QuickLinks-- Click here to rapidly navigate through this documentUNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549FORM 10-K
|X|FOR ANNUAL
REPORTAND TRANSITION REPORTS PURSUANT TOSECTIONSECTIONS 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the Year Ended December 31, 2000 OR |_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
(Mark one)
ý
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Year Ended December 31, 2002
OR
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from toCommission File Number 0-28252
BROADVISION, INC.
(Exact name
(Exact Name ofregistrantRegistrant asspecifiedSpecified in itscharter) Delaware 94-3184303 -------- ---------- (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 585 Broadway, Redwood City, California 94063 - -------------------------------------- ----- (Address of principal executive offices) (Zip Code) (650) 261-5100 -------------- Registrant's telephone number, including area codeCharter)
Delaware
(State or Other Jurisdiction of Incorporation or Organization)94-3184303
(I.R.S. Employer Identification No.)
585 Broadway, Redwood City, California
(Address of principal executive offices)
94063
(Zip Code)
(650) 542-5100
(Registrant's telephone number, including area code)Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange which registered ------------------- --------------------------------------NoneNoneSecurities registered pursuant to Section 12(g) of the Act: Common Stock, $.0001 par value
------------------------------ (Title
(Title of Class)Indicate by check mark whether the
registrantregistrant: (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|ý No|_|oIndicate 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.
|_| BasedoIndicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2). Yes o No ý
As of June 30, 2002, based on the closing sales price as quoted by the Nasdaq, 26,367,453 shares of
5.2188 on March 28, 2001, theCommon Stock, having an aggregate market value ofthe voting stockapproximately $73,565,194 were held bynonaffiliatesnon-affiliates. For purposes of theregistrant was $1,142,674,573.above statement only, all directors and executive officers of the registrants are assumed to be affiliates.As of March
28, 2001,20, 2003, registrant hadoutstanding 272,101,53132,477,569 shares ofCommon Stock.common stock outstanding.DOCUMENTS INCORPORATED BY REFERENCE
Parts of the Proxy Statement for Registrant's
20012003 Annual Meeting of Stockholders to be held May24, 200128, 2003 are incorporated by reference in Part III of this Form 10-K Report.
BROADVISION, INC.
ANNUAL REPORT ON FORM 10-K
YEAR ENDED DECEMBER 31,20002002
TABLE OF CONTENTSPage No. -------- Part I Item 1. Business...............................................................3 Item 2. Properties............................................................14 Item 3. Legal Proceedings.....................................................14 Item 4.
Part I Item 1. Business 3 Item 2. Properties 15 Item 3. Legal Proceedings 15 Item 4. Submission of Matters to a Vote of Security Holders 16 Part II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters 17 Item 6. Selected Consolidated Financial Data 18 Item 7. Management's Discussion and Analysis of Financial Condition and Results of
Operations19 Item 7A. Quantitative and Qualitative Disclosure About Market Risk 52 Item 8. Financial Statements and Supplementary Data 54 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure97 Part III Item 10. Directors and Executive Officers of the Registrant 97 Item 11. Executive Compensation 97 Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters 98 Item 13. Certain Relationships and Related Transactions 98 Item 14. Controls and Procedures 98 Part IV Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K 98 SIGNATURES 100 BroadVision®, BroadVision One-to-One® and iGuide® are trademarks and registered trademarks in the United States of
Matters to a VoteAmerica and other countries ofSecurity Holders...................14 Part II Item 5. Market for Registrant's Common EquityBroadVision andRelated Stockholder Matters.15 Item 6. Selected Consolidated Financial Data..................................16 Item 7. Management's DiscussionCommerce™, Enterprise™, Command Center™, Portal™, One-to-One Content™, Publishing Center™, Deployment Center™, Integration Services™, Multi-Touchpoint Services™, QuickSilver™ andAnalysisLiveCycle™, are trademarks ofFinancial Condition and Results of Operations.................................................17 Item 7A. Quantitative and Qualitative Disclosure About Market Risk............35 Item 8. Financial Statements and Supplementary Data...........................38 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure..................................................56 Part III Item 10. Directors and Executive Officers of the Registrant...................57 Item 11. Executive Compensation...............................................58 Item 12. Security Ownership of Certain Beneficial Owners and Management.......58 Item 13. Certain Relationships and Related Transactions.......................58 Part IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8.K.....59 SIGNATURES....................................................................60BroadVision.2
CAUTIONARY STATEMENT PURSUANT TO THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
Certain statements set forth or incorporated by reference in this Form 10-K, as well as in our Annual Report to Stockholders for the year ended December 31,
2000,2002, constitute "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Words such as`believes""believes", "anticipates", "expects", "intends", "estimates" and similar expressions are intended to identify forward-looking statements, but are not the exclusive means of identifying such statements. These statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements, or industry results, to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. Such factors include, but are not limited to, those risk factors set forth under "Risk Factors" and elsewhere in this Form 10-K.We expressly disclaim any obligation to update or publicly release any revision to these forward-looking statements after the date of this Form 10-K.
Overview and Industry Background................................4 The BroadVision Solution........................................4 BroadVision Business Strategies.................................4 Extend and Expand our Product Portfolio.......................4 Develop Targeted Application Solutions........................4 Enhance our Service and Support Infrastructure................5 Expand and Leverage Alliances with Key Business Partners......5 Support Diverse Customer Business Models......................5 Grow Our International Presence...............................5 BroadVision Solutions...........................................5 BroadVision Demand Suite......................................6 BroadVision Workplace.........................................6 BroadVision Supply............................................6 Enterprise Relationship Management Tools......................7 Key Capabilities of BroadVision's Applications................7 Other Products................................................8 Product Development...........................................8 BroadVision Global Services.....................................8 Strategic Services............................................8 Technical Services............................................8 Content and Creative Services.................................8 Technical Support Services....................................9 Education Services............................................9 Client Services, Project and Program Management...............9 Partner Services..............................................9 Strategic Alliances.............................................9 Platform Alliances..............................................9 Customers and Markets..........................................10 Sales and Marketing............................................11 Competition....................................................12 Intellectual Property and Other Proprietary Rights.............12 Employees......................................................13 Executive officers...........................................13
Overview and Industry Background 4 The BroadVision Solution 4 BroadVision Business Strategies 5 Extend and Expand our Product Portfolio 5 Develop Targeted Application Solutions 5 Enhance our Service and Support Infrastructure to Help Customers Maximize Their Return on Investment 5 Leverage Alliances with Key Business Partners 5 Support Diverse Customer Business Models 5 BroadVision Solutions 6 BroadVision Portal Applications 6 BroadVision Portal Framework 6 BroadVision Portal Platform 7 Key Capabilities of BroadVision's Solutions 8 Other Products 8 Product Development 9 BroadVision Global Services 9 Consulting Services 9 Support Services 9 Training 10 Delivery Methodology 10 IGuide 10 Strategic Alliances 10 Platform Partners 10 System Integrators and Consulting Partners 11 Application Service Providers 11 Technology Partners 11 Customers and Markets 11 Sales and Marketing 12 Competition 13 Intellectual Property and Other Proprietary Rights 14 Reverse Stock Split 14 Employees 14 Executive officers 15 3
Overview and Industry Background
BroadVision developsWe develop, market, and
sells an integrated suitesupport enterprise business portal applications that enable companies to unify their e-business infrastructure and conduct both interactions and transactions with employees, partners, and customers through a personalized self-service model that increases revenues, reduces costs, and improves productivity.As of
packaged applications for conducting e-business interactions, transactions and services. Global enterprisesDecember 31, 2002, more than 1,200 companies and government entitiesuse thesearound the globe used our applications tosell, buy, and exchange goods, servicesfacilitate their portal-based commerce and informationover the Web and on wireless devices. Theaccess initiatives.BroadVision
e-business application suite enables a corporation to establish and sustain high-yield relationships with customers, suppliers, partners, distributors, employees and other constituents of the extended enterprise. Our consulting, education and support services in more than 34 countries, supported by over 190 partner organizations worldwide, transform these applications into business value for our customers. BroadVision, whichwas founded in 1993 and has been a publicly tradedcompanycorporation since1996, has more than 1,100 customers1996. BroadVision pioneered web-based e-commerce andis a component stockwas among the first to offer pre-integrated, packaged applications to power enterprise business portals.General information about us can be found at www.broadvision.com under the "Company" link. Our annual report on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K, as well as any amendments or exhibits to those reports, are available free of charge through our website as soon as reasonably practicable after we file them with, or furnish them to, the SEC.
The BroadVision Solution
BroadVision's enterprise business portal applications allow organizations to unify and extend their key business applications, information, and business processes by taking advantage of the
Standard & Poor's 500 index. IDC rankspower of the web and new wireless and mobile devices to allow customers, partners, and employees to do business on their own terms, in a personalized and collaborative way. BroadVisionassolutions allow multiple constituents to serve themselves from anywhere, at anytime, through any web device. BroadVision enterprise portal applications enable organizations to create business value by transforming theworld's leading provider of e-commerce software applications (International Data Corp., E-Commerce Software Applications Market Forecast and Analysis, 2000-2004). The BroadVision Solution The BroadVision e-business application suite allows businesses to tailor Web and wireless content to the needs and interests of individual users by personalizing contentway they do business—moving business interactions and transactionsonfrom areal-time basis. Thesemanual, human-assisted paradigm to an automated, personalized self-serviceapplications have demonstratedmodel thatthey can enhance customer satisfactionenhances growth, reduces costs andloyalty, increase business volume and brand awareness, reduce costs to service customers and execute transactions, and enhance employee productivity and retention.improves productivity.Our products enable companies to organize dynamic profiles of
Webweb and wireless users from volunteered data and observed behavior, deliverhighly specializedpersonalized contentin response to these profilesand execute transactions securely. Business managers are able to modify business rules and content in real time, offering a personalized experience to each visitor. Because oftheour commitment to open standards and open architecture,of ourBroadVision applicationsthey are easily integratedintegrate with our customers' existing systems andeasily expandedexpand as our customers' needs and businesses grow.Supporting this application infrastructure, as of December 31, 2002, are more than
190100 partner firms around the world who are working to ensure our joint customers' success through complementary technology, applications, tools and services offerings that extend and enhance BroadVision customers'BroadVisionimplementations.We believe our products
enhanceimprove our customers' revenue opportunities by enabling them to establish more effective and efficient"one-to-one"one-to-one relationships with their customers and business partners. Web and wireless users are engaged by highly personalized real-time interactions,areable to transact business securely andareencouraged to remain online and make return visits. Our applications also improve the cost-effectiveness of one-to-one relationship management by enabling non-technical managers to modify business rules and content in real time and by helping to reducecoststhe cost of customer acquisition and retention, business development,andtechnical supportas well asand employee workplace initiatives.In addition, theBecause we provide pre-integrated, packagedsolution nature of our products decreases our customers'solutions, time to deployment is shorter andallows themcustomers are able toeasilymanage andexpandmaintain theirWebweb and wirelessapplication usageapplications in a cost-effective manner.4
BroadVision Business Strategies
Our objective is to be the leading provider of
self-service e-businessenterprise portal applications.In order toTo achieve this objective, we have adopted the following keystrategic elements:strategies:Extend and Expand our Product Portfolio.
In order toTo enable our customers to effectively manage all of their keye-business processes,commerce and information access initiatives, we have focused our product development and marketing efforts in the following areas:o Continuing to enhance
- •
- enhancing our core technology through
heavyinvestment in research and development activities;o Incorporating- •
- leveraging industry-leading application components into our products; and
o Partnering- •
- partnering with leading technology, platform and
platformservices providers.Develop Targeted Application Solutions. We were among the first companies to introduce packaged
Webweb-based applications for electronic commerce, financial services and knowledge management. We arenowextending our"bestbest ofbreed"breed enterprise portal applications with new applications designed for specific vertical industries. These applications are being developed in conjunction with industry leaders, system integration firms and key technology vendors.4Enhance our Service and Support
Infrastructure. We have changed the name of our services organizationInfrastructure to Help Customers Maximize Their Return on Investment. BroadVision Global Servicesor BVGS, to more accurately reflect the expanding nature of the services provided to our clients and partners. BVGS(BVGS) provides a broad range of consulting, training and technical support services for all of our products. This organization provides business application and technical expertise, along with extensive product knowledge, to complement our products and provide solutions that meet customer business requirements. By using BVGS, customers and business partners are able tobuild customizedcustomize their application solutions to maximize the benefits ofone-to-one relationship management and self-service.our enterprise self-service model.We are committed to extending the service offerings and the resources available to our customers and have implemented programs such as an online BroadVision University,
"train-the-trainer"a train-the-trainer program and third-party educational centers to extend the breadth and depth of our service offerings. We have also tiered our technical support offerings toofferprovide standard, enterprise and personalized support programs for our customers.Expand andLeverage Alliances with Key Business Partners. We partner with leading systems integrators, technology partners, value-added resellers (VARs), application service providers
or ASPs, value-added resellers, or VARs,(ASPs), software partners and hardware platform partners. These alliances provide additional sales and marketing channels for our products, enable us to more rapidly incorporate additional functions andplatformstechnologies into our products and facilitate the successful deployment of customer applications.To accelerate
the acceptanceadoption of our products, we have developed the BroadVision Partner Program. ThisPartner Programprogram is a comprehensive, structured partnership relationship designed to drive effectivepartneralliances and ensurethesuccessof these relationshipsby jointly identifying and pursuing specific business objectives. The BroadVision Partner Program operates within a framework of proactive business planning, revenue targeting,initiatives,structured sales enablement and enhanced BroadVision training as well as marketing and sales engineering support. ThePartner Programpartner program is intended to help our partners successfully develop, promote, and sell their services and solutions in close coordination with ournewly expanded network ofsales engineering, channel and partner marketing and professionalconsulting services. The Partner Program assists our partners in growing their businesses by incorporating our core competency, personalizing interactions and transactions with a wide range of constituencies, into a focused execution matrix.services teams.Support Diverse Customer Business Models. We
intendare committed tocontinue our commitment to flexibility byoffering our customerschoices formaximum flexibility in the deployment of our applications. Customers can choose to deploy our applications using their own in-house technical resources,or can engageengaging with BVGS,to assist with implementation. Customers can also choose to workworking with a BroadVision-trained and certified systems integrator or distribution partner, orwithapplying a combination of our resources and those of apartner. Another option is for a customerpartner toutilize an ASP who hosts the customer's BroadVision application deployment at a remote facility and is responsible for its ongoing service and support. Grow Our International Presence. To capitalize on the emergence of the Web as a global network, we have established, and will continue to add to, our worldwide distribution capabilities. Our partners include multinational systems integrators, as well as partnersassist witha single-country scope of operations. Our product architecture is designed to support multiple languages, multiple currencies and remote, distributed publishing. Ourimplementation.5
The strategies described above involve substantial risks. We may be unable to implement our strategies and
ourthese strategies, even if implemented, may not lead to successful achievement of ourobjectives.objective. If we are unable to implement our strategies effectively, our business may beharmed. We will continueadversely affected.BroadVision Solutions
BroadVision provides a complete enterprise portal application suite for enabling large-scale e-business. All BroadVision products reflect the principles of excellence that drive our company's culture: adherence to
placeopen standards, scalability and performance, data and transaction security, high-powered functionality based on expert business logic and rigorous testing for quality assurance.BroadVision Portal Applications
BroadVision portal applications are a set of cross-industry and industry-specific applications, designed to web-enable specific business processes, leveraging the unique capabilities of a pre-integrated portal framework.
BroadVision One-To-One® Commerce™
BroadVision One-To-One Commerce is a cross-industry portal application for cost-effectively automating and managing the entire sales process over the web. BroadVision One-To-One Commerce combines personalized, multi-channel, direct sales capabilities with the flexibility and collaboration capabilities of BroadVision's integrated portal framework. BroadVision® eMarketing™ is an
emphasis on establishing additional alliances as new technologiesoptional application module that gives business managers the ability to manage closed loop marketing campaigns directly within the BroadVision One-To-One Commerce application. The eMarketing module enables business users to create, execute andstandards emerge, although we may be unable to establish or maintain certain alliances.track personalized marketing campaigns through a graphical user interface.BroadVision
Solutions We offer enterprise-class solutions to connectOne-To-One® Portal™BroadVision One-To-One Portal is a cross-industry portal application for deploying personalized business-to-employee, business-to-business and business-to-consumer portals. It allows companies to
their customers, suppliers,extend enterprise information, resources and business processes to employees, partners andemployees. These solutions enable companies to maintaincustomers in a unified andexpand existing relationships in an online environment via a single, integrated e-business platform.collaborative way.BroadVision® One-To-One® Content™
BroadVision
One-to-One(R) Enterprise is the application system on top of which all BroadVision solutions are built.One-To-OneEnterprise provides a secure and flexible, standards-based architecture that supports large volume transactions, large scale catalogs, distributed content management, enterprise system integration and dynamic personalization. It is based on open standards such as CORBA, Java and XML. 5Ours solution offerings fall into three major categories: o The BroadVision Demand Suite enables one-to-one marketing, automates complex transactions and personalizes self-service for customers. o BroadVision Business Commerce facilitates online trade between business partners, whether they are merchants, resellers, distributors or manufacturers. Large-scale business-to-business sellers such as W.W. Grainger, General Electric and Toshiba use BroadVision Business Commerce to create e-businesses that integrate with structured back-end business system . o BroadVision Retail Commerce: A highly scalable, consumer-focused application used by Fortune 500 retailers such as Circuit City, Sears Roebuck and The Home DepotContent allows organizations to maximize theprofitability and efficiency of the online retailing channel. o BroadVision MarketMaker attracts and retains buyers and suppliers by focusing on their specific business needs. It facilitates the formation of trading communities with automated order processing, attribute-based request for quotes, or RFQs, sophisticated catalog management, dynamic auctioning and robust analytic and reporting capabilities. o BroadVision Finance combines business rules and intelligent matching to dynamically customize content, news, quotes and service recommendations according to a customer's profile or a visitor's behavior. These advanced personalization capabilities can result in more transactions, increased opportunities for cross-selling and up-selling and greater customer loyalty. o BroadVision Billing brings electronic bill payment and delivery capabilities to e-commerce and marketing Web sites. It enables companies that want to personalize interactions with customers during their ongoing billing cycles to streamline routine billing practices while gaining knowledgevalue of theircustomers' needs, preferencescontent assets by delivering personalized content to customers, employees, andbuying activities usingpartners exactly theWeb. oway they want it via web, wireless or print. BroadVision One-To-One Content effectively manages all types of business content throughout its entire lifecycle from design, creation, and management through deployment and distribution.BroadVision Portal Framework
The BroadVision
Workplace offering enablesportal framework unifies and integrates the appropriate technologies necessary for companies toshare information via an enterprisewide portal and decrease the cost of procuring indirect goods via a centralized e-procurement site. odeploy content-rich, process-aware, user-centric portals.BroadVision
Information Exchange PortalOne-To-One® Enterprise™BroadVision One-To-One Enterprise is a
ready-to-usescalable, reliable and mature applicationfor building powerfulplatform that enables organizations to deploy and manage enterpriseinformation portals, enabling businesses to reach customers, partners, suppliersportal applications. It includes a system of6
integrated tools that support personalized interactions and
employeestransactions over the web and througha single, personalized gateway. It allows users to perform sophisticated publishing, access relevant information, perform analysis, manage business processes and collaborate across organizational boundaries through user-defined Web pages. o BroadVision Procurement is a complete, Web-based self-service purchasing system for maintenance, repair and operations, or MRO, goods. It simplifies purchasing administration and facilitates business planning through advanced administrative, analytical and reporting tools. o The BroadVision Supply offering provides businesses with a robust online marketplace for buying and selling goods. o BroadVision MarketMaker, as described above. o BroadVision Information Exchange Portal, as described above. 6These offerings are underpinned by a set of common enterprise relationship management tools and capabilities, including the following: oother wireless devices.BroadVision® Command Center™
BroadVision Command Center is a
toolrules-based personalization system thatallows managersenables non-technical users toadd, altertailor content to the needs and interests of different users. For example, communities of web site visitors can be defined by similar demographics, transaction levels ordelete informationother attributes, making the web experience more relevant andmanage relationshipscompelling for each user.BroadVision® Deployment Center™
BroadVision Deployment Center simplifies and standardizes the process of moving enterprise portal assets from development environments to staging and production servers.
BroadVision® Integration Services™
BroadVision Integration Services is an integration solution that enables BroadVision applications to connect directly to backend systems, unlocking valuable data and business processes for use by everyone in the extended enterprise.
BroadVision® Multi-Touchpoint Services™
BroadVision Multi-Touchpoint Services extend the reach of BroadVision-powered web sites to touchpoints across the
extended enterprise. It enables a personalized, dynamicenterprise including PDAs, web-enabled phones, ATMs, kiosks, call centers, voice channels, andinteractive experience for site visitors. o BroadVision Design Center offers Web authors and Internet application developers faster time-to-market by shortening the site development cycle. o BroadVision One-To-Oneother similar devices.BroadVision® Publishing
is a powerful tool for creating, publishing, updating and versioning a company's electronic assets. oCenter™BroadVision Publishing Center is
an easy-to-usea web-based toolwith a Web-based interface for managing distributed, collaborative online content development.that allows non-technical business users to publish and edit content. It allows a distributed team ofnon-technicalcontent experts to manage every aspect of site content, including creation, editing, staging, production and archiving.oBroadVision® QuickSilver™
BroadVision
InstantQuickSilver is a full-featured software package for creating and publishing long, complex documents in multiple output formats (including HTML, PDF, Postscript and ASCII) across different platforms and networks. The XML Publisherallows casual content contributorsextends the power and versatility of QuickSilver toleverage the functionality ofinclude XML file interchange support.BroadVision
Publishing Center without extensive training. It uses customized, business-specific forms that permit easy data entry and are usually specific to a content type. Key Capabilities of BroadVision's Applications We designed all of thePortal PlatformOpen Standards-Based Architecture
BroadVision solutions
for use in mission-critical, high-performance environments by companies with demanding architecture, deployment and maintenance requirements. Some of the key capabilities of the applications include: o Ease of use--tools designed with graphical user interfaces allowing non-technical business managers to modify business rules and content in real time. o Scalability--robust embedded application server functionality allows BroadVision One-To-One applications to support large numbers of concurrent customers and transactions. o Flexible integration--a comprehensive set of APIs allows integration with a variety of legacy business systems such as Oracle, PeopleSoft, SAP, and custom mainframe systems. o Open standards-based architecture--object-orientedare built on object-oriented application code written inC++ andJ2EE programming environments, including Java and JavaScript, and where appropriate C++, which allows developers and system integrators to use, integrate, modify, adapt or extend the applications with minimal impact on other areas to create a rapidly customized product that meets specific business requirements.Support for the CORBA standard for object-oriented computing enables high-volume performance, flexible application deployment and easy integration with
otherthird-party or legacy applications. Our applications fully support XML, which is the emerging standard for managing and exchanging data between e-business systems as well as for re-purposing and sending information to wireless devices.7
In addition, we use other widely accepted standards in developing our products, including Web Services, Structured Query Language (SQL) for accessing relational database management systems; Common Gateway Interface (CGI) and Hypertext Transfer Protocol (HTTP) for
Webweb access; Netscape Application Programming Interface (NAPI) for access to Netscape'sWebweb servers; Secure Socket Layer (SSL) for secure transmissions over networks; and the RC2 and MD5 encryption algorithms supplied by RSA.Our applications can be operated in conjunction with relational database management systems provided by IBM Corporation, Informix, Microsoft, Oracle and Sybase.
oSupported application servers include WebLogic, WebSphere and SunOne.Key Capabilities of BroadVision's Solutions
We have designed all BroadVision portal applications for use in mission-critical, high-performance environments by companies with complex architecture, and demanding deployment and maintenance requirements. Some of the key capabilities of BroadVision applications include:
- •
- Scalability—Advanced load balancing and multi-layered caching allow BroadVision applications to support large numbers of concurrent customers and transactions.
- •
- Personalization—BroadVision's advanced personalization technology, including session-and event-based observations and transaction information, provide a better understanding of site visitors and allow our customers to dynamically tailor content to them.
- •
- Ease of use—BroadVision applications and tools are designed with graphical user interfaces that allow non-technical business managers to modify business rules and content in real time.
- •
- Unification—BroadVision's robust portal framework pre-integrates the technologies necessary to deploy content-rich, process-aware, user-centric portals, including data integration, business logic, process logic and user experience.
- •
- Legacy integration—A comprehensive set of application programming interfaces (APIs) allows for rapid, seamless integration with a variety of legacy business systems such as Oracle, PeopleSoft, SAP and custom mainframe systems.
- •
- Secure transaction
processing--secureprocessing—BroadVision applications provide secure handling of a wide range ofcommercecommercial and financial services transactionsincludesincluding order pricing and discount/incentive handling, tax computation, shipping and handling charges, payment authorization, credit card processing, order tracking, news and stock feeds through a combination of built-in functionality and integration withotherthird-party products.o Multiplatform availability--BroadVision One-To-One Enterprise and its associated- •
- Multi-platform availability—BroadVision applications are
available onoptimized for a variety of hardware and software platforms including IBM AIX, Sun Solaris, Microsoft Windows NT and Hewlett-Packard's HP-UX. Supported databases include Oracle, Sybase, Informix, IBM and Microsoft SQL Server.o Multilingual/Multicurrency--availability of content displaySupported application servers include WebLogic, WebSphere andinterface in Arabic,SunOne.- •
- Multilingual/Multicurrency—BroadVision applications are global ready and designed to support multiple languages (Arabic, Chinese, Hebrew, Japanese, Korean, Slovakian, Turkish and most Western European
languageslanguages) andsupport fora wide range of currencies, including theEuro, enable worldwide use of our applications. 7euro. Other Products
In addition to our products, we have entered into agreements that enable us to resell selected third-party software products from
Broadbase, Interwoven,WebMethods, IONA Technologies,MacromediaFAST, Savvion andVerity.IBM Corporation. These are sublicensed to end users and either incorporated in or sold as options to our products.License revenue from these third-party products constituted approximately 5%, 7% and less than 1% of total software product license revenues for each of the years ended December 31, 2000, 1999 and 1998, respectively.8
Product Development
We believe that our future success will depend in large part on our ability to enhance and extend the BroadVision
One-To-Oneenterprise portal application suite: portal applications,suite, develop new products,portal framework and associated platform technologies; maintain technologicalleadershipleadership; and satisfy an evolving range of customer requirements for large-scale interactive online relationship management applications.Our product development organization is responsible for developing product architecture and core technology, product testing,
andquality assurance, writing product user documentation and expanding the ability of BroadVisionOne-To-Oneproducts to operate with the leading hardware platforms, operating systems, database management systems and key electronic commerce transaction processing standards.Since inception, we have made substantial investments in product development and related activities. Certain technologies have been acquired and integrated into BroadVision
One-To-Oneproducts through licensing arrangements.As of December 31,
2000, there were 3482002, we had 115 employees in our product development organization. Our research and development expenses were $41.4 million in the year ended December 31, 2002, $78.7 million in the year ended December 31, 2001 and $51.6 million in the year ended December 31,2000, $14.6 million in the year ended December 31, 1999 and $9.2 million in the year ended December 31, 1998.2000.To date, we have not capitalized any software development costs as products are made available for general release relatively concurrently with the establishment of technological feasibility. We expect to continue to devote substantial resources to our product development activities.
BroadVision Global Services
BroadVision provides a full spectrum of global services to help ensure success for businesses, including strategic services, implementation services, migration services and ongoing training and support.
Consulting Services
The BroadVision Global Services
(BVGS)organization provides strategic services that help customers achieve maximum business value from their BroadVisionGlobal Services, or BVGS, provides a broad range of consulting, training and technical support services to all of our customersapplications and implementationpartners. This organization provides business application and technical expertise, along with extensive product knowledge, to complement our products and provide solutionsservices thatmeet customers' unique business requirements. By using our services, customers are able to build customized application solutions to maximize the benefits of one-to-one relationship management and self-service. A summary of the services provided by BVGS is as follows: o Strategic Services. We provide business strategy and process consulting to assist customers in defining and planning profitable online businesses, while optimally utilizing the functionality of our products. Services include in-depth needs analysis, customer segmentation, one-to-one marketing expertise, storyboarding and business organizational planning to achieve timely and successful implementation of our e-business solutions. Strategic Services consulting is generally offered on a time and materials basis. o Technical Services. We provide technical services for development of customized BroadVision One-To-One applications, custom interfaces, data conversions and system integration. These consultants participate in a wide range of activities, including requirements definition, solution design, development and implementation and performance planning, architecture and tuning. These consultants also provide advanced technology services focused on application development for custom objects and templates and database administration and tuning. Technical Services consulting is generally offered on a time and materials basis. o Content and Creative Services. This group specializes in information architecture, content management, sourcing, workflow processes and user experience design. The group is made up of BroadVision One-To-One product design expertsensure rapid deployment and avarietyrobust, highly scalable application ensure. BVGS leverages a global supply chain ofleading third party design companies. This team combines extensive interactive designcertified professionals to provide customers with the highest value at the lowest possible landed cost. Our comprehensive migration services—including migration planning andmarketing experienceoptimization—provide a cost effective approach tobuild effective user experiences. Contentmigration andCreativeprotect our customers' investment in critical business applications.Support Services
consulting is generally offered on a time and materials basis. 8o Technical Support Services.We have tiered our support programs to better serve the needs of our worldwide customer base. Standard Support provides technical assistance during regular business hours; Enterprise Support is designed for customers with mission-critical environments, providing customers with access to support experts 24 hours a day, 7 days a week; and Personalized Support assigns a specific individual to a customer along with other customer specified support services, including on-site support engineers. We have technical support centers in North America, Europe and Asia. Under our standard maintenance agreement, we provide telephone support and upgrade rights to new releases, including patch releases as necessary,
andas well as product enhancements.o Education Services.9
Training
Under the banner of BroadVision University, we deliver training solutions that ensure our customers and partners have access to timely and effective training for successful implementation of BroadVision
One-to-One Applicationsapplications globally. Our advanced delivery infrastructure allows us to deliver courses throughout the world at our facilities or at customer locations. In addition toinstructor ledinstructor-led courses, BroadVision University has launched a global e-learning platform to facilitate the delivery of web-based on-demand courses. BroadVision University also delivers an extensive training program to BroadVision employees to ensure high-quality and consistent training of our own personnel. This program provides a series of foundation courses that are general in content for all audiences as well asspecific courses based onproduct- and role-specific courses.Delivery Methodology
BroadVision LiveCycle is a multi-disciplinary implementation process that integrates business, content management, creative and technical expertise to take sites live efficiently. Each phase of the
employee's role in BroadVision. o Client Services, Projectprocess—Define, Design, Develop, Deploy—has a suggested set of best practice tasks andProgram Management. This management team drives project discipline from discovery through deployment and into production support based on our client and partner needs. Our Client Services Managers manage multiple projects with a variety of customers and provide deep knowledge and best practices advocacy within BroadVision for appropriate implementation, training and support services. Our Project Managers are responsible fordeliverables formulated to identify all theday-to-day project management activities, which can include project scope, deliverables, change management and resource coordination. Our Project Managers also leverage our BVGS iGuide methodology and work closely with our clients, partners and consultants to collaboratively deliver each project plan. Our Program Managers are also responsible for managing our national and global accounts where our clients are implementing enterprise-wide solutions. These Program Managers establish processes and coordinate knowledge and relationships between corporate functions and individual line or field business units to re-use information, resulting in speed to market and low cost of ownership. o Partner Services. The goal of partner services is to provide the partner community with the appropriate integration of BVGS services, tools, resources and best practiceskey issues required todeliver the highest level of customer satisfaction. This team works directly with our extensive partner community including system integrators, technology partners, platform partnerslaunch a high-performance and profitable site.iGuide™
iGuide™ is a web-based application
service providers to ensure partner readinessthat includes step-by-step instructions, tips andenable knowledge transfer between BVGS and the partner community. Specific activities include the creation and execution of partner specific training and development plans utilizing BroadVision University, development of a Partner Framework that clearly outlines the working relationship between BVGS and a given partner, and the ongoing measurement of partner capabilities and readiness. Strategic Alliances A significant element of our sales strategy is to engage in strategic business alliances to assist us in marketing, selling and developing customer applications. As of December 31, 2000, we had developed key strategic business alliances with over 190 systems integration, design, consulting and other services organizations throughout the world, including Accenture, Deloitte Consulting, Hewlett-Packard Consulting, IBM Global Services, KPMG Consulting, Leapnet, PricewaterhouseCoopers and Roundarch. Moreover, as of December 31, 2000, we had trained over 15,000 external consultants. In April 1999, we announced a strategic alliance with Hewlett-Packard in which Hewlett-Packard agreed to resell and support the current BroadVision One-To-One product suite and to co-develop, sell and support integrated business-portal solutions that will act as the interface to next generation e-servicestemplates forenterprise customers. In June 2000, the companies deepened their strategic relationship by signing a consulting Systems Integration Partner Agreement. As a result of this agreement, more than 400 consultants trained by HP Consulting are engagedevery stage in the implementation process.Strategic Alliances
We recognize that today's organizations require an open, partner-based approach to e-business. Accordingly, we have assembled a team of
more than 40 BroadVision customer sites worldwide. Hewlett-Packard is leveraging its approximately 5,000 personbest-of-breed partners with the skills, services and value-added products necessary to design, deploy and manage a globalsales force to reselle-business. Working together, we andsupport the current BroadVision One-To-One product suite. Throughout 2000, PricewaterhouseCoopersour partners can help organizations go live quickly with dynamic, interactive applications.Platform Partners
Our platform partners are industry-leading firms that possess significant market share and
BroadVision have been working together on more than 20 engagements, across many major industries, for Fortune 500 and new economy clients. The expanded alliance will combine the global reach, e-business acumen, consulting andtechnology leadership. Their products include hardware, operating systems,integration experience of PricewaterhouseCoopers with BroadVision's comprehensive suite of integrated e-business softwarenetwork products andservices. Platform Alliances Our platform alliances are partnerships formed toservices and database systems. With BroadVision, they integratetechnologies to drive business growth. NCR Corporation. In November 2000, data warehousing and automatic teller machine, or ATM, leader NCR Corporation and BroadVision announced a worldwide agreement to enable companies to drive business growth with personalized communications to consumers and businesses. This $17 million commitment represents the two companies' joint investment in research and development, marketing and the development and operation of Centers of Expertise. Through this agreement, NCR and BroadVision plan to work together to develop software adapters between our industry-leading e-business applications and NCR's world-class Teradata database, Customer Relationship Management solutions and ATMs. 9Intel Corporation. In November 2000, BroadVision and Intel Corporation announced an e-business alliance to develop and market solutions built on BroadVision's suite of e-business applications and Intel-based servers. The agreement advances both companies' commitment to deliver cost-effective, enterprise-class e-business solutions. BEA Systems. Also in November 2000, BroadVision and BEA Systems announced a strategic alliance under which BEA Systems' WebLogic Server would be marketed with BroadVision One-To-One Enterprise. This arrangement is intended to allow users to combine BEA's leading Java-based application server technology with our leading e-business software applications. I2 Technologies. In October 2000, i2 Technologies and BroadVision announced a joint development agreement to deliver a comprehensive e-commerce solution. The combined offering will integrate the i2 TradeMatrix Sell and i2 TradeMatrix Content Solutionstheir products with our suite ofe-business applications to create a best-of-breed solution for managing the entire e-commerce value chain. Aimed at companies that want to accelerate their time-to-market and reduce cost of ownership as they establish new e-businesses, this is one of the first e-business solutions to integrate front-end multi-enterprise order capture and creation to back-end order management and fulfillment capabilities. Compaq Computer Corporation. In September 2000, acting on our commitment to deliver enterprise-ready solutions to the Windows marketplace, we announced a strategic relationship with Compaq Computer Corporation for the development and marketing of solutions built on our suite of e-businessenterprise business portal applications andCompaq's ProLiant servers.commit globally to develop joint technology, marketing and selling programs with BroadVision.IBM: BroadVision and IBM
Corporation. Alsoformed a partnership in September 2000IBM and BroadVision announced an agreement that will enable IBMto integrate our full suite ofe-businessBroadVision applications on IBM's RS/6000 serversthat employ high-performance copper technology.in conjunction with IBM's DB2 data management software. Theagreementresulting application platform provides customers with more choices for building and deploying their e-business web sites. BroadVision and IBM will work to integrate the solutionsas well as increasing network performance and availability.with IBM WebSphere for Enterprise Java Beans integration with back-end systems. In addition, IBM Global Serviceswill createhas created a practice of service professionals around the world to help customers implement BroadVision applications. In December 2001, IBM and BroadVision entered into an agreement whereby we could resell IBM's WebSphere Application Server product as a component of BroadVision solutions.NCR Corporation: BroadVision and NCR, a leader in data warehousing and automatic teller machine (ATM) products, announced a worldwide agreement in November 2000 that enables companies to drive business growth through personalized communications to consumers and businesses. Specifically, NCR and BroadVision are developing software adapters between BroadVision enterprise
10
business portal applications and NCR's world-class Teradata database, customer relationship management solutions and ATMs.
Sun Microsystems: BroadVision and Sun Microsystems formed an alliance in March 2000 that provides for joint engineering, marketing and sales initiatives to develop, promote and sell next-generation e-commerce applications based on Sun's premier Java 2 Enterprise Edition (J2EE) technology.
System Integrators and Consulting Partners
Our system integrators and consulting partners help customers plan and implement their enterprise business portal strategies—including integration with front- and back-office systems. They have developed their own industry-leading technologies and best practices that complement our applications.
Application Service Providers
Our application service provider partners develop, host and support value-added application products based on our technology. These application products typically extend our technology into new areas or leverage our applications by adding industry-specific functionality, providing targeted solutions that address specific market needs.
