent distributors, value-added resellers, and system
integrators. It also has a global network of strategic business relationships
with key industry platform and Web developer partners.
The Company's revenues are derived from software license fees and fees
charged for its services. The Company generally recognizes license fees when the
software has been delivered, the customer acknowledges an unconditional
obligation to pay, and the Company has no significant obligations remaining.
Professional services revenues generally are recognized as services are
performed. Software maintenance revenues are recognized ratably over the term of
the support period, which is typically one year.
23
Results of Operations
The following table sets forth certain items reflected in the Company's
consolidated statements of operations as a percentage of total revenues for the
periods indicated.
Year Ended December 31,
------------------------------------------
1995 1996 1997
------------- ------------ -----------
Revenues:
Software licenses .................. --% 68.6% 70.0%
Services ........................... 100.0 31.4 30.0
------ ----- -----
Total revenues ................... 100.0 100.0 100.0
------ ----- -----
Cost of revenues:
Cost of software licenses .......... -- 3.0 6.1
Cost of services ................... 46.1 19.9 15.8
------ ----- -----
Total cost of revenues ........... 46.1 22.9 21.9
------ ----- -----
Gross profit ........................ 53.9 77.1 78.1
------ ----- -----
Operating expenses:
Research and development ........... 476.9 45.8 27.3
Sales and marketing ................ 249.6 110.9 67.9
General and administrative ......... 156.7 18.7 11.1
------ ----- -----
Total operating expenses ......... 883.2 175.4 106.3
------ ----- -----
Operating loss ...................... (829.3) (98.3) (28.2)
Other income, net ................... 29.7 5.1 1.0
------ ----- -----
Net loss ............................ (799.6)% (93.2)% (27.2)%
====== ===== =====
Revenues
Total revenues for the Company were $27.1 million in 1997 as compared to
$10.9 million in 1996, which represents an increase of 149% year-over-year.
During 1995, the Company's software products were under development and total
revenues were $540,000, consisting principally of domestic consulting services.
In 1997 and 1996, North American revenues were $12.9 million and $4.4 million,
or 48% and 41% of total revenues, respectively; revenues to Europe were $10.9
million and $3.3 million, or 40% and 30% of total revenues, respectively; and
revenues to Asia/Pacific were $3.4 million and $3.2 million, or 12% and 29% of
total revenues, respectively. The 149% increase in total revenues for 1997 as
compared to 1996 is a result of strong market acceptance of the Company's
cornerstone product, the BroadVision One-to-One Application System, which was
facilitated by the introduction in 1997 of new complementary application
products, One-To-One Commerce, One-To-One Financial, and One-To-One Knowledge.
The significant increase for 1996 as compared to 1995 is a result of the
introduction of the BroadVision One-To-One Application System in late 1995.
Although the Company has experienced revenue growth in recent periods,
historical growth rates may not be sustained and may not be indicative of future
operating results. The Company anticipates that international revenues will
continue to account for a significant amount of total revenues, and management
expects to continue to commit significant time and financial resources to the
maintenance and ongoing development of direct and indirect international sales
and support channels. There can be no assurance, however, that the Company will
be able to maintain or increase international market acceptance for its family
of products.
Software Licenses. The Company's software license revenues were $19.0
million in 1997 as compared to $7.5 million in 1996, which represents an
increase of 154% year-over-year. There were no software license revenues in
1995. In 1997 and 1996, North American software license revenues were $8.6
million and $3.1 million, or 45% and 41% of the Company's total software license
revenues, respectively; software license revenues to Europe were $8.8 million
and $2.3 million, or 47% and 30% of the Company's total software license
revenues, respectively; and software license revenues to Asia/Pacific were $1.6
million and $2.1 million, or 8% and 29% of the Company's total software license
revenues, respectively.
24
Services. Services revenues consist primarily of professional services and
maintenance. The Company's professional services include its Strategic Services
Group, its Interactive Services Group, its Content and Creative Services Group
and its Education Services Group. Professional services are generally offered on
a time and materials basis. Maintenance revenue is generally derived from annual
service agreements and is recognized ratably over the period of the agreement.
Maintenance fees are based on a percentage of the list price for the related
software.
Total services revenues were $8.1 million in 1997 as compared to $3.4
million in 1996, which represents an increase of 138% year-over-year. During
1995, the Company was in its early stages of development and services revenues
were $540,000. In 1997 and 1996, North American services revenues were $4.3
million and $1.3 million, or 53% and 39% of the Company's total services
revenues, respectively; services revenues in Europe were $2.0 million and $1.0
million, or 25% and 30% of the Company's total services revenues, respectively;
and services revenues in Asia/Pacific were $1.8 million and $1.1 million, or 22%
and 31% of the Company's total services revenues, respectively.
Professional services revenues were $6.0 million in 1997 as compared to
$2.8 million in 1996, which represents an increase of 114% year-over-year. In
1995, professional services revenues were $540,000 and related principally to a
single domestic contract development project. Professional services revenues as
a percentage of total services revenues were 74%, 83%, and 100% in 1997, 1996,
and 1995, respectively. The 114% increase in professional services revenues for
1997 as compared to 1996 is a result of higher business volumes and greater
utilization of the Company's professional consultants. The significant increase
for 1996 as compared to 1995 is primarily the result of comparing a full year of
operations during 1996 with the 1995 period, which was a development stage
period. 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.
Maintenance revenues were $2.1 million in 1997 as compared to $599,000 in
1996, which represents an increase of 251% year-over-year. There were no
maintenance revenues in 1995. Maintenance revenues as a percentage of total
services revenues were 26%, 18%, and 0% in 1997, 1996, and 1995, respectively.
The increase in maintenance revenues is a result of expanding software sales and
the corresponding maintenance fees relating to a larger installed base of
software licenses. As the Company's installed license base grows, its
maintenance revenues as a percentage of total revenues may increase.
Operating Expenses
Cost of Software Licenses. Cost of software licenses 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. In 1997 and 1996, cost of software licenses was $1.7
million and $330,000, or 9% and 4% of related software license revenues,
respectively, consisting principally of third-party royalties and commissioned
agent fees. There were no software license costs in 1995. Cost of software
licenses increased in both absolute dollar and percentage terms during 1997 as
compared to 1996 due to expanded sales volumes and higher commissioned agent
fees as a result of increased distributor sales. Commissioned agent fees were
$703,000 in 1997 as compared to $80,000 in 1996. To a lesser extent, an
increased number of third-party products bundled with or embedded in the
Company's products also contributed to the increases.
Cost of Services. Cost of services consists primarily of employee-related
costs and fees of third-party consultants incurred in providing consulting,
post-contract customer support, and training services. In 1997, 1996, and 1995,
cost of services were $4.3 million, $2.2 million, and $249,000, or 53%, 63%, and
46% of related services revenues, respectively. Cost of services increased 98%
in absolute dollars during 1997 as compared to 1996 due to expanded business
volumes, as represented by the 138% increase in total services revenues. The
higher level of costs is attributable to additions to the Company's consulting
staff, the employment of outside consultants to meet short-term consulting
arrangements, an increasing number of licenses with support or maintenance
components, and a higher level of fixed costs resulting from the Company's
expansion of its services organization to meet higher business volumes. The
decrease in cost of services as a percentage of total services revenues in 1997
as compared to 1996 is a result of increased utilization of professional staff
and overall higher business volumes in relation to fixed overhead costs. During
1995, the Company was in its development
25
stage and generally in the process of building its support services
infrastructure. The Company expects that services costs will continue to
increase in absolute dollars as the Company continues to expand its services
organization to support anticipated higher levels of business.
Research and Development. Research and development expenses consist
primarily of salaries, other employee-related costs, and consulting fees
relating to the development of the Company's products. In 1997, 1996, and 1995,
research and development expenses were $7.4 million, $5.0 million, and $2.6
million, respectively. Research and development expenses increased by 48% in
1997 as compared to 1996 and increased by 94% in 1996 as compared to 1995. The
increases in research and development expenses are primarily attributable to
costs associated with additional personnel within those operations for the
enhancement of existing products and the development of new products. The
Company anticipates that research and development expenses will continue to
increase in absolute dollars for 1998. Development costs incurred in research
and development of new software products are expensed as incurred until
technological feasibility in the form of a working model has been established,
at which time such costs are capitalized, subject to recoverability. As of
December 31, 1997, no software development costs had been capitalized.
Sales and Marketing. Sales and marketing expenses consist primarily of
salaries and other employee-related costs, commissions and other incentive
compensation, travel and entertainment, and expenditures for marketing programs
such as collateral materials, trade shows, public relations, and creative
services. In 1997, 1996, and 1995, sales and marketing expenses were $18.4
million, $12.1 million, and $1.3 million, respectively. Sales and marketing
expenses increased by 53% in 1997 as compared to 1996 and increased by 795% in
1996 as compared to 1995. During 1995, the Company was still in the development
stage and sales and marketing expenses in percentage terms increased
significantly year-over-year. The overall increases in sales and marketing
expenditures reflect the cost of hiring additional sales and marketing
personnel, developing and expanding its sales distribution channels, deploying
new products, and expanding promotional activities. The Company expects to
continue to expand its direct sales and marketing efforts and expects sales and
marketing expenses to continue to increase in absolute dollars.
General and Administrative. General and administrative expenses consist
primarily of salaries, other employee-related costs, and professional service
fees. In 1997, 1996, and 1995 general and administrative expenses were $3.0
million, $2.0 million, and $846,000, respectively. General and administrative
expenses increased by 47% in 1997 as compared to 1996 and increased by 140% in
1996 as compared to 1995. The increases in general and administrative expenses
are attributable to the hiring of additional administrative and management
personnel, increased professional fees, additional provision for doubtful
accounts, and additional infrastructure to support the expansion of the
Company's operations. The Company expects to continue to add administrative
staff to support broadened operations. As a result, the Company expects that
general and administrative expenses will continue to increase in absolute
dollars.
Prior to the Company's initial public offering in June 1996, the Company
recorded deferred compensation for the difference between the exercise price and
the deemed fair value of the Company's Common Stock with respect to 1,794,000
shares issuable upon exercise of options. The total amount was recorded as
deferred compensation and is being amortized to cost of services, research and
development, selling and marketing, and general and administrative expenses over
the vesting periods of the options, generally 60 months. Deferred compensation
amortization for 1997, 1996, and 1995 was $428,000, $513,000, and $100,000,
respectively. The amortization of deferred compensation will have an adverse
effect on the Company's reported results of operations through 2003, but such
effect will be significantly reduced beginning in the third quarter of 2001.
Income taxes. Deferred taxes are recognized as a result of temporary
differences that arise between the tax basis of assets and liabilities and the
related financial statement carrying amounts, as measured using the tax rates
that are expected to be in effect when the temporary differences reverse. During
1997, 1996, and 1995, the Company generated pre-tax losses of $7.4 million,
$10.1 million, and $4.3 million, respectively. The Company has approximately
$10.0 million in net deferred tax assets, however, it has not reported any
associated income tax benefit because the net deferred tax assets are fully
reserved due to uncertainties regarding the realization of the assets, given the
lack of earnings history for the Company. See "Risk Factors--Deferred Tax
Assets" and Note 6 to Consolidated Financial Statements.
At December 31, 1997, the Company had federal and state net operating loss
carryforwards of approximately $17.1 million and $6.4 million, respectively. In
addition, the Company had federal and state research
26
and development credit carryforwards of approximately $585,000 and $451,000,
respectively, available to offset future tax liabilities. The Company's net
operating loss and tax credit carryforwards expire in 1999 through 2013, if not
utilized. Utilization of the carryforwards may be subject to annual limitation
due to changes in the Company's ownership resulting from the Company's
preferred stock financings and its public stock offerings.