Technology Partners
Additionally, we have developed key technology partnerships with leading
Web-web- and wireless-focused companies in areas complementary to our solutions, such as data analysis and reporting, enterprise application integration, enterpriseWebweb management, call center management, content management, voice recognition, payment processing, auctioning and XML. These technology partnerships enhance our ability to base our products on industry standards and to take advantage of current and emerging technologies. These alliances include companies such asBroadbase, Documentum, E.Piphany, Genesys, i2, Interwoven, Nuance, Tibco, WebMethodsSeeBeyond andYantra.WebMethods.Customers and Markets
As of December 31,
2000,2002, we had licensed our products to over9701,200 end-user customersincluding customers acquired as part of the Interleaf acquisition,andover 190 partners and the total number of our installed customer base as of December 31, 2000 was over 1,100 accounts across top vertical markets worldwide. As of December 31, 2000, our products were commercially deployed in over 572 live Web sites.partners. During the years ended December 31,2000,2002, 2001 andDecember 31, 1999,2000, no customer accounted for more than 10% of our total revenues.Our primary target customers are Global 2000 organizations that are at the forefront of building innovative
Web applicationsenterprise business portals to increase revenues, improve productivity and reduce operational costs.We also target pure-play Web companies that have built or are building their core businesses on the Web.A sample listing of our customers by industry
is asfollows:o
- •
- Financial Services:
ABN AMRO, Bank of America, Barclay's Bank, Bear Stearns, China Trust Bank,Achmea, Answer Financial, Banca Popolare, CIBC, Citibank,Credit Suisse,e-Trade, FleetBoston,GMAC, Hartford Life,ING Bank, Lloyds TSB Bank, Northern Trust,and TD Waterhouse. o Manufacturing: o High-Tech: Agilent, Compaq, Hewlett-Packard, Intel, NEC, NCR, Macromedia, Molex, Motorola, Novell, RS Components, Siemens, Sony, Toshiba, Unisys and Xerox; oTatra Bank, State Bank of India, Unicredito Italia- •
- Manufacturing/Industrial
Equipment:Equipment/Distribution: Boeing, Crown Equipment, GE Supply, Hilti,MRO.com,Holcim Group, Invacare, ISTARK, Maytag, Molex, NEXANS, Northrup Grumman, Owens Corning, Pitney Bowes, Schneider Electronics, WETHAI, WW Graingerand Sealed Air; o- •
- High Tech: Agilent, Dickson Cyber Concepts, Intel, Motorola, NCR, Solectron, Sony, Toshiba, Xilinx
- •
- Oil/
Gas:Gas/Utilities: Aramco Service Company,Cooper Cameron, Fuel Quest and Tosco; o Automobile: Ferrari, Fiat and Maserati o Consumer Packaged Goods: Coors, GE and Georgia Pacific; o Aircraft/Transport: Aviall, Boeing and Rockwell. 10o Government/Centrica, Energis, Eni Group, OMV, Phillips, Saudi Aramco11
- •
- Public Sector:
San Diego Workforce, Singapore Post, StateU.S. Air Force, Ministry ofCalifornia, Swiss Post, USDefense, U.S. Coast Guard, U.S. General Services Administration,USU.S. Postal Serviceand World Health Organization. o- •
- Retail:
Blackwell's, Brookstone,Circuit City,Hallmark,Home Depot,Maytag,OfficeMax,Pitney Bowes,RedEnvelope, Sears Roebuck,Shop At Home, Swatch, andWal*Mart. oMart- •
- Telecom: British Telecom, ConnectOne,
Eircom, Ericsson, France Telecom, Genuity,Japan Telecom, KPN, MCI Worldcom,Nortel Networks, Telia, Telus, UUNet, Verizon and Vodafone. o Travel:Mobile Business Communications, Voicestream, Vodafone- •
- Travel/Leisure: Aer Lingus, Air Canada, Air France,
Amadeus, Budget Canada, Carlson Companies, Club Med, Forte Hotels, Japan Airlines,Cendant, EGET, Iberia, India Railways, OPODO, RailEuropeRand McNally, TAM Airlines and Nippon Travel. o Pharmaceuticals/- •
- Healthcare:
Advance PCS, formerly Advance Paradigm,Advacncerx, Allegiance, Baxter, BD BioScience, Cardinal Health,Inc./Allegiance Healthcare ,Fresenius, GE Medical,Care, Hawaii Medical Service Association, Highmark, Janssen Pharmaceutica, Longs Drugs,HighMark, HMSA, Medimania, Merck Medco,NTT Data Healthcare, Pfizer and Premier Healthcare. o Media/Publishing/Entertainment: Electronic Arts, Grolier, Loftus Multimedia, NextMedia and Primedia.PharmaciaSales and Marketing
We market our products primarily through a direct sales organization with operations in North America, Europe,
Australiaand Asia/Pacific. On December 31,2000,2002, our direct sales organization included544121 sales representatives, managers and sales support.We have sales offices located throughout the world to support the sales and marketing of our products. In support of the Americas sales and marketing organizations, offices are located in the United States in
Arizona,California, Colorado,Florida,Georgia, Illinois,Kansas, Maryland,Massachusetts,Michigan, Minnesota, New Jersey,New York,North Carolina, Ohio, Oregon, Pennsylvania,Texas, VirginiaWashingtonandWisconsin;Washington; in Canada, inToronto,Ontario and Vancouver, BritishColumbia; in Latin America, in Argentina, Brazil and Mexico.Columbia.Sales and marketing offices for our
EMEA, or Europe/Middle East/Africa,Europe region are located in Austria,Denmark, Finland,France, Germany, Italy, the Netherlands, Spain, Sweden, Switzerland and the United Kingdom.Our sales and marketing offices in the Asia Pacific/Japan/
IndiaIndia/Middle East region are located inAustralia,India, Japan, the People's Republic of China, including Hong Kong, the Republic of China (Taiwan), SingaporeandSouth Korea. A component of our strategy is continued expansion of our international activities. We intend to broaden our presence in international markets by expanding our international sales force and by entering into additional distribution agreements. We also contract with third-party resellers, distributors and systems integrators in North America, South America, Europe, Australia and Asia. We intend to increase our use of this distribution channel.Singapore.Initial sales activities typically
includeinvolve discussion and review of the potential business value associated with the implementation of a BroadVision solution, a demonstration of oure-business product suiteenterprise business portal capabilities at the prospect's site, followed by one or more detailed technical reviews, often presented at our headquarters. The sales process usually involves collaboration with the prospective customer in order to specify the scope of the application. Our global services organizationtypically plays a key role in helpinghelps customers to design, and then develop and deploy, their applications.As of December 31,
2000, 1962002, 14 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 ourWeb site.website.Our marketing efforts are targeted at:
o Product strategy development
- •
- developing and
product management; o Buildingsupporting marketing programs to enhance customer loyalty;- •
- building market awareness through press and
analystsindustry analyst relations;o Creating- •
- generating and developing marketing and sales leads;
- •
- creating brand awareness and visibility;
o Producing- •
- producing and maintaining marketing
informationcollateral and sales tools;o Generating- •
- developing and supporting marketing programs associated with various alliance partners; and
- •
- developing
customer leads; o Sourcing and managing relationshipsmaterials associated withsystems integrators, value-added resellers and creative designers; and o Advertising agencies and technology partners. 11industry solutions. 12
Competition
If we fail to compete successfully with current or future competitors, we may lose market share. The market for
personalized e-business and one-to-one relationship managemententerprise portal applications is rapidly evolving and intensely competitive. Our customers' requirements and the technology available to satisfy those requirements will continually change. We expect competition in this market to persist andintensifyincrease in the future. Our primary competition currently includes:o
- •
- in-house development efforts by prospective customers or partners;
o- •
- other vendors of application software or application development platforms and tools directed at interactive commerce and
financial services,portal applications, such asAllaire, Ariba,Art Technology Group,Inc.,Blue Martini,CommerceOne, InterWorldBEA, IBM Corporation,Open Market, Inc.,Microsoft, Oracle, PeopleSoft, Plumtree, SAP, Siebel andVignette Corporation; o WebVignette; and- •
- web content developers that develop custom software or integrate other application software into custom
solutions; o International Business Machines Corporation; and o Microsoft Corporation.solutions.The principal competitive factors affecting the market for our products are:
o Depth
- •
- depth and breadth of functionality offered;
o Ease- •
- personalization and other features;
- •
- integration of
application development; o Availabilityportal applications and framework;- •
- availability of knowledgeable developers;
o Time- •
- time required for application
development; o Reliancedeployment;- •
- reliance on industry standards;
o Product- •
- product reliability;
o Proven- •
- proven track record;
o Scalability; o Maintainability; o Personalization- •
- scalability;
- •
- maintainability;
- •
- product quality;
- •
- price; and
other features; o Product quality; o Price; and o Customer- •
- technical support.
Compared to us, manyMany of these competitors and other current and future competitors have longer operating histories and significantly greater financial, technical, marketing and other resources than
those of us.BroadVision. As a result, they may be able to respond more quickly to new or changing opportunities, technologies and customer requirements. Many of these companiesalsocan use their greater name recognition and more extensive customer base to gain market share at our expense. Competitors may be able to undertake more extensive promotional activities, adopt more aggressive pricing policies and offer more attractive terms to purchasers. Current and potential competitors may bundle their products to discourage users from purchasing our products. In addition, 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. Competitive pressures may make it difficult for us to acquire and retain customers and may require us to reduce the price of our products. We may be unable to compete successfully with current or new competitors.13
Intellectual Property and Other Proprietary Rights
Our success and ability to compete are dependent to a significant degree on our proprietary technology. Although we hold a U.S patent, issued in January 1998, on elements of the BroadVision One-To-One Enterprise product
thisand a U.S. patent acquired as part of the Interleaf acquisition on the elements of the extensible electronic document processing system for creating new classes of active documents, these patents may not provide an adequate level of intellectual property protection. In addition, litigation like the lawsuit we filed against Art Technology Group, which was settled in February 2000, may be necessary in the future to enforce our intellectual property rights, to protect our trade secrets, to determine the validity and scope of the proprietary rights of others, or to defend against claims of infringement or invalidity. We cannot guarantee that infringement or other claims will not be asserted or prosecuted against us in the future, whether resulting from our intellectual property or licenses from third parties. Claims or litigation, whether successful or unsuccessful, could result in substantial costs and diversions of resources, either of which could harm our business.We also rely on copyright, trademark, service mark, trade secret laws and contractual restrictions to protect our proprietary rights in products and services. We have registered "BroadVision" and "BroadVision One-To-One" as trademarks in the United States and in other countries. It is possible that our competitors or other companies will adopt product names similar to these trademarks, impeding our ability to build brand identity and possibly confusing customers.
As a matter of company policy, we enter into confidentiality and assignment agreements with our employees, consultants and vendors. We also control access to and distribution of our software, documents and other proprietary information. Notwithstanding these precautions, it may be possible for an unauthorized third party to copy or otherwise obtain and use our software or other proprietary information or to develop similar software independently. Policing unauthorized use of our products will be difficult, particularly because the global nature of the Internet makes it difficult to control the ultimate destination or security of software and other transmitted data. The laws of other countries may afford us little or no effective protection of our intellectual property.
We rely upon certain softwareReverse Stock Split
On July 24, 2002, we announced that
we license from third parties, including relational database management systems from Oracle and Sybase, object request broker software from IONA Technologies, database access technology from RogueWave Software and other software that is integrated with internally developed software and used inoursoftware to perform key functions. In this regard, allBoard of Directors had approved a one-for-nine reverse split of ourservices incorporate data encryptioncommon stock. The reverse split was effective as of 8:00 p.m. Eastern Daylight Time on July 29, 2002. Each nine shares of outstanding common stock of the Company automatically converted into one share of common stock. Our common stock began trading on a post-split basis at the opening of trading on the Nasdaq National Market on July 30, 2002. The accompanying consolidated financial statements andauthentication technology licensed from RSA. Our third-party technology licenses may not continuerelated financial information contained herein have been retroactively restated tobe availablegive effect tous on commercially reasonable terms, if at all. The loss of or inability to maintain any of these technology licenses could result in delays in introduction of our products and services until equivalent technology, if available, is identified, licensed and integrated, which could harm our business. 12Recent Acquisitions On April 14, 2000, we acquired Interleaf, Inc. and its subsidiaries ("Interleaf") pursuant to a statutory merger involving a stock-for-stock exchange. We acquired Interleaf primarily to enable us to add significant wireless technology capabilities and substantially increase our ability to provide enhanced personalized e-business applications across multi-touch points. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Overview" and Note 2 of "Notes to Consolidated Financial Statements" for more detailed information.the July 2002 stock split.Employees
As of December 31,
2000,2002, we employed a total of2,412449 full-time employees, of whom1,828285 are based in North America and South America,372131 in Europe and21233 in Asia. Of these full-time employees,740135 are in sales and marketing,348115 are in product development,1,135170 are in global services and client support, and18929 are in finance, administration and operations.As of December 31, 1999 and 1998, we employed 652 and 271 full-time employees, respectively.We believe that our future success depends on attracting and retaining highly skilled personnel.
Competition for personnel is intense, and weWe may be unable to attract and retain high-caliber employees. Our employees are not represented by any collective bargaining unit. We have never experienced a work stoppage and consider our employee relations to be good.14
Executive Officers
The following table sets forth certain information regarding our current executive officers.
Name Age Position ---- --- --------
Name Age Position Pehong Chen 45 Chairman of the Board, Chief Executive Officer and President Andrew Nash 40 Executive Vice President and Chief Operating Officer Pehong
Chen............43 Chairman of the Board, Chief Executive Officer and President Randall C. Bolten......48 Chief Financial Officer and Executive Vice President, Operations James W. Thanos........52 Executive Vice President and General Manager, Worldwide Field Operations Nancy Mills-Turner.....48 Executive Vice President and General Manager, Worldwide Products Organization Chris M. Grejtak.......52 Executive Vice President, Worldwide Marketing and Business Development, and Chief Marketing Officer PehongChen has served as our Chairman of the Board, Chief Executive Officer and President since our 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, a provider of multimedia applications development systems, which was acquired by Sybase. He received a B.S. in Computer Science from National Taiwan University, an M.S. in Computer Science from Indiana University and a Ph.D. in Computer Science from the University of California at Berkeley.Randall C. BoltenAndrew Nash has served
as our Chief Financial Officer since September 1995 and as Chief Financial Officer and Executive Vice President, Operations from January 2000. 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, 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. 13James W. Thanos has served as our Vice President and General Manager, Americas since January 1998 andas our Executive Vice President andGeneral Manager, Worldwide Field Operations,Chief Operating Officer sinceJanuary 2000. From January 1995 to January 1998, Mr. Thanos served as Vice President of North American Operations of Aurum Software, a sales force automation company. FromMay1994 to January 1995, Mr. Thanos served as Vice President of Sales of Digital Equipment Corporation. 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, a decision support software company. Mr. Thanos holds a B.A. in International Relations from Johns Hopkins University. Nancy Mills-Turner joined BroadVision in September 1999 as Vice President of Worldwide Professional Services, in January 2000, was promoted to Executive Vice President and General Manager, Worldwide Professional Services and in January 2001 was named Executive Vice President and General Manager, Worldwide Products Organization.2002. Prior to joining BroadVision,she worked for Oracle managing the professional services groups including ConsultingMr. Nash was Chief Executive Officer of Novaroo, Inc., a privately held strategy andEducation. Before joining Oracle in 1995, she served as director of Federal, State and Local practice consultants at PricewaterhouseCoopers LLP. Prior to PricewaterhouseCoopers LLP, she was Vice President, Software at BIS Computer Solutions directing the activities of product development divisions specializing in commercial and criminal justice applications and implementations services. Ms. Mills-Turner received a B.A./B.S. in Business Administration and Biochemistry from Arizona State University and a Master's degree in Business Administration and Information Management Sciences from University of Southern California. Chris M. Grejtak joined us in January 2001 as Executive Vice President, Worldwide Marketing and Business Development, and Chief Marketing Officer.corporate advisory firm. FromJanuary2000 toJanuary2001,heMr. Nash served as Chief Executive Officer ofViquity,Collaborex, Inc., aprovider of hosted universal connectivity services for internet-based integration of mission critical business systems.collaborative commerce application service provider. FromDecember 19961998 toJanuary2000, Mr.Grejtak was theNash served in multiple roles at Baan Company N.V., an enterprise application provider for industrial enterprises, ultimately serving as Executive Vice President,Worldwide Marketing for Brio Technology,Services and member of the board of directors. Mr. Nash also held the positions of CEO, Coda plc, and President, Baan Corporate Office Solutions during his tenure at Baan. In 1995, Mr. Nash commenced the Asia Pacific operations International Consulting Solutions, aprovidercompany acquired by Deloitte Consulting. After the acquisition, Mr. Nash became a Partner ofanalytics software for enterprise infrastructure management. From December 1995 to December 1996,Deloitte Consulting and served on the Global Board of Management of Deloitte Consulting/ICS. Mr.Grejtak was the Vice President of Marketing for Red Brick Systems, Inc., which developed databaseNash previously held managementsystem technology to support data warehousepositions with Oracle andbusiness intelligence applications. Mr. GrejtakArthur Andersen. He received aB.A.Bachelor of Commerce from the University of Melbourne (Australia) and a Graduate Diploma inSociologyComputing fromMiddlebury College.Monash University (Australia).Our principal administration, research and development, sales, consulting, training and support facilities are located in Redwood City, California, where we occupy approximately
162,00049,000 square feet pursuant to leases expiring through2008. We recently entered into a lease for a new facility currently under construction that will provide us with an additional approximately 519,000 square feet in Redwood City, California. The facility is expected to be available for occupancy during June 2001.2007.Our European headquarters are located in Green Park, Reading, in the United Kingdom where we
leasecurrently occupy approximately19,0006,500 square feet.Our Asia Pacific headquarters are located in Taipei, Taiwan where we lease approximately 19,000 square feet.In addition, we have offices throughout the world to support the development, sales, marketing and support of our products and services. See "Sales and Marketing" above.
In April 2001, we filed a Form 8-K with the Securities and Exchange Commission reporting that several purported class action lawsuits had been filed against us and certain of our officers and directors. In each of the lawsuits, the plaintiffs sought to assert claims on behalf of a class of all persons who purchased securities of BroadVision between January 26, 2001 and April 2, 2001. The complaints alleged that BroadVision and the individual defendants violated federal securities laws in connection with our reporting of financial results for the quarter ended December 31, 2000. The lawsuits were consolidated into a single action. On November 5, 2001, BroadVision and the individual defendants filed motions to dismiss the consolidated complaint. On February 22,
2000, we reached2002, the Court granted these motions, dismissed the consolidated complaint without prejudice and ordered the lead15
plaintiff to file an amended complaint within 30 days. On March 25, 2002, the plaintiff filed its Second Amended Consolidated Complaint, which added claims for breach of fiduciary duty and named members of our board of directors as additional defendants. All defendants filed motions to dismiss the Second Amended Consolidated Complaint on May 10, 2002. The hearing on the defendant's motion to dismiss was heard on August 30, 2002. On September 11, 2002, the Court (1) dismissed with prejudice the claims that the defendants violated federal securities laws, on the basis that the complaint failed to state a claim upon which relief could be granted, and (2) dismissed without prejudice the claims for breach of fiduciary duty, on the basis that the claims were made under state law and, in the absence of any remaining federal law claims, the Court would decline to exercise supplemental jurisdiction. We are not aware of plaintiffs filing an appeal of the Court's September 11, 2002 decision or filing another complaint in any other court. We believe that the action was without merit and will continue to defend ourselves vigorously should plaintiffs continue to pursue any of these claims.
On June 7, 2001, Verity, Inc. filed suit against us alleging copyright infringement, breach of contract, unfair competition and other claims. We have answered the complaint denying all allegations and are defending ourselves vigorously. The trial date is set for July 14, 2003 in San Jose, California, in the United States District Court, Northern District, San Jose Division. We are unable to estimate the amount or range of any potential loss from this matter.
On July 18, 2002, Avalon Partners, Inc., doing business as Cresa Partners, filed a suit against us in the Superior Court of the State of California, San Mateo County, claiming broker commissions related to our termination and restructuring of certain facilities leases associated with our restructuring plans taken during the second quarter of 2002. The matter was settled by way of a settlement agreement executed by both parties in March 2003 and
entered into a license agreement with Art Technology Group, or ATG, in connection withthe parties expect the lawsuitwe filed on December 11, 1998 against ATG alleging infringement of our U.S. Patent No. 5,710,887. In accordance with the terms of the settlement agreement, we granted ATG a nonexclusive, nontransferable, worldwide, perpetual license and we were paid by ATG $8 million at the effective date of the settlement. In addition, we will receive an additional $7 million payable in quarterly installments, which payments commenced February 24, 2000,to be dismissed in theformsecond quarter offour consecutive quarterly paymentsfiscal 2003.We are also subject to various other claims and legal actions arising in the ordinary course of
$750,000 during 2000 and eight consecutive quarterly paymentsbusiness. In the opinion of$500,000 during 2001 and 2002. There are nomanagement, after consultation with legal counsel, the ultimate disposition of these matters is not expected to have a materialpendingeffect on our business, financial condition or results of operations. Although management currently believes that the outcome of other outstanding legal proceedings,to which weclaims and litigation involving us will not have a material adverse effect on its business, results of operations oranyfinancial condition, litigation is inherently uncertain, and there can be no assurance that existing or future litigation will not have a material adverse effect on our business, results ofour subsidiaries is a party.operations or financial condition.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERSNot applicable.
1416
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our common stock is quoted on the Nasdaq National Market under the symbol "BVSN." The following table shows high and low sale prices per share of the common stock as reported on the Nasdaq National Market:
High Low ---- --- Fiscal Year 2000 First Quarter......................... $ 90.67 $ 42.44 Second Quarter........................ 61.56 26.88 Third Quarter......................... 54.56 25.69 Fourth Quarter........................ 36.19 11.81 Fiscal Year 1999 First Quarter......................... $ 8.04 $ 3.01 Second Quarter........................ 8.19 4.35 Third Quarter......................... 15.54 6.82 Fourth Quarter........................ 59.67 14.10
High Low Fiscal Year 2002 First Quarter $ 30.06 $ 15.30 Second Quarter 15.75 2.70 Third Quarter 4.59 1.23 Fourth Quarter 6.15 1.10 Fiscal Year 2001 First Quarter $ 164.88 $ 40.32 Second Quarter 76.32 20.88 Third Quarter 47.61 6.12 Fourth Quarter 35.64 7.11 As of March
28, 2001,20, 2003, there were1,8311,971 holders of record of our common stock. On March28, 2001,20, 2003, the last sale price reported on the Nasdaq National Market System for our common stock was$5.2188$4.07 per share.In May 2000, we exchanged equity securities worth $3.0 million with netalone.com. We issued to netalone.com 76,665 shares of our Common Stock in exchange for the receipt from netalone.com of 23,366,700 shares of its Common Stock. In September 2000, in connection with Compaq Computer Corporation entering into a master marketing and license agreement with us, we issued a warrant to Compaq for 43,478 shares of our Common Stock with an exercise price of $34.50 per share. The exercise period for the warrant began on September 1, 2000 and expires on September 1, 2005.We have never declared or paid cash dividends on our common stock, and it is our present intention to retain earnings to finance the expansion of our business. In addition, our credit facility with our commercial lender contains certain covenants that may limit our ability to pay cash dividends.
1517
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATAThe 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 CompanyBroadVision and Notes thereto, and other financial information included elsewherehereinin of this Form 10-K. Historical results are not necessarily indicative of results that may be expected for future periods.
Years Ended December 31, ----------------------------------------------------------------------- 2000 1999 1998 1997 1996 ----------- ----------- ----------- ----------- ----------- (in thousands, except per share data)Consolidated Statement of Operations Data: Revenues: Software licenses ....................... $ 250,838 $ 75,383 $ 36,067 $ 18,973 $ 7,464 Services ................................ 163,078 40,131 14,844 8,132 3,418 ----------- ----------- ----------- ----------- ----------- Total revenues .................... 413,916 115,514 50,911 27,105 10,882 Cost of revenues: Cost of software licenses ............... 7,827 3,703 1,001 1,664 330 Cost of services ........................ 117,808 25,108 8,704 4,284 2,164 ----------- ----------- ----------- ----------- ----------- Total cost of revenues ............ 125,635 28,811 9,705 5,948 2,494 ----------- ----------- ----------- ----------- ----------- Gross profit .............................. 288,281 86,703 41,206 21,157 8,388 Operating expenses: Research and development ................ 51,621 14,568 9,227 7,392 4,985 Sales and marketing ..................... 167,415 48,903 26,269 18,413 12,066 General and administrative .............. 28,195 7,970 3,786 2,990 2,034 Goodwill and intangible amortization .......................... 187,748 -- -- -- -- Charge for acquired in-process technology 10,100 -- -- -- -- ----------- ----------- ----------- ----------- ----------- Total operating expenses .......... 445,079 71,441 39,282 28,795 19,085 ----------- ----------- ----------- ----------- ----------- Operating (loss) income ................. (156,798) 15,262 1,924 (7,638) (10,697) Other, net .............................. (4,831) 3,547 2,115 265 552 ----------- ----------- ----------- ----------- ----------- Net (loss) income ....................... $ (161,629) $ 18,809 $ 4,039 $ (7,373) $ (10,145) =========== =========== =========== =========== =========== Net (loss) income per share: Basic (loss) earnings per share ........... $ (0.62) $ 0.08 $ 0.02 $ (0.04) $ (0.06) =========== =========== =========== =========== =========== Shares used in computation -- basic (loss) earnings per share ........................ 259,780 229,128 210,114 181,872 169,335 =========== =========== =========== =========== =========== Diluted (loss) earnings per share ......... $ (0.62) $ 0.07 $ 0.02 $ (0.04) $ (0.06) =========== =========== =========== =========== =========== Shares used in computation -- diluted (loss) earnings per share ........................ 259,780 260,712 230,877 181,872 169,335 =========== =========== =========== =========== ===========As of December 31, ----------------------------------------------------------------------- 2000 1999 1998 1997 1996 ----------- ----------- ----------- ----------- ----------- (in thousands)Consolidated Balance Sheet Data: Cash and cash equivalents ................. $ 153,137 $ 279,823 $ 61,878 $ 8,277 $ 17,608 Working capital ........................... 215,831 324,156 63,620 11,485 18,258 Total assets .............................. 1,143,024 406,128 101,562 26,539 26,714 Debt and capital leases, less current portion ................................... 3,897 4,890 3,194 3,005 495 Accumulated deficit ....................... (162,423) (794) (19,603) (23,642) (16,269) Total stockholders' equity ................ 1,009,298 345,188 81,809 15,121 21,01616
Years Ended December 31, 2002 2001 2000 1999 1998 (in thousands, except per share data) Consolidated Statement of Operations Data: Revenues: Software licenses $ 40,483 $ 101,480 $ 250,838 $ 75,383 $ 36,067 Services 75,415 146,943 164,661 40,131 14,844 Total revenues 115,898 248,423 415,499 115,514 50,911 Cost of revenues: Cost of software licenses 8,144 9,895 7,827 3,703 1,001 Cost of services 38,898 97,639 119,391 25,108 8,704 Total cost of revenues 47,042 107,534 127,218 28,811 9,705 Gross profit 68,856 140,889 288,281 86,703 41,206 Operating expenses: Research and development 41,432 78,677 51,621 14,568 9,227 Sales and marketing 48,918 139,799 167,415 48,903 26,269 General and administrative 16,288 42,311 28,088 7,970 3,786 Goodwill and intangible amortization 3,548 211,216 187,855 — — Charge for acquired in-process
technology— 6,418 10,100 — — Restructuring charge 110,449 153,284 — — — Impairment of assets 3,129 — — — — Impairment of goodwill and other intangibles — 336,379 — — — Total operating expenses 223,764 968,084 445,079 71,441 39,282 Operating (loss) income (154,908 ) (827,195 ) (156,798 ) 15,262 1,924 Other, net (8,011) (6,928 ) 18,217 4,543 2,036 (Loss) income before income taxes (162,919 ) (834,123 ) (138,581 ) 19,805 3,960 Income tax provision (benefit) 7,603 2,136 23,048 996 (79 ) Net (loss) income $ (170,522 ) $ (836,259 ) $ (161,629 ) $ 18,809 $ 4,039
Net (loss) earnings per share:
Basic (loss) earnings per share $ (5.32 ) $ (27.20 ) $ (5.60 ) $ 0.74 $ 0.17
Shares used in computation—basic (loss) earnings per share
32,036
30,748
28,864
25,458
23,346
Diluted (loss) earnings per share
$
(5.32
)
$
(27.20
)
$
(5.60
)
$
0.65
$
0.16
Shares used in computation—diluted (loss) earnings per share
32,036
30,748
28,864
28,968
25,653
As of December 31,
2002 2001 2000 1999 1998 (in thousands) Consolidated Balance Sheet Data: Cash and cash equivalents $ 77,386 $ 75,758 $ 153,137 $ 279,823 $ 61,878 Working capital 5,616 67,165 218,553 324,156 63,620 Total assets 240,136 392,417 1,143,024 406,128 101,562 Debt and capital leases, less current portion 1,945 2,922 3,897 4,890 3,194
Accumulated deficit
(1,169,204
)
(998,682
)
(162,423
)
(794
)
(19,603
)Total stockholders' equity 41,633 203,147 1,009,298 345,188 81,809 18
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONSOverview
We develop, market and
sell an integrated suitesupport enterprise portal applications that enable companies to unify their e-business infrastructure and conduct both interactions and transactions with employees, partners, and customers through a personalized self-service model that increases revenues, reduces costs, and improves productivity. As ofpackaged applications for conducting e-business interactions, transactions and services. Global enterprisesDecember 31, 2002, more than 1,200 companies and government entities around the globe usetheseour applications tosell, buy, and exchange goods, servicesfacilitate their portal-based commerce and informationoveraccess initiatives.BroadVision was founded in 1993 and has been a publicly traded corporation since 1996. BroadVision pioneered web-based e-commerce and was among the
Webfirst to offer pre-integrated, packaged applications to power enterprise business portals.BroadVision's enterprise portal applications allow organizations to unify and
on wireless devices. Our e-business application suite enables a corporation to establishextend their key business applications, information, andsustain high-yield relationships with customers, suppliers, partners, distributors, employees and other constituentsbusiness processes by taking advantage of theextended enterprise. Thepower of the web and new wireless and mobile devices to allow customers, partners, and employees to do business on their own terms, in a personalized and collaborative way. BroadVisione-business application suite allows businessessolutions allow multiple constituents totailor Web and wireless contentserve themselves from anywhere, at anytime, through any web. BroadVision enterprise portal applications enable organizations to create business value by transforming theneeds and interests of individual users by personalizing contentway they do business; moving business interactions and transactionsonfrom areal-time basis. Thesemanual, human-assisted paradigm to an automated, personalized self-serviceapplications have demonstratedmodel thatthey can enhance customer satisfactionenhances growth, reduces costs andloyalty, increase business volume and brand awareness, reduce costs to service customers and execute transactions, and enhance employee productivity and retention. Our products enable companies to organize dynamic profiles of Web and wireless users from volunteered data and observed behavior, deliver highly specialized content in response to these profiles and securely execute transactions. Business managers are able to modify business rules and content in real time, offering a personalized experience to each visitor. Because of the open architecture of our applications, they are easily integrated with our customers' existing systems and easily expanded as our customers' needs and businesses grow. Supporting this application infrastructure are more than 190 partner firms around the world who are working to ensure our joint customers' success through complementary technology, applications, tools, and services offerings that extend and enhance customers' BroadVision implementations.improves productivity.We believe our products
enhanceimprove our customers' revenue opportunities by enabling them to establish more effective and efficient"one-to-one"one-to-one relationships with their customers and business partners. Web and wireless users are engaged by highly personalized real-time interactions,areable to transact business securely andareencouraged to remain online and make return visits. Our applications also improve the cost-effectiveness of one-to-one relationship management by enabling non-technical managers to modify business rules and content in real time and by helping to reducecoststhe cost of customer acquisition and retention, business development,andtechnical supportas well asand employee workplace initiatives.In addition, theBecause we provide pre-integrated, packagedsolution nature of our products decreases our customers'solutions, time to deployment is shorter andallows themcustomers are able toeasilymanage andexpandmaintain theirWebweb and wirelessapplication usageapplications in a cost-effective manner. Because of our commitment to open standards and open architecture, BroadVision applications integrate with our customers' existing systems and expand as our customers' needs and businesses grow.Supporting this application infrastructure, as of December 31, 2002, are more than 100 partner firms around the world who are working to ensure our joint customers' success through complementary technology, applications, tools and services offerings that extend and enhance BroadVision customers' implementations.
We
sellmarket our products and services worldwide through a direct sales force anda channel ofindependent distributors, value-added resellersor VARs,(VARs) and application service providersor ASPs.(ASPs). In addition, our sales are promoted through independent professional consulting organizations, known as systemsintegrators, or consulting partnersintegrators. We have operations in North America, Europe, andthrough membersAsia/Pacific.BroadVision Global Services (BVGS) organization provides a full spectrum of global services to help ensure success for businesses, including strategic services, implementation services, migration services and ongoing training and maintenance.
19
Recent Events
We have experienced a
global networkgeneral downturn in the economy, our industry and our business since the beginning ofstrategic business relationships with key industry platform2001. This downturn is likely to continue in the future andWeb developer partners. We also engage in strategic business allianceshas had and could continue toassist with the marketing, selling and development of our customers' applications. We place a strategic emphasis on technology alliances to ensure that our products are based on industry standards and to position us to take advantage of current and emerging technologies. All of these independent entities are often referred to in this document as "partners." The benefits of this approach include enabling us to focushave an impact on ourcore competencies while reducing time to market and simplifying the task of designing and developing applications for us and our customers. On April 14, 2000, we acquired Interleaf pursuant to a statutory merger involving a stock-for-stock exchange. The acquisition occurred primarily to enable us to add significant wireless technology capabilities and substantially increase our ability to provide enhanced personalized e-business applications across multi-touch points. We accounted for this acquisition as a purchase business combination. Accordingly, the results of operations of Interleaf are includedfuture financial results. As discussed inour combined results from the date of the acquisition. Please seeNote29 of Notes to Consolidated Financial Statements, we have recorded significant restructuring charges in connection with our reduction in workforce and abandonment of certain operating facilities as part of our program to restructure our operations and related facilities initiated in the second quarter of fiscal 2001. A pre-tax charge of $153.3 million was recorded during fiscal 2001 and $110.4 million was recorded during fiscal 2002 to provide formore detailed information. 17STATEMENT OF OPERATIONS AS A PERCENT OF TOTAL REVENUESthese actions and other related items. Costs for the abandoned facilities were estimated to include the impairment of assets, remaining lease liabilities and brokerage fees partially offset by estimated sublease income. Estimates related to sublease costs and income are based on assumptions regarding the period required to locate and contract with suitable sublessees and sublease rates which were based upon market trend information analyses. Adjustments to the restructuring reserve will be made in future periods, if necessary, based upon the then current actual events and circumstances.On July 18, 2002, Avalon Partners, Inc., doing business as Cresa Partners, filed a suit against us in the Superior Court of the State of California, San Mateo County, claiming broker commissions related to our termination and restructuring of certain facilities leases associated with our restructuring plans taken during the second quarter of 2002. The
following table sets forth certain items reflectedmatter was settled by way of a settlement agreement executed by both parties in March 2003 and the parties expect the lawsuit to be dismissed in the second quarter of fiscal 2003.On May 9, 2002, the Company and Pacific Shores Development LLC ("PacShores") entered into (i) the First Amendment to Lease (Lease Termination and Mutual General Release Agreement), made effective as of April 29, 2002 (the "Buildings 4 and 5 Termination Agreement") and (ii) the First Amendment to Lease made effective as of April 29, 2002 (the "Building 6 Amendment"). Under the Buildings 4 and 5 Termination Agreement, the Triple Net Building Lease dated April 12, 2000 between PacShores, as Lessor, and the Company, as Lessee, for Premises at Pacific Shores Center, Building 4, Redwood City, California and the Triple Net Building Lease dated February 16, 2000 between PacShores, as Lessor, and the Company, as Lessee, for Premises at Pacific Shores Center, Building 5, Redwood City, California, were terminated. In conjunction with the termination, PacShores released all security deposits held by it relating to those premises and we paid to PacShores a total of $45.0 million as a termination fee (the "Termination Fee"). Under the Building 6 Amendment, the parties released each other from all claims and we agreed to provide an additional $3.5 million as security deposit in the form of letters of credit. This letter of credit is included as restricted cash and investments in our
consolidated statementsConsolidated Balance Sheet as of December 31, 2002. We paid the Termination Fee in full during the second quarter of 2002 by payment of approximately $20.0 million from existing cash and investments and by drawing down approximately $25.0 million from our line of credit. The $25.0 million line of credit is due in February 2004.On April 8, 2002, we filed a Form 8-K with the Securities and Exchange Commission to report that we had received notice from our independent public accountant, Arthur Andersen LLP, of its resignation as our auditor as a result of our plans to change independent public accountants for the fiscal year ending December 31, 2002 due to an anticipated future non-audit business relationship between the two companies.
On May 13, 2002, we filed a Form 8-K with the Securities and Exchange Commission to report our selection of our independent public accountants, BDO Seidman, LLP, as auditors for the fiscal year ending December 31, 2002.