Liquidity and Capital Resources
The Company has funded its operations to date primarily through the private
placement of Common and Preferred Stock and an initial public offering of
3,360,000 shares of Common Stock. Through May 1996, private placements provided
net proceeds totaling $15.5 million, and in June 1996 the initial public
offering yielded net proceeds of $20.7 million. At December 31, 1997, the
Company had $10.5 million in cash and cash equivalents, restricted cash, and
restricted short-term investments, which represents a decrease of $9.2 million
as compared to $19.7 million at December 31, 1996. The Company currently has no
significant capital commitments other than obligations under equipment and
operating leases and $2.7 million outstanding under a term debt credit facility
with its commercial bank. Effective February 1998, the Company's commercial bank
increased its credit facility to provide for total borrowings of up to $6.5
million.
Cash used in operating activities was $8.7 million, $8.4 million, and $3.7
million in 1997, 1996, and 1995, respectively. The primary use of cash in
operating activities was to fund ongoing operations and support higher levels of
trade receivables as a result of significant year-over-year increases in
revenues. Cash used in investing activities was $3.6 million and $4.4 million in
1997 and 1996, respectively, and was primarily for the acquisition of property
and equipment, net of $2.1 million of short-term investment maturities in 1997
and inclusive of uses for the purchase of $2.1 milion of short-term investments
in 1996. Cash provided by investing activities was $614,000 in 1995 and was
primarily attributable to the maturity of short-term investments net of property
and equipment acquisitions of $679,000. Cash provided by financing activities
was $2.9 million, $26.1 million, and $6.6 million in 1997, 1996, and 1995,
respectively. The primary source of cash provided by financing activities was
proceeds from the issuance of stock and, to a lesser extent, borrowings.
The Company believes that its available cash resources, cash generated from
operations and amounts available under its commercial credit facilities, will
be sufficient to meet its expected working capital and capital expenditure
requirements for at least the next 12 months. This estimate is a forward-looking
statement that involves risks and uncertainties, and actual results may vary as
a result of a number of factors, including those discussed under "Risk Factors"
and elsewhere herein.
On March 4, 1998, the Company filed a registration statement on Form S-3 in
connection with a proposed public offering of the Company's Common Stock. The
registration statement covers 3,795,000 shares of Common Stock of which
3,000,000 shares are being sold by the Company, 300,000 shares are being sold by
certain stockholders of the Company and 495,000 shares are issuable upon
exercise of the underwriters' over-allotment option. There can be no assurance
that the proposed public offering will be sucessfully completed.
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.
Quarterly Results of Operations
The following tables set forth certain unaudited consolidated statement of
operations data for the eight quarters ended December 31, 1997, as well as such
data expressed as a percentage of the Company's total revenues for the period
indicated. This data has been derived from unaudited consolidated financial
statements that, in the opinion of management, include all adjustments
(consisting only of normal recurring adjustments) necessary for a fair
presentation of such information when read in conjunction with the Consolidated
Financial Statements and Notes thereto. The unaudited quarterly information
should be read in conjunction with the Consolidated Financial Statements of the
Company and Notes thereto included elsewhere in this Form 10-K. The Company
believes that period-to-period comparisons of its financial results are not
necessarily meaningful and should not be relied upon as an indication of future
performance.
27
1996 Quarter Ended
-------------------------------------------------------
Mar. 31 June 30 Sep. 30 Dec. 31
------------- ------------- ------------- -------------
(in thousands)
Statement of Operations Data:
Revenues:
Software licenses .................. $ 1,099 $ 1,564 $ 2,074 $ 2,727
Services ........................... 299 738 1,026 1,356
-------- ------- ------- -------
Total revenues ................... 1,398 2,302 3,100 4,083
-------- ------- ------- -------
Cost of revenues:
Cost of software licenses .......... 96 93 72 69
Cost of services ................... 165 331 520 1,148
-------- ------- ------- -------
Total cost of revenues ........... 261 424 592 1,217
-------- ------- ------- -------
Gross profit ........................ 1,137 1,878 2,508 2,866
-------- ------- ------- -------
Operating expenses:
Research and development ........... 917 1,277 1,320 1,472
Sales and marketing ................ 1,585 2,486 3,574 4,421
General and administrative ......... 340 320 592 782
-------- ------- ------- -------
Total operating expenses ......... 2,842 4,083 5,486 6,675
-------- ------- ------- -------
Operating loss ...................... (1,705) (2,205) (2,978) (3,809)
Other income, net ................... 7 25 304 216
-------- ------- ------- -------
Net loss ............................ $ (1,698) $(2,180) $(2,674) $(3,593)
======== ======= ======= =======
1997 Quarter Ended
-------------------------------------------------------
Mar. 31 June 30 Sep. 30 Dec. 31
------------- ------------- ------------- -------------
(in thousands)
Statement of Operations Data:
Revenues:
Software licenses .................. $ 3,148 $ 4,098 $ 5,513 $ 6,213
Services ........................... 2,143 1,929 1,641 2,420
------- ------- ------- -------
Total revenues ................... 5,291 6,027 7,154 8,633
------- ------- ------- -------
Cost of revenues:
Cost of software licenses .......... 214 425 460 566
Cost of services ................... 1,143 1,001 1,010 1,130
------- ------- ------- -------
Total cost of revenues ........... 1,357 1,426 1,470 1,696
------- ------- ------- -------
Gross profit ........................ 3,934 4,601 5,684 6,937
------- ------- ------- -------
Operating expenses:
Research and development ........... 1,680 1,802 2,113 1,797
Sales and marketing ................ 4,204 4,257 4,630 5,323
General and administrative ......... 746 700 763 780
------- ------- ------- -------
Total operating expenses ......... 6,630 6,759 7,506 7,900
------- ------- ------- -------
Operating loss ...................... (2,696) (2,158) (1,822) (963)
Other income (expense), net ......... 209 49 131 (123)
------- ------- ------- -------
Net loss ............................ $(2,487) $(2,109) $(1,691) $(1,086)
======= ======= ======= =======
1996 Quarter Ended
-------------------------------------------------------
Mar. 31 June 30 Sep. 30 Dec. 31
------------- ------------- ------------- -------------
(in thousands)
As a Percentage of Revenues:
Revenues:
Software licenses .................. 78.7% 67.9% 66.9% 66.8%
Services ........................... 21.3 32.1 33.1 33.2
-------- ------- ------- -------
Total revenues ................... 100.0 100.0 100.0 100.0
-------- ------- ------- -------
Cost of revenues:
Cost of software licenses .......... 6.9 4.0 2.3 1.7
Cost of services ................... 11.8 14.4 16.8 28.1
-------- ------- ------- -------
Total cost of revenues ........... 18.7 18.4 19.1 29.8
-------- ------- ------- -------
Gross profit ........................ 81.3 81.6 80.9 70.2
-------- ------- ------- -------
Operating expenses:
Research and development ........... 65.6 55.5 42.6 36.1
Sales and marketing ................ 113.5 108.0 115.3 108.3
General and administrative ......... 24.3 13.9 19.1 19.2
-------- ------- ------- -------
Total operating expenses ......... 203.4 177.4 177.0 163.5
-------- ------- ------- -------
Operating loss ...................... (122.1) (95.8) (96.1) (93.3)
Other income, net ................... 0.5 1.1 9.8 5.3
-------- ------- ------- -------
Net loss ............................ (121.6)% (94.7)% (86.3)% (88.0)%
======== ======= ======= =======
1997 Quarter Ended
-------------------------------------------------------
Mar. 31 June 30 Sep. 30 Dec. 31
------------- ------------- ------------- -------------
(in thousands)
As a Percentage of Revenues:
Revenues:
Software licenses .................. 59.5% 68.0% 77.1% 72.0%
Services ........................... 40.5 32.0 22.9 28.0
------- ------- ------- -------
Total revenues ................... 100.0 100.0 100.0 100.0
------- ------- ------- -------
Cost of revenues:
Cost of software licenses .......... 4.0 7.1 6.4 6.6
Cost of services ................... 21.6 16.6 14.1 13.1
------- ------- ------- -------
Total cost of revenues ........... 25.6 23.7 20.5 19.6
------- ------- ------- -------
Gross profit ........................ 74.4 76.3 79.5 80.4
------- ------- ------- -------
Operating expenses:
Research and development ........... 31.8 29.9 29.5 20.8
Sales and marketing ................ 79.4 70.6 64.7 61.7
General and administrative ......... 14.1 11.6 10.7 9.0
------- ------- ------- -------
Total operating expenses ......... 125.3 112.1 104.9 91.5
------- ------- ------- -------
Operating loss ...................... (50.9) (35.8) (25.4) (11.1)
Other income (expense), net ......... 3.9 0.8 1.8 ( 1.4)
------- ------- ------- -------
Net loss ............................ (47.0)% (35.0)% (23.6)% (12.6)%
======= ======= ======= =======
The Company expects to experience significant fluctuations in future
quarterly operating results that may be caused by many factors including, among
others, the timing of introductions or enhancements of products and services by
the Company or its competitors, the length of the Company's sales cycle, market
acceptance of new products, the pace of development of the market for online
commerce, the mix of the Company's products sold, the size and timing of
significant orders and the timing of customer production or deployment, demand
for the Company's products, changes in pricing policies by the Company or its
competitors, changes in the Company's sales incentive plans, budgeting cycles of
its customers, customer order deferrals in anticipation of new products or
enhancements by the Company or its competitors, cancellation of orders prior to
customer deployment or during the warranty period, nonrenewal of service
agreements, product life cycles, software defects and other product quality
problems, changes in strategy, changes in key personnel, the extent of
international expansion, seasonal trends, the mix of distribution channels
through which the Company's
28
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.
29
RISK FACTORS
This Form 10-K contains forward-looking statements that involve risks and
uncertainties. The Company's actual results may differ materially from the
results discussed in the forward-looking statements. Factors that might cause
such a difference include, but are not limited to, those discussed below and
elsewhere in this Form 10-K.
Operating Losses and Accumulated Deficit
Since its inception, the Company has incurred substantial costs to
research, develop, and enhance its technology and products, to recruit and train
a marketing and sales group, and to establish an administrative organization. As
a result, the Company has incurred net losses in each fiscal quarter since
inception and, as of December 31, 1997, had an accumulated deficit of $23.6
million. To the extent such losses continue, the Company's accumulated deficit
would increase, and stockholders' equity would decrease. The Company anticipates
that its operating expenses will increase substantially in the foreseeable
future as it continues the development of its technology, increases its sales
and marketing activities, and creates and expands its distribution channels.
Accordingly, the Company expects to incur additional losses. 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 achieve or sustain revenue growth or profitability. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
Fluctuations in Quarterly Operating Results
As a result of the Company's relatively short operating history, the
Company has only limited historical financial data for quarterly periods on
which to base planned operating expenses. The Company's expense levels are based
in part on its product development requirements as well as its expectations as
to future revenues. The Company anticipates that its operating expenses will
increase substantially for the foreseeable future as the Company continues to
develop and market its initial products, increases its sales and marketing
activities, creates and expands the distribution channels for its products, and
broadens its customer support capabilities.
The Company expects to experience significant fluctuations in future
quarterly operating results that may be caused by many factors including, among
others, the timing of introductions or enhancements of products and services by
the Company or its competitors, the length of the Company's sales cycle, market
acceptance of new products, the pace of development of the market for online
commerce, the mix of the Company's products sold, the size and timing of
significant orders and the timing of customer production or deployment, demand
for the Company's products, changes in pricing policies by the Company or its
competitors, changes in the Company's sales incentive plans, budgeting cycles of
its customers, customer order deferrals in anticipation of new products or
enhancements by the Company or its competitors, nonrenewal of service
agreements, product life cycles, software defects and other product quality
problems, changes in strategy, changes in key personnel, the extent of
international expansion, seasonal trends, the mix of distribution channels
through which the Company's products are sold, the mix of international and
domestic sales, changes in the level of operating expenses to support projected
growth, and general economic conditions. The Company anticipates that a
significant portion of its revenues will be derived from a limited number of
orders, and the timing of receipt and fulfillment of any such orders is expected
to cause material fluctuations in the Company's operating results, particularly
on a quarterly basis. As with many software companies, the Company anticipates
that it will make the major portion of each quarter's deliveries near the end of
each quarter and, as a result, short delays in delivery of products at the end
of a quarter could adversely affect operating results for that quarter. In
addition, the Company intends, in the near term, to increase significantly its
personnel, including its domestic and international direct sales force. The
timing of such expansion and the rate at which new sales people become
productive could also cause material fluctuations in the Company's quarterly
operating results.
Due to the foregoing factors, quarterly revenues and operating results are
difficult to forecast, and the Company believes that period-to-period
comparisons of its operating results will not necessarily be meaningful
30
and should not be relied upon as any indication of future performance. It is
likely that the Company's future quarterly operating results from time to time
will not meet the expectations of market analysts or investors, which may have
an adverse effect on the price of the Company's Common Stock. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
Early Stage of Market Development; Dependence on the Internet
The Company's products and services facilitate online communication and
commerce over public and private networks. The market for the Company's products
and services is at an early stage of development and is rapidly evolving. As is
typical for new and rapidly evolving industries, demand and market acceptance
for recently introduced products and services are subject to a high level of
uncertainty, especially where, as is true of the Company, acquisition of the
product requires a large capital commitment or other significant commitment of
resources. With respect to the Company, this uncertainty is compounded by the
risks that consumers and enterprises will not adopt electronic commerce and
knowledge management and that an appropriate infrastructure necessary to support
increased commerce and communication on the Internet will fail to develop, in
each case, to a sufficient extent and within an adequate time frame to permit
the Company to succeed.
Adoption of electronic commerce and knowledge management, particularly by
those individuals and enterprises that have historically relied upon traditional
means of commerce and communication, will require a broad acceptance of new and
substantially different methods of conducting business and exchanging
information. Moreover, the Company's products and services involve a new
approach to the conduct of online business and, as a result, intensive marketing
and sales efforts may be necessary to educate prospective customers regarding
the uses and benefits of the Company's products and services in order to
generate demand for the Company's systems. For example, enterprises that have
already invested substantial resources in other methods of conducting business
may be reluctant or slow to adopt a new approach that may replace, limit, or
compete with their existing systems.
Similarly, individuals with established patterns of purchasing goods and
services may be reluctant to alter those patterns or may otherwise be resistant
to providing the personal data which is necessary to support the Company's
consumer profiling capability. Moreover, the security and privacy concerns of
existing and potential users of the Company's products and services may inhibit
the growth of online business generally and the market's acceptance of the
Company's products and services in particular. Accordingly, there can be no
assurance that a viable market for the Company's products will emerge or be
sustainable.
Sales of most of the Company's products and services will depend upon the
adoption of the Internet as a widely used medium for commerce and communication.
The Internet may not prove to be a viable commercial marketplace because of
inadequate development of the necessary infrastructure, such as a reliable
network backbone, or non-timely development of complementary products, such as
high speed modems. The Internet has experienced, and is expected to continue to
experience, significant growth in the number of users and amount of traffic.
There can be no assurance that the Internet infrastructure will continue to be
able to support the demands placed on it by this continued growth. In addition,
the Internet could lose its viability due to delays in the development or
adoption of new standards and protocols to handle increased levels of Internet
activity or due to increased governmental regulation. Moreover, critical issues
concerning the commercial use of the Internet (including security, reliability,
cost, ease of use, accessibility, and quality of service) remain unresolved and
may negatively affect the growth of Internet use or the attractiveness of
commerce and communication on the Internet. Because global commerce and online
exchange of information on the Internet and other similar open wide area
networks are new and evolving, there can be no assurance that the Internet will
prove to be a viable commercial marketplace. If critical issues concerning the
commercial use of the Internet are not favorably resolved, if the necessary
infrastructure and complementary products are not developed, or if the Internet
does not become a viable commercial marketplace, the Company's business,
financial condition, and operating results will be materially adversely
affected.
Potential Impact of Privacy Concerns
One of the principal features of the BroadVision One-To-One Application
System is the ability to develop and maintain profiles for use by business
managers in determining the nature of the content to be provided to
31
that customer. Typically, profile information is often captured when consumers,
business customers, and employees visit a site on the Web and volunteer
information in response to survey questions concerning their backgrounds,
interests, and preferences. Profiles are augmented over time through the
collection of usage data. Although BroadVision One-To-One products are designed
to enable the development of applications that permit Web site visitors to
prevent the distribution of any of their personal data beyond that specific Web
site, privacy concerns may nevertheless cause visitors to be resistant to
providing the personal data necessary to support this profiling capability.
Moreover, even the perception of substantial security and privacy concerns,
whether or not valid, may indirectly inhibit market acceptance of the Company's
products. In addition, such concerns may be heightened by legislative or
regulatory requirements that require notification to Web site users that the
data captured as a result of visitation of certain Web sites may be used by
marketing entities to unilaterally address product promotion and advertising to
that user. While the Company is not aware of any such legislation or regulatory
requirements currently in effect in the United States, certain other countries
and political entities, such as the European Community, have adopted such
legislation or regulatory requirements, and no assurance can be given that
similar legislation or regulator requirements will not be adopted in the United
States. If the privacy concerns of consumers are not adequately addressed, the
Company's business, financial condition, and operating results could be
materially adversely affected.
Competition
The market for online interactive relationship management applications is
new, rapidly evolving, and intensely competitive. The Company expects
competition to persist and intensify in the future. The Company's primary
competition comes from in-house development efforts by potential customers or
partners. The Company's competitors also include other vendors of application
software directed at interactive commerce and financial services and Web content
developers engaged to develop custom software or to integrate other application
software into custom solutions. The Company currently encounters direct
competition from Edify, InterWorld, Microsoft, Netscape, and OMI, among others.
Many of these competitors have longer operating histories, and significantly
greater financial, technical, marketing, and other resources than the Company
and thus may be able to respond more quickly to new or changing opportunities,
technologies, and customer requirements. Also, many current and potential
competitors have greater name recognition and more extensive customer bases that
could be leveraged, thereby gaining market share to the Company's detriment.
Such competitors may be able to undertake more extensive promotional activities,
adopt more aggressive pricing policies, and offer more attractive terms to
purchasers than the Company. Moreover, certain of the Company's current and
potential competitors, such as Netscape and Microsoft, are likely to bundle
their products in a manner that may discourage users from purchasing products
offered by the Company. In addition, current and potential competitors have
established or may establish cooperative relationships among themselves or with
third parties to enhance their products. Accordingly, it is possible that new
competitors or alliances among competitors may emerge and rapidly acquire
significant market share. There can be no assurance that the Company will be
able to compete successfully with current or future competitors, or that
competitive pressures faced by the Company will not have a material adverse
effect on the Company's business, financial condition, and operating results.
See "Business--Competition."
Product and Customer Concentration
To date, substantially all of the Company's revenues have been attributable
to sales of licenses of the BroadVision One-To-One Application System and
related services. The Company currently expects the BroadVision One-To-One
Application System and related services to account for most of its future
revenues. Accordingly, if any of the Company's customers is not able to
successfully develop and deploy an online marketplace using the BroadVision
One-To-One Application System, the Company's reputation could be damaged, which
could have a material adverse effect on the Company's business, financial
condition, and operating results. In addition, factors adversely affecting the
pricing of or demand for the BroadVision One-To-One Application System, such as
competition or technological change, could have a material adverse effect on the
Company's business, financial condition, and operating results. The Company's
future financial performance will depend, in significant part, on the successful
development, introduction, and customer acceptance of new and enhanced versions
of the BroadVision One-To-One Application System and of new products the Company
develops. There can be no assurance that the Company will be successful in
upgrading and continuing to market the BroadVision One-To-One Application System
or that the Company will successfully
32
develop new products or that any new products will achieve market acceptance.
In 1997, software license and service revenues from Metronet accounted for
approximately 11% of the Company's total revenues.
Lengthy Sales and Implementation Cycles
The license of the Company's software products is often an enterprise-wide
decision by prospective customers, requiring the Company to engage in a lengthy
sales cycle to provide a significant level of education to prospective customers
regarding the use and benefits of the Company's products. In addition, the
implementation of the Company's products involves a significant commitment of
resources by customers or by the Company's Worldwide Professional Services
Organization consultants over an extended period of time. As a result, the
Company's sales and customer implementation cycles are subject to a number of
significant delays over which the Company has little or no control. In many
cases, the Company expects to recognize a substantial portion of the revenue
related to the sale of its products upon deployment or production by the
customer of the products. As a result, delays in license transactions due to
lengthy sales cycles or delays in customer production or deployment of a product
could have a material adverse effect on the Company's business, financial
condition, and operating results and can be expected to cause the Company's
operating results to vary significantly from quarter to quarter.
Risks Associated with Expanding Distribution
To date, the Company has sold its products primarily through its direct
sales force. The Company's ability to achieve significant revenue growth in the
future will depend in large part on its success in recruiting and training
sufficient direct sales personnel and establishing and maintaining relationships
with distributors, resellers, systems integrators, and other third parties.
Although the Company is currently investing, and plans to continue to invest,
significant resources to expand its sales force and to develop distribution
relationships with third-party distributors and resellers, the Company may at
times experience difficulty in recruiting qualified sales personnel and in
establishing necessary third-party alliances. There can be no assurance that the
Company will be able to successfully expand its direct sales force or other
distribution channels or that any such expansion will result in an increase in
revenues. Any failure by the Company to expand its direct sales force or other
distribution channels would materially adversely affect the Company's business,
financial condition, and operating results.
Dependence on Systems Integrators
The Company's potential customers may rely on third-party systems
integrators to develop, deploy, and manage online marketplaces. If the Company
were unable to adequately train a sufficient number of systems integrators or
if, for any reason, a large number of such integrators were to adopt a different
product or technology instead of the BroadVision One-To-One Application System,
the Company's business, financial condition, and operating results could be
materially and adversely affected.
Rapid Technological Change; New Product Delays
The information services, software, and communications industries are
characterized by rapid technological change, changes in customer requirements,
frequent new product and service introductions and enhancements, and emerging
industry standards. The introduction of products and services embodying new
technologies and the emergence of new industry standards and practices can
render existing products and services obsolete and unmarketable. The Company's
future success will depend, in part, on its ability to develop leading
technologies, enhance its existing products and services, develop new products
and services that address the increasingly sophisticated and varied needs of its
prospective customers, and respond to technological advances and emerging
industry standards and practices on a timely and cost-effective basis. There can
be no assurance that the Company will be successful in effectively using new
technologies, adapting its products to emerging industry standards, developing,
introducing, and marketing product and service enhancements, or new products and
services, or that it will not experience difficulties that could delay or
prevent the successful development, introduction, or marketing of these products
and services, or that its new product and service enhancements will adequately
meet the requirements of the marketplace and achieve market acceptance. If the
Company is unable, for technical or other reasons, to develop and introduce new
products and services or
33
enhancements of existing products and services in a timely manner in response
to changing market conditions or customer requirements, or if new products and
services do not achieve market acceptance, the Company's business, financial
condition, and operating results will be materially and adversely affected.