During the first quarter of 2002 we engaged a third party firm to conduct a physical inventory of our computer hardware assets located in North America. We conducted an internal physical inventory
20
on computer hardware assets located outside of North America. The objective of the physical inventory was to verify the amount and location of our computer hardware. As a result of the findings of the physical inventory and related reconciliation with our asset records, we recorded an asset impairment charge of approximately $2.3 million net book value related to computer hardware. During the third quarter of 2002, we conducted an additional review of remaining computer and communication-related assets not reviewed during the first quarter inventory and recorded an asset impairment charge of $853,000 as a result of the findings of our inventory and related reconciliation with our asset records.
Critical Accounting Policies
BroadVision management's discussion and analysis of our financial condition and results of operations
expressedare based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. In preparing these financial statements, we are required to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosures of contingent assets and liabilities. On an ongoing basis, we evaluate our estimates, including those related to doubtful accounts, product returns, investments, goodwill and intangible assets, income taxes and restructuring, asa percentwell as contingencies and litigation. We base our estimates on historical experience and on various other assumptions that we believe are reasonable, the results oftotal revenueswhich form the basis for making judgments about theperiods indicated.
Years Ended December 31, --------------------------- 2000 1999 1998 ------ ------ ------Revenues: Software licenses ............................. 61% 65% 71% Services ...................................... 39 35 29 ---- ---- ---- Total revenues ........................ 100 100 100 ---- ---- ---- Cost of revenues: Cost of software licenses ..................... 2 3 2 Cost of services .............................. 28 22 17 ---- ---- ---- Total cost of revenues ..................... 30 25 19 ---- ---- ---- Gross profit .......................... 70 75 81 ---- ---- ---- Operating expenses: Research and development ...................... 13 13 18 Sales and marketing ........................... 41 42 52 General and administrative .................... 7 7 7 Goodwill and intangible amortization .......... 45 -- -- Charge for acquired in-process technology ..... 2 -- -- ---- ---- ---- Total operating expenses ................... 108 62 77 ---- ---- ---- Operating (loss) income ............... (38) 13 4 Other, net ................................. 4 4 4 ---- ---- ---- (Loss) Income before income taxes ..... (34) 17 8 Income tax provision ....................... 5 1 -- ---- ---- ---- Net (loss) income ..................... (39)% 16% 8% ==== ==== ====RESULTS OF OPERATIONS Revenuescarrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates using different assumptions or conditions. We believe the following critical accounting policies reflect the more significant judgments and estimates used in the preparation of our consolidated financial statements.Revenue Recognition
Overview—Our revenues are derived from fees for licenses of our software
licensing arrangementsproducts, maintenance, consulting services and customer training. We generally charge fees for licenses of our software products either based on the number of persons registered to use the product or based on the number of CPUs on which the product is installed. Licenses for software whereby fees chargedfor services. Software is generally licensedare based upon the number of persons registered to use the product are differentiated between licenses for development use and licenses foritsuse in deployment of the customer's website.Deployment licensesLicenses for software whereby fees charged aregenerally based on the number of persons who registeron acustomer's website using our software.per-CPU basis do not differentiate between development and deployment usage. Our revenue recognition policies are in accordance with Statement of Position("SOP")(SOP) No. 97-2,Software Revenue Recognition, asamended andamended; SOP No. 98-9,Software Revenue Recognition, With Respect to CertainTransactions.Transactions and the Securities and Exchange Commission's Staff Accounting Bulletin No. 101,Revenue Recognition in Financial Statements.Software License Revenue—We license our products through our direct sales force and indirectly through resellers. In general, software license revenues are recognized when a non-cancelable license agreement has been signed and the customer acknowledges an unconditional obligation to pay, the software product has been delivered, there are no uncertainties surrounding product acceptance, the fees are fixed and determinable and collection is considered
probable; professional servicesprobable. Delivery is considered to have occurred when title and risk of loss have been transferred to the customer, which generally occurs when media containing the licensed programs is provided to a common carrier. In case of electronic delivery, delivery occurs when the customer is given access to the licensed programs. If collectibility is not considered probable, revenue is recognized when the fee is collected. Subscription-based license revenues arerecognized as such services are performed; and maintenance revenues, or post-contract customer support, or PCS, including revenues bundled with software agreements which entitle the customers to technical support and future unspecified enhancements to our products, are deferred andrecognized ratably over therelated contract period, generally twelve months.subscription period. We enter into reseller arrangements that typically provide for sublicense fees payable to us based upon a percentage of list price. We do not grant our resellers the right of return.We recognize revenue using the residual method pursuant to the requirements of SOP No. 97-2, as amended by SOP No. 98-9. Revenues recognized from multiple-element software arrangements are
21
allocated to each element of the arrangement based on the fair values of the elements, such as licenses for software products,
post contractmaintenance, consulting services or customersupport, installation ortraining. The determination of fair value is based on objective evidence, which is specific to us.IfWe limit our assessment of objective evidenceof fair value doesfor each element to either the price charged when the same element is sold separately or the price established by management having the relevant authority to do so, for an element notexist for all elements of a license agreement and PCS is the only undelivered element, then all revenue for the license arrangement is recognized ratably over the term of the agreement as license revenue.yet sold separately. If evidence of fair value of all undelivered elements exists but evidence does not exist for one or more delivered elements, then revenue is recognizedusingunder the residual method. Under the residual method, the fair value of the undelivered elements is deferred and the remaining portion of the arrangement fee is recognized as revenue.Services that the Company provides are not essential to the functionality of the software.We record unearned revenue for software arrangements when cash has been received from the customer and the arrangement does not qualify for revenue recognition under our revenue recognition policy. We record accounts receivable for software arrangements when the arrangement qualifies for revenue recognition but cash or other consideration has not been received from the customer.
Services Revenue—Consulting services revenues and customer training revenues are recognized as such services are performed. Maintenance revenues, which include revenues bundled with software license agreements that entitle the customers to technical support and future unspecified enhancements to our products, are deferred and recognized ratably over the related agreement period, generally twelve months. Our professional services which consist of consulting, maintenance and training are delivered through BVGS. Services that we provide are not essential to the functionality of our
BroadVision Global Services Organization, or BVGS, presently comprised of the Strategic Services Group, the Technical Services Group, the Content and Creative Services Group, the Client Services, Project and Program Management Group, the Partner Services Group, the Education Services Group and the Technical Support Services Group. The first three groups providesoftware. This group provides consulting services,the fourth groupmanages projects and client relationships,the fifth groupmanages the needs of our partner community,the sixth groupprovides training-related services to employees, customers and partners, andthe last groupalso provides software maintenance services, including technical18support, to our customers and partners. RevenueWe record reimbursement by our customers for out-of-pocket expenses as a component of services revenue.Allowances and Reserves
Occasionally, our customers experience financial difficulty after we record the sale but before we are paid. We maintain allowances for doubtful accounts for estimated losses resulting from
consulting services is typically recognized as services are performed. Maintenance fees relating to technical support and upgrades are recognized ratably overthemaintenance period. A summaryinability of oursoftwarecustomers to make required payments. Our normal payment terms are 30 to 90 days from invoice date. If the financial condition of our customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required. We record estimated reductions to revenue for potential returns of products by our customers. If market conditions were to decline, we may experience larger volumes of returns resulting in an incremental reduction of revenue at the time the return occurs.Impairment Assessments
As discussed in Note 4 to our Consolidated Financial Statements, we adopted Statement of Financial Accounting Standard (SFAS) No. 142, "Goodwill and
servicesOther Intangible Assets," on January 1, 2002. This standard requires that goodwill no longer be amortized, and instead, be tested for impairment on a periodic basis.Pursuant to SFAS No. 142, we are required to test goodwill for impairment upon adoption and annually or more often if events or changes in circumstances indicate that the asset might be impaired. While there was no accounting charge to record upon adoption, at September 30, 2002, we concluded that, based on the existence of impairment indicators, including a decline in our market value, we would be required to test goodwill for impairment. SFAS No. 142 provides for a two-stage approach to determining whether and by how much goodwill has been impaired. Since we have only one reporting unit for purposes of applying SFAS No. 142, the first stage requires a comparison of the fair value of the Company to its net book value. If the fair value is greater, then no impairment is deemed to have
22
occurred. If the fair value is less, then the second stage must be completed to determine the amount, if any, of actual impairment. We completed the first stage and determined that our fair value at September 30, 2002 exceeded our net book value on that date, and as a result, no impairment of goodwill was recorded in the consolidated financial statements. We obtained an independent appraisal of fair value to support our conclusion. We also determined that our fair value exceeded our net book value as of December 31, 2002 and therefore, no additional impairment was warranted.
The process of evaluating the potential impairment of goodwill is highly subjective and requires significant judgment. In estimating our fair value, we made estimates and judgments about future revenues and cash flows. Our forecasts were based on assumptions that are consistent with the plans and estimates we are using to manage our business. Changes in these estimates could change our conclusion regarding impairment of goodwill and potentially result in a non-cash goodwill impairment charge, for all or a portion of the goodwill balance at December 31, 2002. For long-lived assets, accounting standards dictate that assets become impaired when the undiscounted future cash flows expected to be generated by
geographic regionthem are less than their carrying amounts. When that occurs, the affected assets are written down to their estimated fair value.Deferred Tax Assets
We analyze our deferred tax assets with regard to potential realization. We have established a valuation allowance on our deferred tax assets to the extent that we determined that it is more likely than not that some portion or all of the deferred tax asset will not be realized based upon the uncertainty of their realization. We have considered estimated future taxable income and ongoing prudent and feasible tax planning strategies in assessing the amount of the valuation allowance. Based upon this analysis, we recorded a valuation allowance for our deferred tax assets during the three months ended June 30, 2002, which resulted in a charge of $6.3 million.
Accounting for Stock-Based Compensation
We apply Accounting Principles Board (APB) Opinion Number 25,Accounting for Stock Issued to Employees, and related interpretations when accounting for our stock option and stock purchase plans. In accordance with APB No. 25, we apply the intrinsic value method in accounting for employee stock options. Accordingly, we generally recognize no compensation expense with respect to stock-based awards to employees.
During the year ended December 31, 2002, the Company recorded compensation expense of $846,000. This charge was recorded as a result of granting terminated employees continued vesting of their stock options for a period beyond their actual termination date. The compensation charge was calculated using the Black-Scholes model. $739,000 of the charge is recorded in general and administrative expense and the remaining $107,000 is included in restructuring charge as it related to employees terminated under the Company's restructuring plan.
We have determined pro forma information regarding net income and earnings per share as if we had accounted for employee stock options under the fair value method as required by SFAS Number 123,Accounting for Stock Compensation. The fair value of these stock-based awards to employees was estimated using the Black-Scholes option pricing model. Please see Note 10 of Notes to Consolidated Financial Statements for assumptions used in the Black-Scholes option pricing model. Had compensation cost for the Company's stock option plan and employee stock purchase plan been determined consistent with SFAS No. 123, the Company's reported net income (loss) and net earnings
23
(loss) per share would have been changed to the amounts indicated below (in thousands except per share data):
Years Ended December 31, 2002 2001 2000 Net loss as reported $ (170,522 ) $ (836,259 ) $ (161,629 ) Add: Stock-based employee compensation expense included in reported net loss, net of related tax effects 846 1,014 226 Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects (47,979 ) 39,661 (323,184 ) Pro forma net loss $ (217,655 ) $ (795,584 ) $ (484,587 ) Earnings per share: Basic—as reported $ (5.32 ) $ (27.20 ) $ (5.60 ) Basic—pro forma $ (6.80 ) $ (25.87 ) $ (16.79 ) Diluted—as reported $ (5.32 ) $ (27.20 ) $ (5.60 ) Diluted—pro forma $ (6.80 ) $ (25.87 ) $ (16.79 ) Restructuring
Our Restructuring charges are comprised primarily of: (i) severance and benefits termination costs related to the reduction of our workforce; (ii) lease termination costs and/or costs associated with permanently vacating our facilities; and (iii) impairment costs related to certain long-lived assets abandoned. We account for each of these costs in accordance with SEC Staff Accounting Bulletin No. 100,Restructuring and Impairment Charges
We account for severance and benefits termination costs in accordance with EITF Issue No. 94-3,Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (Including Certain Costs Incurred in a Restructuring) (EITF 94-3). Accordingly, we record the liability related to these termination costs when the following conditions have been met: (i) management with the appropriate level of authority approves a termination plan that commits us to such plan and establishes the benefits the employees will receive upon termination; (ii) the benefit arrangement is communicated to the employees in sufficient detail to enable the employees to determine the termination benefits; (iii) the plan specifically identifies the number of employees to be terminated, their locations and their job classifications; and (iv) the period of time to implement the plan does not indicate changes to the plan are likely. The termination costs recorded by us are not associated with nor do they benefit continuing activities.
We account for the costs associated with lease termination and/or abandonment in accordance with EITF 88-10. Accordingly, we record the costs associated with lease termination and/or abandonment when the leased property has no substantive future use or benefit to us. Under EITF 88-10, we record the liability associated with lease termination and/or abandonment as the sum of the total remaining lease costs and related exit costs, less probable sublease income. We account for costs related to long-lived assets abandoned in accordance with SFAS 144 and, accordingly, charges to expense the net carrying value of the long-lived assets when we cease to use the assets.
Inherent in the estimation of the costs related to our Restructuring efforts are assessments related to the most likely expected outcome of the significant actions to accomplish the Restructuring. In determining the charge related to the Restructuring, the majority of estimates made by management related to the charge for excess facilities. In determining the charge for excess facilities, we were required to estimate future sublease income, future net operating expenses of the facilities, and brokerage commissions, among other expenses. The most significant of these estimates related to the timing and extent of future sublease income in which to reduce our lease obligations. Specifically, in
24
determining the Restructuring obligations related to facilities as of December 31, 2002, we reduced our lease obligations by estimated sublease income of $28.8 million. We based our estimates of sublease income, in part, on the opinions of independent real estate experts, current market conditions and rental rates, an assessment of the time period over which reasonable estimates could be made, the status of negotiations with potential subtenants, and the location of the respective facility, among other factors.
These estimates, along with other estimates made by management in connection with the Restructuring, may vary significantly depending, in part, on factors that may be beyond our control. Specifically, these estimates will depend on our success in negotiating with lessors, the time periods required to locate and contract suitable subleases and the market rates at the time of such subleases. Adjustments to the facilities reserve will be required if actual lease exit costs or sublease income differ from amounts currently expected. We will review the status of Restructuring activities on a quarterly basis and, if appropriate, record changes to our Restructuring obligations in current operations based on management's most current estimates.
Legal Matters
Management's current estimated range of liability related to pending litigation is based on claims for which it is probable that a liability has been incurred and our management can estimate the amount and range of loss. We have recorded the minimum estimated liability related to those claims, where there is a range of loss. Because of the uncertainties related to both the determination of the probability of an unfavorable outcome and the amount and range of loss in the event of an unfavorable outcome, management is unable to make a reasonable estimate of the liability that could result from the remaining pending litigation. As additional information becomes available, we will assess the probability and the potential liability related to our pending litigation and revise our estimates, if necessary. Such revisions in our estimates of the potential liability could materially impact our results of operations and financial position.
25
Statement of Operations as a Percent of Total Revenues
The following table sets forth certain items reflected in our consolidated statements of operations expressed as a percent of total revenues for the periods
indicated is as follows:
Software % Services % Total % -------- -------- -------- -------- -------- -------- (dollars in thousands)Year Ended December 31, 2000: Americas .................. $155,337 62% $125,994 77% $281,331 68% Europe .................... 75,046 30 28,565 18 103,611 25 Asia/Pacific .............. 20,455 8 8,519 5 28,974 7 -------- -------- -------- -------- -------- -------- Total ....................... $250,838 100% $163,078 100% $413,916 100% ======== ======== ======== ======== ======== ======== Year Ended December 31, 1999: Americas .................. $ 48,822 65% $ 30,501 76% $ 79,323 69% Europe .................... 18,918 25 7,293 18 26,211 22 Asia/Pacific .............. 7,643 10 2,337 6 9,980 9 -------- -------- -------- -------- -------- -------- Total ....................... $ 75,383 100% $ 40,131 100% $115,514 100% ======== ======== ======== ======== ======== ======== Year Ended December 31, 1998: Americas .................. $ 19,301 54% $ 10,029 67% $ 29,330 58% Europe .................... 13,879 38 3,065 21 16,944 33 Asia/Pacific .............. 2,887 8 1,750 12 4,637 9 -------- -------- -------- -------- -------- -------- Total ....................... $ 36,067 100% $ 14,844 100% $ 50,911 100% ======== ======== ======== ======== ======== ========2000indicated.
Years Ended December 31, 2002 2001 2000 Revenues: Software licenses 35 % 41 % 60 % Services 65 59 40 Total revenues 100 100 100 Cost of revenues: Cost of software licenses 7 4 2 Cost of services 34 39 28 Total cost of revenues 41 43 30 Gross profit 59 57 70 Operating expenses: Research and development 36 32 13 Sales and marketing 42 56 41 General and administrative 14 17 7 Goodwill and intangible amortization 3 85 45 Charge for acquired in-process technology — 3 2 Restructuring charge 95 62 — Impairment of assets 3 — — Impairment of goodwill and other intangibles — 135 — Total operating expenses 193 390 108 Operating loss (134 ) (333 ) (38 ) Other (expense) income, net (7 ) (3 ) 4 Loss before provision for income taxes (141 ) (336 ) (34 ) Provision for income taxes 6 1 5 Net loss (147 )% (337 )% (39 )% 26
Software % Services % Total % (dollars in thousands) Year Ended December 31, 2002: Americas $ 23,988 59 % $ 46,137 61 % $ 70,125 61 % Europe 14,658 36 24,853 33 39,511 34 Asia/Pacific 1,837 5 4,425 6 6,262 5 Total $ 40,483 100 % $ 75,415 100 % $ 115,898 100 % Year Ended December 31, 2001: Americas $ 51,863 51 % $ 98,385 67 % $ 150,248 60 % Europe 37,606 37 37,524 26 75,130 30 Asia/Pacific 12,011 12 11,034 7 23,045 10 Total $ 101,480 100 % $ 146,943 100 % $ 248,423 100 % Year Ended December 31, 2000: Americas $ 145,277 58 % $ 128,339 78 % $ 273,616 66 % Europe 80,531 32 27,011 16 107,542 26 Asia/Pacific 25,030 10 9,311 6 34,341 8 Total $ 250,838 100 % $ 164,661 100 % $ 415,499 100 % Revenues
2002 versus
19992001Total revenues for the year ended December 31,
2000 increased $298.42002 decreased $132.5 million or258%53% on a year-over-year basis, and consisted ofan increasea decrease in software license revenue of$175.5$61.0 million or233%60% andan increasea decrease in professional services revenue of$122.9$71.5 million or306%49%.The
233% increase60% decrease in software license revenues isa result of continued strong demand by existing and new customers for our expanding product line and core competencies and the growing market for business-to-business and business-to-consumer e-commerce software application solutions. Our aggressive growth and enhanced presence in global markets were contributing factors in ourprimarily attributable to an overallincrease in revenues. Also contributing to increased revenues are sales of software licenses of products acquireddecline in theInterleaf transaction. Revenues attributedeconomy throughout the 2002 fiscal year in comparison to thesales of software licenses for products acquired as a result of2001 fiscal year. Continued economic uncertainty affected theInterleaf acquisition were approximately $11 million from the date of acquisition through December 31, 2000. During the year, we continued to expand the functionality and personalization attributes ofspending on information technology which significantly affected ourapplication products that contributed to a broadened customer base and an increased level of repeat business. In addition, our deploymentlicenserevenues, which are based upon related user profiles, continued to accelerate as a result of an increasingly large number of live sites. Software product license revenues for our Enterprise applications increased to $18.6 million in 2000 as compared to $14.6 million in 1999. Software license revenues for our web applications and tools, or packaged solutions, increased to $232.2 million in 2000 as compared to $60.8 million in 1999. Deployment license revenues increased to $81.8 million in 2000 as compared to $31.2 million in 1999. During the year ended December 31, 2000, we licensed 557 new end-user customers, including customers acquired as part of the Interleaf acquisition, and 74 new partners which compares with approximately 217 new end-user customers and 47 new partners for the year ended December 31, 1999. As of December 31, 2000, we had a total installed license base of 1,169 consisting of 972 end-user customers, including customers acquired as part of the Interleaf acquisition, and 197 partners, which compares with 415 end-user customers and 123 partners as of December 31, 1999.revenue during 2002.The
306% increase49% decrease in professional services revenue is a result ofhigher levels of consulting related servicesdecreased business volume associated withincreased business volumesdecreased software license revenues over the past year andhigher customer support revenues derived from a larger installed customer base.an overall decline in the economy. Maintenance related fees for technical support and product upgrades were$46.2$38.7 million in20002002 which compares to$13.4$59.9 million in1999. We also experienced increases in services and maintenance revenues as a result of the Interleaf acquisition. Total services revenues related to customers acquired as a result of the Interleaf acquisition were approximately $17 million. During fiscal2002.2001 versus 2000
we expanded our corporate training facilities by building new training centers in Chicago, Illinois, the United Kingdom and Taipei, Taiwan. To date we have achieved good market acceptance for our products and have experienced continued revenue growth. We anticipate that international revenues will continue to account for a significant amount of total revenues, and expect to continue to commit significant time and financial resources to the maintenance and ongoing development of direct and indirect international sales and support channels. However, we may be unable to maintain or continue to increase international or domestic market acceptance for our family of products. 191999 versus 1998Total revenues for the year ended December 31,
1999 increased $64.62001 decreased $167.1 million or127%40% on a year-over-year basis, and consisted ofan increasea decrease in software license revenue of$39.3$149.4 million or109%60% andan increasea decrease in professional services revenue of$25.3$17.7 million or170%11%.The
109% increase60% decrease in software license revenueswas a result of continued strong demand foris attributable to an overall decline in the economy throughout the 2001 fiscal year in comparison to the 2000 fiscal year. Continued economic uncertainty affected the spending on information technology which significantly affected ourexpanding product line and core competencies; our strategic positioning within a high momentum market for business-to-business and business-to-consumer personalization focused software application solutions; and the ability to achieve greater penetration into our existing customer base while continuing to add significant numbers of new quality customers. During the year, we continued to expand the functionality and personalization attributes of our application products that contributed to a broadened customer base and an increased level of repeat business. In addition, our deployment related user profile based licensing revenues continued to accelerate as a result of an increasingly larger number of live sites. Software productlicenserevenues for our Enterprise applications decreased to $14.6 million in 1999 as compared to $19.3 million in 1998. Deployment related user profile license revenues increased to $31.2 million in 1999 as compared to $14.8 million in 1998. During the year ended December 31, 1999, we licensed approximately 217 new end-user customers and 47 new partners which compares with approximately 94 new end-user customers and 27 new partners for the year ended December 31, 1998. As of December 31, 1999, we had a total installed license base of over 410 end-user customers and 120 partners, which compares with over 195 end-user customers and 75 partners as of December 31, 1998.revenue during 2001.The
170% increase11% decrease in professional services revenuewasis a result ofhigher levels of consulting related servicesdecreased business volume associated withincreased business volumesdecreased software license revenues over the past year andhigher customer support revenuesan overall decline in the economy. The decrease in overall professional services revenue was partially offset by an increase in maintenance related revenue derived froma larger installed customer base.maintenance renewal agreements. Maintenance related fees27
for technical support and product upgrades were
$13.4$59.9 million in19992001 which compares to$5.1$46.2 million in1998. During the year ended December 31, 1999, we continued to expand and enhance our professional services group and, during August 1999, we completed our greatly expanded corporate training facility located in Redwood City, California. We also added additional training and professional consulting related facilities in Europe and Asia as of December 31, 1999.2000.Cost of Revenues
Cost of
license revenuessoftware licenses includes the costs of product media, duplication, packaging and other manufacturing costs as well as royalties payable to third parties for software that is either embedded in, or bundled and sold with, our products.Cost of services consists primarily of employee-related costs, third-party consultant fees incurred on consulting projects, post-contract customer support and instructional training services.
Years Ended December 31, ----------------------------------------------------------------- 2000 % 1999 % 1998 % -------- -------- -------- -------- -------- -------- (dollars in thousands)Cost of software licenses [1] $ 7,827 3% $ 3,703 5% $ 1,001 3% Cost of services [2] 117,808 72 25,108 63 8,704 59 -------- -------- -------- Total cost of revenues [3] .. $125,635 30% $ 28,811 25% $ 9,705 19% ======== ======== ========[1] --
Years Ended December 31, 2002 % 2001 % 2000 % (dollars in thousands) Cost of software licenses(1) $ 8,144 20 % $ 9,895 10 % $ 7,827 3 % Cost of services(2) 38,898 52 97,639 66 119,391 73 Total cost of revenues(3) $ 47,042 41 % $ 107,534 43 % $ 127,218 30 %
- (1)
- Percentage is calculated based on total software license revenues for the period
indicated [2] --indicated.- (2)
- Percentage is calculated based on total services revenues for the period
indicated [3] --indicated.- (3)
- Percentage is calculated based on total revenues for the period
indicated 2000indicated.2002 versus
19992001For the year ended December 31,
2000,2002, cost oflicense revenues increased $4.1software licenses decreased $1.8 million or111%18% on a year-over-year basis. Cost of software licenses as a percent of license revenues was3%20% in20002002 as compared to5%10% in1999.2001. The decrease in absolute dollars year over year is a result of decreased license revenues and resulting decrease in revenues with associated third party royalties. The increases in the 2002 fiscal year from the 2001 fiscal year as a percentage of license revenue is due primarily to a $3.2 million writeoff of pre-paid royalties for software we no longer intend to utilize. This charge was taken during the fourth quarter of fiscal year 2002. Cost of software licenses, excluding the prepaid royalty write-off, as a percentage of software license revenue were 12% in fiscal year 2002.Cost of services
revenuesduring2000 increased $92.72002 decreased $58.7 million or369%60% on a year-over-year basis. Cost of services as a percent of services revenues was72%52% in20002002 as compared to63%66% in1999. In absolute dollar terms, the increase in cost of software licenses was principally a result of increased sales of our products and of royalty-bearing third party products. In relative percentage terms, cost of software licenses decreased principally as a result of renegotiating the royalty provisions of agreements with software suppliers from per copy royalties to fixed fee prepaid license fees. 202001. The increasedecrease in cost of servicesrevenuesin absolute dollar termsduring 2000 as compared to 1999 is a result of higher business volumes as evidenced by increased services revenues. The increase in cost of servicesand as a percentage ofrevenues can primarily be attributed to an increase in personnel who do not generaterevenue duringtheir initial training period.2002 as compared to 2001 was the result of reductions in force that occurred during the 2002 fiscal year, which resulted in decreased salary and salary-related expenses as well as a decreased use of third party consultants. Total employees inglobal services and client supportBVGS were1,135170 as of December 31,20002002 as compared to246394 as of December 31,1999. This includes employees added as a result of the Interleaf acquisition. In addition, we increased our use of outside consultants from the prior year in order to meet our short-term demands. 19992001.2001 versus
19982000For the year ended December 31,
1999,2001, cost oflicense revenuessoftware licenses increased$2.7$2.1 million or270%26% on a year-over-year basis. Cost of software licenses as a percent of license revenues was5%10% in19992001 as compared to 3% in1998.2000. The increases in the 2001 fiscal year from the 2000 fiscal year are due to a higher level of sales with associated royalties due on third-party products. In addition, during the year ended December 31, 2001, we recorded expense for a prepaid royalty of $500,000 to third parties for products that we do not expect to sell in future years.Cost of services
revenuesduring1999 increased $16.42001 decreased $21.8 million or188%18% on a year-over-year basis. Cost of services as a percent of services revenues was63%66% in19992001 as compared to59%73% in1998.2000. Theincrease in cost of license revenues, in both absolute dollar and relative percentage terms, was principally a result of the higher mix of third party software bundled and sold with our products and the related third party royalty fees payable on those sales. Third party royalty costs relative to license revenues have been offset to some extent as a result of our renegotiating previously existing percentage-based royalty arrangements into prepaid fixed fee royalties for periods extending through 2004. The increasedecrease in cost of servicesrevenuesin absolute dollar termsduring 1999 as compared to 1998 was a result of higher business volumes as evidenced by increased services revenues. Overall costs increased as a result of additions to our professional services staffandthe employment of outside consultants to meet short-term consulting demands. The increase in cost of servicesas a percentage ofservices revenuesrevenue during 2001 as compared to28
2000 was
athe result ofthe assimilation of new professional consultants added to the groupreductions in force that occurred during the 2001 fiscal year, which resulted in decreased salary andhighersalary-related expenses as well as a decreased use ofoutside consultantsthird party consultants. Total employees inrelationBVGS were 394 as of December 31, 2001 as compared tothe extent previously used during the prior year period.1,135 as of December 31, 2000.Operating Expenses and Other Income (Expense), net
Research and development expenses consist primarily of salaries, employee-related benefit costs and consulting fees incurred in association with the development of our products. Costs incurred for the research and development of new software products are expensed as incurred until
thesuch time that technological feasibility, in the form of a working model, is established at whichpoint thesetime such costs are capitalizedsubject to recoverability.and recorded at the lower of unamortized cost or net realizable value. The costswe haveincurred subsequent to the establishment of a working model but prior to general release of the product have not been significant. To date, we have not capitalized any costs related to the development of softwaredevelopment costs.for external use.Sales and marketing expenses consist primarily of salaries, employee-related benefit costs, commissions and other incentive compensation, travel and entertainment and
marketing-relatedmarketing program-related expenditures such as collateral materials, trade shows, public relations, advertising, and creative services.General and administrative expenses consist primarily of salaries, employee-related benefit costs, accounts receivable reserves expense, and professional service fees.
A summary of operating expenses is set forth in the following table. The percentage of expenses is calculated based on total revenues.
Years Ended December 31, ------------------------------------------------------------------- 2000 % 1999 % 1998 % -------- -------- -------- -------- -------- -------- (dollars in thousands)Research and development ................. $ 51,621 13% $ 14,568 13% $ 9,227 18% Sales and marketing ...................... 167,415 41 48,903 42 26,269 52 General and administrative ............... 28,195 7 7,970 7 3,786 7 Goodwill and intangible amortization ..... 187,748 45 -- -- -- -- Charge for acquired in-process technology 10,100 2 -- -- -- -- -------- -------- -------- Total operating expenses ................. $445,079 108% $ 71,441 62% $ 39,282 77% ======== ======== ======== ======== ======== ======== Interest income .......................... $ 16,706 4% $ 5,142 4% $ 2,484 5% ======== ======== ======== ======== ======== ======== Other income (expense), net .............. $ 1,511 0% $ (599) 1% $ (448) 1% ======== ======== ======== ======== ======== ========212000
Years Ended December 31, 2002 % 2001 % 2000 % (dollars in thousands) Research and development $ 41,432 36 % $ 78,677 32 % $ 51,621 13 % Sales and marketing 48,918 42 139,799 56 167,415 41 General and administrative 16,288 14 42,311 17 28,088 7 Goodwill and intangible amortization 3,548 3 211,216 85 187,855 45 Charge for acquired in-process technology — — 6,418 3 10,100 2 Restructuring charge 110,449 95 153,284 62 — — Impairment of assets 3,129 3 — — — — Impairment of goodwill and other intangibles — — 336,379 135 — — Total operating expenses $ 223,764 193 % $ 968,084 390 % $ 445,079 108 % Interest income $ 4,130 4 % $ 11,404 5 $ 16,706 4 % Other income (expense), net $ (12,141 ) (10 )% $ (18,332 ) (7 )% $ 1,511 0 % 2002 versus
19992001Research and development expenses for the year were
$51.6$41.4 million in20002002 as compared to$14.6$78.7 million in19992001, which representsan increasea decrease of253% year-over-year. Sales and marketing expenses for the year were $167.4 million in 2000 as compared to $48.9 million in 1999 which represents an increase of 242% year-over-year. General and administrative expenses for the year were $28.2 million in 2000 as compared to $8.0 million in 1999 which represents an increase of 253% year-over-year. Interest income for the year was $16.7 million in 2000 as compared to $5.1 million in 1999 that represents an increase of 227% year-over-year. Net other income (expense) for the year was $1.5 million in 2000 as compared to $(599,000) in 1999 that represents an increase of 350%47% year-over-year. Theincreasedecrease in research and development expenses is primarily attributable topersonnela reduction in staffing levels resulting in decreased salary and salary related costsfor added headcount within those operations involved in the enhancement of existing applications and the developmentas well as other cost-cutting efforts taken by us as part of ournext generationrestructuring plan, such as consolidation ofproducts. We added personnelfacilities.Sales and marketing expenses for the year were $48.9 million in 2002 as compared to $139.8 million in 2001 which represents a
development facility in Waltham, Massachusetts in conjunction with the Interleaf acquisition. The increases in salesdecrease of 65% year-over-year. Sales and marketing expensesreflectsdecreased as29
a result of decreased salary expense related to 2002 fiscal year reductions in force, in addition to decreased commission expense as a result of decreases in license revenue from 2001 to 2002.
General and administrative expenses for the
costyear were $16.3 million in 2002 as compared to $42.3 million in 2001, which represents a decrease ofhiring additional sales and marketing personnel including sales commissions, the continued development of sales distribution channels and the expansion of promotional activities and marketing-related programs.62% year-over-year. Theincreasedecrease in general and administrative expenses is attributable toadditional administrativedecreases in the general reserves of our accounts receivable balances due to better than expected collection efforts andmanagement personnel, higher professional fees, increase in bad debt reservedeclining accounts receivable balances and decreased salary expense as a result ofan increasereductions inaccounts receivable due to our rapid growth, and additional infrastructure to support the expansion of our operations. The increaseworkforce as well as decreases ininterest income is attributable to a higher level of investment income during the yearfacilities costs as a result of continued facilities consolidations and decreases in professional services expenses.Goodwill and intangible amortization—On June 29, 2001, we completed our acquisition of Keyeon LLC ("Keyeon"), a joint venture in which we previously held an
increaseinterest of approximately 36%. As consideration for the acquisition, we issued 301,475 shares of our common stock valued at $13.6 million to the other participants ininvestments and cashthe joint venture, which resulted ininterest bearing accounts.our owning 100% of the outstanding shares of Keyeon. Theincrease in other income, net is primarilyacquisition was accounted for as a purchase. As a result ofrealized gains onthesaleKeyeon acquisition, we recorded goodwill ofinvestments partially offset by realized losses on investments due to impairment as well as interest expense.$880,000. Amortization ofGoodwillgoodwill related to the Keyeon acquisition was $0 in 2002 andOther Intangible Assets Our acquisition ofapproximately $246,000 in 2001. We acquired Interleafwason April 14, 2000. We accounted forunderthe acquisition as a purchasemethodbusiness combination. As a result ofaccounting. Accordingly,this transaction, we recorded goodwill and other intangible assetsrepresentingof $794.7 million. Amortization of goodwill related to theexcessInterleaf transaction was $0 during 2002 and amortization of recognizable intangible assets related to thepurchase price paid over the fair value of net assets acquired of approximately $1.9 million. Gross goodwill recorded as a result of the acquisitionInterleaf transaction was$765.8 million. The aggregate amortization$35 million in 2002. Amortization of goodwill and otherintangibleintangibles assets related to the Interleaf acquisition was$187.6$210.8 million infiscal 2000.2001. On November 24, 1999, we acquired all of the registered shares of Fidutec Information Technology SA. We have accounted for this acquisition as a purchase business combination. Amortization of goodwill related to Fidutec was $0 in 2002 and approximately $214,000 in 2001. As reported in Note 4 in Notes to Consolidated Financial Statements, we recorded a $336.4 million impairment charge during 2001 to reduce goodwill by $330.2 million and other intangible assets by $6.2 million associated with our acquisitions, primarily the Interleaf acquisition, to their estimated fair value. As described in Note 4 in the Notes to Consolidated Financial statements, as of January 1, 2002, we no longer amortize goodwill or the assembled workforce as we have identified the assembled workforce as an intangible asset which does not meet the criteria of recognizable intangible asset as defined by SFAS No. 142. Thegoodwill andremaining other intangible assets are being amortized on a straight-line basis overthe expectedtheir remaining useful life of threeyearsmonths as of December 31, 2002. We periodically assess goodwill andwill amountother intangibles for impairment as discussed in Note 4 of Notes to$264.9 million in 2001, $264.9 million in 2002 and $77.3 millionConsolidated Financial Statements. The remaining intangible assets that are being amortized are a result of the acquisition of Interleaf. We have accounted for the acquisition as a purchase business combination. Amortization expense is estimated to be $887,000 in 2003. It is possible that we may continue to expand our business through acquisitions and internal development. Any additional acquisitions or impairment of goodwill and other purchased intangibles could result in additional merger and acquisition relatedcosts. On November 24, 1999, the Company acquired all of the registered shares of Fidutec Information Technology SA for a cash payment of 6,000,000 Swiss Francs (equivalent U.S. dollar value of $3,765,000, net of cash acquired); of which 1,200,000 Swiss Francs are held in escrow, subject to employee retention conditions lasting 12 to 24 months depending on named employees. The acquisition was accounted for as a purchase. The acquired assets and assumed liabilities, and the related results of operations, are included in the consolidated financial statements of the Company from the date of acquisition. The name of the acquired business has been subsequently changed to BroadVision Professional Services. Amortization of goodwill was approximately $200,000 in fiscal 2000.expenses.Charge for
Acquired In-Process Technologyacquired in-process technology—In connection with theInterleafacquisitionwe recorded a chargeof$10.1 million in the quarter ended June 30, 2000 for acquired in-process technology that had not reached technological feasibility. BasedKeyeon, LLC, and based upon our estimates prepared in conjunction with a third-party valuation consultant,$10.1$6.4 million was allocated toAcquired In-Process Technologyacquired in-process technology and$796.0 million$880,000 was allocated to goodwill and intangible assets. Theamounts allocatedacquired in-process technology included a project tointangible assets include completed technologies of $20.4develop an employee portal product. We estimated that $6.4 millionand assembled workforces of $8.5 million. We used the cost approach to estimate the valueof theassembled workforce and the income approach to estimate the value of the business and technology projects acquired. The income approach takes into consideration the expected future cash flows attributable to the technology projects and discounts these cash flows to present value at a rate that appropriately reflects their risk. The value assigned topurchase price for Keyeon represented acquired in-process technologywas the amount attributable to the efforts of Interleaf up to the time of acquisition. This amount was estimated through application of the "stage of completion" calculation by multiplying the estimated present value of future cash flows, excluding costs of completion, by the percentage of completion of the purchased technology projects at the time of acquisition. Based upon these estimates, material net cash flows from the acquired business are expected to occur during the calendar year 2000. The cash flows for the completed and in-process technologies were discounted using discount rates of 15% to 35%. The fair market value of the technologies acquired have been grouped in three classifications. Completed Technology represents technologythathas successfully completed final Beta test. In-Process Technology represents technology that, as of the valuation date, hashad not yetentered Beta test or has commenced but not yet successfully completed final Beta testreached technological feasibility andhashad no alternative future use.Core Technology is technology that is beingAccordingly, this amount was immediately charged to expense in the consolidated statements of operations. The income approach methodology was usedin not onlyto value thecurrent products andacquired in-processtechnology projects, but also in future, not yet defined projects. Completed technologies are defined as those that have reached technological feasibility. The Company defines technological feasibility astechnology. Under thepoint at whichincome approach, fair value reflects thetechnologies have successfully completed Beta test. 22The Completed Technologies include projects that enable companies to create, manage and deliver e-content for web enabled applications, using XML as its technology backbone and Microsoft Word for content creation. These projects also enable companies to manage XML and non-XML documents throughout their lifecycle in one integrated system. The In-Process Technologies include a project to develop a version of current software which will run on a Unix-based operating system. Aspresent value of thevaluation date,projected free cash flows that will be generated by the products, incorporating the acquired technologies under development, assuming they will be successfully completed. These cash flows are discounted at a rate appropriate for the risk ofthis projectthe asset. The rate of return depends upon the stage of completion, which wasapproximately 34% complete and thereestimated at30
fifty percent. An overall after tax discount rate of thirty percent was
significant technological risk remaining. The value attributedapplied tothis project was $1.3 million. The application from this project has been integrated into our products.the cash flows expected to be generated by the products incorporating technology currently under development. The efforts required to complete the acquired in-process technology included the completion of all planning, designing and testing activities that were necessary to establish that the product can be produced to meet its design requirements, including functions, features and technical performance requirements. The costs to complete this project were included in the year ending December 31,20002001 and there are no expected remaining costs.Another In-Process Technology projectRestructuring charge—During fiscal 2001 and fiscal 2002, we approved restructuring plans to, among other things, reduce our workforce and consolidate facilities. These restructuring and asset impairment charges were taken to align our cost structure with changing market conditions and to create a more efficient organization. A pre-tax charge of $110.4 million was recorded during fiscal 2002 and a pre-tax charge of $153.3 million was recorded during fiscal 2001 to provide for these actions and other related items. We recorded the low-end of a range of assumptions modeled for the restructuring charges, in accordance with SFAS No. 5,Accounting for Contingencies. The high-end of the range was estimated at $117.8 million for the charge related to fiscal 2002. Adjustments to the restructuring reserves will be made in future periods, if necessary, based upon the then current actual events and circumstances.