Risks of Product Defects
Sophisticated software products, such as those of the Company, may contain
undetected errors or failures that become apparent when the products are
introduced or when the volume of services provided increases. There can be no
assurance that, despite testing by the Company and potential customers, errors
will not be found in the Company's products, resulting in loss of revenues,
delay in market acceptance, diversion of development resources, damage to the
Company's reputation, or increased service and warranty costs, which would have
a material adverse effect on the Company's business, financial condition, and
operating results.
Year 2000 Compliance
Many currently installed computer systems and software products are coded
to accept two digit entries in the date code field. These date code fields will
need to accept four digit entries to distinguish 21st century dates from 20th
century dates. As a result, in less than two years, computer systems and
software used by many companies may need to be upgraded to comply with such
"Year 2000" requirements. Although the Company's products are Year 2000
compliant, the Company believes that the purchasing patterns of customers and
potential customers may 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.
Risks Associated with Encryption Technology
A significant barrier to online commerce and communication is the secure
exchange of value and confidential information over public networks. The Company
relies on encryption and authentication technology, including public key
cryptography technology licensed from RSA, to provide the security and
authentication necessary to effect the secure exchange of value and confidential
information. There can be no assurance that advances in computer capabilities,
new discoveries in the field of cryptography or other events or developments
will not result in a compromise or breach of the RSA or other algorithms used by
the Company to protect customer transaction data. If any such compromise of the
Company's security were to occur, it could have a material adverse effect on the
Company's business, financial condition, and operating results.
Dependence on Intellectual Property Rights
The Company's success and ability to compete are dependent to a significant
degree on its proprietary technology. Although the Company holds a patent,
issued in January 1998, on elements of its BroadVision One-To-One Application
System, there can be no assurance as to the degree of intellectual property
protection such patent will provide. The Company has relied primarily on
copyright, trade secret, and trademark law to protect its technology and has
registered "BroadVision" and applied for registration of "BroadVision One-To-
One" as trademarks in the United States. It is possible that competitors of the
Company or others will adopt product names similar to "One-To-One," thereby
impeding the Company's ability to build brand identity and possibly leading to
customer confusion. The Company provides its products to end users generally
under nonexclusive, nontransferable licenses during the term of the agreement,
which is usually in perpetuity. Under the general terms and conditions of the
Company's standard license agreement, the licensed software may be used solely
for internal operations pursuant to BroadVision's published licensing practices.
The Company makes source code available for certain portions of its products.
The source code for the Company's proprietary software is protected both as a
trade secret and as a copyrighted work. The provision of source code may
increase the likelihood of misappropriation by third parties. The Company's
policy is to enter into confidentiality and assignment agreements with its
employees, consultants, and vendors and generally to control access
34
to and distribution of its software, documentation, and other proprietary
information. Notwithstanding these precautions, it may be possible for a third
party to copy or otherwise obtain and use the Company's software or other
proprietary information without authorization or to develop similar software
independently. Policing unauthorized use of the Company's products is
difficult, particularly because the global nature of the Internet makes it
difficult to control the ultimate destination or security of software or other
data transmitted. The laws of other countries may afford the Company little or
no effective protection of its intellectual property. There can be no assurance
that the steps taken by the Company will prevent misappropriation of its
technology or that agreements entered into for that purpose will be
enforceable. In addition, litigation may be necessary in the future to enforce
the Company's intellectual property rights, to protect the Company's trade
secrets, to determine the validity and scope of the proprietary rights of
others, or to defend against claims of infringement or invalidity. Such
litigation, whether successful or unsuccessful, could result in substantial
costs and diversions of resources, either of which could have a material
adverse effect on the Company's business, financial condition, and operating
results. See "Business--Intellectual Property and Other Proprietary Rights."
Risk of Infringement
The Company may, in the future, receive notices of claims of infringement
of other parties' trademark, copyright, and other proprietary rights. There can
be no assurance that claims for infringement or invalidity (or claims for
indemnification resulting from infringement claims) will not be asserted or
prosecuted against the Company. In particular, claims could be asserted against
the Company for violation of trademark, copyright, or other laws as a result of
the use by the Company, its customers, or other third parties of the Company's
products to transmit, disseminate, or display information over or on the
Internet. Any such claims, with or without merit, could be time consuming to
defend, result in costly litigation, divert management's attention and
resources, cause product shipment delays, or require the Company to enter into
royalty or licensing agreements. There can be no assurance that such licenses
would be available on reasonable terms, if at all, and the assertion or
prosecution of any such claims could have a material adverse effect on the
Company's business, financial condition, and operating results. See
"Business--Intellectual Property and Other Proprietary Rights."
Dependence on Certain Licenses
The Company relies in part on certain technology which it licenses from
third parties, including RDBMSs from Oracle and Sybase, object request broker
software from IONA, database access technology from Rogue Wave, and other
software, which is integrated with internally developed software and used in the
Company's software to perform key functions. In this regard, all of the
Company's services incorporate data encryption and authentication technology
licensed from RSA. There can be no assurance that the Company's third-party
technology licenses will continue to be available to the Company on commercially
reasonable terms, if at all. The loss or inability to maintain any of these
technology licenses could result in delays in introduction of the Company's
products and services until equivalent technology, if available, is identified,
licensed, and integrated, which could have a material adverse effect on the
Company's business, financial condition, and operating results.
Dependence on Key Personnel
The Company's performance is substantially dependent on the performance of
its executive officers and key employees. The Company is dependent on its
ability to retain and motivate highly qualified personnel, especially its
management and highly skilled development teams. The Company does not have "key
person" life insurance policies on any of its employees. The loss of the
services of any of its key employees, particularly its founder and Chief
Executive Officer, Pehong Chen, could have a material adverse effect on the
Company's business, financial condition, and operating results. The Company's
future success also depends on its continuing ability to identify, hire, train,
and retain other highly qualified technical and managerial personnel.
Competition for such personnel is intense. There can be no assurance that the
Company will be able to attract, assimilate, or retain qualified technical and
managerial personnel in the future, and the failure of the Company to do so
would have a material adverse effect on the Company's business, financial
condition, and operating results. See "Business--Executive Officers and Key
Personnel."
Risks Associated with International Strategy
In 1997, approximately 52% of the Company's total revenues were derived
from sales outside of North America. A component of the Company's strategy is
its planned expansion of its international activities. There
35
can be no assurance that the Company will be able to maintain and expand its
activities in international markets. In addition, there are certain risks
inherent in doing business in international markets, such as unexpected changes
in regulatory requirements, export controls relating to encryption technology
and other export restrictions, tariffs and other trade barriers, difficulties
in staffing and managing foreign operations, political instability,
fluctuations in currency exchange rates, reduced protection for intellectual
property rights in some countries, seasonal reductions in business activity
during the summer months in Europe and certain other parts of the world, and
potentially adverse tax consequences, any of which could adversely impact the
success of the Company's international operations. There can be no assurance
that one or more of such factors will not have a material adverse effect on the
Company's current or future international operations and, consequently, on the
Company's business, financial condition, and operating results. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
Deferred Tax Assets
Deferred taxes are recognized as a result of timing differences that arise
between the tax basis of assets and liabilities and the related financial
statement carrying amounts, as measured using the tax rates and laws that are
expected to be in effect when the timing differences reverse. The Company has
approximately $10.0 million in net deferred tax assets, however, it has not
reported any associated income tax benefit because the Company has provided a
valuation allowance for all of its deferred tax assets as it is presently unable
to conclude that it is more likely than not that the deferred tax assets will be
realized. The Company's accounting for deferred taxes under Statement of
Financial Accounting Standard No. 109 involves the evaluation of a number of
factors concerning the realizability of deferred tax assets. Some of the factors
that were taken into consideration include the Company's stage of development
and related history of operating losses, the competitive market in which it
operates, the nature of the deferred tax assets, and the lack of carryback
capacity to realize these assets. Although management's operating plans indicate
the company will be profitable in future periods, management's evaluation of all
available evidence in assessing the realizability of the deferred tax assets
indicates that such plans are not considered sufficient to overcome the weight
of existing negative factors. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and Note 6 of Notes to
Consolidated Financial Statements.
Government Regulation
There can be no assurance that a federal, state, or foreign agency will not
attempt to regulate the Company's activities. The Company anticipates that it
may be required to comply with additional regulations, if enacted by federal or
state authorities, as the market for online commerce evolves. The Company also
may be subject to foreign laws and state and foreign sales and use tax laws. If
enacted or deemed applicable to the Company, such laws, rules, or regulations
could be imposed on the Company's activities or its business, thereby rendering
the Company's business or operations more costly or burdensome, less efficient,
or impossible, any of which could have a material adverse effect on the
Company's business, financial condition, and operating results.
Due to the increasing popularity of the Internet, it is possible that laws
and regulations may be enacted with respect to the Internet, covering issues
such as user privacy, pricing, content, and quality of products and services.
For example, because the Company's products involve the solicitation of personal
data regarding individual consumers, the Company's business could be adversely
affected by laws regulating the solicitation, collection, or processing of such
data. The Telecommunications Act of 1996 (the "Telecommunications Act"), which
was enacted in January 1996, prohibits the transmission over the Internet of
certain types of information and content. The scope of the prohibition and
liability associated with any violation of the Telecommunications Act are
currently unsettled. The imposition upon the Company and other software and
service providers of potential liability for information carried on or
disseminated through its application systems could require the Company to
implement measures to reduce its exposure to such liability, which may require
the expenditure of substantial resources, or to discontinue certain services.
The increased attention focused upon these liability issues as a result of the
Telecommunications Act could adversely affect the growth of Internet and private
network use. Any costs incurred by the Company as a result of such liability or
asserted liability could have a material adverse effect on the Company's
business, financial condition, and operating results. In addition, the
36
adoption of other laws or regulations may reduce the rate of growth of the
Internet, which could in turn decrease the demand for the Company's services
and increase the Company's cost of doing business, or could otherwise have a
material adverse effect on the Company's business, financial condition, and
operating results.
The Company's software utilizes encryption technology, the export of which
is regulated by the United States government. There can be no assurance that
export regulations, either in their current form or as may be subsequently
enacted, will not limit the Company's ability, to distribute its software
outside the United States. Moreover, federal or state legislation or regulation
may further limit levels of encryption or authentication technology that the
Company is able to utilize in its software. While the Company takes precautions
against unlawful exportation of its software, the global nature of the Internet
makes it difficult to effectively control the distribution of software. Any
revocation or modification of the Company's export authority, unlawful
exportation of the Company's software, or adoption of new legislation or
regulation relating to exportation of software and encryption technology could
have a material adverse effect on the Company's business, financial condition,
and operating results.
Future Capital Needs; Uncertainty of Additional Financing
The Company currently anticipates that its available cash resources, cash
generated from operations, and amounts available under its commercial credit
facilities will be sufficient to meet its presently anticipated working capital
and capital expenditure requirements for at least the next 12 months.
On March 4, 1998, the Company filed a registration statement on Form S-3 in
connection with a proposed public offering of the Company's Common Stock. The
registration statement covers 3,795,000 shares of Common Stock of which
3,000,000 shares are being sold by the Company, 300,000 shares are being sold by
certain stockholders of the Company and 495,000 shares are issuable upon
exercise of the underwriters' over-allotment option. There can be no assurance
that the proposed public offering will be sucessfully completed.
The Company may need to raise additional funds in order to support more
rapid expansion, develop new or enhanced services, respond to competitive
pressures, acquire complementary businesses or technologies, or respond to
unanticipated requirements. If additional funds are raised through the issuance
of equity securities, the percentage ownership of the stockholders of the
Company will be reduced, stockholders may experience additional dilution, or
such equity securities may have rights, preferences, or privileges senior to
those of the holders of the Company's Common Stock. There can be no assurance
that additional financing will be available when needed on terms favorable to
the Company, if at all. If adequate funds are not available or are not available
on acceptable terms, the Company may be unable to develop or enhance its
products, take advantage of future opportunities, or respond to competitive
pressures or unanticipated requirements, which could have a material adverse
effect on the Company's business, financial condition, and operating results.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resouces."
Management of a Changing Business
The Company has experienced substantial change and expansion in its
business and operations since its inception in 1993 and expects to continue to
experience periods of rapid change. The Company's past expansion has placed, and
any future expansion would place, significant demands on the Company's
administrative, operational, financial, and other resources. The Company expects
operating expenses and staffing levels to increase substantially in the future.
In particular, the Company intends to hire a significant number of additional
personnel in 1998 and later years. Competition for such personnel is intense,
and there can be no assurance that the Company will be able to attract,
assimilate, or retain additional highly qualified personnel in the future. The
Company also expects to expend resources with respect to future expansion of its
accounting and internal management systems and the implementation of a variety
of new systems and procedures. In addition, the Company expects that future
expansion will continue to challenge the Company's ability to train, motivate,
and manage its employees and to attract and retain qualified senior managers and
technical persons, such as programmers and software architects. If the Company's
revenues do not increase in proportion to its operating expenses, the Company's
management systems do not expand to meet increasing demands, the Company fails
to attract, assimilate, and retain qualified personnel, or the Company's
management otherwise fails to manage the Company's expansion effectively, there
would be a material adverse effect on the Company's business, financial
condition, and operating results.
Volatility of Stock Price
The market price of the Company's Common Stock is highly volatile and
subject to wide fluctuations in response to quarterly variations in operating
results, announcements of technological innovations or new
37
software or services by the Company or its competitors, changes in financial
estimates by securities analysts, or other events or factors, many of which are
beyond the Company's control. In addition, the stock market has experienced
significant price and volume fluctuations that have particularly affected the
market prices of equity securities of many high technology companies and that
often have been unrelated to the operating performance of such companies. These
broad market fluctuations may adversely affect the market price of the
Company's Common Stock. In the past, following periods of volatility in the
market price for a company's securities, securities class action litigation has
often been instituted. Such litigation could result in substantial costs and a
diversion of management attention and resources, which could have a material
adverse effect on the Company's business, financial condition, and operating
results. It is likely that the Company's future quarterly operating results
from time to time will not meet the expectations of market analysts or
investors, which may have an adverse effect on the price of the Company's
Common Stock. See "Market for Registrant's Common Equity and Related
Stockholder Matters."
38
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
BroadVision, Inc.:
We have audited the accompanying consolidated balance sheets of
BroadVision, Inc. and subsidiaries, as of December 31, 1997 and 1996, and the
related consolidated statements of operations, stockholders' equity and cash
flows for each of the years in the three-year period ended December 31, 1997.
These consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of BroadVision,
Inc. and subsidiaries as of December 31, 1997 and 1996, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 1997, in conformity with generally accepted accounting
principles.
KPMG PEAT MARWICK LLP
Mountain View, California
January 28, 1998, except as to note 11,
which is as of March 4, 1998
39
BROADVISION, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except per share data)
December 31,
--------------------------
1997 1996
----------- ------------
ASSETS
Current assets:
Cash and cash equivalents ..................................................... $ 8,277 $ 17,608
Restricted cash ............................................................... 1,400 --
Short-term investments, restricted in 1997 .................................... 796 2,112
Accounts receivable, less allowance for doubtful accounts and returns of
$671 and $191, for 1997 and 1996, respectively................................ 9,586 5,548
Prepaid expenses and other current assets ..................................... 566 317
--------- ---------
Total current assets ....................................................... 20,625 25,585
Property and equipment, net ...................................................... 6,467 3,024
Other assets ..................................................................... 250 321
--------- ---------
Total assets ............................................................... $ 27,342 $ 28,930
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable .............................................................. $ 1,863 $ 958
Accrued expenses .............................................................. 2,168 2,526
Unearned revenue .............................................................. 1,335 2,625
Deferred maintenance .......................................................... 2,552 924
Current portion of capital lease obligations .................................. 773 294
Current portion of long-term debt ............................................. 449 --
--------- ---------
Total current liabilities .................................................. 9,140 7,327
Capital lease obligations, excluding current portion ............................. 803 495
Long-term debt, excluding current portion ........................................ 2,202 --
Other liabilities ................................................................ 76 92
--------- ---------
Total liabilities .......................................................... 12,221 7,914
--------- ---------
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; 20,343 and 19,908
shares issued and outstanding in 1997 and 1996, respectively. ................. 2 2
Additional paid-in capital ...................................................... 40,366 39,316
Deferred compensation ........................................................... (1,605) (2,033)
Accumulated deficit ............................................................. (23,642) (16,269)
--------- ---------
Total stockholders' equity ................................................. 15,121 21,016
--------- ---------
Total liabilities and stockholders' equity ................................. $ 27,342 $ 28,930
========= =========
See accompanying notes to consolidated financial statements
40
BROADVISION, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
Years Ended December 31,
--------------------------------------------
1997 1996 1995
----------- -------------- -------------
Revenues:
Software licenses ............................................... $ 18,973 $ 7,464 $ --
Services ........................................................ 8,132 3,418 540
-------- -------- --------
Total revenues ............................................... 27,105 10,882 540
Cost of revenues:
Cost of software licenses ....................................... 1,664 330 --
Cost of services ................................................ 4,284 2,164 249
-------- -------- --------
Total cost of revenues ....................................... 5,948 2,494 249
-------- -------- --------
Gross profit .............................................. 21,157 8,388 291
Operating expenses:
Research and development ........................................ 7,392 4,985 2,575
Sales and marketing ............................................. 18,413 12,066 1,348
General and administrative ...................................... 2,990 2,034 846
-------- -------- --------
Total operating expenses ....................................... 28,795 19,085 4,769
-------- -------- --------
Operating loss ............................................ (7,638) (10,697) (4,478)
Other income, net .................................................. 265 552 160
-------- -------- --------
Net loss .................................................. $ (7,373) $(10,145) $ (4,318)
======== ======== ========
Basic and diluted net loss per share ............................... $ (0.36) $ (0.54) $ (0.36)
======== ======== ========
Shares used in computing basic and diluted net loss per share ...... 20,208 18,815 11,976
======== ======== ========
See accompanying notes to consolidated financial statements
41
BROADVISION, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(in thousands, except per share amounts)
Convertible
Preferred Stock Common Stock
-------------------- -------------------
Shares Amount Shares Amount
----------- -------- ---------- --------
Balances as of December 31, 1994 .................... 5,600 $ 1 6,720 $ 1
Issuance of Series C convertible preferred stock
at $2.00 per share, net of issuance costs of $49.... 3,001 -- -- --
Issuance of common stock at $ 0.05 to
$ 0.12 per share.................................... -- -- 334 --
Common stock repurchased ............................ -- -- (746) --
Deferred compensation related to grant of stock
options ............................................ -- -- -- --
Amortization of deferred compensation ............... -- -- -- --
Net loss ............................................ -- -- -- --
----- ---- ----- ---
Balances as of December 31, 1995 .................... 8,601 1 6,308 1
Issuance of Series C convertible preferred stock
at $2.00 per share ................................. 3 -- -- --
Issuance of Series E convertible preferred stock
at $8.00 per share.................................. 634 -- -- --
Conversion of preferred Series A, B, C and E to
common stock ....................................... (9,238) (1) 9,258 1
Issuance of common stock through initial public
offering ........................................... -- -- 3,360 --
Issuance of stock under employee stock
purchase plan ...................................... -- -- -- --
Issuance of common stock from exercise
of options ......................................... -- -- 1,112 --
Common stock repurchased ............................ -- -- (130) --
Deferred compensation related to grant of stock
options ............................................ -- -- -- --
Amortization of deferred compensation ............... -- -- -- --
Net loss ............................................ -- -- -- --
------ ----- ----- ---
Balances as of December 31, 1996 .................... -- -- 19,908 2
Issuance of stock under employee stock
purchase plan ...................................... -- -- 242 --
Issuance of common stock from exercise
of options ......................................... -- -- 255 --
Common stock repurchased ............................ -- -- (62) --
Amortization of deferred compensation ............... -- -- -- --
Net loss ............................................ -- -- -- --
------ ----- ------ ---
Balances as of December 31, 1997 .................... -- $-- 20,343 $ 2
====== ===== ====== ===
Total
Additional Accumulated Deferred Stockholders'
Paid-in Capital Deficit Compensation Equity
----------------- ------------- -------------- --------------
Balances as of December 31, 1994 .................... $ 4,330 $ (1,806) $ -- $ 2,526
Issuance of Series C convertible preferred stock
at $2.00 per share, net of issuance costs of $49.... 5,952 -- -- 5,952
Issuance of common stock at $ 0.05 to
$ 0.12 per share.................................... 31 -- -- 31
Common stock repurchased ............................ (37) -- -- (37)
Deferred compensation related to grant of stock
options ............................................ 1,136 -- (1,136) --
Amortization of deferred compensation ............... -- -- 100 100
Net loss ............................................ -- (4,318) -- (4,318)
-------- ---------- --------- ---------
Balances as of December 31, 1995 .................... 11,412 (6,124) (1,036) 4,254
Issuance of Series C convertible preferred stock
at $2.00 per share ................................. 6 -- -- 6
Issuance of Series E convertible preferred stock
at $8.00 per share.................................. 5,055 -- -- 5,055
Conversion of preferred Series A, B, C and E to
common stock ....................................... -- -- -- --
Issuance of common stock through initial public
offering ........................................... 20,755 -- -- 20,755
Issuance of stock under employee stock
purchase plan ...................................... 394 -- -- 394
Issuance of common stock from exercise
of options ......................................... 205 -- -- 205
Common stock repurchased ............................ (21) -- -- (21)
Deferred compensation related to grant of stock
options ............................................ 1,510 -- (1,510) --
Amortization of deferred compensation ............... -- -- 513 513
Net loss ............................................ -- (10,145) -- (10,145)
-------- ---------- --------- ---------
Balances as of December 31, 1996 .................... 39,316 (16,269) (2,033) 21,016
Issuance of stock under employee stock
purchase plan ...................................... 979 -- -- 979
Issuance of common stock from exercise
of options ......................................... 81 -- -- 81
Common stock repurchased ............................ (10) -- -- (10)
Amortization of deferred compensation ............... -- -- 428 428
Net loss ............................................ -- (7,373) -- (7,373)
-------- ---------- --------- ---------
Balances as of December 31, 1997 .................... $ 40,366 $ (23,642) $ (1,605) $ 15,121
======== ========== ========= =========
See accompanying notes to consolidated financial statements
42
BROADVISION, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Years Ended December 31,
----------------------------------------------
1997 1996 1995
------------- -------------- -------------
Cash flows from operating activities:
Net loss ............................................................... $ (7,373) $ (10,145) $ (4,318)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation and amortization ........................................ 1,613 753 120
Amortization of deferred compensation ................................ 428 513 100
Allowance for doubtful accounts and returns .......................... 515 196 --
Changes in operating assets and liabilities:
Accounts receivable .................................................. (4,553) (5,349) (395)
Prepaid expenses and other assets .................................... (178) (551) (53)
Accounts payable and accrued expenses ................................ 547 2,996 374
Unearned revenue and deferred maintenance ............................ 338 3,194 355
Other liabilities .................................................... (16) 15 77
--------- ---------- ---------
Net cash used in operating activities ............................... (8,679) (8,378) (3,740)
--------- ---------- ---------
Cash flows from investing activities:
Purchase of property and equipment ..................................... (4,878) (2,529) (679)
Purchase of short-term investments ..................................... (796) (2,112) (196)
Maturity of short-term investments ..................................... 2,112 196 1,489
--------- ---------- ---------
Net cash provided by (used in) investing activities ................. (3,562) (4,445) 614
--------- ---------- ---------
Cash flows from financing activities:
Proceeds from sale/leaseback ........................................... 987 -- 748
Net change in restricted cash .......................................... (1,400) -- --
Proceeds from borrowings ............................................... 2,651 -- --
Payments on capital lease .............................................. (378) (274) (65)
Proceeds from issuance of common stock ................................. 1,060 21,354 31
Proceeds from issuance of preferred stock .............................. -- 5,061 5,952
Repurchase of common stock ............................................. (10) (21) (37)
--------- ---------- ---------
Net cash provided by financing activities ............................... 2,910 26,120 6,629
--------- ---------- ---------
Net increase (decrease) in cash and cash equivalents .................... (9,331) 13,297 3,503
Cash and cash equivalents, beginning of year ............................ 17,608 4,311 808
--------- ---------- ---------
Cash and cash equivalents, end of year .................................. $ 8,277 $ 17,608 $ 4,311
========= ========== =========
Supplemental cash flow disclosures:
Cash paid for interest ................................................. $ 108 $ 86 $ 32
========= ========== =========
Noncash investing and financing activities:
Acquisition of equipment under capital lease ........................... $ 1,165 $ 380 $ --
========= ========== =========
Deferred compensation relating to stock options granted at less than
fair market value .................................................... $ -- $ 1,510 $ 1,136
========= ========== =========
See accompanying notes to consolidated financial statements
43
BROADVISION, INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1997, 1996 and 1995
NOTE 1--ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Business
BroadVision, Inc. (the "Company") develops, markets and supports
application software solutions for one-to-one relationship management for the
extended enterprise. These solutions enable businesses to use the Internet as a
platform to conduct commerce, provide self-service, and deliver targeted
information to their customers, suppliers, distributors, employees, and other
constituents of their extended enterprises. The BroadVision One-To-One product
family allows businesses to tailor Web site content to the needs and interests
of individual users by personalizing each visit on a real-time basis.