Severance and benefits—We recorded a charge of approximately $7.6 million during fiscal year ended December 31, 2002 related to severance benefits to terminated employees in the United States and various international locations. Costs incurred include severance, payroll taxes and COBRA benefits. Included in the $7.6 million is $107,000 of non-cash charges. These non-cash charges represent a one-time compensation charge taken as a result of granting certain terminated employees extended vesting of stock options beyond the standard vesting schedule for terminated employees. The compensation charge was calculated using the Black-Scholes option pricing model. Approximately $817,000 of severance and benefits related costs remained accrued as of December 31, 2001 as a result of our 2001 restructuring plan. Approximately $6.9 million of severance and benefits costs had been paid out during fiscal 2002 and the remaining $1.4 million of severance, payroll taxes and COBRA benefits is expected to be paid in full by December 31, 2003. Our restructuring plan included plans to terminate the employment of approximately 430 employees in North and South America and approximately 95 employees throughout Europe and Asia/Pacific during the first three quarters of fiscal 2002, impacting all of our departments. The employment of approximately 525 employees was terminated during fiscal year 2002. As a result of these reductions, we expect annual salary savings of approximately $44.6 million.
Facilities/Excess Assets—During fiscal year 2002, we revised our estimates and expectations with respect to our facilities disposition efforts due to further consolidation and abandonment of additional facilities and to account for changes in estimates used in our 2001 restructuring plan based upon actual events and circumstances. Total lease termination costs include the impairment of related assets, remaining lease liabilities and brokerage fees offset by estimated sublease income. The estimated costs of abandoning these leased facilities, including estimated sublease income, were based on market information analyses provided by a commercial real estate brokerage firm retained by us. Based on the factors above, a facilities/excess assets charge of $101.7 million was recorded during fiscal year 2002 and includes non-cash asset impairment charges of approximately $18.9 million.
Approximately $89.9 million of facilities related costs remained accrued as of December 31, 2001 as a result of our 2001 restructuring plan. Net cash payments during fiscal year 2002 related to abandoned facilities amounted to $78.0 million. Actual future cash requirements may differ materially from the accrual at December 31, 2002, particularly if actual sublease income is significantly different from historical estimates. As of December 31, 2002, $94.7 million of lease termination costs, net of anticipated sublease income, is expected to be paid by the end of the second quarter of fiscal 2013. We expect to pay approximately $26.9 million over the next twelve months and the remaining $67.8 million from January 1, 2004 through June of fiscal 2013. The $94.7 million is net of approximately
31
$44.8 million of estimated sublease income of which approximately $28.8 million represents sublease agreements yet to be negotiated.
Other—We recorded charges of approximately $1.1 million during fiscal year 2002 for various incremental costs incurred as a direct result of the restructuring plan. The remaining reserve balance of $79,000 is expected to be paid in full by the end of the fourth quarter of 2003
Actual future cash requirements may differ materially from the restructuring accruals at December 31, 2002, particularly if actual sublease income is significantly different from current estimates. Adjustments to the restructuring accruals will be made in future periods, if necessary, based upon the then current actual events and circumstances.
Interest Income—Interest income decreased to $4.1 million for the year ended December 31, 2002 from $11.4 million for the year ended December 31, 2001. The decrease is attributable to decreased cash balances from 2001 to 2002.
Other income (expense), net for the 2002 fiscal year was an
upgradeexpense of $12.1 million as compared to expense of $18.3 million in 2001. The main reason for the decrease in other expense is due to a decrease in losses on asset sales/disposals of $2.2 million, a decrease in losses on foreign currency of $1.6 million and a decrease in equity in net loss from unconsolidated subsidiaries of $2.4 million.Impairment of assets—During the first quarter of 2002, we engaged a third party firm to conduct a physical inventory of our computer hardware assets located in North America. We conducted an
existing productinternal physical inventory on computer hardware assets located outside of North America. The objective of the physical inventory was to verify the amount and location of our computer hardware. As a result of the findings of the physical inventory and related reconciliation with our asset records, we recorded an asset impairment charge of approximately $2.3 million net book value related to computer hardware during the first quarter of fiscal 2002. During the third quarter of 2002, we conducted an additional review of remaining computer and communication related assets not reviewed during the first quarter inventory and recorded an asset impairment charge of $853,000 as a result of the findings of our inventory and related reconciliation with our asset records.Impairment of goodwill and other intangible assets—As discussed in Note 4 to our Consolidated Financial Statements, we adopted SFAS No. 142, "Goodwill and Other Intangible Assets," on January 1, 2002. This standard requires that
will take into account new W3C standards being developedgoodwill no longer be amortized, and instead, be tested forXMLimpairment on a periodic basis.Pursuant to SFAS No. 142, we are required to test goodwill for impairment upon adoption and
will provideannually or more often if events or changes in circumstances indicate that thecapabilityasset might be impaired. While there was no accounting charge to record upon adoption, at September 30, 2002, we concluded that, based on the decline in our stock price, we would be required to test goodwill for impairment. SFAS No. 142 provides for ausertwo-stage approach toauthordetermining whether andcreate documents for a specific output device. As of the valuation date, this project was approximately 6% complete. The value attributed to this project was $300,000. This project was subsequently canceled and the project has no future alternative use. Costs incurred to complete this project were not material. A third In-Process Technology project is being developed to provide a new, cost-effective means for a website to deliver content both to full-function personal computers and to reduced-function devices such as wireless telephones and wireless personal digital assistants. As of the valuation date, this project was approximately 57% complete. The value attributed to this project was $8.5 million. The application from this projectby how much goodwill has beenintegrated intoimpaired. Since we have only one reporting unit for purposes of applying SFAS No.142, the first stage requires a comparison of ourproducts. The efforts requiredfair value tocompleteour net book value. If theacquired in-process technology includedfair value is greater, then no impairment is deemed to have occurred. If thecompletionfair value is less, then the second stage must be completed to determine the amount, if any, ofall planning, designingactual impairment. We completed the first stage andtesting activitiesdetermined thatwere necessary to establishour fair value at September 30, 2002, exceeded our net book value on thatthe product can be produced to meet its design requirements, including functions, featuresdate, andtechnical performance requirements. The costs to complete this project were includedas a result, no impairment of goodwill was recorded in theyear endingcondensed consolidated financial statements. We obtained an independent appraisal of fair value to support our conclusion. We also determined, as of December 31,20002002, that our fair value exceeded our net book value andthere arenoexpected remaining costs. Core Technology encompasses both leveraged codeimpairment of goodwill andgeneral technological know-how, experienceother intangible assets existed.The process of evaluating the potential impairment of goodwill is highly subjective and
expertise regardingrequires significant judgment. In estimating thedesign, manufacture and development of content management technology in existing products. It is therefore not appropriate to consider thefair value of theCore TechnologyCompany, we made estimates and judgments about future revenues and cash flows. Our forecasts were based on assumptions that are consistent with32
the plans and estimates we are using to
be partmanage the Company. Changes in these estimates could change our conclusion regarding impairment ofthe estimated value of In-Process Technology. Thus, the value of the In-Process Technology has been isolated by allocatinggoodwill and potentially result in a non-cash goodwill impairment charge, for all or a portion of the goodwill balance at December 31, 2002. For long-lived assets, accounting standards dictate that assets become impaired when the undiscounted future cash flows expected to be generated by them are less than their carrying amounts. When that occurs, the affected assets are written down to their estimated fair value. As described in "Recent Accounting Pronouncements" in this document, our accounting for goodwill changed in 2002 upon adoption of SFAS No. 142.During the third quarter of 2001, we determined that the goodwill and other intangible assets related to our various acquisitions may have been impaired. In accordance with SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of" and Accounting Principles Board Opinion No. 17, "Intangible Assets", we performed an impairment analysis. These standards require that goodwill and other intangible assets be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. Because we had integrated the acquired companies' operations, we performed the test for impairment at an overall enterprise level. Our policy is to use a discounted cash flow
to this Core Technology that gives full recognition to its contribution. As noted above, the income forecast method was used to value the business and technology projects acquired. The value of the acquired In-Process Technology and the Completed Technologies wasapproach. This approach includes analyzing estimatedby discounting to present value the freefuture cash flowsgenerated by the products with which the technologies are associatedover the remainingeconomic liveslife of thetechnologies. Discount rates used ranged from 15%goodwill and other intangible assets as well as a disposition value at the end of the life of the goodwill and other intangible assets. The resulting value was then compared to35% and were based upontherelative risk associated with the completed technologiescarrying value of stockholders' equity and theincomplete development projectsdifference represents goodwill andupon considerations such as stageother intangible assets impairment measured on a discounted basis. Accordingly, we recorded an impairment charge ofcompletion, remaining development milestones, technological uncertainties and projected cost$336.4 million during the 2001 fiscal year.We are attempting to
complete. We believe that these discount rates are consistent with the overallreduce expenses in an effort to return to profitability during a period when revenues have been less than originally expected. Therefore, operating costsof capital and the relative risks of the completed technologies and the research and development project. We have valued the In-Process Technology using the "Percentage Completion Approach" as suggested by the U.S. Securities and Exchange Commission. This approach varies from the traditional discounted cash flow approach that is used to value In-Process Technology. The Percentage Completion Approach does not include completion costsmay decline in thediscounted cash flow analysis and the present value ofnear future,cash flows is multiplied by the estimated percentage complete as of the valuation datebut there can be no assurance that such decline will be enough todetermine the value of the acquired In-Process Technology. The cost approach was utilizedreturn BroadVision tovalue the assembled workforce. This approach considers the concept of avoided costs as an indicator of value and is an appropriate method for estimating the fair market value of an asset where reliable data for sales of comparable property are not available and where the property does not directly produce an income stream. The basis of the valuation is the estimated costprofitability. Should revenues increase significantly, we would expect our expenses torecruit and train the new work force. As part of the Purchase and Sale Agreement and the closing compilation documents, Non-Compete Agreements (the "Agreements") were executedincrease commensurate withcertain Interleaf employees. No value of the aggregate purchase price was allocated to the Agreements based upon numerous facts and circumstances such as the likelihood of employees leaving BroadVision and the effect on our performance these employees would have should they leave the Company and were not barred from competing. 1999increases in revenues.2001 versus
19982000Research and development expenses for the year were
$14.6$78.7 million in19992001 as compared to$9.2$51.6 million in19982000, which represents an increase of58% year-over-year. Sales and marketing expenses for the year were $48.9 million in 1999 as compared to $26.3 million in 1998 which represents an increase of 86% year-over-year. General and administrative expenses for the year were $8.0 million in 1999 as compared to $3.8 million in 1998 which represents an increase of 111% year-over-year. Net other income for the year was $4.5 million in 1999 as compared to $2.0 million in 1998 which represents an increase of 123%52% year-over-year. The increase in research and development expenseswasis primarily attributable topersonnel costs for added headcount within those operationsincreased efforts involved in the enhancement of existing applications and the development of our23next generation of products. The increasesproducts partially offset by compensation reductions and cost-cutting efforts put insalesplace during the 2001 fiscal year.Sales and marketing expenses
reflectsfor thecostyear were $139.8 million in 2001 as compared to $167.4 million in 2000 which represents an decrease ofhiring additional sales16% year-over-year. Sales and marketingpersonnel, the continued development of sales distribution channels and the expansion of promotional activities and marketing-related programs. In addition, commission rates were higher during 1999expenses decreased as a result ofsales people exceeding their sales quotas.decreased salary expense related to 2001 fiscal year reductions in force, in addition to decreased commission expense as a result of decreases in license revenue from 2000 to 2001.General and administrative expenses for the year were $42.3 million in 2001 as compared to $28.1 million in 2000, which represents an increase of 51% year-over-year. The increase in general and administrative expenses is attributable to
additional administrative and management personnel,higher professional fees primarily due to increased legal expenses andadditional infrastructure to supportincreases in theexpansiongeneral reserves of ouroperations. The increase in net other income is attributable to a higher level of investment income during the yearaccounts receivable balances as a result ofearningsthe effects of the economic slowdown and its impact onproceeds receivedthe operations of certain emerging electronic commerce customers, partially offset by decreased salary expense as a result of reductions in workforce.Goodwill and intangible amortization—As a result of the Keyeon acquisition, we recorded goodwill of $880,000. Amortization of goodwill related to the Keyeon acquisition was approximately $246,000 in 2001. As a result of the Interleaf transaction, we recorded goodwill and other intangible assets of
33
$794.7 million. Amortization of goodwill and other intangibles assets related to the Interleaf acquisition was $210.8 million in 2001 as compared to $187.6 million in 2000. Amortization of goodwill related to Fidutec was approximately $214,000 in 2001 and 2000. As reported in Note 4 in Notes to Consolidated Financial Statements, we recorded a $336.4 million impairment charge during 2001 to reduce goodwill by $330.2 million and other intangible assets by $6.2 million associated with our acquisitions, primarily the Interleaf acquisition, to their estimated fair value.
Charge for acquired in-process technology—In connection with the Keyeon acquisition in 2001, $6.4 million was allocated to acquired in-process technology and $880,000 was allocated to goodwill and intangible assets. The acquired in-process technology includes a project to develop an employee portal product. We estimated that $6.4 million of the purchase price for Keyeon represented acquired in-process technology that had not yet reached technological feasibility and had no alternative future use. Accordingly, this amount was immediately charged to expense in the Consolidated Statements of Operations.
In connection with the Interleaf acquisition which occurred in 2000, we estimated that $10.1 million of the purchase price for Interleaf represented acquired in-process technology that had not yet reached technological feasibility and had no alternative future use. Accordingly, this amount was immediately charged to expense in the Consolidated Statements of Operations upon consummation of the acquisition. The value assigned to acquired in-process technology was the amount attributable to the efforts of Interleaf up to the time of acquisition. The amount was estimated through the application of the "stages of completion" by multiplying the estimated present value of future cash flows, excluding cost of completion, by the percentage of completion of the purchased technology at the time of the acquisition. The discount rate included a factor that took into account the uncertainty surrounding the successful development of the acquired in-process technology.
Restructuring charge—During the 2001 fiscal year, we approved a restructuring plan to restructure our worldwide operations including a reduction in workforce of approximately 859 employees and the consolidation of our operating facilities. These restructuring actions were taken to align our cost structure with changing market conditions and to create a more efficient organization. A pre-tax charge of $153.3 million was recorded in 2001 which included severance and benefits charges, lease abandonment costs, asset impairment charges and other charges incurred as a direct result of the restructuring. We determined a range of expected losses on lease abandonment. We accrued for losses at the low-end of a range in accordance with SFAS No. 5,Accounting for Contingencies. The high-end of the range is estimated at $243.1 million, an increase in the restructuring charge of $89.8 million. Total severance and benefits costs were $9.1 million and included $662,000 of non-cash charges. Approximately $7.6 million of severance and benefits had been paid as of December 31, 2001. We terminated approximately 654 employees in North and South America and approximately 205 employees throughout Europe and Asia Pacific during 2001. The reduction in workforce occurred through all of our departments. Total facilities and excess assets charges during 2001 were $143.8 million and included $36.8 million of asset impairment charges. Approximately $17.1 million of facilities charges had been paid as of December 31, 2001. Other restructuring charges of $405,000 are for various incremental costs incurred as a direct result of the restructuring. Approximately $292,000 had been paid as of December 31, 2001.
Interest Income—Interest income decreased to $11.4 million for the year ended December 31, 2001 from $16.7 million for the year ended December 31, 2000. The decrease is attributable to decreased cash balances.
Other (expense) income, net—for the 2001 fiscal year was an expense of $18.3 million as compared to income of $1.5 million in 2000. The main reason for the decrease in other income is due to a
follow-on public stock offeringdecrease inNovember 1999.short term investment gains on sale of $1.6 million, an increase in cost method investment34
realized losses of $11.7 million, an increase in equity in net loss from unconsolidated subsidiaries of $1.9 million and an increase in losses on asset disposals of $3.1 million.
Impairment of goodwill and other intangible assets—During the third quarter of 2001, we determined that the goodwill and other intangible assets related to our various acquisitions may have been impaired. In accordance with SFAS No. 121,Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of and Accounting Principles Board Opinion No. 17,Intangible Assets, we performed an impairment analysis. We recorded an impairment charge of $330.2 million during the 2001 fiscal year for goodwill. Please see Note 4 of Notes to Consolidated Financial Statements for additional information.
Income Taxes
For the year ended December 31,
2000,2002, we recordedana current income tax provision of$23.0$7.6 million. $6.3 millionconsistingofcurrent expense of $28.6the $7.6 millionandrelates to a valuation provision for our deferred taxbenefitasset recorded in the second quarter of$5.6 million relatingfiscal 2002. The tax expense, excluding the deferred tax asset valuation provision, mainly relates tofederal,foreign withholding taxes and stateand foreignincome taxes. For the year ended December 31,1999,2001, we recorded an income tax provision of$996,000 consisting solely of current expense$2.1 million relating tofederalstate and foreign income taxes.For the year ended December 31, 1998, we recorded a net income tax benefit of $79,000, comprised of a deferred tax benefit of $700,000 and current tax expense of $621,000. The effective tax rate includes the write-off of acquired in-process technology and amortization of Goodwill and other intangibles of approximately $197.8 million for 2000. The effective tax rate after this adjustment is 39%. The effective tax rates were 5% for 1999 and 0 for 1998.Liquidity and Capital Resources
December 31, ------------------------------- 2000 1999 1998 -------- -------- ------- (dollars in thousands)Cash, cash equivalents and short-term Investments.................... $222,534 $348,581 $61,878 Working capital.................. $215,831 $324,156 $63,620 Working capital ratio............ 2.7 6.8 4.9
December 31, 2002 2001 2000 (dollars in thousands) Cash, cash equivalents and liquid short-term investments $ 101,870 $ 141,463 $ 222,534 Long-term liquid investments $ 587 $ 22,135 $ 78,769 Restricted cash and investments $ 16,704 $ 29,949 $ — Working capital $ 5,616 $ 67,165 $ 218,553 Working capital ratio 1.0 1.5 2.7 As of December 31,
2000,2002, cash, cash equivalents,andliquid short-term investments, liquid long-term investments and restricted cash and investments totaled$222.5$119.2 million, which represents a decrease of$126.1$74.4 million as compared to December 31,1999.2001. This decrease is primarily attributed to net cash used for operations. Wecurrentlyhave$4.9 million of outstanding term debt under our existinga credit facility with Silicon Valley Bank that includes term loans in the form of promissory notes and a revolving line of credit (the "SVB Facility") for up to $25.0 million. Under the revolving line of credit portion of the SVB Facility, amounts borrowed bear interest at the bank's prime rate (4.25% as of December 31, 2002) and interest is due monthly, with the principal due in March 2003. We have two outstanding term loans under the SVB Facility. The total outstanding amount of these term loans were $2.9 million as of December 31, 2002 and $3.9 million as of December 31, 2001. Interest on these term loans are at the bank's prime rate (4.25% as of December 31, 2002 and 4.84% as of December 31, 2001) and prime rate plus 1.25% (5.5% as of December 31, 2002 and 6.09% as of December 31, 2001), respectively. Principal and interest are due in consecutive monthly payments through maturity of these term loans in March 31, 2005 and September 30, 2006, respectively. Principal payments of $977,000 are due annually from 2000 through 2004, $611,000 due in 2005, and a final payment of $357,000 due in 2006.Borrowings under the SVB Facility are collateralized by substantially all of our owned assets and we are subject to certain covenants, including restrictions on payment of dividends and other distributions as well as an obligation to maintain $80.0 million in unrestricted cash and cash equivalents, short-term investments and long-term investments (excluding equity investments) and maintain $30.0 million on deposit with SVB. As of December 31, 2002, we were in compliance with all specified financial covenants. During the second quarter of 2002, we drew down $25.0 million on our revolving line of credit as partial funding of our PacShores Building 4 and 5 Termination Agreement.
35
See discussion below for more information. Interest is payable monthly at the bank's prime rate (4.25% annually as of December 31, 2002) and principal is due in full in February 2004. There were no outstanding amounts under the revolving line of credit as of December 31, 2001. As discussed in Note 13 of Notes to Consolidated Financial Statements, we renewed and amended our revolving credit facility in March 2003 which changed the principal due date from March 2003 to February 2004. The amount available under the revolving line of credit remains unchanged at $25.0 million. Borrowings under the renewed revolving line of credit are collateralized by all of the Company's assets and bear interest at the bank's prime rate (4.25% as of March 1, 2003). Interest is due monthly and principal is due at expiration. The amended and restated loan and security agreement requires us to maintain certain levels in cash and cash equivalents, short-term investment and long-term investments (excluding equity investments). Additionally, the amended and restated loan and security agreement requires us to maintain certain levels on deposit with our commercial
bank. We have funded our operations by cash generatedlender and certain quarterly net income (loss) levels.As of December 31, 2002 and December 31, 2001, commitments totaling $16.7 million and $25.0 million, respectively, in the form of standby letters of credit were issued and outstanding from
operations and public offeringsfinancial institutions in favor of ourcommon stock. Public stock offerings during June 1996, March 1998 and November 1999 netted for us proceedsvarious landlords to secure obligations under our facility leases. These letters of$20.7 million, $53.7credit are collateralized by a security agreement, under which we are required to maintain in a restricted specified interest bearing account approximately $16.7 million and$210.4$29.9 million of available cash equivalents and short-term investments as of December 31, 2002 and December 31, 2001, respectively. The $16.6 million and the $29.9 million have been presented as restricted cash and investments in the accompanying consolidated balance sheet at December 31, 2002 and December 31, 2001, respectively.Cash (Used For) Provided by Operating Activities
Cash used for operating activities was $99.2 million for fiscal 2002 and $77.9 million for fiscal 2001, respectively. The primary reason for the net cash used for operating activities for fiscal 2002 is due to the net loss of $170.5 million adjusted for certain non-cash items such as depreciation expense, amortization of prepaid royalties, amortization of intangibles, impairment of assets, non-cash restructuring charge, accounts receivable reserves and provision for deferred tax asset valuation for $74.6 million as well as a decrease in accounts payable and accrued expenses of $9.1 million, a decrease in unearned revenues and deferred maintenance of $14.4 million, a decrease in other noncurrent assets of $2.6 million, partially offset by decreases in accounts receivable of $12.9 million and in prepaids and other of $3.6 million, and an increase in the restructuring reserves of $6.3 million. Cash (used for) provided by operating activities was
$55.3 million for the year 24ended December 31, 2000, $33.3($77.9) million for the year ended December 31,19992001 and$1.2$55.3 million for the year ended December 31,1998. Operating2000. Net cash used for operating activitiesconsisted primarily of the net operating incomefor the yearafter adding back variousended December 31, 2001 was primarily attributed to the net loss for the year less non-cashitemscharges such as goodwill and intangible amortization, fixed asset depreciation and amortization, impairment of goodwill and other intangibles,andcharge for acquired in-process technology anddepreciation, increasethe non-cash portion of the restructuring charge. Other key contributors included decreases in accounts payable andotheraccrued expenses,increase inunearned revenue and deferred maintenance and increases in other noncurrent assets, all partially offset byincreasesdecreases in accounts receivable and prepaidexpensesexpenses.Cash Provided By (Used For) Investing Activities
Cash provided by investing activities was $73.9 million for fiscal 2002 and
other current assets.was primarily due to net sales/maturities of investments of $61.5 million and $13.2 million released from restricted cash and investments. Cash used for investing activities was$220.9$15.0 million for the year ended December 31,2000, $38.62001 and consists of purchases of property and equipment of $55.7 million, partially offset by net sales of investments of $32.8 million and cash acquired in the Keyeon acquisition of $7.2 million.36
Cash Provided By Financing Activities
Cash provided by financing activities was $26.9 million for fiscal 2002 and consists of $2.9 million of net proceeds from the issuance of common stock and $25.0 million in proceeds from borrowings less $977,000 of repayments on borrowings. Cash provided by financing activities was $15.5 million for the year ended December 31,
19992001 and$6.4 million for the year ended December 31, 1998. Investing activities consisted primarily of capital expenditures and the acquisition of strategic investments. We expect that our capital expenditures will continue to increase in the future. We currently estimate that planned capital expenditures for fiscal 2001 will be approximately $32.0 million. We plan to fund these capital expenditures from cash provided by operations. Cash provided by financing activities was $38.9 million for the year ended December 31, 2000, $223.2 million for the year ended December 31, 1999 and $58.8 million for the year ended December 31, 1998. Financing activitiesconsisted primarily of proceeds from the issuance of common stock.Capital expenditures were $1.1 million for fiscal 2002 and $55.7 million for fiscal 2001. Our capital expenditures consisted of purchases of operating resources to manage our operations and included computer hardware and software, office furniture and fixtures and leasehold improvements.
In connection with our restructuring plan initiated during 2001, we consolidated various operating facilities during 2001 and 2002. Lease termination costs include the abandonment of certain excess lease facilities for the remaining lease terms. These costs totaled $101.7 million, including $18.9 million in leasehold improvements impairments, during 2002 and $143.8 million, including $36.8 million in leasehold improvements impairments in 2001. Total lease termination costs include the abandonment of leasehold improvements and the remaining lease liabilities and brokerage fees, offset by estimated sublease income. The estimated costs of abandoning these facilities, estimated costs to sublease as well as estimated sublease income, were based upon market information analyses provided by a commercial real estate brokerage firm retained by us.
On May 9, 2002, the Company and PacShores entered into (i) the Buildings 4 and 5 Termination Agreement and (ii) the Building 6 Amendment. Under the Buildings 4 and 5 Termination Agreement, the Triple Net Building Lease dated April 12, 2000 between PacShores, as Lessor, and the Company, as Lessee, for Premises at Pacific Shores Center, Building 4, Redwood City, California and the Triple Net Building Lease dated February 16, 2000 between PacShores, as Lessor, and the Company, as Lessee, for Premises at Pacific Shores Center, Building 5, Redwood City, California, were terminated. In conjunction with the termination, PacShores released all security deposits held by it relating to those premises in exchange for our payment to PacShores a total of $45.0 million as the Termination Fee. Under the Building 6 Amendment, the parties released each other from all claims and we agreed to provide an additional $3.5 million as security deposit in the form of letters of credit. This letter of credit is included as restricted cash and investments in our Condensed Consolidated Balance Sheet as of December 31, 2002. We
believe that ourpaid the Termination Fee in full during the second quarter of 2002 by payment of approximately $20.0 million from existing cash and investments and by drawing down approximately $25.0 million from our line of credit. The $25.0 million line of credit, as amended, is due in February 2004.We expect to incur significant operating expenses for the foreseeable future in order to execute our business plan. A summary of total future minimum lease payments as of December 31, 2002, under noncancelable operating lease agreements, together with amounts included in restructuring reserves is as follows (in thousands); properties that are part of the restructuring have been included:
Year Ended December 31, Total future minimum lease payments 2003 $ 26,281 2004 25,855 2005 25,652 2006 22,620 2007 20,495 2008 and thereafter 81,487 Total minimum lease payments 202,390 As of December 31, 2002, $129.4 million of future minimum lease payments, net of anticipated sublease income, is accrued in our restructuring accruals. The restructuring accruals are net of
37
approximately $44.8 million of sublease income of which approximately $28.8 million represents estimated sublease income for sublease agreements yet to be negotiated and the remaining $16.0 million represents sublease income to be received under non-cancelable sublease agreements signed by December 31, 2002. See Note 9 of Notes to Consolidated Financial Statements for additional information.
The following table summarizes our contractual obligations and the effect such obligations are expected to have on our liquidity and cash
equivalentsflows in future years. The operating leases include facilities included in restructuring and excluded $44.8 million of sublease income of which approximately $28.8 million represents estimated sublease income for sublease agreements yet to be negotiated.
Total Less than
1 year1-3 years 4-5 years Over
5 years(in thousands) Long-term debt $ 2,922 $ 977 $ 1,588 $ 357 $ — SVB Facility 25,000 — 25,000 — — Hewlett-Packard agreement 1,042 1,042 — — — Non-cancelable operating leases 202,390 26,281 51,507 43,115 81,487 $ 231,354 $ 28,300 $ 78,095 $ 43,472 $ 81,487 The following table summarizes our letters of credit and the effect such letters of credit could have on our liquidity and cash flows in future periods if the letters of credit were drawn upon. Restricted cash and investments represent the collateral for these letters of credit.
In thousands:
Total Less than
1 year1-3 years 4-5 years Over
5 years$ 16,704 $ 75 $ 308 $ 1,917 $ 14,404 We anticipate that such operating expenses, as well as capital expenditures, will constitute a material use of our cash resources. As a result, our net cash flows will depend heavily on the level of future sales, our ability to restructure operations successfully and our
anticipated cash flows from operations will be sufficientability tomeetmanage infrastructure costs.We currently expect to fund our short-term working capital and operating resource expenditure requirements, for at least the next
year. Thereafter,twelve months, from our existing cash and cash equivalents and short-term investment resources, our anticipated cash flows from operations and anticipated cash flows from subleases. However, we could experience unforeseen circumstances such as a worsening economic downturn, legal or lease settlements and less than anticipated cash inflows from operations, invested assets, and subleases that may increase our use of available cash or need to obtain additional financing. Also, we may find it necessary to obtain additional equity or debtfinancing. Infinancing 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. We 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 theeventissuance of equity securities, the percentage ownership of our stockholders 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 our common stock. There can be no assurance that additional financingis required, we may notwill beable to raise itavailable on acceptable terms,orif at all.WeIf adequate funds are not available or are not available on acceptable terms, we may be unable to develop our products, take advantage of future opportunities or respond to competitive pressures or unanticipated requirements, which could havevarious credit facilities withacommercial lender which include term debt in the form of notes payablematerial adverse effect on our business, financial condition anda revolving line of credit that provides for up to $10.0 million of additional borrowings, based on eligible accounts receivable. As of December 31, 2000 and 1999, outstanding term debt borrowings were $4.9 million and $5.9 million, respectively. As of December 31, 2000 and 1999, we had no outstanding borrowings under our revolving line of credit. However, commitments totaling $2.4 million and $2.8 million, in the form of standby letters of credit were issued under its revolving line of credit facility as of December 31, 2000 and 1999, respectively (see Note 7). Commitments totaling $23.0 million in the form of standby letters of credit were also issued from separate financial institutions as of December 31, 2000. 25future operating results. 38
Quarterly Results of Operations
The following tables set forth certain unaudited condensed consolidated statement of operations data for the eight quarters ended December 31,
2000,2002, as well as that data expressed as a percentage of our total revenues for the periods indicated.This data has been derived from unaudited condensed 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 and Notes thereto included elsewhere herein on this Form 10-K. We believe that period-to-period comparisons of our financial results are not necessarily meaningful and should not be relied upon as an indication of future performance.