BroadVision One-To-One applications achieve this result by interactively
capturing Web site visitor profile information, organizing the enterprise's
content, targeting that content to each visitor based on easily constructed
business rules, and executing transactions.
Basis of Presentation
The accompanying consolidated financial statements include the accounts of
the Company and its wholly-owned subsidiaries. All significant intercompany
accounts and transactions have been eliminated in consolidation.
Use of Estimates
The preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires the Company's management to
make certain assumptions and estimates that affect the amounts reported. Actual
results could differ from those estimates. Such estimates include established
reserves for potentially uncollectible accounts receivable and a valuation
allowance for deferred tax assets.
Revenue Recognition
The Company's revenue recognition policies are in accordance with Statement
of Position (SOP) No. 91-1, Software Revenue Recognition, and are as follows:
* Software license revenues are recognized when the software has been
delivered, the customer acknowledges an unconditional obligation to
pay, and the Company has no significant obligations remaining.
* Professional services revenues are recognized as such services are
performed.
* Maintenance revenues, including revenues bundled with software
agreements which entitle the customers to technical support and future
enhancements, are deferred and recognized over the related contract
period, generally twelve months.
In October 1997, the American Institute of Certified Public Accountants
issued SOP 97-2, Software Revenue Recognition. The statement provides specific
industry guidance and stipulates that revenue recognized from software
arrangements is to be allocated to each element of the arrangement based on the
relative fair values of the elements, such as software products, upgrades,
enhancements, post contract customer support, installation, or training. Under
SOP 97-2, the determination of fair value is based on objective evidence which
is specific to the vendor. If such evidence of fair value for each element of
the arrangement does not exist, all revenue from the arrangement is deferred
until such time that evidence of fair value does exist or until all elements of
the arrangement are delivered. Revenue allocated to software products, specified
upgrades and enhancements is generally recognized upon delivery of the related
products, upgrades and enhancements. Revenue allocated to post contract customer
support is generally recognized ratably over the term of the support, and
revenue allocated to service elements is generally recognized as the services
are performed. SOP 97-2 will be adopted by the Company effective January 1, 1998
and is not expected to have any material effect on revenue recognition.
44
BROADVISION, INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements -- (Continued)
December 31, 1997, 1996 and 1995
Research and Development and Software Development Costs
Development costs incurred in research and development of new software
products are expensed as incurred until technological feasibility in the form of
a working model has been established at which time such costs are capitalized,
subject to recoverability. Products are typically made available for general
release, concurrent with achievement of technological feasibility. Accordingly,
no software development costs have been capitalized through December 31, 1997.
Cash and Cash Equivalents
The Company considers all debt securities purchased with remaining
maturities of three months or less to be cash equivalents which consisted of
approximately $7,708,000 in money market funds as of December 31, 1997 and
$16,729,000 in commercial paper as of December 31, 1996.
Short-term Investments
As of December 31, 1997, short-term investments of $796,000 consisted of a
one year certificate of deposit maintained with the Company's commercial bank as
a guarantee for a standby letter of credit issued by the bank in favor of the
Company's landlord. As of December 31, 1996, short-term investments consisted
principally of commercial paper. All short-term investments are classified as
available-for-sale, have maturities of one year or less and are carried at
amortized cost which approximates fair value. Realized gains and losses are
computed using the specific identification method. Realized and unrealized gains
or losses have not been significant.
Concentrations of Credit Risk
Financial assets that potentially subject the Company to significant
concentrations of credit risk consist principally of cash, cash equivalents,
short-term investments, and trade accounts receivable. The Company's cash, cash
equivalents and short term investments are held with a commercial bank. The
Company markets and sells its product throughout the world and performs ongoing
credit evaluations of its customers. The Company generally does not require
collateral on accounts receivable as the majority of the its customers are
large, well-established companies. The Company maintains reserves for potential
credit losses but historically has not experienced any significant losses
related to individual customers or groups of customers in any particular
industry or geographic area.
Fair Value of Financial Instruments
The Company's financial instruments consist of cash equivalents, short-term
investments, accounts receivable, accounts payable and debt. The Company does
not have any derivative financial instruments. The Company believes the reported
carrying amounts of its financial instruments approximated fair value, based
upon the short maturity of cash equivalents, short-term investments, accounts
receivable and payable, and based on the current rates available to the Company
on similar debt issues.
Property and Equipment
Property and equipment are stated at cost and depreciated on a
straight-line basis over their estimated useful lives (two to five years).
Leasehold improvements are amortized over the corresponding lease term or their
estimated useful lives, whichever is shorter.
In accordance with the provisions of Statement of Financial Accounting
Standards (SFAS) No. 121, Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to Be Disposed Of, the Company evaluates long-lived assets
and certain identifiable intangibles for impairment whenever events or changes
in circumstances indicate that the carrying amount of an asset may not be
recoverable. Under SFAS No. 121, an impairment loss would be recognized when
estimated future cash flows expected to result from the
45
BROADVISION, INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements -- (Continued)
December 31, 1997, 1996 and 1995
use of the asset and its eventual disposition is less than the carrying amount.
The Company adopted SFAS No. 121 on January 1, 1996. The adoption of SFAS No.
121 had no effect on the Company's consolidated results of operations.
Income Taxes
The Company utilizes the asset and liability method of accounting for
income taxes. Under the asset and liability method, deferred tax assets and
liabilities are established to recognize the future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases. Deferred tax
assets and liabilities are measured using enacted tax rates expected to apply in
the years in which temporary differences are expected to be recovered or
settled. The effects on deferred tax assets and liabilities of a change in tax
rates is recognized in income in the period that includes the enactment date.
Employee Stock Option and Purchase Plans
The Company accounts for employee stock-based awards in accordance with the
provisions of Accounting Principles Board (APB) Opinion No. 25, Accounting for
Stock Issued to Employees, and related interpretations. As such, compensation
expense would be recorded on the date of grant only if the current market price
of the underlying stock exceeded the exercise price. Effective January 1, 1996,
the Company adopted the disclosure requirements of SFAS No. 123, Accounting for
Stock-Based Compensation. Under SFAS No. 123, the Company must disclose pro
forma net loss and pro forma loss per share for employee stock option grants and
employee stock purchases occurring subsequent to December 31, 1994 as if the
SFAS No. 123 fair value-based method had been applied.
Net Loss Per Share
The Financial Accounting Standards Board (FASB) recently issued SFAS No.
128, Earnings Per Share. SFAS No. 128 requires the presentation of basic net
income per share, and for companies with complex capital structures, diluted net
income per share. In conjunction with the Company's adoption of SFAS No. 128,
the Company also adopted the provisions of Staff Accounting Bulletin (SAB) No.
98, issued in February 1998. Accordingly, shares previously included pursuant to
SAB No. 83 have been omitted from both pro forma basic and diluted net income
per share amounts. Prior periods have been restated to conform to SFAS No. 128,
however, as the Company had a net loss in the prior periods, basic and diluted
loss per share are the same as the previously presented primary loss per share.
Excluded from the computation of diluted earnings per share for 1997 are
options to acquire 3,702,000 shares of Common Stock with a weighted-average
exercise price of $4.41 and warrants to acquire 93,750 shares of Common Stock
with a weighted-average exercise price of $6.16 because their effects would be
anti-dilutive.
Foreign Currency Translations
The functional currency of the Company's foreign subsidiaries is the U.S.
dollar. Resulting foreign exchange gains and losses are included in the
consolidated results of operations and, to date, have not been significant.
Recently Issued Accounting Standards
In June 1997, the FASB issued SFAS No. 130, Reporting Comprehensive Income;
and SFAS No. 131, Disclosures about Segments of an Enterprise and Related
Information, which are effective for the Company beginning with its year ended
December 31, 1998.
SFAS No. 130 establishes standards for the reporting and disclosure of
comprehensive income and its components which will be presented in association
with a company's financial statements. Comprehensive income is defined as the
change in a business enterprise's equity during a period arising from
transactions, events or circumstances relating to nonowner sources, such as
foreign currency translation adjustments and unrealized gains or losses on
available-for-sale securities. It includes all changes in equity during a period
except those resulting from investments by or distributions to owners.
46
BROADVISION, INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements -- (Continued)
December 31, 1997, 1996 and 1995
SFAS No. 131 establishes annual and interim reporting standards relating to
the disclosure of an enterprise's business segments, products, services,
geographic areas, and major customers.
Adoption of these standards is not expected to have a material effect on
the Company's consolidated financial position or results of operations.
NOTE 2--PROPERTY AND EQUIPMENT (in thousands):
December 31,
---------------
1997 1996
------ ------
Furniture and fixtures ....................... $ 636 $ 539
Computer and software ........................ 5,458 3,210
Leasehold improvements ....................... 2,780 138
------ ------
8,874 3,887
Less accumulated depreciation and amortization 2,407 863
------ ------
$6,467 $3,024
====== ======
Leased equipment totaled approximately $2,256 and $1,105 as of December 31,
1997 and 1996, respectively. Accumulated depreciation for leased equipment
totaled approximately $927 and $355 as of December 31, 1997 and 1996,
respectively.
NOTE 3--ACCRUED EXPENSES (in thousands):
December 31,
---------------
1997 1996
------ ------
Employee benefits ....................... $ 420 $ 254
Commissions and bonuses ................. 833 696
Directors and officers insurance premiums 57 283
Taxes payable ........................... 366 129
Contractor fees ......................... 162 489
Other ................................... 330 675
------ ------
$2,168 $2,526
====== ======
NOTE 4--UNEARNED REVENUE (in thousands):
December 31,
---------------
1997 1996
------ ------
Software licenses $ 803 $2,217
Services ........ 532 408
------ ------
$1,335 $2,625
====== ======
NOTE 5--DEBT
As of December 31, 1997, the Company had $2,651,000 outstanding under a
commercial credit facility. Borrowings bear interest at the bank's prime rate
(8.5% as of December 31, 1997). Principal and interest is due in consecutive
monthly payments through maturity based on the term of the facility. Principal
payments of $449,000 annually are due from 1998 through 2000 and $326,000
annually from 2001 through 2004. The credit
47
BROADVISION, INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements -- (Continued)
December 31, 1997, 1996 and 1995
facility includes covenants which impose certain restrictions on the payment of
dividends and other distributions and requires the Company to maintain monthly
financial covenants, including a minimum quick ratio, tangible net worth ratio
and minimum cash reserves. The minimum cash reserves covenant is replaced with
a minimum debt service coverage ratio upon six consecutive quarters of
profitability. Borrowings are collateralized by a security interest in
substantially all of the Company's owned assets. The Company was in compliance
with all of its financial covenants as of December 31, 1997.
NOTE 6--INCOME TAXES
The individual components of the Company's deferred tax assets as of
December 31, 1997 and 1996 were as follows (in thousands):
December 31,
-------------------
1997 1996
-------- --------
Depreciation and amortization ................ $ 401 $ 175
Accrued liabilities .......................... 887 403
Capitalized research and development ......... 1,024 531
Net operating losses ......................... 6,408 5,093
Tax credits .................................. 1,258 431
------ ------
Total deferred tax assets ................. 9,978 6,633
Less valuation allowance ..................... 9,978 6,633
------ ------
$ -- $ --
====== ======
The Company has provided a valuation allowance for all of its deferred tax
assets as it is presently unable to conclude that it is more likely than not
that the deferred tax assets will be realized. Some of the factors that were
taken into consideration include the Company's stage of development and related
history of operating losses, the competitive market in which it operates, the
nature of the deferred tax assets, and the lack of carryback capacity to realize
these assets. Although management's operating plans indicate the Company will be
profitable in future periods, management's evaluation of all available evidence
in assessing the realizability of the deferred tax assets indicates that such
plans are not considered sufficient to overcome the weight of existing negative
factors.
As of December 31, 1997, the Company had federal and state net operating
loss carryforwards of approximately $17,100,000 and $6,400,000, respectively,
available to offset future regular and alternative minimum taxable income. In
addition, the Company had federal and state research and development credit
carryforwards of approximately $585,000 and $451,000, respectively, available to
offset future tax liabilities. The Company's net operating loss and tax credit
carryforwards expire in the years 1999 through 2013, if not utilized.
The Tax Reform Act of 1986 and the California Tax Conformity Act of 1987
limit the use of net operating loss carryforwards in certain situations where
changes occur in the stock ownership of a company. The Company believes such an
ownership change, as defined, may have occurred and, accordingly, certain of the
Company's federal and state net operating loss carryforwards may be limited in
their annual usage.
NOTE 7-- COMMITMENTS
Leases
During 1997, the Company entered into a lease for a new headquarters
facility. The Company leases this and its other facilities under noncancelable
operating lease agreements expiring through the year 2007. Under the terms of
the agreements, the Company is required to pay property taxes, insurance and
normal maintenance costs. As of December 31, 1997, the Company is committed to
spend approximately $523,000 for tenant
48
BROADVISION, INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements -- (Continued)
December 31, 1997, 1996 and 1995
improvements for its new headquarters facility. The Company also leases certain
equipment under capital leases expiring through the year 2000. A summary of
future minimum lease payments is as follows (in thousands):
Capital Operating
Year Ended December 31, leases leases
- ----------------------- ------- -------
1998 .................................................. $ 903 $ 1,938
1999 .................................................. 684 1,621
2000 .................................................. 224 1,362
2001 .................................................. -- 1,269
2002 .................................................. -- 1,346
Thereafter ............................................ -- 7,445
------- -------
Total minimum lease payments ........................... 1,811 $14,981
=======
Less amount representing imputed interest .............. 235
-------
Present value of net minimum capital lease payments .... 1,576
Less current portion ................................... 773
-------
Capital leases, excluding current portion .............. $ 803
=======
Rental expense relating to operating leases was approximately $1,161,000,
$571,000, and $264,000 for the years ended December 31, 1997, 1996 and 1995,
respectively.
Total minimum sublease payments to be received in the future under
noncancelable subleases total $2,298,000 through May, 2000.
Standby Letter of Credit Commitments
As of December 31, 1997, the Company had outstanding commitments in the
form of two standby letters of credit. A letter for $1,400,000 was issued in
favor of the Company's equipment leasing financier expiring November 12, 1998;
with provisions for automatic annual renewals not to extend beyond April 10,
2000. A letter for $794,000 was issued in favor of the Company's corporate
facility landlord which expired February 14, 1998. The standby letter of credit
commitments are secured by compensating cash balances of equal value with the
issuing bank. These compensating balances are shown as restricted in the
accompanying consolidated balance sheet.
NOTE 8--STOCKHOLDERS' EQUITY
Convertible Preferred Stock
All outstanding convertible preferred stock and warrants to purchase
convertible preferred stock were converted to common stock and warrants to
purchase common stock at the time of the Company's initial public offering in
June 1996.
Warrants
As of December 31, 1997, there were warrants outstanding to acquire 33,750
and 60,000 shares of common stock at $2.00 and $8.50 per share and relate to
equipment lease financing and a facilities lease, respectively. The fair value
of these warrants was not significant.
Common Stock
The Company applies APB Opinion No. 25 and related interpretations in
accounting for its stock option and stock purchase plans. Accordingly, the
Company has recorded deferred compensation of $1,510,000 and
49
BROADVISION, INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements -- (Continued)
December 31, 1997, 1996 and 1995
$1,136,000 in 1996 and 1995, respectively, for the difference between the
exercise price and the deemed fair value of the common stock underlying options
granted in 1996. This amount is being amortized to expense over the vesting
period of the individual options, generally five years.
The Company has reserved 5,000,000 shares of common stock for issuance
under its Equity Incentive Plan. Under this plan, the Board of Directors may
grant incentive or nonqualified stock options at prices not less than 100% or
85%, respectively, of the fair market value of the Company's common stock, as
determined by the Board of Directors, at the grant date. The vesting of
individual options may vary but in each case at least 20% of the total number of
shares subject to options will become exercisable per year. These options
generally expire ten years after grant date.
When an employee option is exercised prior to vesting, any unvested shares
so purchased are subject to repurchase by the Company at the original purchase
price of the stock upon termination of employment. The right to repurchase
lapses at a minimum rate of 20% per year over five years from the date the
option was granted or, for new employees, the date of hire. Such right is
exercisable only within 90 days following termination of employment. As of
December 31, 1997, 426,293 shares were subject to repurchase at a
weighted-average price of $0.18.
The Company's President and Chief Executive Officer holds an option to
purchase 500,000 shares of common stock at an exercise price of $4.00 per share.
The shares subject to option vest ratably on a monthly basis over a 60-month
period commencing April 1, 1995. As of December 31, 1997, 275,000 shares were
vested.
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option-pricing model with the following weighted-average
assumptions for grants in 1997 and 1996: no dividend yield; expected volatility
of 67% in 1997 and 60% in 1996; risk-free interest rate of 5.91% in 1997 and
6.5% in 1996; and expected life of 2.8 years in 1997 and 5 years in 1996.
Activity in the Company's stock option plan is as follows:
1997 1996 1995
---------------------------- ------------------------------ -------------------------
Weighted- Weighted- Weighted-
Shares Average Shares Average Shares Average
Fixed Options (000's) Exercise Price (000's) Exercise Price (000's) Exercise Price
- ------------------------------------ --------- ---------------- ----------- ---------------- --------- ---------------
Outstanding at beginning of year 2,393 $ 2.75 1,924 $ 0.13 1,004 $ 0.06
Granted ............................ 1,346 6.69 1,849 3.98 1,916 .14
Exercised .......................... (255) 0.31 (1,092) 0.18 (334) .09
Forfeited .......................... (577) 4.19 (288) 2.83 (662) .06
----- ------ -----
Outstanding at end of year ......... 2,907 4.50 2,393 2.75 1,924 .13
===== ====== =====
Options vested at year-end ......... 641 2.64 309 0.22 200 .06
===== ====== ===== =======
Weighted-average fair value of
options granted during the year $ 6.70 $ 2.29 .08
======== ======== =======
50
BROADVISION, INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements -- (Continued)
December 31, 1997, 1996 and 1995
The following table summarizes stock options outstanding as of December 31,
1997:
Options Outstanding Options Vested
----------------------------------------------------- -------------------------------
Number Weighted-Avg. Number
Outstanding Remaining Exercisable
Range of at 12/31/97 Contractual Life Weighted-Avg. at 12/31/97 Weighted-Avg.
Exercise Prices (000's) In Years Exercise Price (000's) Exercise Price
- ----------------- ------------- ------------------ ---------------- ------------- ---------------
$0.06 - $0.20 695 7.47 $ 0.16 281 $ 0.16
0.40 - 5.31 406 8.42 2.51 141 1.54
5.50 - 5.75 644 8.19 5.52 80 5.53
6.00 - 7.00 620 8.94 6.82 108 6.92
7.13 - 8.50 542 9.14 7.72 31 7.58
----- ---
$0.06 - $8.50 2,907 8.39 $ 4.50 641 $ 2.64
===== ===
The Company grants options outside of the Company's stock option plan. A
summary of options outside of the plan is presented below:
1997 1996 1995
---------------------------- ---------------------------- -------------------------
Weighted- Weighted- Weighted-
Shares Average Shares Average Shares Average
Performance Options (000's) Exercise Price (000's) Exercise Price (000's) Exercise Price
- ------------------------------------ --------- ---------------- --------- ---------------- --------- ---------------
Outstanding at beginning of year 711 $ 3.52 20 $ 0.20 -- --
Granted ............................ 154 5.50 727 3.46 20 .20
Exercised .......................... -- -- (20) 0.20 -- --
Forfeited .......................... (70) 0.80 (16) 0.80 -- --
--- --- --
Outstanding at end of year ......... 795 4.07 711 3.52 20 .20
=== === ==
Options vested at year-end ......... 395 3.60 197 4.35 -- --
=== ===
Weighted-average fair value of
options granted during the year $ 5.50 $ 2.03 .12
======== ======== ===
The 795,000 options outstanding have exercise prices between $0.80 and
$7.00 and a weighted-average contractual life of 7.25 years. As of December 31,
1997, 12,000 shares were subject to repurchase at $0.20.