Three Months Ended --------------------------------------------------------------------------------------------------- Dec. 31, Sep. 30, June 30, Mar. 31, Dec. 31, Sep. 30, June 30, Mar. 31, 2000 2000 2000 2000 1999 1999 1999 1999 --------- --------- --------- --------- --------- --------- --------- --------- (dollars in thousands)Statement of Operations Data: Revenues: Software licenses ......... $ 80,926 $ 72,351 $ 56,848 $ 40,713 $ 28,161 $ 18,954 $ 15,484 $ 12,783 Services .................. 55,951 47,843 38,496 20,788 15,582 10,877 7,992 5,681 --------- --------- --------- --------- --------- --------- --------- --------- Total revenues ...... 136,877 120,194 95,344 61,501 43,743 29,831 23,476 18,464 Cost of revenues: Cost of software licenses . 2,805 1,395 1,563 2,064 1,243 676 1,037 747 Cost of services .......... 37,838 34,015 30,282 15,673 9,994 7,241 4,624 3,321 --------- --------- --------- --------- --------- --------- --------- --------- Total cost of revenues ........... 40,643 35,410 31,845 17,737 11,237 7,917 5,661 4,068 Gross profit ................ 96,234 84,784 63,499 43,764 32,506 21,914 17,815 14,396 Operating expenses: Research and development .. 21,168 14,988 9,706 5,759 4,582 3,816 3,268 2,901 Sales and marketing ....... 64,846 43,799 33,570 25,200 19,012 12,136 10,019 7,665 General and administrative .......... 9,600 8,198 6,786 3,611 2,969 2,119 1,611 1,271 Goodwill and intangible amortization ............ 66,089 66,308 55,351 -- -- -- -- -- Charge for acquired in-process technology ... -- -- 10,100 -- -- -- -- -- --------- --------- --------- --------- --------- --------- --------- --------- Total operating expenses ........... 161,703 133,293 115,513 34,570 26,563 18,071 14,898 11,837 --------- --------- --------- --------- --------- --------- --------- --------- Operating (loss) income ..... (65,469) (48,509) (52,014) 9,194 5,943 3,843 2,917 2,559 Other, net .................. 1,431 (4,247) (2,857) 842 2,120 651 398 378 --------- --------- --------- --------- --------- --------- --------- --------- Net (loss) income ........... $ (64,038) $ (52,756) $ (54,871) $ 10,036 $ 8,063 $ 4,494 $ 3,315 $ 2,937 ========= ========= ========= ========= ========= ========= ========= ========= As a Percentage of Revenues: Revenues: Software licenses ......... 59% 60% 60% 66% 64% 63% 66% 69% Services .................. 41 40 40 34 36 37 34 31 --------- --------- --------- --------- --------- --------- --------- --------- Total revenues ...... 100 100 100 100 100 100 100 100 Cost of revenues: Cost of software licenses . 2 1 1 3 3 2 4 4 Cost of services .......... 28 28 32 26 23 24 20 18 --------- --------- --------- --------- --------- --------- --------- --------- Total cost of revenues ........... 30 29 33 29 26 26 24 22 Gross profit ................ 70 71 67 71 74 74 76 78 Operating expenses: Research and development .. 16 13 10 9 10 13 14 16 Sales and marketing ....... 47 36 35 41 44 41 43 41 General & administrative .. 7 7 7 6 7 7 7 7 Goodwill and intangible amortization ............ 48 55 58 -- -- -- -- -- Charge for acquired in-process technology ... -- -- 11 -- -- -- -- -- --------- --------- --------- --------- --------- --------- --------- --------- Total operating expenses ........... 118 111 121 56 61 61 64 64 --------- --------- --------- --------- --------- --------- --------- --------- Operating (loss) income ..... (48) (40) (54) 15 14 13 12 14 Other, net .................. 1 (4) (3) 1 5 2 2 2 --------- --------- --------- --------- --------- --------- --------- --------- Net (loss) income ........... (47)% (44)% (57)% 16% 19% 15% 14% 16% ========= ========= ========= ========= ========= ========= ========= =========
Three Months Ended Dec. 31,
2002Sep. 30,
2002June 30,
2002Mar. 31,
2002Dec. 31,
2001Sep. 30,
2001June 30,
2001Mar. 31,
2001(dollars in thousands) Statement of Operations Data: Revenues: Software licenses $ 11,239 $ 10,756 $ 10,309 $ 8,179 $ 21,019 $ 16,292 $ 21,029 $ 43,140 Services 17,546 16,483 19,110 22,276 27,912 32,437 37,006 49,588 Total revenues 28,785 27,239 29,419 30,455 48,931 48,729 58,035 92,728 Cost of revenues: Cost of software licenses 4,727 1,414 903 1,100 3,287 1,713 2,655 2,240 Cost of services 7,391 8,751 10,422 12,334 12,406 15,661 30,595 38,977 Total cost of revenues 12,118 10,165 11,325 13,434 15,693 17,374 33,250 41,217 Gross profit 16,667 17,074 18,094 17,021 33,238 31,355 24,785 51,511 Operating expenses: Research and development 6,677 7,774 13,006 13,975 14,860 16,230 20,616 26,971 Sales and marketing 7,553 9,384 15,803 16,178 19,657 25,895 41,766 52,481 General and administrative 2,513 2,573 5,009 6,193 6,604 10,849 14,268 10,590 Goodwill and intangible amortization 887 887 887 887 12,146 66,493 66,297 66,280 Charge for acquired in-process technology — — — — 6,418 — — — Restructuring charge 7,299 63,205 34,565 5,380 19,964 9,847 123,473 — Impairment of assets — 853 — 2,276 — — — — Impairment of goodwill and other intangibles — — — — — 336,379 — — Total operating expenses 24,929 84,676 69,270 44,889 79,649 465,693 266,420 156,322 Operating loss (8,262 ) (67,602 ) (51,176 ) (27,868 ) (46,411 ) (434,338 ) (241,635 ) (104,811 ) Other, net (1,715 ) (131 ) (5,514 ) (8,254 ) (8,914 ) 1,391 (1,207 ) (334 ) Net loss $ (9,977 ) $ (67,733 ) $ (56,690 ) $ (36,122 ) $ (55,325 ) $ (432,947 ) $ (242,842 ) $ (105,145 ) 39
Dec. 31,
2002Sep. 30,
2002June 30,
2002Mar. 31,
2002Dec. 31,
2001Sep. 30,
2001June 30,
2001Mar. 31,
2001As a Percentage of Revenues: Revenues: Software licenses 39 % 39 % 35 % 27 % 43 % 33 % 36 % 47 % Services 61 61 65 73 57 67 64 53 Total revenues 100 100 100 100 100 100 100 100 Cost of revenues: Cost of software licenses 16 5 3 4 7 4 5 2 Cost of services 26 32 35 40 25 32 52 42 Total cost of revenues 42 37 38 44 32 36 57 44 Gross profit 58 63 62 56 68 64 43 56 Operating expenses: Research and development 23 29 44 46 30 33 36 29 Sales and marketing 26 34 54 53 40 53 72 57 General and administrative 9 9 17 20 14 22 24 11 Goodwill and intangible amortization 3 3 3 3 25 137 114 72 Charge for acquired in-process technology — — — — 13 — — — Restructuring charge 26 233 118 18 41 20 213 — Impairment of assets — 3 — 8 — — — — Impairment of goodwill and other intangibles — — — — — 690 — — Total operating expenses 87 311 236 148 163 955 459 169 Operating loss (29 ) (248 ) (174 ) (92 ) (95 ) (891 ) (416 ) (113 ) Other, net (6 ) (1 ) (19 ) (27 ) (18 ) 3 (2 ) — Net loss (35 )% (249 )% (193 )% (119 )% (113 )% (888 )% (418 )% (113 )% Our quarterly operating results have fluctuated in the past and may fluctuate significantly in the future as a result of a variety of factors, many of which are outside of our control. It is likely that our operating results in one or more future quarters may be below the expectations of securities analysts and investors. In that event, the trading price of our common stock almost certainly would decline.
26RECENT ACCOUNTING PRONOUNCEMENTS
In
June 1998,January 2002, the Financial Accounting StandardsBoard,Board's Emerging Issues Task Force (EITF) reached consensus on EITF 01-14 on the topic ofIncome Statement Characterization of Reimbursements Received for Out of Pocket Expenses Incurred. This topic addresses whether reimbursements received for out-of-pocket expenses incurred should be characterized in the income statement as revenue orFASB, issued Statementas a reduction ofFinancial Accounting Standard, or SFAS, No. 133, Accountingexpenses incurred. The EITF concluded that reimbursements received forDerivative Instruments and Hedging Activities,out of pocket expenses incurred should be characterized asamended by SFAS No. 137, effective for all fiscal quarters of fiscal yearsrevenue in the income statement. This announcement will be applied in financial reporting periods beginning afterJuneDecember 15,2000. Accordingly, we adopted SFAS No. 133,2001, and comparative financial statements for prior periods will be reclassified to comply with the guidance in this announcement. The Company is currently recording reimbursement by its customers for out-of-pocket expenses asamended, beginninga component of services revenue. Prior to adoption of EITF 01-14 on January 1,2001.2002, the Company recorded reimbursement by its customers for out-of-pocket expenses as a reduction to cost of sales. Prior periods have been reclassified to comply with the guidance of EITF 01-14. The effect of this reclassification was to increase services revenues and increase cost of services for fiscal 2001 and fiscal 2000 by $3.9 million and $1.6 million, respectively.In June 2002, the FASB issued SFAS No.
133 establishes standards146,Accounting fortheCosts Associated with Exit Activities, which addresses financial accounting and reportingof derivative instrumentsfor costs associated with exit activities andhedging activities, including certain derivative instruments embeddedsupersedes Emerging Issues Task Force ("EITF") 94-3,Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred inother contracts. Undera40
Restructuring). SFAS No.
133, entities are required to carry all derivative instruments146 requires that a liability for a cost associated with an exit or disposal activity be recognized and measured initially at fair valueon their balance sheets. The accountingonly when the liability is incurred. This differs from EITF 94-3, which required that a liability forchanges inan exit cost be recognized at thefair value (i.e., gains or losses)date of an entity's commitment to an exit plan. However, under SFAS No. 146, aderivative instrument depends on whether itliability for one-time termination benefits is recognized when an entity has committed to a plan of termination, provided certain other requirements have been met. In addition, under SFAS No. 146, a liability for costs to terminate a contract is not recognized until the contract has beendesignatedterminated, andqualifies as parta liability for costs that will continue to be incurred under a contract's remaining term without economic benefit to the entity is recognized when the entity ceases to use the right conveyed by the contract. SFAS No. 146 is effective for exit or disposal activities initiated after December 31, 2002. The Company will adopt the provisions ofa hedging activity and the underlying purposeSFAS No. 146 forit. We dorestructuring activities initiated after December 31, 2002. The Company does notbelieve thatexpect the adoption of SFAS No.133146 will have asignificantmaterial impact onourits consolidated results of operations or financialstatementsposition.In November 2002, the EITF reached a consensus on Issue 00-21, addressing how to account for arrangements that involve the delivery or
related disclosures.performance of multiple products, services, and/or rights to use assets. Revenue arrangements with multiple deliverables are divided into separate units of accounting if the deliverables in the arrangement meet the following criteria: (1) the delivered item has value to the customer on a standalone basis; (2) there is objective and reliable evidence of the fair value of undelivered items; and (3) delivery of any undelivered item is probable. Arrangement consideration should be allocated among the separate units of accounting based on their relative fair values, with the amount allocated to the delivered item being limited to the amount that is not contingent on the delivery of additional items or meeting other specified performance conditions. The final consensus will be applicable to agreements entered into in fiscal periods beginning after June 15, 2003 with early adoption permitted. The provisions of this Consensus are not expected to have a significant effect on the Company's financial position or operating results.In
June 2000,November 2002, the FASB issuedStatementInterpretation No.138,45 (FIN 45), "Guarantor's Accounting and Disclosure Requirements forCertain Derivative InstrumentsGuarantees, Including Indirect Guarantees of Indebtedness of Others", which clarifies disclosure andCertain Hedging Activities. FASB Statement No. 138 addresses certain issuesrecognition/measurement requirements related to certain guarantees. The disclosure requirements are effective for financial statements issued after December 15, 2002 and theimplementationrecognition/measurement requirements are effective on a prospective basis for guarantees issued or modified after December 31, 2002. The application ofSFAS No. 133, but doesthe requirements of FIN 45 did notchange the basic model of SFAS No. 133 or further delay the implementation of SFAS No. 133. In December 1999, the Securities and Exchange Commission, or SEC, issued Staff Accounting Bulletin No. 101, or SAB 101, Revenue Recognition in Financial Statements, which provides guidancehave a material impact on therecognition, presentation and disclosure of revenue in financial statements filed with the SEC. SAB 101 outlines the basic criteria that must be met to recognize revenue and provides guidance for disclosure related to revenue recognition policies. We adopted SAB 101 during the fourth quarter of 2000, as required. There was no material effect on ourCompany's financial position or results ofoperations asoperations.In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based Compensation—Transition and Disclosure." This Statement amends SFAS No. 123, "Stock-Based Compensation," to provide alternative methods of transition for a
resultvoluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, this Statement amends the disclosure requirements of SFAS No. 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of theadoptionmethod used on reported results. The disclosure provisions ofSAB 101.this Standard are effective for fiscal years ending after December 15, 2002 and have been incorporated into these financial statements and accompanying footnotes.In
March 2000,January 2003, the FASB issued Interpretation No.44,46 (FIN 46), "Consolidation of Variable Interest Entities," which addresses consolidation by business enterprises of variable interest entities that either: (1) do not have sufficient equity investment at risk to permit the entity to finance its activities without additional subordinated financial support, orFIN 44, Accounting for Certain Transactions Involving Stock Compensation-an Interpretation of APB 25. This Interpretation clarifies (a)(2) thedefinition of employee for purposes of applying Opinion 25, (b) the criteria for determining whether a plan qualifies as a non-compensatory plan, (c) the accounting consequence of various modifications to the termsequity investors lack an essential characteristic of apreviously fixed stock optioncontrolling financial interest. FIN 46 requires disclosure of Variable Interest Entities (VIEs) in financial statements issued after January 31, 2003, if it is reasonably possible that as of the transition date: (1) the Company will be the primary beneficiary of an existing VIE that will require consolidation or,award and (d)(2) theaccounting forCompany will hold a significant variable interest in, or have significant41
involvement with, an
exchange of stock compensation awards in a business combination. This Interpretation became effective July 1, 2000, but certain conclusions in this Interpretation cover specific eventsexisting VIE. We do not have any entities thatoccur after either December 15, 1998will require disclosure orJanuary 12, 2000. However, before the effective date of July 1, 2000, the effects of applying this Interpretation are recognized on a prospective basis from July 1, 2000. We adopted FIN 44 27in July,2000. There was no material effect on our financial position or results of operationsnew consolidation as a result of adopting theadoptionprovisions of FIN44.46.RISK FACTORS
The risks and uncertainties described below are not the only ones facing us. Additional risks and uncertainties not presently known to us or that we currently deem immaterial also may impair our business operations. If any of the following risks actually occur, our business could be harmed. In that event, the trading price of our common stock could decline.
Risks related to our business
FluctuationsWe have experienced prolonged negative cash flows and difficulty returning to profitability.
We have experienced a decline in revenues sequentially for the first three quarters of fiscal 2001 and the first three quarters of fiscal 2002 and the outlook on future periods is unclear given the general economic conditions. Furthermore, we incurred net losses for the past eleven quarters and have not achieved positive cash flow from operations in the last nine quarters. We may not be profitable from operations for the near term and may continue to incur negative cash flow. If the negative cash flow continues, our
quarterlyliquidity and ability to operate our business would be severely and adversely impacted. Additionally, our ability to raise financial capital may be hindered due to our operational losses and negative cash flows, reducing our operating flexibility.We are continuing efforts to reduce and control our expense structure. We believe strict cost containment and expense reductions are essential to achieving positive cash flow and profitability. A number of factors could preclude us from successfully bringing costs and expenses in line with our revenues, including unplanned uses of cash, the inability to accurately forecast business activities and further deterioration of our revenues. If we are not able to effectively reduce our costs and achieve an expense structure commensurate with our business activities and revenues, we may have inadequate levels of cash for operations or for capital requirements, which could significantly harm our ability to operate our business.
General economic conditions are and may continue to affect our ability to return to profitability.
There has been a general downturn in the United States of America and global economy. If the economic environment continues to decline or if the current global slowdown worsens or becomes prolonged, our future results may be significantly impacted. We believe that the current economic decline has increased the average length of our sales cycle and our operating results
may causecould suffer and our stock pricetocould declineand make it difficult for us to forecast quarterly revenueif we do not achieve the level of revenues we expect.Like other U.S. companies, our business and operating
results. Our quarterly operatingresultshave fluctuatedare subject to uncertainties arising out of the terrorist attacks on the United States, including the economic consequences of military actions or additional terrorist activities and associated political instability, and the impact of heightened security concerns on domestic and international travel and commerce. Such uncertainties could also lead to delays or cancellations of customer orders, a general decrease in corporate spending or our inability to effectively market and sell our products. Any of these results could substantially harm our business and results of operations, causing a decrease in our revenues.Failure to maintain our Nasdaq listing would harm our stock price and the liquidity of our common stock.
We effected a one-for-nine reverse stock split in July 2002. Prior to the effective time of the reverse stock split, our common stock was trading below $1.00 per share. The Nasdaq has a $1.00 per share minimum bid requirement, pursuant to which our common stock could be de-listed from the Nasdaq National Market if it trades below $1.00 for thirty consecutive trading days and does not
42
subsequently trade above $1.00 for 10 consecutive days. There can be no assurance that our trading price will remain above the $1.00 per share requirement for the necessary time period mandated by Nasdaq. If we do not meet the Nasdaq requirements to maintain our listing on the Nasdaq National Market, our common stock could trade on the OTC Bulletin Board or in the
past"pink sheets" maintained by the National Quotation Bureau, Inc. Such alternatives are generally considered to be less efficient markets, andmay fluctuate significantly inour stock price, as well as thefuture as a result of a variety of factors, many of which are outside of our control. It is likely that our operating results in one or more future quarters may be below the expectations of securities analysts and investors. In that event, the trading priceliquidity of our common stock,almost certainlywoulddecline. Factors that maybe adversely impacted by a Nasdaq delisting.Failure to meet our SVB Facility financial covenants would allow SVB to terminate the SVB Facility and accelerate our repayment obligations, which would negatively affect our
quarterly operating results includecash liquidity.We recently renewed and amended the
following: oSVB Facility during thetimingsecond quarter ofintroductions or enhancementsfiscal 2002 and further renewed and amended the SVB Facility during the first quarter of fiscal 2003. The SVB Facility is secured by substantially all of ourproductsowned assets. The primary financial covenant under the SVB Facility obligates us to maintain certain levels of available cash, cash equivalents, short-term investments andservices or our competitors; o timinglong-term investments (excluding equity investments). Falling below such levels would be an event ofreceiptdefault for which Silicon Valley Bank may, among other things, accelerate the payment of the facility. While we plan to adhere to the financial covenants of the SVB Facility andfulfillmentavoid an event ofsignificant orders; o market acceptance of new products; o the mix of products sold by us; o changes in our pricing policies or our competitors; o changes in our sales incentive plans; o the budgeting cycles of our customers; o customer order deferrals in anticipation of new products or enhancements by us or our competitors or because of macro-economic conditions o nonrenewal of our service agreements, which generally automatically renew for one-year terms unless earlier terminated by either party upon 90-days notice; o product life cycles; o changes in strategy; o seasonal trends; o the mix of distribution channels through which our products are sold; o the mix of international and domestic sales; o the rate at which new sales people become productive; and o changesdefault, in thelevelevent that it appears we are unable to avoid an event ofoperating expensesdefault, it may be necessary or advisable tosupport projected growth. Due to theseretire andother factors, it is difficult to accurately forecastterminate the SVB Facility and pay off all remaining balances borrowed. Such a payoff would further limit ourquarterly revenuesavailable cash andoperating results. We believe that period-to-period comparisons of our operating results may not be meaningful and you should not rely upon them as any indication of our future performance.cash equivalents.Our future financial performance is largely dependent on the successful upgrading of our current products and introduction of new products.
Our future financial performance will depend, in significant part, on the successful development and sale of new and enhanced versions of our
BroadVision One-To-One applicationproducts and other new products. We may be unable to upgrade and continue to marketthe BroadVision One-To-One applicationproducts. We may be unable to successfully develop new products and new products may not achieve market acceptance.28If we are unable to meet the rapid technological changes in online commerce and communication, our products and services may fail to be competitive.
Our
salesproducts and services may fail to besubject to macro-economic conditionscompetitive if we do not maintain or exceed the pace of technological developments in Internet commerce and communication. 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 evolving industry standards and practices. 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. Our future success will depend, in part, on our ability to:
- •
- develop leading technologies;
- •
- enhance our existing products and services;
- •
- develop new products and services that
could have an effect onaddress thewillingnessincreasingly sophisticated and varied needs of ourcustomersprospective customers; andprospects- •
- respond to
make large capital spending decisions. The average size of transactions involving the licensing of ourtechnological advances and emerging industry standards and practices on a timely and cost-effective basis.Internet commerce technology is complex and new products
is over $400,000andhas increased over the last few years. The current macro-economic forecast for the United Statesenhancements can require long development periods. If we are unable to develop andsome other countries indicate an economic slowdown. Many customersintroduce new products andprospective customers have issued public announcements regarding workforce reductions and spending controlsservices or enhancements in a timely manner in response tothis slowdown. Because of these corporate pronouncementschanging market conditions or customer requirements,43
or if new products and
economic conditions,services do not achieve market acceptance, ourcustomers and prospectsbusiness maydefer large capital spending decisions that, in turn, could result in shortfalls in our revenue and operating result expectations.fail to be competitive.Our lengthy sales and product implementation cycles could cause delays in revenue recognition and make it difficult to predict
oursour quarterly results.Our sales and product implementation cycles are subject to delays over which we have little or no control. These delays can affect the timing of revenue recognition and make it difficult to predict our quarterly results. Licensing
the BroadVision One-to-One applicationour products is often an enterprise-wide decision by prospective customers. The importance of this decision requires that we engage in a lengthy sales cycle with prospective customers. During the sales process, we provide a significant level of education regarding the uses and benefits of our products. Once the decision has been made to implement our products, our customers or our BroadVision Global Services consultants then must commit significant resources over an extended period of time. Slowdowns in general economic conditions may result in decisions by customers to defer decisions to purchase our products. Delays in license transactions due to unusually lengthy sales cycles could cause our operating results to vary significantly from quarter to quarter.The market for our products and services is in
its early stages of developmenta rapidly evolving environment and may fail tomature intoremain asustainable market.viable marketOur products and services facilitate online commerce and communication over public and private networks. The market for these products and services is
in its early stages of development and israpidly evolving. A viable market may fail toemerge orbe sustainable. We cannot predict the level of demand for and market acceptance of our products and services, especially because acquisition of our products and services requires a large capital or other significant resource commitment. If the market for our products and services does not continue to mature, we will be unable to execute successfully our business plan. Adoption of electronic commerce and knowledge management, particularly by those individuals and companies that have historically relied upon traditional means of commerce and communication, will require a broad acceptance of new and different methods of conducting business and exchanging information.Our future revenues and profits will substantially depend on the Internet being accepted and widely used for commerce and communication.If Internet commerce does not continue to grow or grows more slowly than expected, our future revenues and profits may not meet our expectations or those of analysts. In theemergingmarketplace of Internet commerce, our products and services involve a new approach to the conduct of online business. As a result, intensive marketing and sales efforts may be necessary to educate prospective customers regarding the uses and benefits of our products and services, thereby generating demand. Companies that have already invested substantial resources in other methods of conducting business may be reluctant to adopt a new approach that may replace, limit or compete with their existing systems. Similarly, purchasers with established patterns of commerce may be reluctant to alter those patterns or may otherwise resist providing the personal data necessary to support our consumer profiling capability. In addition, the security and privacy concerns of existing and potential online purchasers may inhibit the growth of online business generally and the market's acceptance of our products and services in particular. Accordingly, a viable market for our products and services may notemerge orbe sustainable.Fluctuations in our quarterly operating results may cause our stock price to decline and make it difficult for us to forecast quarterly revenue and operating results.
Our
success is substantially dependent on revenues from our BroadVision One-to-One Enterprise product suitequarterly operating results have fluctuated in the past andrelated services. To date, substantially allmay fluctuate significantly in the future as a result of a variety of factors, many of which are outside of ourrevenues have been attributable to license salescontrol. It is likely that our operating results in one or more future quarters may be below the expectations of securities analysts and investors. In that event, theBroadVision One-To-One Enterprise product and related packaged application products and associated services. We currently expect thesetrading price of our common stock almost certainly would decline.Factors that may affect our quarterly operating results include the following:
- •
- the timing of introductions or enhancements of our products and services or our competitors;
44
- •
- timing of receipt and fulfillment of significant orders;
- •
- market acceptance of new products;
- •
- the mix of products sold by us;
- •
- changes in our pricing policies or our competitors;
- •
- changes in our sales incentive plans;
- •
- the budgeting cycles of our customers;
- •
- customer order deferrals in anticipation of new products or enhancements by us or our competitors or because of macro-economic conditions;
- •
- nonrenewal of our maintenance agreements, which generally automatically renew for one-year terms unless earlier terminated by either party upon 90-days notice;
- •
- product life cycles;
- •
- changes in strategy;
- •
- seasonal trends;
- •
- the mix of distribution channels through which our products are sold;
- •
- the mix of international and domestic sales;
- •
- the rate at which new sales people become productive; and
- •
- changes in the level of operating expenses to
account for mostsupport projected growth.Due to these and other factors, it is difficult to accurately forecast our quarterly revenues and operating results. We believe that period-to-period comparisons of our operating results may not be meaningful and you should not rely upon them as any indication of our future
revenues. The inability of our customers to successfully develop and deploy an online marketplace using BroadVision One-To-One application products could damage our reputation and cause a loss of customers. In addition, factors negatively affecting the pricing of or demand for the BroadVision One-To-One application products, such as increased competition or rapid technological change, could cause our revenues to decline. 29performance. We have substantially
expandedmodified our business and operations and will need to manage and supportthis expansionthese changes effectively in order for our business plan to succeed.We
havesubstantially expanded then contracted our business and operations since our inception in1993; in particular, we1993. We grew from 652 employees at the end of 1999 to 2,412 employees at the end of2000.2000 and have reduced our numbers to 1,102 at the end of 2001 and 449 at the end of 2002. If we are unable to supportthis growththese changes effectively, we may have to divert additional resources away from executing our business plan and toward internal administration.Our past expansion has placed significant demands on our administrative, operational, financial and other resources.If ourrevenuesexpenses do notincrease in proportiontrack our revenues, we may have toour operating expenses,make additional changes to our management systemsdo not expand to meet increasing demands or our management otherwise fails to support our expansion effectively,and our business plan may not succeed.We are dependent on direct sales personnel and third-party distribution channels to achieve revenue growth.
To date, we have sold our products primarily through our direct sales force. Our ability to achieve significant revenue growth in the future largely will depend on our success in recruiting, training and
trainingretaining sufficient direct sales personnel and establishing and maintaining relationships with distributors, resellers and systems integrators. Our products and services require a sophisticated sales effort targeted at the senior management of our prospective customers. New hires as well as employees of our distributors, resellers and systems integrators require training and take time to achieve full productivity. Our recent hires may not become as productive as necessary, and we may be unable to hire and retain sufficient numbers of qualified individuals in the future. We have entered into strategic alliance agreements with partners,including Hewlett-Packard Company,under which partners have agreed to resell and support our current BroadVision One-to-One product suite. These contracts are generally terminable by either party upon 30 days' notice of an uncured material breach. Termination ofthe Hewlett-Packard or other similarany of these alliances could harm our45
expected revenues. We may be unable to expand our other distribution channels, and any expansion may not result in revenue increases. If we fail to maintain and expand our direct sales force or other distribution channels, our revenues may not grow or they may decline.
Our customers may rely on third-party systems integrators for the success of online marketplaces.
Our current and prospective customers may rely on third-party systems integrators to develop, deploy and manage online marketplaces. If we are unable to adequately train these systems integrators who, as a result, ineffectively assist customers with their online marketplaces, our reputation may be harmed and we may lose customers. In addition, if for any reason a large number of these integrators adopt a different product or technology instead of the BroadVision
One-To-One applicationproducts, sales of these products may not grow or they may decline.We are susceptible to numerous risks associated with international operations.
Our international activities expose us to numerous additional risks. In the year ended December 31,
2000,2002, approximately32%39% of our revenues were derived from sales outside of North America.We have twenty six offices in Europe and Asia and two offices in Australia. A key component of our business strategy is to expand our international activities.As we continue to expand internationally, we will be increasingly subject to risks of doing business internationally, including:
o
- •
- unexpected changes in regulatory requirements;
o- •
- export controls relating to encryption technology and other export restrictions;
o- •
- tariffs and other trade barriers;
o- •
- difficulties in staffing and managing foreign operations;
o- •
- political and economic instability;
o- •
- fluctuations in currency exchange rates;
o- •
- reduced protection for intellectual property rights in some countries;
o- •
- cultural barriers;
30o- •
- seasonal reductions in business activity during the summer months in Europe and certain other parts of the world; and
o- •
- potentially adverse tax consequences.
Our international sales growth will be limited if we are unable to establish additional foreign operations, expand international sales channel management and support, hire additional personnel, customize products for local markets and develop relationships with international service providers, distributors and system integrators. Even if we are able to successfully expand our international operations, we may not succeed in maintaining or expanding international market demand for our products.
Our products are especially susceptible to product defects because they are complex.
Sophisticated software products, like those sold by us, may contain undetected errors that will not become apparent until after the products are introduced or when the volume of provided services increases. It is possible that, despite testing by us and our prospective customers, errors will be found in our products. Product defects could result in all or any of the following consequences to our business:
o
- •
- loss of revenues;
o46
- •
- delay in market acceptance;
o- •
- diversion of development resources;
o- •
- damage to our reputation; or
o- •
- increased service and warranty costs.
Because a significant portion of our sales activity occurs at the end of each fiscal quarter, delays in a relatively small number of license transactions could adversely affect our operating results for the quarter.
Like most software companies, a significant proportion of our sales are concentrated near the end of each fiscal quarter. Gross margins are high for our license transactions. Customers and prospective customers are aware of these facts and use these conditions in an attempt to obtain concessions. While we have
consistently avoidedtried to avoid making concessions that could result in lower margins, the tactic often results in delays in the closing of license transactions. Small delays in a relatively small number of license deals could have a significant impact on our reported operating results for that quarter.Current and potential competitors could make it difficult for us to acquire and retain customers now and in the future.
If we fail to compete successfully with current or future competitors, we may lose market share. The market for e-business solutions is rapidly evolving and intensely competitive. Our customers' requirements and the technology available to satisfy those requirements will continually change. We expect competition in this market to persist and increase in the future. Our primary competition currently includes:
o
- •
- in-house development efforts by prospective customers or partners;
o- •
- other vendors of application software or application development platforms and tools directed at interactive commerce and financial services, such as
Allaire, Ariba,Art Technology Group,Inc.,Blue Martini,CommerceOne, InterWorld Corporation, Open Market, Inc.,IBM, Microsoft, Oracle, PeopleSoft, Plumtree, SAP, Siebel and VignetteCorporation; o Weband- •
- web content developers that develop custom software or integrate other application software into custom
solutions; o International Business Machines Corporation; and o Microsoft Corporation.solutions.The principal competitive factors affecting the market for our products are:
o Depth
- •
- depth and breadth of functionality offered;
o Ease- •
- ease of application development;
o Availability- •
- availability of knowledgeable developers;
o Time- •
- time required for application development;
o Reliance- •
- reliance on industry standards;
31o Product- •
- product reliability;
o Proven- •
- proven track record;
o Scalability; o Maintainability; o Personalization- •
- scalability;
- •
- maintainability;
- •
- personalization and other features;
o Product- •
- product quality;
o Price;- •
- price; and
o Customer- •
- technical support.
47
Compared to us, many of these and other current and future competitors have longer operating histories and significantly greater financial, technical, marketing and other resources. As a result, they may be able to respond more quickly to new or changing opportunities, technologies and customer requirements. Many of these companies also can use their greater name recognition and more extensive customer base to gain market share at our expense. Competitors may be able to undertake more extensive promotional activities, adopt more aggressive pricing policies and offer more attractive terms to purchasers. Current and potential competitors may bundle their products to discourage users from purchasing our products. In addition, 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. Competitive pressures may make it difficult for us to acquire and retain customers and may require us to reduce the price of our products. We may be unable to compete successfully with current or new competitors.
Our success and competitive position will depend on our ability to protect our proprietary technology.
Our success and ability to compete are dependent to a significant degree on our proprietary technology. Although we hold a
U.SU.S. patent, issued in January 1998, on elements of the BroadVision One-To-One Enterprise productthisand a U.S. patent acquired as part of the Interleaf acquisition on the elements of the extensible electronic document processing system for creating new classes of active documents, these patents may not provide an adequate level of intellectual property protection. In addition, litigation like the lawsuit we filed against Art Technology Group, which was settled in February 2000, may be necessary in the future to enforce our intellectual property rights, to protect our trade secrets, to determine the validity and scope of the proprietary rights of others, or to defend against claims of infringement or invalidity. We cannot guarantee that infringement or other claims will not be asserted or prosecuted against us in the future, whether resulting from our intellectual property or licenses from third parties. Claims or litigation, whether successful or unsuccessful, could result in substantial costs and diversions of resources, either of which could harm our business.We also rely on copyright, trademark, service mark, trade secret laws and contractual restrictions to protect our proprietary rights in products and services. We have registered "BroadVision" and "BroadVision One-To-One" as trademarks in the United States and in other countries. It is possible that our competitors or other companies will adopt product names similar to these trademarks, impeding our ability to build brand identity and possibly confusing customers.
As a matter of company policy, we enter into confidentiality and assignment agreements with our employees, consultants and vendors. We also control access to and distribution of our software, documents and other proprietary information. Notwithstanding these precautions, it may be possible for an unauthorized third party to copy or otherwise obtain and use our software or other proprietary information or to develop similar software independently. Policing unauthorized use of our products will be difficult, particularly because the global nature of the Internet makes it difficult to control the ultimate destination or security of software and other transmitted data. The laws of other countries may afford us little or no effective protection of our intellectual property.
A breach of the encryption technology that we use could expose the company to liability and harm our reputation, causing a loss of customers.
If any breach of the security technology embedded in our products were to occur, we would be exposed to liability and our reputation could be harmed, which could cause us to lose customers. A significant barrier to online commerce and communication is the secure exchange of valuable and confidential information over public networks. We rely on encryption and authentication technology, including public key cryptography technology licensed from RSA Security Inc., to provide the security and authentication necessary to
effectaffect the secure exchange of confidential information. Advances in48
computer capabilities, new discoveries in the field of cryptography or other events or developments could cause a breach of the RSA or other algorithms that we use to protect customer transaction data.
We could be subject to claims of intellectual property infringement, which could divert management resources, cause product delays or require that we enter into licensing or royalty agreements.
Third parties may claim that we have infringed their patent, trademark, copyright or other proprietary rights. It is also possible that claims will be made for indemnification resulting from allegations of infringement. In addition, intellectual property infringement claims may be asserted against us as a result of the use by us, our customers or other third parties of our products for the transmission, dissemination or display of information on the Internet. Any claims, with or without
32merit, could be time consuming, costly, cause product shipment delays or require that we enter into royalty or licensing agreements. These licenses might not be available on reasonable terms, or at all. The loss or malfunction of technology licensed from third parties could delay the introduction of our products and services.
We rely in part on technology that we license from third parties, including relational database management systems from Oracle, Sybase, and Informix object request broker software from IONA Technologies PLC, database access technology from Rogue Wave Software
Inc.and other software. We integrate or sublicense this technology with internally developed software to perform key functions. For example, our products and services incorporate data encryption and authentication technology licensed from RSA. Third-party technology licenses might not continue to be available to us on commercially reasonable terms, or at all. Moreover, the licensed technology may contain defects that we cannot control. The loss of any of these technology licenses could cause delays in introducing our products or services until equivalent technology, if available, is identified, licensed and integrated. Delays in introducing our products and services could harm our business.Our executive officers, key employees and highly skilled technical and managerial personnel are critical to our business, and they may not remain with us in the future.
Our performance substantially depends on the performance of our executive officers and key employees. We also rely on our ability to retain and motivate qualified personnel, especially our management and highly skilled development teams. The loss of the services of any of our executive officers or key employees, particularly our founder and Chief Executive Officer, Dr. Pehong Chen, could cause us to incur increased operating expenses and divert senior management resources in searching for replacements. The loss of their services also could harm our reputation if our customers were to become concerned about our future operations. We do not carry "key person" life insurance policies on any of our employees. Our future success also depends on our continuing ability to identify, hire, train and retain other highly qualified technical and managerial personnel. Competition for these personnel is intense, especially in the Internet industry. We have in the past experienced, and may continue to experience, difficulty in hiring and retaining sufficient numbers of highly skilled employees.
If we are unable to meet the rapid technological changesThe significant downturn inonline commerce and communication,ourproducts and services may fail to be competitive. Our products and services may fail to be competitive if we do not maintain or exceed the pace of technological developments in Internet commerce and communication. 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 evolving industry standards and practices. 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. Our future success will depend, in part,business environment has had a negative impact on ourability to: o develop leading technologies; o enhanceoperations. We are currently restructuring ourexisting productsoperations andservices; o develop new productshave taken actions to reduce our workforce andservices that address the increasingly sophisticated and varied needs of our prospective customers; and o respondimplement other cost containment activities. These actions could lead totechnological advances and emerging industry standards and practices on a timely and cost-effective basis. Internet commerce technology is complex and new products and enhancements can require long development periods. If we are unable to develop and introduce new products and services or enhancementsdisruptions ina timely manner in response to changing market conditions or customer requirements, or if new products and services do not achieve market acceptance,our business,may fail to be competitive.reduced employee morale and productivity, increased attrition and problems with retaining existing employees and recruiting future employees and increased financial costs.Limitations on the online collection of profile information could impair the effectiveness of our products.
Online users' resistance to providing personal data and laws and regulations prohibiting use of personal data gathered online without express consent or requiring businesses to notify their
Webweb site49
visitors of the possible dissemination of their personal data could limit the effectiveness of our products.
33One of the principal features of the BroadVision
One-To-One applicationproducts is the ability to develop and maintain profiles of online users to assist business managers in determining the nature of the content to be provided to these online users. Typically, profile information is captured when consumers, business customers and employees visit aWebweb site and volunteer information in response to survey questions concerning their backgrounds, interests and preferences. Profiles can be augmented over time through the subsequent collection of usage data.Although BroadVision
One-To-Oneproducts are designed to enable the development of applications that permitWebweb site visitors to prevent the distribution of any of their personal data beyond that specificWebweb site, privacy concerns may nevertheless cause visitors to resist providing the personal data necessary to support this profiling capability. The mere perception by prospective customers that substantial security and privacy concerns exist among online users, whether or not valid, may indirectly inhibit market acceptance of our products. In addition, new laws and regulations could heighten privacy concerns by requiring businesses to notifyWebweb site users that the data captured from them while online may be used by marketing entities to direct product messages to them.We are subject to increasing regulation at the federal and state levels relating to online privacy and the use of personal user information. Several states have proposed legislation that would limit the uses of personal user information gathered online or require online services to establish privacy policies.
In addition,
bills pending inthe U.S. Federal Trade Commission, or FTC, has urged Congresswould extendto adopt legislation regarding the collection and use of personal identifying information obtained from individuals when accessing Web sites. In the past, the emphasis has been on information obtained from minors. Focus has now shifted to include online privacy protectionstofor adults.Laws andThese regulationsof this kindmay include requirements thatwecompanies establish procedures to,disclose and notifyamong other things: give adequate notice to usersof privacy and security policies, obtain consent from users forregarding information collection anduse of information, ordisclosure practices; provide users with the ability toaccess, correct and deletehave personal informationstored by us. Even indeleted from a company's database; provide users with access to their collected personal information and theabsenceability to correct inaccuracies; clearly identify affiliations with third parties that may collect information or sponsor activities on another company's Web site; and obtain express parental consent prior to collecting and using personal information from children under 13 years ofthose regulations, the Federal Trade Commissionage.The FTC has settled several proceedings resulting in consent decrees in which Internet companies have been required to establish programs regarding the manner in which personal information is collected from users and provided to third parties. We could become a party to a similar enforcement proceeding. These regulatory and enforcement efforts could also harm our customers' ability to collect demographic and personal information from users, which could impair the effectiveness of our
BroadVision One-to-One applicationproducts.New and existing laws could either directly restrict our business or indirectly affect our business by limiting the growth of Internet commerce.
The adoption of any laws or regulations that restrict our methods of doing business or limit the growth of the Internet could decrease demand for our products and services and increase our cost of doing business. Today, there are relatively few laws specifically directed towards online services.
However, due to the increasing popularity of the Internet generally and Internet commerce specifically, we expect that federal, state or foreign agencies will enact laws and regulations with respect to the Internet. These new laws and regulations would be likely to address issues like online user privacy, pricing, content and quality of products and services. If enacted, these laws and regulations could limit the market for our products and services.
50
For example, because our products involve the solicitation of personal data regarding individual consumers, our business could be limited by laws regulating the solicitation, collection or processing of this data. The Telecommunications Act of 1996 prohibits the transmission of some types of information and content over the Internet. The prohibition's scope and the liability associated with a Telecommunications Act violation are currently unsettled. Legislation imposing potential liability upon us for information carried on or disseminated through our products would likely cause us to implement costly measures to reduce our exposure to this liability or to discontinue some of our services.
Our business could be harmed by the expense involved in reacting to actual or potential liability associated with the Telecommunications Act or other Internet-related laws and regulations. In addition, the increased attention focused upon liability issues as a result of the Telecommunications Act could limit the growth of Internet commerce, which could decrease demand for our products.
The United States government regulates the export of technology, including encryption technology, which our products incorporate. Export regulations, either in their current form or as may be subsequently enacted, may limit our ability to distribute our software outside the United States. Any revocation or modification of our export authority or adoption of new laws or regulations relating to the export of software and encryption technology could limit our international operations. The unlawful export of our software could also harm our reputation. Although we take precautions against unlawful export of their software, the global nature of the Internet makes it difficult to effectively control the distribution of software.
34The imposition of sales and other taxes on products sold by our customers over the Internet could have a negative effect on online commerce and, as a result, on demand for our products.
The imposition of new sales or other taxes could limit the growth of Internet commerce generally and, as a result, the demand for our products. Recent federal legislation limits the imposition of state and local taxes on Internet-related sales.
In 1998,Congress has passed the Internet Tax Freedom Act, which places athree-yearmoratorium through November 2003 on state and local taxeson: oon Internet access, unless the tax was already imposed prior to October 1,1998;1998, andodiscriminatory taxes on electronic commerce.There is a possibility that Congress may not renew this legislation in 2001. If Congress chooses not to renew this legislation, state and local governments would be free to impose taxes on electronically purchased goods.We believe that, in accordance with current industry practice, most companies that sell products over the Internet do not currently collect sales or other taxes on shipments of their products into states or foreign countries where they are not physically present.
However,It is possible that one or more states or foreign countries may seek to impose sales or other tax collection obligation on out-of-jurisdiction companies that engage in electronic commerce.A successful assertion by one or more states or foreign countries that companies engaged in electronic commerce should collect sales or other taxes on the sale of their products over the Internet, even though not physically present in the state or foreign country, could indirectly reduce demand for our products.
Our stock price has been and is likely to continue to be highly volatile.
The trading price of our common stock has been and is likely to continue to be highly volatile. Our stock price is subject to wide fluctuations in response to a variety of factors, including:
o
- •
- quarterly variations in operating results;
o- •
- announcements of technological innovations;
o- •
- announcements of new software or services by us or our competitors;
o- •
- changes in financial estimates by securities analysts;
- •
- general economic conditions; or
o51
- •
- other events or factors that are beyond our control.
In addition, the stock market has experienced significant price and volume fluctuations that have particularly affected the trading prices of equity securities of many high technology companies. These fluctuations have often been unrelated or disproportionate to the operating performance of these companies.
Any negative change in the public's perception of the prospects of Internet or electronic commerce companies could further depress our stock price regardless of our results. Other broad market fluctuations may decrease the trading price of our common stock. In the past, following declines in the market price of a company's securities, securities class action litigation, such as the class action lawsuits filed against us and certain of our officers and directors in early 2001, has often been instituted against that company. Litigation could result in substantial costs and a diversion of management's attention and resources.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISKOur exposure to market risk for changes in interest rates relates primarily to our investment portfolio. We had no derivative financial instruments as of December 31,
20002002 and1999.2001. We place our investments in instruments that meet high credit quality standards and the amount of credit exposure to any one issue, issuer and type of instrument is limited.We do not expect any material loss with respect to our investment portfolio. Our financial instrument holdings as of December 31, 2000 were analyzed to determine their sensitivity to interest rate changes. In our sensitivity analysis, we assumed an adverse change in interest rates of 500 basis points and the expected effect on net income was insignificant. 35Cash and Cash Equivalents, Short-Term Investments, Long-Term Investments
We consider all debt and equity securities with remaining maturities of three months or less at the date of purchase to be cash equivalents. Our
cash and cash equivalents consisted of the following (in thousands): December 31, --------------------- 2000 1999 -------- -------- Cash $ 43,253 $ 16,945 Money market funds.............. 94,011 125,807 Corporate notes/bonds........... 2,937 - Government notes/bonds.......... 10,412 - Commercial paper................ 2,524 137,071 -------- -------- $153,137 $279,823 ======== ======== Short-term Investments Ourshort-term investments consist ofmarketabledebt and equityandsecurities that are classified as available-for-sale. Our debt securities are carried at fair value with related unrealized gains or losses reported as other comprehensive income (loss), net of tax. Our long-term investments include debt securities that are classified as available-for-sale.Our investment in marketable equityThese securitiesishave remaining maturities greater than one year from December 31, 2002. These investments are carried at fair value with related unrealized gains or losses reported as other comprehensive income, net of tax.AsAll short term investments have a remaining maturity of
December 31, 2000, ourtwelve months or less. Total short-term and long-term investmentin marketable equity securities had a fair value of $3.1unrealized gains (losses) were $(1.7) million anda cost basis of $5.0 million. Our debt securities are carried at fair value. As of December 31, 2000, commercial paper investments consisted of $11.0$2.1 millioncorporate notes/bonds of $16.9 million and government bonds/notes of $38.4 million. Short-term investments, excluding marketable equity securities, had a weighted average remaining maturity as of December 31, 2000 of approximately three months. Total short-term investment unrealized losses, net, were $26.0 million, net of tax,for theyearyears ended December 31,2000.2002 and 2001, respectively. Total realized gains during fiscal20002002 and 2001 were$3.6$719,000 and $2.0 million, respectively, and are included in other income in the accompanyingstatementConsolidated Statements ofoperations.Operations.Our cash and cash equivalents, short-term investments and long-term investments consisted of the following as of December 31, 2002 (in thousands):
Amortized
costsUnrealized
gainsUnrealized
lossesFair
valueCash $ 36,070 $ — $ — $ 36,070 Money market 36,232 — — 36,232 Corporate notes/bonds 23,369 50 (1 ) 23,418 Government notes/bonds 23,430 11 — 23,441 $ 119,101 $ 61 $ (1 ) $ 119,161
Included in cash and cash equivalents
$
94,090
$
—
$
—
$
94,090Included in short-term investments 24,428 57 (1 ) 24,484 Included in long-term investments 583 4 — 587 $ 119,101 $ 61 $ (1 ) $ 119,161 52
Included in the table above in cash and cash equivalents are $16.7 million of non-current restricted cash and investments.
Our cash and cash equivalents, short-term investments and long-term investments consisted of the following as of December 31, 2001 (in thousands):
Amortized
costUnrealized
gainsUnrealized
lossesFair
valueCash $ 25,874 $ — $ — $ 25,874 Money market 36,299 364 (1 ) 36,662 Corporate note/bonds 75,842 1,056 (8 ) 76,890 Government notes/bonds 53,792 346 (17 ) 54,121 $ 191,807 $ 1,766 $ (26 ) $ 193,547
Included in cash and cash equivalents
$
75,393
$
366
$
(1
)
$
75,758Included in short-term investments 94,773 895 (14 ) 95,654 Included in long-term investments 21,641 505 (11 ) 22,135 $ 191,807 $ 1,766 $ (26 ) $ 193,547 Included in the table above in short-term investments are non-current restricted cash and investments of $29.9 million.
Remaining maturities of our long-term investments as of December 31, 2002 are as follows:
2004 Corporate notes/bonds $ 587 Concentrations of Credit Risk
Financial assets that potentially subject us to significant concentrations of credit risk consist principally of cash, cash equivalents, short-term investments, and trade accounts receivable.
We maintain ourThe Company maintains its cash and cash equivalents and short-term investments with overtenseven separate financial institutions.We marketThe Company markets andsell oursells its products throughout the world andperformperforms ongoing credit evaluations ofourits customers.We generally do not require collateral on accounts receivable as the majority of our customers are large, well-established companies. We maintainThe Company maintains reserves for potential creditlosses but historically have not experienced any significant losses related to individual customers or groups of customers in any particular industry or geographic area.losses. For theyearyears ended December 31, 2002, 2001 and 2000, no one customer accounted for more than 10% of fiscal year2000total revenue. As of December 31,2000, two customers2002 one customer accounted for more than 10% of the Company's accounts receivable. As of December 31, 2001, no one customer individually accounted for more than 10% ofourthe Company's accounts receivable.These customers accounted for 10% and 11% of accounts receivable, respectively.Fair Value of Financial Instruments
Our financial instruments consist of cash equivalents, short-term investments, accounts receivable, accounts payable and debt. We do not have any derivative financial instruments. We believe the reported carrying amounts of
ourits financial instruments approximates fair value, based upon the short maturity of cash equivalents, short-term investments, accounts receivable and payable, and based on the current rates available tousit on similar debt issues.Long-termEquity Investments
Included in the our long-termOur equity investments
are investments in debt securities that are classified as available-for-sale. These securities have remaining maturities greater than one year from December 31, 2000. These investments are carried at fair value with related unrealized gains or losses reported as other comprehensive income, netconsist oftax. As of December 31, 2000, our long-term investments in debt securities had a fair value of $34.3 million in corporate bonds/notes and $44.6 million in government bonds/notes. The remaining weighted average days to maturity as of December 31, 2000 was approximately twenty three months. Also included in our long-term investments areequity investments in public and non-public companies that are accounted for under either the cost method of accounting or the equity method of accounting. Equity investments are accounted for under the cost method of accounting when we have a minority interest and do not have the ability to exercise significant influence. These investments are classified as available for sale and are carried at fair36value when readily determinable market values exist or at cost 53
when such market values do not exist. Adjustments to fair value are recorded as a component of other comprehensive income unless the investments are considered permanently impaired in which case the adjustment is recorded as a component of other income (expense), net in the consolidated statement of operations. Equity investments are accounted for under the equity method of accounting when we have a minority interest and have the ability to exercise significant influence. These investments are classified as available for sale and are carried at cost with periodic adjustments to carrying value for
ourequity in net income (loss) of the equity investee. Such adjustments are recorded as a component of other income, net. Any decline in value of our investments, which is other than a temporary decline, is charged to earnings during the period in which the impairment occurs.The total fair value of our cost method long-term equity investments in public and non-public companies as of December 31, 2002 was
$19.4 million with a cost basis of $27.3$2.1 million. This includesa $750,000 write down$12.6 million ofan investmentwrite-downs during 2002 of investments due to another than temporaryother-than-temporary decline in fair value. Therewas also an additional $250,000 write down of an investment duewere no unrealized gains or losses recorded toan other than temporary decline in fair value. The total unrealized loss, net, duringdate and for the year ended December 31,2000 in our cost method2002 related to long-terminvestments was $4.3 million, net of tax. The total fair value of ourequitymethod long-term investment was $4.4 million as of December 31, 2000. This includes $600,000 of equity in net losses realized during the twelve months ended December 31, 2000. The equity in net losses realized is recorded as a component of other income, net in the accompanying statement of operations. 37investments.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATAThe following consolidated financial statements and the related notes thereto of BroadVision, Inc. and the Report of Independent Certified Public Accountants are filed as a part of this Form 10K.
54
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTSTo The Board of Directors and Stockholders of BroadVision, Inc.
:and Subsidiaries:We have audited the accompanying consolidated balance
sheetssheet of BroadVision, Inc. (a Delaware corporation) and subsidiaries as of December 31,2000 and 1999,2002, and the related consolidated statements of operations, stockholders' equity and cash flows for theyearsyear then ended. Theseconsolidatedfinancial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on theseconsolidated financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. 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 financial statements referred to above present fairly, in all material respects, the financial position of BroadVision, Inc. and subsidiaries as of December 31, 2000 and 1999, and the results of their operations and their cash flows for the years then ended in conformity with accounting principles generally accepted in the United States. Arthur Andersen LLP San Jose, California March 30, 2001 38REPORT OF INDEPENDENT ACCOUNTANTS The Board of Directors and Stockholders of BroadVision, Inc.: We have audited the accompanying consolidated statements of operations, stockholders' equity, and cash flows of BroadVision, Inc. and subsidiaries for the year ended December 31, 1998. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidatedfinancial statements based on our audit. The consolidated financial statements of BroadVision, Inc. as of December 31, 2001, and for each of the two years in the period ended December 31, 2001, prior to the revisions discussed in Notes 1 and 4, were audited by other independent accountants who have ceased operations. Those independent accountants expressed an unqualified opinion on those financial statements in their report dated March 29, 2002.We conducted our audit in accordance with auditing standards generally accepted in the United States of America. 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 audit provides a reasonable basis for our opinion.
In our opinion, the 2002 consolidated financial statements referred to above present fairly, in all material respects, the
results of operations and cash flowsfinancial position of BroadVision, Inc. and subsidiaries as of December 31, 2002, and the results of their operations and their cash flows for the year then endedDecember 31, 1998,in conformity with accounting principles generally accepted in the United States of America./s/ KPMGAs disclosed in Note 1 to the consolidated financial statements, upon adoption of new accounting pronouncements effective during 2002, the Company changed its method of accounting for goodwill and other intangible assets, and its method of accounting for reimbursable out-of-pocket expenses.
As discussed above, the consolidated financial statements of BroadVision, Inc. as of December 31, 2001, and for each of the two years in the period ended December 31, 2001, were audited by other independent accountants who have ceased operations. As described in Note 1, these financial statements have been restated to include the transitional disclosures required by Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets," which was adopted by the Company on January 1, 2002, and to reclassify reimbursable out-of-pocket expenses in accordance with Emerging Issues Task Force Issue 01-14 "Income Statement Characterization of Reimbursements Received for Out of Pocket Expenses Incurred," also adopted by the Company on January 1, 2002. We audited the transitional disclosures for 2001 and 2000 described in Notes 1. We also audited the adjustments described in Note 4 that were applied to restate the 2001 and 2000 consolidated financial statements. In our opinion, all such adjustments and transitional disclosures are appropriate and have been properly applied. However, we were not engaged to audit, review, or apply any procedures to the 2001 or 2000 consolidated financial statements of the company other than with respect to such adjustments and transitional disclosures and, accordingly, we do not express an opinion or any other form of assurance on the 2001 and 2000 consolidated financial statements taken as a whole.
/s/ BDO Seidman, LLP
Mountain View,San Jose, California
January26, 1999,24, 2003, except for Note 13
and the penultimate paragraph of Note 6,
as to which thesectiondate is March 28, 200355
THE FOLLOWING REPORT IS A COPY OF A REPORT PREVIOUSLY ISSUED BY ARTHUR ANDERSEN LLP AND HAS NOT BEEN REISSSUED. BROADVISION, INC. HAS RESTATED ITS FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2001 AND 2000, TO INCLUDE THE TRANSITIONAL DISCLOSURES REQUIRED BY STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NO. 142, "GOODWILL AND OTHER INTANGIBLE ASSETS," AND TO RECLASSIFY REIMBURSABLE OUT-OF-POCKET EXPENSES IN ACCORDANCE WITH EMERGING ISSUES TASK FORCE ISSUE 01-14 "INCOME STATEMENT CHARACTERIZATION OF REIMBURSEMENTS RECEIVED FOR OUT OF POCKET EXPENSES INCURRED," ALSO ADOPTED BY THE COMPANY ON JANUARY 1, 2002. THE REVISION TO THE 2001 AND 2000 FINANCIAL STATEMENTS RELATED TO THIS TRANSITIONAL DISCLOSURE WERE REPORTED ON BY BDO SEIDMAN, LLP, AS STATED IN THEIR REPORT APPEARING HEREIN.
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of
Note 1 entitled "Stock Splits," which isDirectors and Stockholders of BroadVision, Inc. and Subsidiaries:We have audited the accompanying consolidated balance sheets of BroadVision, Inc. (a Delaware corporation) and subsidiaries as of December 31, 2001 and 2000, and the related consolidated statements of operations, stockholders' equity and cash flows for each of the three years in the period ended December 31, 2001. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States of America. 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 financial statements referred to above present fairly, in all material respects, the financial position of BroadVision, Inc. and subsidiaries as of December 31, 2001 and 2000, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2001, in conformity with accounting principles generally accepted in the United States of America.
/s/ARTHUR ANDERSEN LLP
San Jose, California
March13, 2000 3929, 2002 56
BROADVISION, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS(in
(in thousands, except per share amounts)
December 31, ------------------------------- 2000 1999 -------------- --------------ASSETS Current assets: Cash and cash equivalents $ 153,137 $ 279,823 Short-term investments 69,397 68,758 Accounts receivable, less allowance for doubtful accounts of $4,015 and $1,446 as of December 31, 2000 and 1999, respectively 104,811 26,540 Prepaids and other 17,417 5,085 -------------- -------------- Total current assets 344,762 380,206 Property and equipment, net 76,685 16,751 Deferred tax asset 5,579 -- Long-term investments 102,555 4,414 Goodwill and other intangibles, net 607,501 -- Other assets 5,942 4,757 -------------- -------------- Total assets $ 1,143,024 $ 406,128 ============== ============== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Current portion of long-term debt and capital lease obligations $ 977 $ 1,247 Accounts payable 15,711 5,754 Accrued expenses 53,676 13,156 Unearned revenue 16,330 3,896 Deferred maintenance 42,237 15,228 Deferred income taxes -- 16,769 -------------- -------------- Total current liabilities 128,931 56,050 Long-term debt, net of current portion 3,897 4,890 Other noncurrent liabilities 898 -- -------------- -------------- Total liabilities 133,726 60,940 -------------- -------------- Commitments (Note 7) Stockholders' equity: Convertible preferred stock, $0.0001 par value; 10,000 shares authorized; none issued and outstanding -- -- Common stock, $0.0001 par value; 2,000,000 shares authorized; 270,066 and 244,812 shares issued and outstanding as of December 31, 2000 and 1999, respectively 27 24 Additional paid-in capital 1,176,042 320,259 Deferred compensation -- (226) Accumulated other comprehensive (loss) income (4,348) 25,925 Accumulated deficit (162,423) (794) -------------- -------------- Total stockholders' equity 1,009,298 345,188 -------------- -------------- Total liabilities and stockholders' equity $ 1,143,024 $ 406,128 ============== ==============
December 31, 2002 2001 ASSETS Current assets: Cash and cash equivalents $ 77,386 $ 75,758 Short-term investments 24,484 65,705 Accounts receivable, less allowance for doubtful accounts and reserves of $5,502 and $8,194 as of December 31, 2002 and 2001, respectively 22,917 39,768 Prepaids and other 9,181 12,816 Total current assets 133,968 194,047 Property and equipment, net 26,600 67,219 Deferred tax asset — 2,857 Long-term investments 587 22,135 Restricted cash and investments 16,704 29,949 Equity investments 2,083 5,583 Goodwill 53,421 53,421 Other intangibles, net 3,899 7,446 Other assets 2,874 9,760 Total assets $ 240,136 $ 392,417
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities: Bank borrowings and current portion of long-term debt $ 25,977 $ 977 Accounts payable 8,105 11,276 Accrued expenses 55,787 61,712 Unearned revenue 14,158 22,580 Deferred maintenance 24,325 30,337 Total current liabilities 128,352 126,882 Long-term debt, net of current portion 1,945 2,922 Other noncurrent liabilities 68,206 59,466 Total liabilities 198,503 189,270 Commitments and Contingencies (Note 8) Stockholders' equity: Convertible preferred stock, $0.0001 par value; 10,000 shares authorized; none issued and outstanding — — Common stock, $0.0001 par value; 2,000,000 shares authorized; 32,440 and 31,643 shares issued and outstanding as of December 31, 2002 and 2001, respectively 3 3 Additional paid-in capital 1,210,797 1,207,071 Accumulated other comprehensive loss 37 (5,245 ) Accumulated deficit (1,169,204 ) (998,682 ) Total stockholders' equity 41,633 203,147 Total liabilities and stockholders' equity $ 240,136 $ 392,417 The accompanying notes are an integral part of these consolidated financial statements
4057
BROADVISION, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS(in
(in thousands, except per share amounts)
Years Ended December 31, ----------------------------------- 2000 1999 1998 --------- --------- ---------Revenues: Software licenses $ 250,838 $ 75,383 $ 36,067 Services 163,078 40,131 14,844 --------- --------- --------- Total revenues 413,916 115,514 50,911 Cost of revenues: Cost of software licenses 7,827 3,703 1,001 Cost of services 117,808 25,108 8,704 --------- --------- --------- Total cost of revenues 125,635 28,811 9,705 --------- --------- --------- Gross profit 288,281 86,703 41,206 Operating expenses: Research and development 51,621 14,568 9,227 Sales and marketing 167,415 48,903 26,269 General and administrative 28,195 7,970 3,786 Goodwill and intangible amortization 187,748 -- -- Charge for acquired in-process technology 10,100 -- -- --------- --------- --------- Total operating expenses 445,079 71,441 39,282 --------- --------- --------- Operating (loss) income (156,798) 15,262 1,924 Interest income 16,706 5,142 2,484 Other income (expense), net 1,511 (599) (448) --------- --------- --------- (Loss) income before income taxes (138,581) 19,805 3,960 Income tax provision (benefit) 23,048 996 (79) --------- --------- --------- Net (loss) income $(161,629) $ 18,809 $ 4,039 ========= ========= ========= Basic (loss) earnings per share $ (0.62) $ 0.08 $ 0.02 ========= ========= ========= Diluted (loss) earnings per share $ (0.62) $ 0.07 $ 0.02 ========= ========= ========= Shares used in computing basic earnings (loss) per share 259,780 229,128 210,114 ========= ========= ========= Shares used in computing diluted earnings (loss) per share 259,780 260,712 230,877 ========= ========= =========
Years Ended December 31, 2002 2001 2000 Revenues: Software licenses $ 40,483 $ 101,480 $ 250,838 Services 75,415 146,943 164,661 Total revenues 115,898 248,423 415,499 Cost of revenues: Cost of software licenses 8,144 9,895 7,827 Cost of services 38,898 97,639 119,391 Total cost of revenues 47,042 107,534 127,218 Gross profit 68,856 140,889 288,281 Operating expenses: Research and development 41,432 78,677 51,621 Sales and marketing 48,918 139,799 167,415 General and administrative 16,288 42,311 28,088 Goodwill and intangible amortization 3,548 211,216 187,855 Charge for acquired in-process technology — 6,418 10,100 Restructuring charge 110,449 153,284 — Impairment of assets 3,129 — — Impairment of goodwill and other intangibles — 336,379 — Total operating expenses 223,764 968,084 445,079 Operating loss (154,908 ) (827,195 ) (156,798 ) Interest income 4,130 11,404 16,706 Other (expense) income, net (12,141 ) (18,332 ) 1,511 Loss before provision for income taxes (162,919 ) (834,123 ) (138,581 ) Provision for income taxes 7,603 2,136 23,048 Net loss $ (170,522 ) $ (836,259 ) $ (161,629 ) Basic loss per share $ (5.32 ) $ (27.20 ) $ (5.60 ) Diluted loss per share $ (5.32 ) $ (27.20 ) $ (5.60 ) Shares used in computing basic loss per share 32,036 30,748 28,864 Shares used in computing diluted loss per share 32,036 30,748 28,864 The accompanying notes are an integral part of these consolidated financial statements
4158
BROADVISION, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(in thousands)
Convertible Preferred
StockCommon Stock Accumulated
Other
Comprehensive
Income (loss)Additional
Paid-in CapitalDeferred
CompensationAccumulated
DeficitComprehensive
Income (loss)Total
Stockholders'
EquityShares Amount Shares Amount Balances as of December 31, 1999 — $ — 27,201 $ 3 $ 320,280 $ (226 ) $ 25,925 $ (794 ) $ 345,188 Comprehensive income: �� Net income (161,629 ) $ (161,629 ) (161,629 ) Unrealized investment loss less reclassification adjustment for gains (losses) included in net loss, net of $20,069 tax (30,273 ) (30,273 ) (30,273 ) Total comprehensive income $ (191,902 ) Issuance of common stock under employee stock purchase plan — — 121 — 12,155 — — — 12,155 Issuance of common stock from exercise of options, including tax benefits of $22,841 — — 1,077 — 49,562 — — — 49,562 Issuance of common stock and options to purchase common stock in connection with Interleaf acquisition — — 1,599 — 789,605 — — — 789,605 Issuance of warrants for common stock — — — — 1,459 — — — 1,459 Long-term investment in exchange for common stock — — 8 — 3,000 — — — 3,000 Issuance of common stock from exercise of warrants — — 1 — 5 — — — 5 Amortization of deferred compensation — — — — — 226 — — 226 Balances as of December 31, 2000 — — 30,007 $ 3 $ 1,176,066 $ — $ (4,348 ) $ (162,423 ) $ 1,009,298 Comprehensive loss: Net loss (836,259 ) $ (836,259 ) (836,259 ) Unrealized investment loss less reclassification adjustment for gains (losses) included in net loss, net of $701 of tax (897 ) (897 ) (897 ) Total comprehensive loss $ (837,156 ) 59
BROADVISION, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY(in(Continued)
(in thousands)
Common Stock Additional -------------------------- Paid-in Shares Amount Capital ----------- ----------- -----------Balances as of December 31, 1997 183,087 $ 18 $ 40,350 Comprehensive income: Net income Unrealized gain on equity securities Total comprehensive income Issuance of common stock from public offering, net of costs 31,104 3 53,742 Issuance of common stock for long-term investments 1,107 -- 1,322 Issuance of common stock from exercise of warrants 261 -- -- Issuance of common stock under employee stock 2,052 -- 1,599 purchase plan Issuance of common stock from exercise of options 5,697 -- 2,190 Common stock repurchased (144) -- (2) Deferred compensation forfeited due to voluntary terminations -- -- (693) Deferred compensation on stock options -- -- 240 Amortization of deferred compensation -- -- -- ----------- ----------- ----------- Balances as of December 31, 1998 223,164 21 98,748 Comprehensive income: Net income Unrealized gain on equity securities, net of $17,318 tax Total comprehensive income Issuance of common stock under employee stock 1,833 -- 3,928 purchase plan Issuance of common stock from exercise of options 10,038 -- 7,201 Issuance of common stock from public offering, net of offering costs of $2,285 9,315 3 210,376 Issuance of common stock from exercise of warrants 462 -- 6 Amortization of deferred compensation -- -- -- ----------- ----------- ----------- Balances as of December 31, 1999 244,812 $ 24 $ 320,259 =========== =========== =========== Comprehensive loss: Net loss Unrealized loss on equity securities, net of $20,069 tax Total comprehensive loss Issuance of common stock under employee stock 1,088 -- 12,155 purchase plan Issuance of common stock from exercise of 9,692 1 49,561 options, including tax benefits of $22,841 Issuance of common stock in connection with Interleaf acquisition 14,392 2 789,603 Issuance of warrants for common stock -- -- 1,459 Long-term investment in exchange for common stock 77 -- 3,000 Issuance of common stock from exercise of warrants 5 -- 5 Amortization of deferred compensation -- -- -- ----------- ----------- ----------- Balances as of December 31, 2000 270,066 $ 27 $ 1,176,042 =========== =========== ===========Accumulated Other Total Deferred Comprehensive Accumulated Comprehensive Stockholders Compensation Income (loss) Deficit Income (loss) Equity ------------ ------------- ----------- ------------- ------------Balances as of December 31, 1997 $ (1,605) $ -- $ (23,642) $ 15,121 Comprehensive income: Net income 4,039 $ 4,039 4,039 Unrealized gain on equity securities 3,198 3,198 3,198 ----------- Total comprehensive income $ 7,237 =========== Issuance of common stock from public offering, net of costs -- -- -- 53,745 Issuance of common stock for long-term investments -- -- -- 1,322 Issuance of common stock from exercise of warrants -- -- -- -- Issuance of common stock under employee stock -- -- -- 1,599 purchase plan Issuance of common stock from exercise of options -- -- -- 2,190 Common stock repurchased -- -- -- (2) Deferred compensation forfeited due to voluntary terminations 693 -- -- -- Deferred compensation on stock options (240) -- -- -- Amortization of deferred compensation 597 -- -- 597 ----------- ------------ ----------- ----------- Balances as of December 31, 1998 (555) 3,198 (19,603) 81,809 Comprehensive income: Net income 18,809 $ 18,809 18,809 Unrealized gain on equity securities, net of 22,727 22,727 22,727 $17,318 tax ----------- Total comprehensive income $ 41,536 =========== Issuance of common stock under employee stock -- -- -- 3,928 purchase plan Issuance of common stock from exercise of options -- -- -- 7,201 Issuance of common stock from public offering, net of offering costs of $2,285 -- -- -- 210,379 Issuance of common stock from exercise of warrants -- -- -- 6 Amortization of deferred compensation 329 -- -- 329 ----------- ------------ ----------- ----------- Balances as of December 31, 1999 $ (226) $ 25,925 $ (794) $ 345,188 =========== ============ =========== =========== Comprehensive loss: Net loss (161,629) $ (161,629) (161,629) Unrealized loss on equity securities, net of (30,273) (30,273) (30,273) $20,069 tax ----------- Total comprehensive loss $ (191,902) =========== Issuance of common stock under employee stock -- -- -- 12,155 purchase plan Issuance of common stock from exercise of -- -- -- 49,562 options, including tax benefits of $22,841 Issuance of common stock in connection with Interface acquisition -- -- -- 789,605 Issuance of warrants for common stock 1,459 Long-term investment in exchange for common stock 3,000 Issuance of common stock from exercise of warrants -- -- -- 5 Amortization of deferred compensation 226 -- -- 226 ----------- ------------ ----------- ----------- Balances as of December 31, 2000 $ -- $ (4,348) $ (162,423) $ 1,009,298 =========== ============ =========== ===========
Convertible Preferred
StockCommon Stock Accumulated
Other
Comprehensive
Income (loss)Additional
Paid-in CapitalDeferred
CompensationAccumulated
DeficitComprehensive
Income (loss)Total
Stockholders'
EquityShares Amount Shares Amount Issuance of common stock under employee stock purchase plan — — 266 — 6,975 — — — 6,975 Issuance of common stock from exercise of options — — 1,069 — 9,450 — — — 9,450 Issuance of common stock in connection with Keyeon acquisition — — 301 — 13,566 — — — 13,566 Stock-based compensation charge — — — — 1,014 — — — 1,014 Balances as of December 31, 2001 — — 31,643 $ 3 $ 1,207,071 $ — $ (5,245 ) $ (998,682 ) $ 203,147 Comprehensive loss: Net loss (170,522 ) $ (170,522 ) (170,522 ) Unrealized investment gain less reclassification adjustment for gains (losses) included in net loss, net of $2,606 tax 5,282 5,282 5,282 Total comprehensive loss $ (165,240 ) Issuance of common stock under employee stock purchase plan — — 558 — 1,793 — — — 1,793 Issuance of common stock from exercise of options — — 238 1,087 — — — 1,087 Stock-based compensation charge — — — — 846 — — — 846 Balances as of December 31, 2002 — — 32,439 $ 3 $ 1,210,797 $ — $ 37 $ (1,169,204 ) $ 41,633 The accompanying notes are an integral part of these consolidated financial statements.
60
BROADVISION, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Years Ended December 31, 2002 2001 2000 Cash flows from operating activities: Net loss $ (170,522 ) $ (836,259 ) $ (161,629 ) Adjustments to reconcile net loss to net cash (used for) provided by operating activities: Depreciation and amortization 18,200 25,440 10,477 Deferred tax asset — — (5,579 ) Income tax benefit from stock option exercises — — 22,841 Amortization of deferred compensation — — 226 Stock-based compensation charge 846 350 — Allowance for doubtful accounts and reserves 3,979 8,298 2,687 Amortization of prepaid royalties 6,764 3,853 1,914 Amortization of prepaid compensation — 609 1,961 Realized loss on cost method long-term investments 12,649 12,625 1,000 Equity in net loss from unconsolidated subsidiary — 2,438 572 Loss on sale of equipment 344 3,113 — Impairment of assets 3,129 — — Amortization of goodwill and other intangibles 3,548 211,216 187,855 Impairment of intangibles — 336,379 — Charge for acquired in-process technology — 6,418 10,100 Non-cash restructuring charge 18,891 37,460 — Provision for deferred tax asset valuation 6,279 — — Changes in operating assets and liabilities, net of effects from acquired business: Accounts receivable 12,872 55,863 (68,876 ) Prepaids and other 3,635 9,332 (12,693 ) Restructuring reserve 6,323 90,789 — Accounts payable and accrued expenses (9,097 ) (34,548 ) 39,262 Unearned revenue and deferred maintenance (14,434 ) (5,625 ) 28,165 Increase in other noncurrent assets (2,600 ) (5,618 ) (2,949 ) Net cash (used for) provided by operating activities (99,194 ) (77,867 ) 55,334 Cash flows from investing activities: Purchase of property and equipment (1,091 ) (55,697 ) (67,515 ) Proceeds from sale of assets 247 761 — Transfer from restricted cash/investments 13,245 — — Purchase of long-term investments (2,349 ) (45,728 ) (106,864 ) Sales/maturity of long-term investments 24,315 103,251 2,952 Direct costs of acquisition, net of cash acquired — — (6,039 ) Cash acquired in purchase transaction — 7,171 — Purchase of short-term investments (43,041 ) (118,971 ) (261,046 ) Sales/maturity of short-term investments 82,582 94,251 217,642 Net cash provided by (used for) investing activities 73,908 (14,962 ) (220,870 ) 61
BROADVISION, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
(in thousands)
Years Ended December 31, 2002 2001 2000 Cash flows from financing activities: Proceeds from borrowings 25,000 — — Repayments of borrowings (977 ) (975 ) (1,220 ) Payments on capital lease obligations — — (270 ) Proceeds from issuance of warrants for common stock — — 1,459 Proceeds from issuance of common stock, net 2,891 16,425 38,881 Net cash provided by financing activities 26,914 15,450 38,850 Net increase (decrease) in cash and cash equivalents 1,628 (77,379 ) (126,686 ) Cash and cash equivalents, beginning of period 75,758 153,137 279,823 Cash and cash equivalents, end of period 77,386 $ 75,758 $ 153,137 Supplemental cash flow disclosures: Cash paid for interest $ 883 $ 500 $ 554 Cash paid for income taxes $ 1,324 $ 2,136 $ 1,890 Non-cash investing and financing activities: Long-term investment acquired in exchange for common stock — — 3,000 In connection with the acquisition of Keyeon, the following non-cash transaction occurred: Fair value of assets acquired, including cash — (17,573 ) — Liabilities assumed — 4,007 — Issuance of common stock — 13,566 — In connection with the acquisition of Interleaf, the following non-cash transaction occurred: Fair value of assets acquired, including cash — — (822,562 ) Liabilities assumed — — 26,918 Issuance of common stock — — 789,605 Cash paid for acquisition and acquisition costs — — 6,039 The accompanying notes are an integral part of these consolidated financial statements
4262
BROADVISION, INC. AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands)
Years Ended December 31, ----------------------------------- 2000 1999 1998 --------- --------- ---------Cash flows from operating activities: Net income (loss) $(161,629) $ 18,809 $ 4,039 Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation and amortization 10,477 4,739 2,947 Amortization of deferred compensation 226 329 597 Provision for doubtful accounts 2,687 758 458 Revenue resulting from non-monetary transactions -- -- (2,917) Amortization of prepaid royalties 1,914 333 250 Amortization of prepaid compensation 1,961 182 -- Realized loss on cost method long-term investments 1,000 -- -- Equity in net loss from unconsolidated subsidiary 572 -- -- Amortization of goodwill and other intangibles 187,748 -- -- Charge for acquired in-process technology 10,100 -- -- Changes in operating assets and liabilities, net of effects from acquired business: Income tax benefit from stock option exercises 22,841 -- -- Accounts receivable (68,876) (11,368) (7,036) Prepaid expenses and other (12,693) (403) (2,716) Deferred tax asset (5,579) -- -- Accounts payable and accrued expenses 39,262 11,602 3,145 Unearned revenue and deferred maintenance 28,165 10,930 2,633 Increase in other noncurrent assets (2,842) (2,565) (237) --------- --------- --------- Net cash provided by operating Activities 55,334 33,346 1,163 --------- --------- --------- Cash flows from investing activities: Purchase of property and equipment (67,515) (13,291) (4,198) Purchase of long-term investments (106,864) (1,414) (3,000) Maturity of long-term investments 2,952 -- -- Direct costs of acquisition, net of cash acquired (6,039) (3,765) -- Purchase of short-term investments (261,046) (72,783) -- Maturity of short-term investments 217,642 52,667 796 --------- --------- --------- Net cash used for investing activities (220,870) (38,586) (6,402) --------- --------- --------- Cash flows from financing activities: Net change in restricted cash -- -- 1,400 Proceeds from borrowings -- 3,000 1,424 Repayments of borrowings (1,220) (620) (603) Payments on capital lease obligations (270) (709) (913) Proceeds from issuance of warrants for common stock 1,459 -- -- Proceeds from issuance of common stock, net 38,881 221,514 57,532 --------- --------- --------- Net cash provided by financing activities 38,850 223,185 58,840 --------- --------- --------- Net increase (decrease) in cash and cash equivalents (126,686) 217,945 53,601 Cash and cash equivalents, beginning of period 279,823 61,878 8,277 --------- --------- --------- Cash and cash equivalents, end of period $ 153,137 $ 279,823 $ 61,878 ========= ========= ========= Supplemental cash flow disclosures: Cash paid for interest $ 554 $ 404 $ 394 ========= ========= ========= Cash paid for income taxes $ 1,890 $ 538 $ 428 ========= ========= ========= Non-cash investing and financing activities: Prepaids and other assets acquired through non-monetary Transactions -- -- 1,250 Investments acquired through non-monetary Transactions -- -- 4,025 Unearned revenue and deferred maintenance from non-monetary transactions -- -- 2,358 Equipment acquired under capital leases -- -- 316 Long-term investment acquired in exchange for common Stock 3,000 -- 1,322 Deferred compensation on stock options -- -- 240 Deferred compensation forfeited due to voluntary Terminations -- -- 693 In connection with the acquisition of Interleaf, the following non-cash transaction occurred: Fair value of assets acquired, including cash (822,562) -- -- Liabilities assumed 26,918 -- -- Issuance of common stock 789,605 -- -- --------- Cash paid for acquisition and acquisition costs $ 6,039 -- -- In connection with the acquisition of Fidutec, the following non-cash transaction occurred: Fair value of assets acquired, including cash -- (4,164) -- Liabilities assumed -- 399 -- --------- --------- --------- Cash paid for acquisition and acquisition costs $ -- $ 3,765 $ --The accompanying notes are an integral part of these consolidated financial statements 43BROADVISION, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31,20002002Note
1 --1—Organization and Summary of Significant Accounting PoliciesNature of Business
BroadVision, Inc. (collectively with its subsidiaries, the "Company") was incorporated in the state of Delaware on May 13,
1993. The Company1993 and has been a publicly traded corporation since 1996. BroadVision develops, markets, andsells an integrated suitesupports enterprise portal applications that enable companies to unify their e-business infrastructure and conduct both interactions and transactions with employees, partners, and customers through a personalized self-service model that increases revenues, reduces costs, and improves productivity. As ofpackaged applications for conducting e-business interactions, transactions and services. Global enterprisesDecember 31, 2002, more than 1,200 leading companies and government entities around the globe usetheseBroadVision applications tosell, buy, and exchange goods, services,enable their portal-based commerce and informationoveraccess initiatives. As of December 31, 2002, more than 100 partner firms around theWebworld are working to ensure the Company's joint customers' success through complementary technology, applications, tools, andon wireless devices. Theservices offerings that extend and enhance customers' BroadVisione-business application suite enablesimplementations.Acquisitions
On June 29, 2001, the Company completed its acquisition of Keyeon LLC, or "Keyeon", formerly a joint venture in which the Company held an
entityinterest of approximately 36%. As consideration for the acquisition, the Company issued 301,475 shares of its common stock valued at $13.6 million toestablish and sustain high-yield relationships with customers, suppliers, partners, distributors, employees, andthe otherconstituentsformer participants in theextended enterprise. BroadVision services, supported by over 190 partner organizations worldwide, transform these applications into business valuejoint venture, which resulted in the Company owning 100% of the outstanding shares of Keyeon. The acquisition was accounted forBroadVision's customers through consulting, education,as a purchase. The acquired assets andsupport servicesassumed liabilities, and the related results of operations, are included inmore than 34 countries. Acquisitionthe consolidated financial statements of the Company from the date of acquisition (See Note 2).On April 14, 2000, the Company completed its acquisition of Interleaf, Inc. and its subsidiaries ("Interleaf") pursuant to a statutory merger involving a stock-for-stock exchange. The acquisition was accounted for as a purchase. The acquired assets and assumed liabilities, and the related results of operations, are included in the consolidated financial statements of the Company from the date of acquisition. Net assets were recorded at fair value at the acquisition date. The excess of the purchase price over the fair value of net assets acquired is included in goodwill and other intangible assets in the accompanying consolidated balance sheet. Amounts allocated to in-process technology were expensed in the period in which the acquisition was
consummated; seeconsummated (see Note2.2).Basis of Presentation and Use of Estimates
The accompanying consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation. In the Company's opinion, the consolidated financial statements presented herein include all necessary adjustments, consisting of normal recurring adjustments, to fairly state the Company's financial position, results of operations, and cash flows for the periods indicated. The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make certain assumptions and estimates that affect reported amounts of assets and liabilities as of the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from estimates.