Employee Stock Purchase Plan
The Board of Directors has reserved 600,000 shares for issuance under the
Company's Employee Stock Purchase Plan (the "Purchase Plan"). The Purchase Plan
permits eligible employees to purchase common stock equivalent to a percentage
of the employee's earnings, not to exceed 15%, at a price equal to 85% of the
fair market value of the common stock at dates specified by the Board of
Directors as provided in the Plan.
Under SFAS No. 123, compensation cost is recognized for the fair value of
the employees' purchase rights, which was estimated using the Black-Scholes
model with the following assumptions in 1997 and 1996: an expected life of seven
months; expected volatility of 67% and 60%, respectively; risk-free interest
rate of 5.05% and 6.5%, respectively; and no dividend yield. The
weighted-average fair value of the purchase rights granted in 1997 and 1996 was
$2.16 and $2.61, respectively.
51
BROADVISION, INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements -- (Continued)
December 31, 1997, 1996 and 1995
Pro Forma Disclosure
Had compensation cost for the Company's stock option plan and stock
purchase plan been determined consistent with SFAS No. 123, the Company's
reported net loss of $7,373,000 and net loss per share of $0.36 for the year
ended December 31, 1997, would have been increased to $9,551,000 and $0.47,
respectively, on a pro forma basis. The Company's reported net loss of
$10,145,000 and net loss per share of $0.54 for the year ended December 31,
1996, would have been increased to $11,270,000 and $0.60, respectively, on a pro
forma basis. The effects of these pro forma disclosures are not representative
of the pro forma effects on future periods because they only include options
granted in 1995 and subsequent years.
NOTE 9--EMPLOYEE BENEFIT PLAN
In November 1994, the Company adopted a 401(k) employee retirement plan
under which eligible employees may contribute up to 20% of their annual
compensation, subject to a limitation of $9,500 in 1997. Employees vest
immediately in their contributions and earnings thereon. The plan allows for,
but does not require, Company matching contributions. As of December 31, 1997,
the Company has not made any such matching contributions.
NOTE 10--GEOGRAPHIC AND SIGNIFICANT CUSTOMER INFORMATION
The Company's export sales to Europe represented 40.0% and 30.1% of total
revenues in 1997 and 1996, respectively, and export sales to Asia Pacific
represented 12.4% and 29.4% of total revenues in 1997 and 1996, respectively.
During 1995, the Company was in its development stage and had no significant
export revenues.
In 1997, approximately 11% of the Company's revenues were attributable to
one customer. In 1996 and 1995, approximately 10% and 93% of the Company's
revenues were attributable to two different customers, respectively. As of
December 31, 1997, two customers accounted for 19.4% and 11.8% of total trade
accounts receivable, respectively.
NOTE 11--SUBSEQUENT EVENTS
On March 1, 1998, the Company finalized an arrangement dated February 5,
1998 with its commercial bank to approve an increase in its existing term debt
credit facility to provide for up to $4,250,000 in total borrowings (total
outstanding as of December 31, 1997 of $2,651,000). In addition, the bank
approved a $2,250,000 accounts receivable line of credit to facilitate working
capital financing.
On March 4, 1998, the Company filed a registration statement on Form S-3 in
connection with a proposed public offering of the Company's Common Stock. The
registration statement covers 3,795,000 shares of Common Stock of which
3,000,000 shares are being sold by the Company, 300,000 shares are being sold by
certain stockholders of the Company and 495,000 shares are issuable upon
exercise of the underwriters' over-allotment option.
52
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
Not applicable
PART III
Certain information required by Part III is incorporated by reference in
this Report from the Company's definitive proxy statement for its 1997 Annual
Meeting of Stockholders to be filed pursuant to Regulation 14A (the "Proxy
Statement").
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information for the Company's directors and on compliance with Section
16(a) of the Securities Exchange Act of 1934, as amended required by this Item
is incorporated by reference from the Proxy Statement. The information for the
Company's executive officers required by this Item appears under the caption
"Executive Officers and Key Personnel" at Item 1 of this report.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item is incorporated by reference from the
Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item is incorporated by reference from the
Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item is incorporated by reference from the
Proxy Statement.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) The following documents are filed as a part of this Report.
1. Consolidated Financial Statements. The following Consolidated
Financial Statements of the Company are included at Part II, Item
8, of this Annual Report on Form 10-K.
Independent Auditors' Report
Consolidated Balance Sheets as of December 31, 1997 and 1996
Consolidated Statements of Operations for the three years in the
period ended December 31, 1997
Consolidated Statements of Stockholders' Equity for the three
years in the period ended December 31, 1997
Consolidated Statements of Cash Flows for the three years in the
period ended December 31, 1997
Notes to Consolidated Financial Statements
2. Financial Statement Schedule. Attached to this Annual Report on
Form 10-K.
Report on Financial Statement Schedule and Consent of Independent
Auditors
Schedule II -- Valuation and Qualifying Accounts
3. Exhibits. The exhibits listed on the accompanying Index to
Exhibits immediately following the consolidated financial
statement schedule are filed as part of, or incorporated by
reference into, this Annual Report on Form 10-K.
(b) Reports on Form 8-K.
No reports on Form 8-K were filed by the Company during the quarter
ended December 31, 1997.
53
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized, in Redwood City, State
of California, on this 6th day of March 1998.
BroadVision, Inc.
By: /s/ Pehong Chen
--------------------------------
Pehong Chen
Chairman of the Board and
Chief Executive Officer
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Pehong Chen and Randall C. Bolten his
attorney-in-fact, with the power of substitution, for him in any and all
capacities, to sign any amendments to this Report on Form 10-K, and to file the
same, with exhibits thereto and other documents in connection therewith, with
the Securities and Exchange Commission, hereby ratifying and confirming all that
the said attorneys-in-fact, or his substitute or substitutes, may do or cause to
be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Signature Title Date
- ----------------------------- ------------------------------ --------------
/s/ Pehong Chen Chairman of the Board and March 6, 1998
- --------------------------- Chief Executive Officer
Pehong Chen (Principal Executive Officer)
/s/ Randall C. Bolten Vice President, Operations, March 6, 1998
- --------------------------- Chief Financial Officer
Randall C. Bolten (Principal Financial
and Accounting Officer)
/s/ David L. Anderson Director March 6, 1998
- ---------------------------
David L. Anderson
/s/ Yogen K. Dalal Director March 6, 1998
- ---------------------------
Yogen K. Dalal
/s/ Koh Boon Hwee Director March 6, 1998
- ---------------------------
Koh Boon Hwee
/s/ Carl Pascarella Director March 6, 1998
- ---------------------------
Carl Pascarella
54
REPORT ON FINANCIAL STATEMENT SCHEDULE AND
CONSENT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders
BroadVision, Inc.
The audits referred to in our report dated January 28, 1998, except as to note
11, which is as of March 4, 1998, included the related financial statement
schedule as of December 31, 1997 and 1996, and for each of the years in the
three-year period ended December 31, 1997, are included in the Annual Report on
Form 10-K for the year ended December 31, 1997. The financial statement
schedule is the responsibility of the Company's management. Our responsibility
is to express an opinion on the financial statement schedule based on our
audits. In our opinion, the financial statement schedule, when considered in
relation to the basic consolidated financial statements taken as a whole,
presents fairly, in all material respects, the information set forth therein.
We consent to incorporation by reference in the registration statements (No.
333-3844) on Form S-8 and (No. 333-47339) on Form S-3 of BroadVision Inc. of
our reports dated January 28, 1998, except as to note 11, which is as of March
4, 1998, relating to the consolidated balance sheets of BroadVision, Inc. and
subsidiaries as of December 31, 1997 and 1996, and the related consolidated
statements of operations, stockholders' equity and cash flows for each of the
years in the three-year period ended December 31, 1997, and the related
schedule, which report appears in the December 31, 1997, Annual Report on Form
10-K of BroadVision, Inc.
KPMG PEAT MARWICK LLP
Mountain View, California
March 5, 1998
55
BROADVISION, INC. AND SUBSIDIARIES
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
(in thousands)
Balance at Charged to
Beginning Costs and Balance at
Description of Period Expenses Deductions(1) End of Period
- ----------- --------- -------- ------------- -------------
Allowance for doubtful accounts
Year Ended December 31, 1995 ............................. $ -- $ -- $ -- $ --
====== ====== ===== ====
Year Ended December 31, 1996 ............................. $ -- $ 196 $ 5 $191
====== ====== ===== ====
Year Ended December 31, 1997 ............................. $ 191 $ 515 $ 35 $671
====== ====== ===== ====
(1) Represents net charge-offs of specific receivables.
56
BROADVISION, INC.
ANNUAL REPORT ON FORM 10-K
DECEMBER 31, 1997
INDEX TO EXHIBITS
Exhibit Description
- ------------------ -------------------------------------------------------------
3.1* Amended and Restated Certificate of Incorporation.
3.2* Amended and restated Bylaws.
4.1* References are hereby made to Exhibits 3.1 to 3.2.
4.3* Second Amended and restated Investor's Rights Agreement dated
April 15, 1997 among the Company and certain of its
stockholders.
10.1*(1) Form of Indemnity Agreement between the Company and each of
its directors.
10.2*(1) Equity Incentive Plan (the "Equity Incentive Plan").
10.3*(1) Form of Incentive Stock Option under the Equity Incentive
Plan.
10.4*(1) Form of Nonstatutory Stock Option under the Equity Incentive
Plan.
10.5*(1) Form of Nonstatutory Stock Option (Performance-Based).
10.6*(1) 1997 Employee Stock Purchase Plan ( the "Employee Stock
Purchase Plan").
10.7*(1) Employee Stock Purchase Plan Offering (Initial Offering).
10.8*(1) Employee Stock Purchase Plan Offering (Subsequent Offering).
10.9* Master Equipment Lease Agreement dated May 23, 1997 between
the Company and Lighthouse Capital Partners, L.P.
10.10*+ Terms and Conditions dated January 1, 1997 between IONA
Technologies LTD and the Company.
10.11* Series D Preferred Stock Option Agreement dated February 27,
1997 between the Company and Pehong Chen.
10.12* Standard Office Lease dated February 8, 1996 between the
Company and GVE Distel Associates, a California General
Partnership.
10.13*(1) Stock Option Plan.
10.14*(1) Form of Incentive Stock Option under the Stock Option Plan.
10.15*(1) Form of Nonstatutory Stock Option under the Stock Option Plan.
10.16* Lease dated February 5, 1997 between the Company and
Martin/Campus Associates, L.P.
10.17** Loan and Security, dated July 2, 1997, between Silicon Valley
Bank and the Company.
10.18*** First Amendment to Loan and Security Agreement, dated as of
February 5, 1998 between the Company and Silicon Valley Bank.
21.1 Subsidiaries of the Company.
23.1 Consent of KPMG Peat Marwick LLP. Reference is hereby made to
page 55.
24.1 Power of Attorney. Reference is hereby made to page 54.
27.1 Financial Data Schedule.
- ------------
* Incorporated by reference to the Company's Registration Statement on
Form S-1 filed on April 19, 1996, as amended on May 9,1996, May 29,
1996 and June 17, 1996.
** Incorporated by reference to the Company's 10-Q for the quarter ended
September 30, 1997 filed on November 12, 1997.
*** Incorporated by reference to the Company's Registration Statement on
Form S-3 filed on March 4, 1998.
(1) Represents a management contract or compensatory plan or arrangement.
+ Confidential treatment requested.