63
Revenue Recognition
Overview
The Company's revenue consists of fees for licenses of the Company's software products, maintenance, consulting services and customer training. The Company generally charges fees for licenses of its software products either based on the number of persons registered to use the product or based on the number of Central Processing Units ("CPUs") on which the product is installed. Licenses for software whereby fees charged are based upon the number of persons registered to use the product are differentiated between licenses for development use and licenses for use in deployment of the customer's website. Licenses for software whereby fees charged are on a per-CPU basis do not differentiate between development and deployment usage. The Company's revenue recognition policies are in accordance with Statement of Position ("SOP") No. 97-2,Software Revenue Recognition, as
amended andamended; SOP No. 98-9,Software Revenue Recognition, With Respect to CertainTransactions.Transactions and the Securities and Exchange Commission's Staff Accounting Bulletin No. 101,Revenue Recognition in Financial Statements.Software License Revenue
The Company licenses its products through its direct sales force and indirectly through resellers. In general, software license revenues are recognized when a non-cancelable license agreement has been signed and the customer acknowledges an unconditional obligation to pay, the software product has been delivered, there are no uncertainties surrounding product acceptance, the fees are fixed and determinable and collection is considered
probable; professional servicesprobable. Delivery is considered to have occurred when title and risk of loss have been transferred to the customer, which generally occurs when media containing the licensed programs is provided to a common carrier. In case of electronic delivery, delivery occurs when the customer is given access to the licensed programs. If collectibility is not considered probable, revenue is recognized when the fee is collected. Subscription-based license revenues arerecognized as such services are performed; and maintenance revenues or post-contract support ("PCS"), including revenues bundled with software agreements which entitle the customers to technical support and future unspecified enhancements to the Company's products, are deferred andrecognized ratably over therelated contract period, generally twelve months.subscription period. The Company enters into reseller arrangements that typically provide for sublicense fees payable to the Company based upon a percentage of list price. The Company does not grant its resellers the right of return.The Company recognizes revenue using the residual method pursuant to the requirements of SOP No. 97-2, as amended by SOP No. 98-9. Revenues recognized from multiple-element software arrangements are allocated to each element of the arrangement based on the fair values of the elements, such as licenses for software products,
post contractmaintenance, consulting services or customersupport, installation, ortraining. The determination of fair value is based on objective evidence, which is specific to the Company.IfThe Company limits its assessment of objective evidenceof fair value doesfor each element to either the price charged when the same element is sold separately or the price established by management having the relevant authority to do so, for an element notexist for all elements of a license agreement and PCS is the only undelivered element, then all revenue for the license arrangement is recognized ratably over the term of the agreement as license revenue.yet sold separately. If evidence of fair value of all undelivered elements exists but evidence does not exist for one or more delivered elements, then revenue is recognized using the residual method. Under the residual method, the fair value of the undelivered elements is deferred and the remaining portion of the arrangement fee is recognized as revenue.The Company records unearned revenue for software
arrangementslicense agreements when cash has been received from the customer and thearrangementagreement does not qualify for revenue recognition under the64
Company's revenue recognition policy. The Company records accounts receivable for software
arrangementslicense agreements when thearrangementagreement qualifies for revenue recognitionandbut cash or other consideration has not been received from the customer.Services Revenue
Consulting services revenues and customer training revenues are recognized as such services are performed. Maintenance revenues, which include revenues bundled with software license agreements that entitle the customers to technical support and future unspecified enhancements to the Company's products, are deferred and recognized ratably over the related agreement period, generally twelve months.
The Company's consulting services, which consist of consulting, maintenance and training, are delivered through BVGS. Services that the Company provides are not essential to the functionality of the software. In
December 1999,accordance with EITF 01-14, which theSecurities and Exchange Commission ("SEC") issued Staff Accounting Bulletin No. 101 ("SAB 101"), REVENUE RECOGNITION IN FINANCIAL STATEMENTS, which provides guidance on the recognition presentation and disclosure of revenue in financial statements filed with the SEC. SAB 101 outlines the basic criteria that must be met to recognize revenue and provides guidance for disclosure related to revenue recognition policies. TheCompany adoptedSAB 101 duringas of January 1, 2002, thefourth quarterCompany records reimbursement by its customers for out-of-pocket expenses as an increase to services revenues. Prior to January 1, 2002, the Company recorded reimbursement by its customers for out-of-pocket expenses as a decrease to cost of2000, as required. There was no material effect on theservices. The Company'sfinancial position,results of operationsor cash flows. Costfor the years ended 2001 and 2000 have been reclassified for comparable purposes in accordance with EITF 01-14. The effect ofsoftware licenses includes the costs of product media, duplication, packagingthis reclassification was to increase services revenues andother manufacturing costs as well as royalties payable to third parties for software that is either embedded in, or bundled and sold with, the Company's products. Costincrease cost of servicesconsists primarily of employee-related costs, third-party consultant fees incurred on consulting projects, PCSfor the year ended 2001 andinstructional training services. 442000 by $3.9 million and $1.6 million, respectively. Research and Development and Software Development Costs
Under the criteria set forth in Statement of Financial Accounting Standards ("SFAS") No. 86,Accounting for the Cost of Computer Software to be Sold, Leased or Otherwise Marketed, development costs incurred in the research and development of new software products are expensed as incurred until technological feasibility in the form of a working model has been established at which time such costs are capitalized
subject to recoverability. Products are made available for limited release, concurrent withand recorded at theachievementlower oftechnological feasibility. Accordingly, software developmentunamortized cost or net realizable value. The costs incurred subsequent to the establishment oftechnological feasibilitya working model but prior to general release of the product have not beensignificant, andsignificant. To date, the Company has not capitalized any costs related to the development of softwaredevelopment costs to date.for external use.Advertising Costs
Advertising costs are expensed as incurred. Advertising expense is included in sales and marketing expense and amounted to
$2.9 million,$571,000, $1.8 million and$47,000$2.9 million in 2002, 2001 and 2000,1999 and 1998,respectively.Prepaid Royalties
Prepaid royalties relating to purchased software to be incorporated and sold with the Company's software products are amortized as a cost of software licenses either on a straight-line basis over the remaining term of the royalty agreement or on the basis of projected product revenues, whichever results in greater amortization.
65
Allowances and Reserves
Occasionally, the Company's customers experience financial difficulty after the Company records the sale but before payment has been received. The Company maintains allowances for doubtful accounts for estimated losses resulting from the inability of its customers to make required payments. The Company's normal payment terms are 30 to 90 days from invoice date. If the financial condition of the Company's customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required
Restructuring
The Company's Restructuring charges are comprised primarily of: (i) severance and benefits termination costs related to the reduction of the Company's workforce; (ii) lease termination costs and/or costs associated with permanently vacating its facilities; and (iii) impairment costs related to certain long-lived assets abandoned. The Company accounts for each of these costs in accordance with SEC Staff Accounting Bulletin No. 100,Restructuring and Impairment Charges
The Company accounts for severance and benefits termination costs in accordance with EITF Issue No. 94-3,Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (Including Certain Costs Incurred in a Restructuring) (EITF 94-3). Accordingly, the Company records the liability related to these termination costs when the following conditions have been met: (i) management with the appropriate level of authority approves a termination plan that commits the Company to such plan and establishes the benefits the employees will receive upon termination; (ii) the benefit arrangement is communicated to the employees in sufficient detail to enable the employees to determine the termination benefits; (iii) the plan specifically identifies the number of employees to be terminated, their locations and their job classifications; and (iv) the period of time to implement the plan does not indicate changes to the plan are likely. The termination costs recorded by the Company are not associated with nor do they benefit continuing activities.
The Company accounts for the costs associated with lease termination and/or abandonment in accordance with EITF 88-10. Accordingly, the Company records the costs associated with lease termination and/or abandonment when the leased property has no substantive future use or benefit to the Company. Under EITF 88-10, the Company records the liability associated with lease termination and/or abandonment as the sum of the total remaining lease costs and related exit costs, less probable sublease income. The Company accounts for costs related to long-lived assets abandoned in accordance with SFAS 144 and, accordingly, charges to expense the net carrying value of the long-lived assets when the Company ceases to use the assets.
Inherent in the estimation of the costs related to the Company's Restructuring efforts are assessments related to the most likely expected outcome of the significant actions to accomplish the Restructuring. In determining the charge related to the Restructuring, the majority of estimates made by management related to the charge for excess facilities. In determining the charge for excess facilities, the Company was required to estimate future sublease income, future net operating expenses of the facilities, and brokerage commissions, among other expenses. The most significant of these estimates related to the timing and extent of future sublease income in which to reduce the Company's lease obligations. Specifically, in determining the Restructuring obligations related to facilities as of
66
December 31, 2002, the Company reduced its lease obligations by estimated sublease income of $28.8 million. The Company based its estimates of sublease income, in part, on the opinions of independent real estate experts, current market conditions and rental rates, an assessment of the time period over which reasonable estimates could be made, the status of negotiations with potential subtenants, and the location of the respective facility, among other factors.
These estimates, along with other estimates made by management in connection with the Restructuring, may vary significantly depending, in part, on factors that may be beyond the Company's control. Specifically, these estimates will depend on the Company's success in negotiating with lessors, the time periods required to locate and contract suitable subleases and the market rates at the time of such subleases. Adjustments to the facilities reserve will be required if actual lease exit costs or sublease income differ from amounts currently expected. The Company will review the status of Restructuring activities on a quarterly basis and, if appropriate, record changes to its Restructuring obligations in current operations based on management's most current estimates.
Legal Matters
The Company's current estimated range of liability related to pending litigation is based on claims for which it is probable that a liability has been incurred and the Company can estimate the amount and range of loss. The Company has recorded the minimum estimated liability related to those claims, where there is a range of loss. Because of the uncertainties related to both the determination of the probability of an unfavorable outcome and the amount and range of loss in the event of an unfavorable outcome, the Company is unable to make a reasonable estimate of the liability that could result from the remaining pending litigation. As additional information becomes available, the Company will assess the potential liability related to its pending litigation and revise its estimates, if necessary. Such revisions in the Company's estimates of the potential liability could materially impact the Company's results of operations and financial position.
Cash and Cash Equivalents, Short-Term Investments, Long-Term Investments
The Company considers all debt and equity securities with
remainingoriginal maturities of three months or less at the date of purchase to be cash equivalents. The Company'scash equivalents consisted of the following (in thousands): December 31, --------------------- 2000 1999 -------- -------- Cash $ 43,253 $ 16,945 Money market funds.............. 94,011 125,807 Corporate notes/bonds........... 2,937 - Government notes/bonds.......... 10,412 - Commercial paper................ 2,524 137,071 -------- -------- $153,137 $279,823 ======== ======== Short-term Investments The Company'sshort-term investments consist ofmarketabledebt and equityand debtsecurities that are classified as available-for-sale. The Company'sinvestment in marketable equitydebt securitiesisare carried at fair value with related unrealized gains or losses reported as other comprehensive income (loss), net of tax. The Company's long-term investments include debt securities that are classified as available-for-sale. These securities have remaining maturities greater than one year from December 31, 2002. These investments are carried at fair value with related unrealized gains or losses reported as other comprehensive income, net of tax.AsAll short term investments have a remaining maturity of
December 31, 2000, the Company'stwelve months or less. Total short-term and long-term investmentin marketable equity securities had a fair value of $3.1unrealized gains (losses) were $(1.7) million anda cost basis of $5.0 million. The Company's debt securities are carried at fair value. As of December 31, 2000, commercial paper investments consisted of $11.0$2.1 millioncorporate notes/bonds of $16.9 million and government bonds/notes of $38.4 million. Short-term investments, excluding marketable equity securities, had a weighted average remaining maturity as of December 31, 2000 of approximately three months. Total short-term investment unrealized losses, net, were $26.0 million, net of tax,for theyearyears ended December 31,2000.2002 and 2001, respectively. Total realized gains during fiscal20002002 and 2001 were$3.6$719,000 and $2.0 million, respectively, and are included in other income in the accompanyingstatementConsolidated Statements ofoperations.Operations.67
The Company's cash and cash equivalents, short-term investments and long-term investments consisted of the following as of December 31, 2002 (in thousands):
Amortized
costsUnrealized
gainsUnrealized
lossesFair
valueCash $ 36,070 $ — $ — $ 36,070 Money market 36,232 — — 36,232 Corporate notes/bonds 23,369 50 (1 ) 23,418 Government notes/bonds 23,430 11 — 23,441 $ 119,101 $ 61 $ (1 ) $ 119,161
Included in cash and cash equivalents
$
94,090
$
—
$
—
$
94,090Included in short-term investments 24,428 57 (1 ) 24,484
Included in long-term investments
583
4
—
587$ 119,101 $ 61 $ (1 ) $ 119,161 Included in the table above in cash and cash equivalents are $16.7 million of non-current restricted cash and investments.
The Company's cash and cash equivalents, short-term investments and long-term investments consisted of the following as of December 31, 2001 (in thousands):
Amortized
costUnrealized
gainsUnrealized
lossesFair
valueCash $ 25,874 $ — $ — $ 25,874 Money market 36,299 364 (1 ) 36,662 Corporate note/bonds 75,842 1,056 (8 ) 76,890 Government notes/bonds 53,792 346 (17 ) 54,121 $ 191,807 $ 1,766 $ (26 ) $ 193,547 Included in cash and cash equivalents $ 75,393 $ 366 $ (1 ) $ 75,758 Included in short-term investments 94,773 895 (14 ) 95,654 Included in long-term investments 21,641 505 (11 ) 22,135 $ 191,807 $ 1,766 $ (26 ) $ 193,547 Included in the table above in short-term investments are non-current restricted cash and investments of $29.9 million.
Remaining maturities of the Company's long-term investments as of December 31, 2002 are as follows:
2004 Corporate notes/bonds $ 587 68
Concentrations of Credit Risk
Financial assets that potentially subject
the Companyus to significant concentrations of credit risk consist principally of cash, cash equivalents, short-term investments, and trade accounts receivable. The Company maintains its cash and cash equivalents and short-term investments with overtenseven separate financial institutions. The Company markets and sells its products throughout the world and performs ongoing credit evaluations of its customers. The Companygenerally does not require collateral on accounts receivable as the majority of its customers are large, well-established companies. The Companymaintains reserves for potential creditlosses but historically has not experienced any significant losses related to individual customers or groups of customers in any particular industry or geographic area.losses. For the years ended December 31,2000, 19992002, 2001 and1998,2000, no one customer accounted for more than 10% of fiscal year totalrevenues.revenue. As of December 31,2000, two customers2002, one customer individually accounted for more than 10% of the Company's accounts receivable.These customers accounted for 10% and 11%As ofaccounts receivable, respectively. NoDecember 31, 2001, no one customer individually accounted for more than 10% of the Company's accountsreceivable as of December 31, 1999. 45receivable. Fair Value of Financial Instruments
The Company's financial instruments consist of cash and cash equivalents, short-term investments, restricted cash and investments, long-term investments, equity investments, accounts receivable, accounts payable and debt. The Company does not have any derivative financial instruments. The Company believes the reported carrying amounts of its financial instruments approximates fair value, based upon the
short maturitymaturities and nature of its cash and cash equivalents, short-term investments, long-term investments, restricted cash and investments, accounts receivable and payable, and based on the current rates available tothe Companyit on similar debt issues.Long-term Investments Included inAdditionally, theCompany's long-term investments are investments in debt securities that are classified as available-for-sale. These securities have remaining maturities greater than one year from December 31, 2000. These investments are carried at fair value with related unrealized gains or losses reported as other comprehensive income, net of tax. As of December 31, 2000,Company periodically evaluates theCompany's long-term investments in debt securities had a faircarrying value of$34.3 million in corporate bonds/notesall of its investments for other-than-temporary impairment when events and$44.6 million in government bonds/notes.circumstances indicate that the book value of an asset may not be recoverable. If such assets are considered to be impaired, the impairment to be recognized is measured by the amounts by which the carrying amount exceeds its fair market value.Equity Investments
The
remaining weighted average days to maturity asCompany's equity investments consist ofDecember 31, 2000 was approximately twenty three months. Also included in the Company's long-term investments areequity investments in public and non-public companies that are accounted for under either the cost method of accounting or the equity method of accounting. The Company had no equity method investments as of December 31, 2002. Equity investments are accounted for under the cost method of accounting when the Company has a minority interest and does not have the ability to exercise significant influence. These investments are classified as available for sale and are carried at fair value when readily determinable market values exist or at cost when such market values do not exist. Adjustments to fair value are recorded as a component of other comprehensive income unless the investments are considered permanently impaired in which case the adjustment is recorded as a component of other income (expense), net in the consolidated statement of operations. Equity investments are accounted for under the equity method of accounting when the Company has a minority interest and has the ability to exercise significant influence. These investments are classified as available for sale and are carried at cost with periodic adjustments to carrying value forthe Company'sequity in net income (loss) of the equity investee. Such adjustments are recorded as a component of other income, net. Any decline in value of the Company's investments, which is other than a temporary decline, is charged to earnings during the period in which the impairment occurs.The total fair value of the Company's cost method long-term equity investments in public and non-public companies as of December 31, 2002 was
$19.4 million with a cost basis of $27.3$2.1 million. This includesa $750,000 write down$12.6 million ofan investmentwrite-69
downs during 2002 of investments due to an
other than temporaryother-than-temporary decline in fair value. Therewas also an additional $250,000 write down of an investment duewere no unrealized gains or losses recorded toan other than temporary decline in fair value. The total unrealized loss, net, duringdate and for the year ended December 31,2000 in the Company's cost method2002 related to long-terminvestments was $4.3 million, net of tax. The total fair value of the Company'sequitymethod long-term investment was $4.4 million as of December 31, 2000. This includes approximately $600,000 of equity in net losses realized during the twelve months ended December 31, 2000. The equity in net losses realized is recorded as a component of other income, net in the accompanying statement of operations.investments.Property and Equipment
Property and equipment are stated at cost and depreciated on a straight-line basis over their estimated useful lives (two to eight years). Leasehold improvements are amortized over the
correspondinglesser of the remaining life of the lease term or their estimated usefullives, whicheverlives. Depreciation expense for the year ended December 31, 2002 was $18.2 million. The Company recorded asset impairments of approximately $18.9 million during fiscal 2002 in connection with the Company's restructuring plan, which isshorter.included in the Company's restructuring charge recorded in the Company's Statement of Operations. The Company also recorded a $3.1 million impairment of assets related to results from the Company's asset physical inventories during 2002.Valuation of Long-Lived Assets
InThe Company periodically assesses the impairment of long-lived assets in accordance with the provisions of SFAS No. 121,
"AccountingAccounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be DisposedOf", theof. The Companyperiodically evaluates the carrying value of long-lived assets and certain identifiable intangibles for impairment, when events and circumstances indicate that the book value of an asset may not be recoverable. Recoverability of assets is measured by a comparison of the carrying amount of an asset to future net cash flows expected to be generated by the asset. If such assets are considered to be impaired,assesses the impairmentto be recognized is measured by the amount by which the carrying amountofthe propertygoodwill andequipment exceeds its fair market value. Noidentifiable intangible assets in accordance with SFAS No. 121,impairment losses have been identifiedSFAS No. 141,Business Combinations and SFAS No. 142,Goodwill and Other Intangible Assets. The Company adopted the provisions of SFAS No. 142 as of January 1, 2002. Please see Note 4 of Notes todate. 46Consolidated Financial Statements for additional information. 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, Financial Accounting Standards Board Interpretation No. 44 (FIN 44), Accounting for Certain Transactions Involving Stock Compensation—an Interpretation of APB No. 25, and related interpretations. As such, compensation expense is recorded on the date of grant only if the current market price of the underlying stock exceeded the exercise price. Pursuant to SFAS No. 123,Accounting for Stock-Based Compensation, the Company discloses the pro forma effects of using the fair value method of accounting for stock-based compensation arrangements. The Company accounts for equity instruments issued to non-employees in accordance with the provisions of SFAS No. 123 and Emerging Issues Task Force (EITF) 96-18,Accounting for Equity Instruments That Are Issued to Other Than Employees For Acquiring or in Conjunction with Selling Goods or Services.
We apply Accounting Principles Board ("APB") Opinion Number 25,Accounting for Stock Issued to Employees, and related interpretations when accounting for our stock option and stock purchase plans. In accordance with APB No. 25, we apply the intrinsic value method in accounting for employee stock options. Accordingly, we generally recognize no compensation expense with respect to stock-based awards to employees.
70
During the year ended December 31, 2002 the Company recorded compensation expense of $846,000. This charge was recorded as a result of granting terminated employees continued vesting of their stock options for a period beyond their actual termination date. The compensation charge was calculated using the Black-Scholes model. $739,000 of the charge is recorded in general and administrative expense and the remaining $107,000 is included in restructuring charge as it related to employees terminated under the Company's restructuring plan.
We have determined pro forma information regarding net income and earnings per share as if we had accounted for employee stock options under the fair value method as required by Statement of Financial Accounting Standards ("SFAS") Number 123,Accounting for Stock Compensation. The fair value of these stock-based awards to employees was estimated using the Black-Scholes option pricing model. Please see Note 10 of Notes to Consolidated Financial Statements for assumptions used in the Black-Scholes option pricing model. Had compensation cost for the Company's stock option plan and employee stock purchase plan been determined consistent with SFAS No. 123, the Company's reported net income (loss) and net earnings (loss) per share would have been changed to the amounts indicated below (in thousands except per share data):
Years Ended December 31, 2002 2001 2000 Net loss as reported $ (170,522 ) $ (836,259 ) $ (161,629 ) Add: Stock-based employee compensation expense included in reported net loss, net of related tax effects 846 1,014 226 Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects (47,979 ) 39,661 (323,184 ) Pro forma net loss $ (217,655 ) $ (795,584 ) $ (484,587 ) Earnings per share: Basic—as reported $ (5.32 ) $ (27.20 ) $ (5.60 ) Basic—pro forma $ (6.80 ) $ (25.87 ) $ (16.79 )
Diluted—as reported
$
(5.32
)
$
(27.20
)
$
(5.60
)Diluted—pro forma $ (6.80 ) $ (25.87 ) $ (16.79 ) Stock Splits
On July 24, 2002, we announced that our Board of Directors had approved a one-for-nine reverse split of our common stock. The reverse split was effective as of 8:00 p.m. Eastern Daylight Time on July 29, 2002. Each nine shares of outstanding common stock of the Company automatically converted into one share of common stock. Our common stock began trading on a post-split basis at the opening of trading on the Nasdaq National Market on July 30, 2002. The accompanying consolidated financial statements and related financial information contained herein have been retroactively restated to give effect for the July 2002 stock split.
On February 8, 2000, the Company's Board of Directors declared an additional three-for-one common stock split in the form of a stock dividend for Stockholders of record as of February 21, 2000.
71
The stock dividend payment date was March 13, 2000 and the Company's common stock traded ex-dividend starting March 14, 2000, reflecting the additional three-for-one stock split.
On September 29, 1999, the Company's Board of Directors declared a three-for-one common stock split in the form of a stock dividend for Stockholders of record as of October 11, 1999. The stock dividend payment date was October 25, 1999 and the Company's common stock traded ex-dividend starting October 26, 1999, reflecting the three-for-one stock split.
On February 8, 2000, the Company's Board of Directors declared an additional three-for-one common stock split in the form of a stock dividend for Stockholders of record as of February 21, 2000. The stock dividend payment date was March 13, 2000 and the Company's common stock traded ex-dividend starting March 14, 2000, reflecting the additional three-for-one stock split.The accompanying consolidated financial statements and related financial information contained herein have been retroactively restated to give effect for the July, 2002 reverse stock split and the February 2000 and September 1999
and February 2000stock splits.Per Share Information
Basic earnings (loss) per share is computed using the weighted-average number of shares of common stock outstanding less shares subject to repurchase. Diluted earnings (loss) per share is computed using the weighted-average number of shares of common stock outstanding and, when dilutive, common equivalent shares from outstanding stock options and warrants using the treasury stock method and shares subject to repurchase. The following table sets forth the basic and diluted earnings (loss) per share computational data for the periods presented. Excluded from the computation of diluted earnings per share for the
yearyears ended December 31, 2002, 2001 and 2000, are options and warrants to acquire34,816,000552,000, 1,229,000 and 3,973,000 shares of common stock, respectively, because their effects would be anti-dilutive.
Years Ended December 31, ---------------------------------- 2000 1999 1998 ----------- -------- -------- (in thousands, except per share amounts)Net income (loss) for basic and Diluted earnings (loss) per share ............. $ (161,629) $ 18,809 $ 4,039 =========== ======== ======== Weighted-average common shares outstanding utilized for basic earnings (loss) per share ..................... 259,780 229,128 210,114 Weighted-average common equivalent shares outstanding: Employee common stock options .............. -- 31,365 20,592 Common stock warrant ....................... -- 219 171 ----------- -------- -------- Total weighted-average common and common equivalent shares outstanding utilized for diluted earnings (loss) per share .................................. 259,780 260,712 230,877 =========== ======== ======== Basic earnings (loss) per share ................. $ (0.62) $ 0.08 $ 0.02 =========== ======== ======== Diluted earnings (loss) per share ............... $ (0.62) $ 0.07 $ 0.02 =========== ======== ========47
Years Ended December 31, 2002 2001 2000 (in thousands, except per share amounts) Net income (loss) for basic and Diluted earnings (loss) per share $ (170,522 ) $ (836,259 ) $ (161,629 ) Weighted-average common shares outstanding to compute basic earnings (loss) per share 32,036 30,748 28,864 Weighted-average common equivalent shares outstanding: Employee common stock options — — — Common stock warrant — — — Total weighted-average common and common equivalent shares outstanding to compute diluted earnings (loss) per share 32,036 30,748 28,864 Basic earnings (loss) per share $ (5.32 ) $ (27.20 ) $ (5.60 ) Diluted earnings (loss) per share $ (5.32 ) $ (27.20 ) $ (5.60 ) Foreign Currency Transactions
The functional currency of the Company's foreign subsidiaries is the U.S. dollar.
Resulting foreignForeign exchange gains and losses resulting from the remeasurement of foreign currency assets and liabilities are included in other income (expense), net in the Consolidated Statements ofOperations and, to date, have not been significant.Operations.72
Comprehensive Income (Loss)
The Company adopted SFAS No. 130, Reporting Comprehensive Income effective January 1, 1998. SFAS No. 130 establishes standards for the reporting and disclosure of comprehensive income (loss) and its components.Comprehensive income (loss) includes the Company's net income (loss) and all changes in equity during a period except those resulting from investments by or distributions to owners.
For the years ended December 31, 2002, 2001 and 2000,
1999 and 1998,comprehensiveincome (loss)loss was ($191,902,000), $41,536,000165.2) million, ($837.2) million, and$7,237,000,$(191.9) million, respectively. The components of other comprehensive income (loss) for these periods relate solely to unrealized gains and losses on available-for-sale investments.Income Taxes and Deferred Tax Assets
Income taxes are computed using an asset and liability approach, which requires the recognition of taxes payable or refundable for the current year and deferred tax assets and liabilities for the future tax consequences of events that have been recognized in the Company's consolidated financial statements or tax returns. The measurement of current and deferred tax assets and liabilities is based on provisions of the enacted tax law; the effects of future changes in tax laws or rates are not anticipated. The measurement of deferred tax assets is reduced, if necessary, by the amount of any tax benefits that, based on available evidence, are not expected to be realized.
The Company analyzes its deferred tax assets with regard to potential realization. The Company has established a valuation allowance on its deferred tax assets to the extent that management has determined that it is more likely than not that some portion or all of the deferred tax asset will not be realized based upon the uncertainty of their realization. The Company has considered estimated future taxable income and ongoing prudent and feasible tax planning strategies in assessing the amount of the valuation allowance. Based upon this analysis, the Company recorded a valuation allowance for its deferred tax assets during the three months ended June 30, 2002, which increased to 100% its valuation allowance and resulted in a charge of $6.3 million included in the provision for income taxes in the Company's Condensed Consolidated Statements of Operations and Comprehensive Loss.
Segment and Geographic Information
The Company operates in one segment, electronic commerce business solutions. The Company's chief operating decision maker is considered to be the Company's CEO. The CEO reviews financial information presented on a consolidated basis accompanied by disaggregated information about revenues by geographic region and by product for purposes of making operating decisions and assessing financial performance.
Reclassifications
Certain prior period balances have been reclassified to conform to the current period presentation.
RecentNew Accounting Pronouncements
In January 2002, the Financial Accounting Standards Board's Emerging Issues Task Force (EITF) reached consensus on EITF 01-14 on the topic ofIncome Statement Characterization of Reimbursements Received for Out of Pocket Expenses Incurred. This topic addresses whether reimbursements received for out-of-pocket expenses incurred should be characterized in the income statement as revenue or as a
73
reduction of expenses incurred. The EITF concluded that reimbursements received for out of pocket expenses incurred should be characterized as revenue in the income statement. This announcement will be applied in financial reporting periods beginning after December 15, 2001, and comparative financial statements for prior periods will be reclassified to comply with the guidance in this announcement. The Company is currently recording reimbursement by its customers for out-of-pocket expenses as a component of services revenue. Prior to adoption of EITF 01-14 on January 1, 2002, the Company recorded reimbursement by its customers for out-of-pocket expenses as a reduction to cost of sales. Prior periods have been reclassified to comply with the guidance of EITF 01-14. The effect of this reclassification was to increase services revenues and increase cost of services for fiscal 2001 and fiscal 2000 by $3.9 million and $1.6 million, respectively.
In June
1998,2002, the FASB issued SFAS No.133,146,Accounting forDerivative InstrumentsCosts Associated with Exit Activities, which addresses financial accounting andHedging Activities, as amended byreporting for costs associated with exit activities and supersedes Emerging Issues Task Force ("EITF") 94-3,Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring). SFAS No.137146 requires that a liability for a cost associated with an exit or disposal activity be recognized and measured initially at fair value only when the liability is incurred. This differs from EITF 94-3, which required that a liability for an exit cost be recognized at the date of an entity's commitment to an exit plan. However, under SFAS No.138,146, a liability for one-time termination benefits is recognized when an entity has committed to a plan of termination, provided certain other requirements have been met. In addition, under SFAS No. 146, a liability for costs to terminate a contract is not recognized until the contract has been terminated, and a liability for costs that will continue to be incurred under a contract's remaining term without economic benefit to the entity is recognized when the entity ceases to use the right conveyed by the contract. SFAS No. 146 is effective forall fiscal quarters of fiscal years beginningexit or disposal activities initiated afterJune 15, 2000. Accordingly, theDecember 31, 2002. The Company will adopt the provisions of SFAS No.133 beginning on January 1, 2001. SFAS No. 133, as amended, establishes standards146 forthe accounting and reporting of derivative instruments and hedgingrestructuring activitiesincluding certain derivative instruments embedded in other contracts. Under SFAS No. 133, entities are required to carry all derivative instruments at fair value on their balance sheets. The accounting for changes in the fair value (i.e., gains or losses) of a derivative instrument depends on whether it has been designated and qualifies as part of a hedging activity and the underlying purpose for it.initiated after December 31, 2002. The Company does notbelieve thatexpect the adoption of SFAS No.133146 will have asignificantmaterial impact on its consolidated results of operations or financial position.In November 2002, the
Company's consolidated financial statementsEITF reached a consensus on Issue 00-21, addressing how to account for arrangements that involve the delivery orrelated disclosures. In March 2000,performance of multiple products, services, and/or rights to use assets. Revenue arrangements with multiple deliverables are divided into separate units of accounting if theFASB issued Interpretation No. 44, "Accounting for Certain Transactions Involving Stock Compensation", an interpretationdeliverables in the arrangement meet the following criteria: (1) the delivered item has value to the customer on a standalone basis; (2) there is objective and reliable evidence ofAccounting Principles Board, ("APB"), Opinion No. 25. This interpretation provides guidance regardingtheapplicationfair value ofAPB Opinion No. 25undelivered items; and (3) delivery of any undelivered item is probable. Arrangement consideration should be allocated among the separate units of accounting based on their relative fair values, with the amount allocated tostock compensation involving employees. This interpretation was effective July 1, 2000 and didthe delivered item being limited to the amount that is not contingent on the delivery of additional items or meeting other specified performance conditions. The final consensus will be applicable to agreements entered into in fiscal periods beginning after June 15, 2003 with early adoption permitted. The provisions of this Consensus are not expected to have amaterialsignificant effect on the Company's financial position or operating results.In November 2002, the FASB issued Interpretation No. 45 (FIN 45), "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others", which clarifies disclosure and recognition/measurement requirements related to certain guarantees. The
74
disclosure requirements are effective for financial statements issued after December 15, 2002 and the recognition/measurement requirements are effective on a prospective basis for guarantees issued or modified after December 31, 2002. The application of the requirements of FIN 45 did not have a material impact on the Company's financial position or results of operations.
In December 2002, the FASB issued SFAS No. 148,Accounting for Stock-Based Compensation- Transition and Disclosure. This Statement amends SFAS No. 123,Stock-Based Compensation, to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, this Statement amends the disclosure requirements of SFAS No. 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. The disclosure provisions of this Standard are effective for fiscal years ending after December 15, 2002 and have been incorporated into these financial statements and accompanying footnotes.
In January 2003, the FASB issued Interpretation No. 46 (FIN 46), "Consolidation of Variable Interest Entities," which addresses consolidation by business enterprises of variable interest entities that either: (1) do not have sufficient equity investment at risk to permit the entity to finance its activities without additional subordinated financial support, or (2) the equity investors lack an essential characteristic of a controlling financial interest. FIN 46 requires disclosure of Variable Interest Entities (VIEs) in financial statements issued after January 31, 2003, if it is reasonably possible that as of the transition date: (1) the company will be the primary beneficiary of an existing VIE that will require consolidation or, (2) the company will hold a significant variable interest in, or have significant involvement with, an existing VIE. The company does not have any entities that will require disclosure or new consolidation as a result of adopting the provisions of FIN 46.
Note 2—Acquired and Disposed Businesses
Keyeon
On June 29, 2001, the Company completed its acquisition of Keyeon, LLC ("Keyeon"), formerly a joint venture in which the Company held an interest of approximately 36%. The acquisition was completed primarily to obtain technology to extend functionality of the Company's existing products. As consideration for the remaining interest in Keyeon, the Company issued 301,475 shares of its common stock valued at $13.6 million to the other former participants in the joint venture which resulted in the Company owning 100% of the outstanding shares of Keyeon, LLC. The acquisition was accounted for as a purchase. The acquired assets and assumed liabilities, and the related results of operations,
orare75
included in the consolidated financial statements of the Company from the date of acquisition. The purchase price allocation is as follows (in thousands):
Purchase price, net of cash acquired $ 6,395 Add: fair value of liabilities assumed 4,007 Total purchase consideration 10,402 Less: fair value allocated to acquired assets 3,104 Excess of purchase consideration over acquired assets and assumed liabilities 7,298 Excess allocated to: Acquired in-process technology 6,418 Goodwill 880 At December 31, 2002, accumulated amortization related to goodwill acquired in the Keyeon acquisition totaled $246,000. Amortization of goodwill ceased as of December 31, 2001. As discussed in Note 1, the Company will no longer amortize goodwill in accordance with SFAS No. 142 but will periodically test for impairment under the provisions of SFAS No. 142. The Company estimated that $6.4 million of the purchase price for Keyeon represented acquired in-process technology that had not yet reached technological feasibility and had no alternative future use. Accordingly, this amount was immediately charged to expense in the Consolidated Statements of Operations during the fourth quarter of 2001. The income approach methodology was used to value the acquired in-process technology. Under the income approach, fair value reflects the present value of the projected free cash
flows. Note 2 -- Acquired Business:flows that will be generated by the products, incorporating the acquired technologies under development, assuming they will be successfully completed. These cash flows are discounted at a rate appropriate for the risk of the asset. The rate of return depends upon the stage of completion which was estimated at fifty percent. An overall after-tax discount rate of thirty percent was applied to the cash flows expected to be generated by the products incorporating technology currently under development.The following summary, prepared on an unaudited pro forma basis, reflects the condensed consolidated results of operations for the year ended December 30, 2001 and 2000 assuming Keyeon had been acquired at the beginning of the periods presented (in thousands, except per share data):
2001 2000 Revenue $ 248,423 $ 415,499 Net loss $ (834,071 ) $ (163,511 ) Basic and diluted net loss per share $ (27.18 ) $ (5.66 ) The pro forma results are not necessarily indicative of what would have occurred if the acquisition had been in effect for the period presented. In addition, they are not intended to be a projection of future results and do not reflect any synergies that might be affected from combined operations.
76
E-Publishing Corporation
On April 30, 2001 and May 15, 2001, the Company entered into agreements with third parties to sell certain assets and liabilities of E-Publishing Corporation, a wholly-owned subsidiary of the Company, which the Company acquired as part of the acquisition of Interleaf in April 2000. The Company recorded a loss on sale of assets of approximately $1.3 million. The loss was included in other expense in the Company's second quarter of 2001 Condensed Consolidated Statements of Operations.
Interleaf
On April 14, 2000, the Company completed its acquisition of Interleaf, Inc. and its subsidiaries ("Interleaf") pursuant to a statutory merger involving a stock-for-stock exchange. Interleaf's software products and related services enable automated electronic business, or e-business, and also enable the extension of e-business to wireless users. Interleaf provides customers with an integrated, easily implemented e-business solution based on extensible Markup Language, or XML, that enables the design, creation and management of XML-based content for transformation and delivery over the Web and related services. As a result of the acquisition, the Company
will havehas the ability to combine technological resources to develop a robust Web-based business solution and reduce time to market for the combined Company's products. Through the acquisition of all of the equity securities of Interleaf, BroadVision acquired all of the assets and assumed liabilities of Interleaf and its existing operations which included in-process technology. Pursuant to the terms of the Agreement and Plan of Merger and Reorganization, dated as of January 26, 2000,(the "Merger Agreement"),each outstanding share of Interleaf common stock was exchanged for481.0395 shares of Company common stock and all options to purchase shares of Interleaf common stock outstanding immediately prior to the consummation of the Merger were converted into options to purchase shares of Company common stock. The Company issued
14,391,9911,599,110 shares of Company common stock with a fair market value of $686.9 million and exchanged options to purchase2,338,342259,815 shares of Company common stock with a fair market value of $102.7 million. The fair market value of the exchanged options to purchase2,338,342259,815 shares of Company common stock was valued using the Black-Scholes option-pricing model. In connection with the acquisition, the Company incurred transaction costs consisting primarily of financial advisor, legal and accounting professional fees of $14.8 million, severance costs of $1.0 million and office closure costs of $1.3 million, resulting in a total purchase price of $806.7 million. The results of operations of Interleaf have been included with the Company's results of operations since the April 14, 2000 acquisition date.The acquisition was accounted for as a purchase business combination. Under this accounting treatment, the purchase price is allocated to the assets acquired and liabilities assumed based on the estimated fair values on the date of acquisition.
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The total purchase price paid for the Interleaf acquisition was allocated as follows (in thousands):
Property and equipment .................... $ 2,896 Net tangible liabilities assumed, excluding property and equipment .................... (1,041) Identifiable intangible assets ............ 28,910 In-process technology ..................... 10,100 Goodwill .................................. 765,805 --------- Total ................................... $ 806,670 ========= Based upon the Company's estimates prepared in conjunction with a third-party valuation consultant, $10.1 million was allocated to acquired in-process technology and $28.9 million was allocated to intangible assets.
Property and equipment $ 2,896 Net tangible liabilities assumed, excluding property and equipment (1,041 ) Identifiable intangible assets 28,910 In-process technology 10,100 Goodwill 765,805 Total $ 806,670 The amounts allocated to intangible assets include completed technologies of $20.4 million and assembled workforces of $8.5 million.
At December 31,
2000,2002, accumulated amortization related to the goodwill and other intangible assets acquired in the Interleaf acquisition totaled$187.6$402.2 million. Goodwill amortization was$180.8$382.8 million and other intangible asset amortization was$6.8$19.3 million. As discussed in Note 4 of Notes to Consolidated Financial Statements, during the third quarter of fiscal 2001, the Company performed an impairment assessment of identifiable intangible assets and goodwill recorded in connection with its various acquisitions. The impairment assessment was performed primarily as a result of the significant decline in the Company's stock price, the net book value of assets significantly exceeding the Company's market capitalization, the underperformance of the Interleaf acquisition relative to projections, and the overall decline in industry growth rates which have negatively impacted the Company's revenues and forecasted revenue growth rate which indicate that this trend might continue for an indefinite period. Also, current economic indicators forecast that this trend may continue for an indefinite period. As a result, the Company recorded a $336.4 million impairment charge during the third quarter of 2001 to reduce goodwill by $330.2 million and other intangible assets by $6.2 million associated with the Company's acquisitions, primarily the Interleaf acquisition, to their estimated fair value.As further discussed in Note 4, upon adoption of SFAS No. 142, on January 1, 2002, the Company no longer amortizes goodwill. Additionally, upon adoption of SFAS No. 141 and 142, the Company no longer amortizes its non-technology based intangible asset, or assembled workforce. The remaining other intangible assets are being amortized on a straight-line basis over
a three-year period.their remaining useful life of 3 months as of December 31, 2002. Amortization expense is estimated to be $887,000 in 2003.The Company estimated that $10.1 million of the purchase price for Interleaf represented acquired in-process technology that had not yet reached technological feasibility and had no alternative future use. Accordingly, this amount was immediately charged to expense in the
consolidated statementsConsolidated Statements ofoperationsOperations upon consummation of the acquisition. The value assigned to acquired in-process technology was theamountsamount attributable to the efforts of Interleaf up to the time of acquisition. The amount was estimated through the application of the "stages of completion" by multiplying the estimated present value of future cash flows, excluding, cost of completion, by the percentage of completion of the purchased technology at the time of the acquisition. The discount rate included a factor that took into account the uncertainty surrounding the successful development of the acquired in-process technology.78
The following summary, prepared on an unaudited pro forma basis, reflects the condensed consolidated results of operations for the twelve-month period ended December 31, 2000,
and 1999assuming Interleaf had been acquired at the beginning of theperiodsperiod presented (in thousands, except per share data):
For the twelve months ended December 31, -------------------------------------- 2000 1999 -------------------- ----------------Revenue................................. $ 427,579 $ 167,159 Net loss................................ $ (236,519) $ (255,180) Basic and diluted net loss per share.... $ (0.89) $ (1.06)
2000 Revenue $ 429,162 Net loss $ (236,519 ) Basic and diluted net loss per share $ (8.01 ) The pro forma results are not necessarily indicative of what would have occurred if the acquisition had been in effect for the periods presented. In addition, they are not intended to be a projection of future results and do not reflect any synergies that might be affected from combined operations. The charges for in-process technology have not been included in the unaudited pro forma results because they are nonrecurring.
On November 24, 1999, the Company acquired all of the registered shares of Fidutec Information Technology SA for a cash payment of 6,000,000 Swiss Francs (equivalent U.S. dollar value of $3,765,000, net of cash acquired); of which 1,200,000 Swiss Francs are held in escrow, subject to employee retention conditions lasting 12 to 24 months depending on named employees. The acquisition was accounted for as a purchase. The acquired assets and assumed liabilities, and the related results of operations, are included in the consolidated financial statements of the Company from the date of acquisition. The name of the acquired business has been subsequently changed to BroadVision Professional Services. The purchase price was allocated based on fair values as follows (in thousands):
Purchase price, net of cash acquired $ 3,765 Add: fair value of liabilities assumed 399 ------- Total purchase consideration 4,164 Less: fair value allocated to acquired assets 798 ------- Excess of purchase consideration over acquired assets and assumed liabilities 3,366 Excess allocated to: Prepaid compensation 2,749 ------- Goodwill $ 617 =======49Note
3 --3—Property and Equipment (in thousands):
December 31, -------------------- 2000 1999 -------- --------Furniture and fixtures $ 6,136 $ 2,323 Computer and software 79,020 17,618 Leasehold improvements 12,099 6,903 -------- -------- 97,255 26,844 Less accumulated depreciation and amortization (20,570) (10,093) -------- -------- $ 76,685 $ 16,751 ======== ========
December 31, 2002 2001 Furniture and fixtures $ 9,138 $ 9,646 Computer and software 49,579 59,182 Leasehold improvements 21,456 38,440 80,173 107,268 Less accumulated depreciation and amortization (53,573 ) (40,049 ) Total property and equipment, net $ 26,600 $ 67,219 Note
4 --4—Goodwill and Other IntangiblesGoodwill and other intangibles consist of the following:
December 31, 2002 2001 Goodwill $ 437,206 $ 437,206 Other Intangibles 22,732 22,732 459,938 459,938 Less: Accumulated amortization (402,618 ) (399,071 ) Goodwill and other intangibles, net $ 57,320 $ 60,867 On January 1, 2002, the Company adopted SFAS No. 142,Goodwill and Intangible Assets. Under SFAS No. 142, goodwill and intangible assets with indefinite lives are no longer subject to amortization
79
but are tested for impairment at least annually using a fair value approach, and whenever there is an impairment indicator. Other intangible assets continue to be valued and amortized over their estimated lives. The following schedule shows the Company's reported net loss for periods prior to adoption of SFAS No. 142 as adjusted to add back goodwill and assembled workforce amortization as if SFAS No. 142 had been adopted:
2001 2000 Reported Net Loss $ (836,259 ) $ (161,629 ) Add back amortization: Goodwill 202,542 181,029 Assembled workforce 2,687 2,009 Adjusted net loss $ (631,030 ) $ 21,409
Basic and diluted net loss per share:
Reported Net Loss $ (27.20 ) $ (5.60 ) Goodwill 6.59 6.27 Assembled workforce 0.09 0.07 Adjusted basic net (loss) income per share $ (20.52 ) $ 0.74 Goodwill 6.59 6.18 Assembled Workforce 0.09 0.07 Adjusted diluted net (loss) income per share $ (20.52 ) $ 0.65 During fiscal 2001, the Company recorded an impairment charge of $330.2 million related to goodwill and $6.2 million related to other intangible assets originally recorded primarily as part of the Interleaf acquisition that closed on April 14, 2000.
Pursuant to SFAS No. 142, the Company is required to test its goodwill for impairment upon adoption and annually or more often if events or changes in circumstances indicate that the asset might be impaired. While there was no accounting charge to record upon adoption, at September 30, 2002, the Company concluded that, based on the existence of impairment indicators, including a decline in its market value, it would be required to test goodwill for impairment. SFAS No. 142 provides for a two-stage approach to determining whether and by how much goodwill has been impaired. Since the Company has only one reporting unit for purposes of applying SFAS No. 142, the first stage requires a comparison of the fair value of the Company to its net book value. If the fair value is greater, then no impairment is deemed to have occurred. If the fair value is less, then the second stage must be completed to determine the amount, if any, of actual impairment. The Company completed the first stage and has determined that its fair value at September 30, 2002 exceeded its net book value on that date, and as a result, no impairment of goodwill was recorded in the consolidated financial statements. The Company obtained an independent appraisal of fair value to support its conclusion. Additionally, the Company concluded that, based upon the market value of its stock in relation to the Company's net book value at December 31, 2002, there was no impairment of goodwill as of December 31, 2002.
The process of evaluating the potential impairment of goodwill is highly subjective and requires significant judgment. In estimating the fair value of the Company, the Company made estimates and
80
judgments about future revenues and cash flows. The Company's forecasts were based on assumptions that are consistent with the plans and estimates the Company is using to manage the business. Changes in these estimates could change the Company's conclusion regarding impairment of goodwill and potentially result in a non-cash goodwill impairment charge, for all or a portion of the goodwill balance at December 31, 2002.
As discussed in Note 1, upon adoption of SFAS No. 142, on January 1, 2002, the Company no longer amortizes goodwill. Additionally, upon adoption of SFAS No. 141 and 142, the Company no longer amortizes its non-technology based intangible asset, or assembled workforce. The remaining other intangible assets are being amortized on a straight-line basis over their remaining useful life of 3 months as of December 31, 2002. Amortization expense is estimated to be $887,000 in 2003.
Note 5—Accrued Expenses (in thousands):
December 31, ----------------- 2000 1999 ------- -------Employee benefits $ 3,900 $ 1,340 Commissions and bonuses 22,790 6,747 Taxes payable 11,439 1,122 Other 15,547 3,947 ------- ------- $53,676 $13,156 ======= =======
December 31, 2002 2001 Employee benefits $ 2,081 $ 3,121 Commissions and bonuses 2,027 5,543 Sales and other taxes 11,956 7,620 Restructuring 29,056 32,454 Other 10,667 12,974 $ 55,787 $ 61,712 Note
5 --6—Long-term Debt and Other Noncurrent LiabilitiesOther noncurrent liabilities consist of the following:
December 31, 2002 2001 Restructuring $ 67,139 $ 58,335 Other 1,067 1,131 $ 68,206 $ 59,466 The Company has various credit facilities with a commercial lender which include term debt in the form of notes payable and a revolving line of credit. In March 2002, the Company renewed and amended its revolving credit
that provides for up tofacility. The amount available under the revolving line of credit was increased from $10.0 million to $25.0 million. Borrowings under the revolving line ofadditionalcredit are collateralized by all of the Company's assets and bear interest at the bank's prime rate (4.25% as of December 31, 2002). At December 31, 2002, $25.0 million was outstanding and the revolving credit facility is due to expire in March 2003. There were no outstanding borrowings(basedunder the revolving line of credit as of December 31, 2001. Interest is due monthly and principal is due at expiration. The amended and restated loan and security agreement requires the Company to maintain $80.0 million in unrestricted cash and cash equivalents, short-term investments and long-term investments (excluding81
equity investments) and $30.0 million on
eligible accounts receivable,deposit with the Company's commercial lender. The Company was in compliance with these covenants asdefined).of December 31, 2002. As of December 31,20002002 and1999,December 31, 2001, outstanding term debt borrowings were$4.9approximately $2.9 million and$5.9$3.9 million,respectively.respectively and consist of two borrowings. Borrowings bear interest at the bank's prime rate(9.50%(4.25% as of December 31,2000)2002 and December 31, 2001) and prime rate plus 1.25% (5.75% as of December 31, 2002 and December 31, 2001). Principal and interestisare due in consecutive monthly payments through maturity based on thetermterms of thefacility.facilities. Principal payments of $977,000 are due annually from 2000 through 2004, $611,000 due in 2005, and a final payment of $357,000 due in 2006.As discussed in Note 13 of
December 31, 2000 and 1999,Notes to Consolidated Financial Statements, in March 2003, the Companyhad no outstanding borrowingsrenewed and amended its revolving credit facility. The amount available underitsthe revolving line ofcredit. However, commitmentscredit remains unchanged at $25.0 million. Borrowings under the revolving line of credit are collateralized by all of the Company's assets and bear interest at the bank's prime rate (4.25% as of March 1, 2003). At December 31, 2002, $25.0 million was outstanding and is due to expire in February, 2004. Interest is due monthly and principal is due at expiration. The amended and restated loan and security agreement requires the Company to maintain certain levels in cash and cash equivalents, short-term investment and long-term investments (excluding equity investments). Additionally, the amended and restated loan and security agreement requires the Company to maintain certain levels on deposit with the Company's commercial lender and certain quarterly net income (loss) levels.Commitments totaling
$2.4$16.7 million and$2.8$25.0 million in the form of standby letters of credit were issuedunder its revolving line of credit facility as of December 31, 2000 and 1999, respectively. Commitments totaling $23.0 million inon theform of standby letters of credit were also issuedCompany's behalf fromseparatefinancial institutions as of December 31,2000 for2002 and December 31, 2001 in favor of the Company's variousfacilities and leasehold improvements; see Note 7. The Company had no outstanding capital leases as of December 31, 2000.landlords to secure obligations under the Company's facility leases. The commercial credit facilities include covenants which impose certain restrictions on the payment of dividends and other distributions andrequiresrequire the Company to meet a financial covenant to maintainmonthly financial covenants, including a minimum quick ratio, tangible net worth ratiocertain levels of available cash, cash equivalents, short-term investments anddebt service coverage ratio.long-term investments (excluding equity investments). Borrowings are collateralized by a security interest in substantially all of the Company's owned assets.The Company was in compliance with its financial covenants as of December 31, 2000 and December 31, 1999. 50NOTE 6 -- INCOME TAXES82
Note 7—Income Taxes
The components of income tax provision
(benefit)are as follows (in thousands):
YEARS ENDED DECEMBER 31, ------------------------------ 2000 1999 1998 ---------- ---------- -------Current: Federal $ 20,491 $ 458 $ 192 State 5,149 2 13 Foreign 2,987 536 416 --------- ------ ------ Total current $ 28,627 $ 996 $ 621 Deferred: Federal (3,160) -- (600) State (2,419) -- (100) --------- ------ ------ Total deferred $ (5,579) $ -- $ (700) --------- ------ ------ $ 23,048 $ 996 $ (79) ========== ====== ======
Years Ended December 31, 2002 2001 2000 Current: Federal $ — $ — $ 20,491 State 175 121 5,149
Foreign
372
2,015
2,987
Total current $ 547 $ 2,136 $ 28,627
Deferred:
Federal 4,537 — (3,160 ) State 2,519 — (2,419 ) Total deferred $ 7,056 $ — (5,579 ) $ 7,603 $ 2,136 $ 23,048 The differences between the income tax provision (benefit) computed at the federal statutory rate of 35% and the Company's actual income tax provision
(benefit)for the periods presented are as follows (in thousands):
YEARS ENDED DECEMBER 31, ------------------------------ 2000 1999 1998 ---------- ---------- -------Expected income tax provision (benefit) $ (48,503) $ 6,930 $ 1,346 Expected state income taxes (benefit), net of federal tax benefit (7,621) 853 (58) Foreign taxes 2,987 (1,009) 416 Alternative minimum tax -- -- 97 Utilization of foreign net operating loss carryforwards (555) (4,124) (2,471) Change in valuation allowance -- -- (600) Foreign losses not benefited 177 -- 988 Non deductible Goodwill and Intangible amortization 76,038 -- -- Write off of acquired In process Technology 4,091 -- -- Research and development tax credits (2,877) (1,492) -- Foreign tax credits (1,412) -- -- Other 723 (162) 203 ---------- -------- ------- Income tax provision (benefit) $ 23,048 $ 996 $ (79) ========== ======== =======
Years Ended December 31, 2002 2001 2000 Expected income tax provision (benefit) $ (57,022 ) $ (290,797 ) $ (48,503 ) Expected state income taxes (benefit), net of federal tax benefit (8,961 ) (45,697 ) (7,621 ) California net operating loss reduction 2,914 — — Foreign taxes 2,361 2,015 2,987 Utilization of foreign net operating loss carryforwards (2,413 ) (390 ) (555 ) Change in valuation allowance 67,070 109,802 — Foreign losses not benefited 2,353 2,154 177 Non deductible goodwill and intangible amortization 1,418 221,724 76,038 Write off of acquired in-process technology — 2,599 4,091 Tax credits (758 ) — (4,289 ) Other 641 726 723 Income tax provision $ 7,603 $ 2,136 $ 23,048 83
The individual components of the Company's deferred tax assets and liabilities are as follows (in thousands):
DECEMBER 31, -------------------- 2000 1999 --------- --------Deferred tax assets: Depreciation and amortization $ 1,490 $ 895 Accrued liabilities 3,751 1,058 Capitalized research and development 1,371 158 Net operating losses 50,470 18,935 Tax credits 14,212 4,190 Other 463 -- Unrealized loss on Marketable securities 4,349 -- --------- -------- Total deferred tax assets 76,106 25,236 Less valuation allowance (63,894) (24,536) --------- -------- 12,212 700 Deferred tax liabilities State tax liability (1,584) -- Unrealized gain on Marketable securities -- (17,318) --------- -------- Net deferred tax asset (liability) $ 10,628 $(16,618) ========= ========
December 31, 2002 2001 Deferred tax assets: Depreciation and amortization $ 7,441 $ 2,278 Accrued liabilities 43,898 62,049 Capitalized research and development 598 957 Net operating losses 174,495 100,895 Tax credits 11,383 14,436 Other 143 238
Unrealized loss on marketable securities
5,429
777
Total deferred tax assets 243,387 181,630 Less valuation allowance (234,697 ) (169,071 ) 8,690 12,559 Deferred tax liabilities State tax liability (8,690 ) (5,503 )
Net deferred tax asset
$
—
$
7,056
The Company has provided a valuation allowance for
a significant portionall of its deferred tax assets as of December 31,2000.2002 due to the uncertainty regarding their future realization. The total valuation allowance increased$39,358,000$67,070,000 from December 31,19992001 to December 31,2000. Approximately $15,010,0002002. None of the increase in the valuation allowancerelatingrelates to income tax benefits arising from the exercise of stock options that will be credited directly tostockholders' equity and will not be available to benefit the income tax provision in any future periods.stockholder's equity. Theremainingincrease in the valuation allowance relates entirely to net operating losses andcredit carryforwards from the Interleaf acquisition. The income tax benefits arising from the deferred tax assets acquired from Interleaf will be credited to Goodwill and will not be available to benefit the income tax provision in any future periods.accrued liabilities.As of December 31,
2000,2002, the Company had federal and statenetoperating loss carryforwards of approximately$138,400,000$462,109,000 and$22,800,000,$144,308,000 respectively, available to offset future regular and alternative minimum taxable income. In addition, the Companyhashad federal and state research and developmentand foreign taxcredit carryforwards of approximately$11,990,000$10,707,000 and $2,222,000 respectively, available to offset future tax liabilities. The Company's federal net operating loss and tax credit carryforwards expire in the years20012003 through2019,2022, if not utilized. The state net operating loss carryforwards expire in the years20012004 through2019.2012. The state research and development credits can be carried forward indefinitely. As of December 31,20002002, the Company's foreign subsidiaries had net operating loss carryforwardsin foreign jurisdictionsofapproximately $2,500,000$2,291,000 that can be used to offset future foreign income.Federal and state tax laws limit the use of net operating loss carryforwards in certain situations where changes occur in the stock ownership of a company.
AnThe Company believes such an ownership change, as defined,hasmay have occurred and, accordingly, certain of the Company's federal and statenetoperating loss carryforwardsacquired from Interleafmay be limited in their annual usage.5184
Note
7 --8—Commitments and ContingenciesOn February 15, 2002, BroadVision and Hewlett-Packard signed an agreement, which terminated Hewlett-Packard's rights to resell BroadVision software effective February 15, 2002. In the event BroadVision becomes insolvent, files a petition for relief under the United States Bankruptcy Code, or materially breaches the agreement, Hewlett-Packard will have rights to a limited term license for BroadVision's business-to-business customer portals software products and a limited use license for BroadVision's One-to-One Enterprise software product. Hewlett-Packard's license will be limited in term until such time as Hewlett-Packard has received monies for sale of the products up to a maximum of $12.0 million. In addition, the Company will pay back to Hewlett-Packard a portion of the unused prepaid royalty payments, received from Hewlett-Packard in prior periods totaling approximately $2.4 million. This amount was included in Unearned Revenue as of December 31, 2001, and this amount was reclassified to Accrued Liabilities in fiscal 2002. The amount due is payable in quarterly installments by December 31, 2003.
Leases
The Company leases its headquarters facility and its other facilities under noncancelable operating lease agreements expiring through the year 2013. Under the terms of the agreements, the Company is required to pay property taxes, insurance and normal maintenance costs.
A summary of total future minimum lease payments under noncancelable operating lease agreements, together with amounts included in restructuring reserves is as follows (in thousands); properties that are part of the restructuring have been included:
Year Ended December 31, Total future minimum lease payments 2003 $ 26,281 2004 25,855 2005 25,652 2006 22,620 2007 20,495 2008 and thereafter 81,487 Total minimum lease payments 202,390 As of December 31, 2002, $129.4 million of future minimum lease payments, net of anticipated sublease income, is
as follows (in thousands): Operating Year Ended December 31, leases ----------------------- -------- 2001 $ 37,126 2002 36,620 2003 34,842 2004 35,325 2005 35,024 2006accrued in the Company's restructuring accruals. The restructuring accruals are net of approximately $44.8 million of sublease income of which approximately $28.8 million represents estimated sublease income for sublease agreements yet to be negotiated andthereafter 97,802 -------- Total minimum lease payments $276,739 ======== Rental expense relating to operating leases was approximately $14,045,000, $2,716,000, $1,101,000 fortheyears ended December 31, 2000, 1999 and 1998, respectively. Minimumremaining $16.0 million represents subleasepaymentsincome to be receivedin the futureundernoncancelable subleases total $82,000.non-cancelable sublease agreements signed by December 31, 2002. See Note 9 of Notes to Consolidated Financial Statements for additional information.85
Standby Letter of Credit Commitments
As of December 31,
2000,2002, the Company hadvarious$16.7 million of outstanding commitments in the form of standby letters of credit$25,380,000in favor of the Company's various landlords to secure obligations under the Company's facility leases.Legal Proceedings
In April 2001, the Company filed a Form 8-K with the Securities and Exchange Commission reporting that several purported class action lawsuits had been filed against the Company and certain of its officers and directors. In each of the lawsuits, the plaintiffs sought to assert claims on behalf of a class of all persons who purchased securities of BroadVision between January 26, 2001 and April 2, 2001. The complaints alleged that BroadVision and the individual defendants violated federal securities laws in connection with its reporting of financial results for the quarter ended December 31, 2000. The lawsuits were consolidated into a single action. On November 5, 2001, BroadVision and the individual defendants filed motions to dismiss the consolidated complaint. On February 22, 2002, the Court granted these motions, dismissed the consolidated complaint without prejudice and ordered the lead plaintiff to file an amended complaint within 30 days. On March 25, 2002, the plaintiff filed its Second Amended Consolidated Complaint, which added claims for breach of fiduciary duty and named members of the Company's board of directors as additional defendants. All defendants filed motions to dismiss the Second Amended Consolidated Complaint on May 10, 2002. The hearing on the defendant's motion to dismiss was heard on August 30, 2002. On September 11, 2002, the Court (1) dismissed with prejudice the claims that the defendants violated federal securities laws, on the basis that the complaint failed to state a claim upon which relief could be granted, and (2) dismissed without prejudice the claims for breach of fiduciary duty, on the basis that the claims were made under state law and, in the absence of any remaining federal law claims, the Court would decline to exercise supplemental jurisdiction. The Company is not aware of plaintiffs filing an appeal of the Court's September 11, 2002 decision or filing another complaint in any other court. The Company believes that the action was without merit and will continue to defend itself vigorously should plaintiffs continue to pursue any of these claims.
On June 7, 2001, Verity, Inc. filed suit against the Company alleging copyright infringement, breach of contract, unfair competition and other claims. The Company has answered the complaint denying all allegations and is defending itself vigorously. The trial date is set for July 14, 2003 in San Jose, California, in the United States District Court, Northern District, San Jose Division. The Company is unable to estimate the amount or range of any potential loss from this matter.
On July 18, 2002, Avalon Partners, Inc., doing business as Cresa Partners ("Cresa"), filed a suit against the Company in the Superior Court of the State of California, San Mateo County, claiming broker commissions related to the Company's termination and restructuring of certain facilities leases associated with our restructuring plans taken during the second quarter of 2002. The matter was settled by way of a settlement agreement executed by both parties in March 2003 and the parties expect the lawsuit to be dismissed in the second quarter of fiscal 2003.
The Company is also subject to various other claims and legal actions arising in the ordinary course of business. In the opinion of management, after consultation with legal counsel, the ultimate
86
disposition of these matters is not expected to have a material effect on the Company's business, financial condition or results of operations. Although management currently believes that the outcome of other outstanding legal proceedings, claims and litigation involving the Company will not have a material adverse effect on its business, results of operations or financial condition, litigation is inherently uncertain, and there can be no assurance that existing or future litigation will not have a material adverse effect on the Company's business, results of operations or financial condition.
Note
8 -- Stockholders' Equity Convertible Preferred Stock9—RestructuringDuring fiscal 2001 and fiscal 2002, the Company approved restructuring plans to, among other things, reduce its workforce and consolidate facilities. These restructuring and asset impairment charges were taken to align the Company's cost structure with changing market conditions and to create a more efficient organization. A pre-tax charge of $110.4 million was recorded during fiscal 2002 and a pre-tax charge of $153.3 million was recorded during fiscal 2001 to provide for these actions and other related items. The Company recorded the low-end of a range of assumptions modeled for the restructuring charges, in accordance with SFAS No. 5,Accounting for Contingencies. The high-end of the range was estimated at $117.8 million for the charge related to fiscal 2002. Adjustments to the restructuring reserves will be made in future periods, if necessary, based upon the then current actual events and circumstances.
The following table summarizes charges recorded during fiscal 2002 for exit activities and asset write-downs (in thousands):
Severance
and BenefitsFacilities/Excess
AssetsOther Total Reserve balances, December 31, 2001 $ 817 $ 89,859 $ 113 $ 90,789 Restructuring charges 7,644 101,742 1,063 110,449
Cash payments
(6,929
)
(78,019
)
(1,097
)
(86,045
)
Non-cash portion
(107
)
(18,891
)
—
(18,998
)
Reserve balances, December 31, 2002
$
1,425
$
94,691
$
79
$
96,195
The nature of the charges summarized above is as follows:
Severance and benefits—The Company recorded a charge of approximately $7.6 million during fiscal year ended December 31, 2002 related to severance benefits to terminated employees in the United States and various international locations. Costs incurred include severance, payroll taxes and COBRA benefits. Included in the $7.6 million is $107,000 of non-cash charges. These non-cash charges represent a one-time compensation charge taken as a result of granting certain terminated employees extended vesting of stock options beyond the standard vesting schedule for terminated employees. The compensation charge was calculated using the Black-Schools option pricing model. Approximately $817,000 of severance and benefits related costs remained accrued as of December 31, 2001 as a result of the Company's 2001 restructuring plan. Approximately $6.9 million of severance and benefits costs had been paid out during fiscal 2002 and the remaining $1.4 million of severance, payroll taxes and COBRA benefits is expected to be paid in full by December 31, 2003. The Company's restructuring
87
plan included plans to terminate the employment of approximately 430 employees in North and South America and approximately 95 employees throughout Europe and Asia/Pacific during the first three quarters of fiscal 2002, impacting all departments within the Company. The employment of approximately 525 employees was terminated during fiscal year 2002. As a result of these reductions, the Company expects annual salary savings of approximately $44.6 million.
Facilities/Excess Assets—During fiscal year 2002, the Company revised its estimates and expectations with respect to its facilities disposition efforts due to further consolidation and abandonment of additional facilities and to account for changes in estimates used in the Company's 2001 restructuring plan based upon actual events and circumstances. Total lease termination costs include the impairment of related assets, remaining lease liabilities and brokerage fees offset by estimated sublease income. The estimated costs of abandoning these leased facilities, including estimated sublease income, were based on market information analyses provided by a commercial real estate brokerage firm retained by the Company. Based on the factors above, a facilities/excess assets charge of $101.7 million was recorded during fiscal year 2002 and includes non-cash asset impairment charges of approximately $18.9 million.
Approximately $89.9 million of facilities related costs remained accrued as of December 31, 2001 as a result of the Company's 2001 restructuring plan. Net cash payments during fiscal year 2002 related to abandoned facilities amounted to $78.0 million. Actual future cash requirements may differ materially from the accrual at December 31, 2002, particularly if actual sublease income is significantly different from historical estimates. As of December 31,
2000,2002, $94.7 million of lease termination costs, net of anticipated sublease income, is expected to be paid by the end of the second quarter of fiscal 2013. The Company expects to pay approximately $26.9 million over the next twelve months and the remaining $67.8 million from January 1, 2004 through June of fiscal 2013. The $94.7 million is net of approximately $44.8 million of estimated sublease income of which approximately $28.8 million represents sublease agreements yet to be negotiated.Other—The Company recorded charges of approximately $1.1 million during fiscal year 2002 for various incremental costs incurred as a direct result of the restructuring plan. The remaining reserve balance of $79,000 is expected to be paid in full by the end of the fourth quarter of 2003.
Note 10—Stockholders' Equity
Convertible Preferred Stock
As of December 31, 2002, there were no outstanding shares of convertible preferred stock. The Board of Directors and the stockholders have approved authorized shares of convertible preferred stock to
10,000,000 shares.10,000,000.
Warrants
As of December 31,
2000,2002, there were warrants outstanding to acquire86,6679,628 shares of common stock at an average price of$20.84.$187.53. These warrants were issued in 1997 and 2000 in connection with revenue transactions. The warrants were valued using the Black-Scholes option-pricing model and revenues recorded net of the fair value of the warrants.88
Common Stock
On July 24, 2002, the Company announced that its Board of Directors had approved a one-for-nine reverse split of its common stock. The reverse split was effective as of 8:00 p.m. Eastern Daylight Time on July 29, 2002. Each nine shares of outstanding common stock of the Company automatically converted into one share of common stock. The Company's common stock began trading on a post-split basis at the opening of trading on the Nasdaq National Market on July 30, 2002.
During
April, 2000,June 2001, the Company completed an acquisition in which it acquiredInterleaf in a stock-for-stock transaction.Keyeon. Please see Note 2, Acquired Business, to Consolidated Financial Statements.In September 1999,During fiscal 2002 there were no increases in the
stockholders approved an increase to the Company's authorizedaggregate number of shares ofCommon Stock from 50,000,000 to 500,000,000, further, during May 2000, the stockholders approved an increase in the authorized shares ofcommon stock available to2,000,000,000 shares. 52be issued under the Company's Equity Incentive Stock Option Plan. During May 2000,2001, the Board of Directors and the stockholders approved an increase in the aggregate number of shares of common stock available to be issued under the Company's Equity Incentive Stock Option Plan by13,125,00012,000,000 shares.In addition, the Board of Directors approved 6,000,000 shares of common stock available to be issued under the Company's Non-Officer Stock Option PlanThe Company applies APB Opinion No. 25 and related interpretations when accounting for its stock option and stock purchase plans. As of December 31,
2000,2002, the Company had reserved84,000,00096 million 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 date of grant. The vesting of individual options may vary but in each case at least20%25% of the total number of shares subject to options will become exercisable per year. These options generally expire ten years after the grant date. When an employee option is exercised prior to vesting, any unvested shares so purchased are subject to repurchase by the Company at the original purchase price of the stock upon termination of employment. The Company's right to repurchase lapses at a minimum rate of 20% per year over five years from the date the option was granted or, for new employees, the date of hire. Such right is exercisable only within 90 days following termination of employment.No3,165 unvested shares were repurchased by the Company during the year ended December 31,2000.2002 at a weighted-average price of $11.77. As of December 31,2000, 612,8452002, 270 shares were subject to repurchase at a weighted-average price of$0.81. 1,438,200$8.48. At December 31, 2001 and2,119,6352000, 7,952 and 68,094 shares, respectively, were subject torepurchase as of December 31, 1999 and 1998, respectively.repurchase.The Company's President and Chief Executive Officer ("CEO") has options to purchase
9,000,0002,219,999 shares of common stock at an average exercise price of$3.56$30.16 per share. On April 1, 1995, the Company's President and CEO was granted options to purchase4,500,000500,000 shares of common stock at an exercise price of$0.44$4.00 per share. These options vest ratably over a 60-month period commencing on grant whereas the first year is subject to cliff vesting. As of December 31,2000,2002, all of the4,500,000500,000 options werevested.exercised. On June 23, 1999, the CEO was granted additional options to purchase4,500,000500,000 shares of common stock at an exercise price of$6.67$60.00 per share. The options vest ratably, 20% after year 1 and the remainder ratably over the next 48 months, over a 60-month period commencing on grant. As of December 31,2000, 1,350,0002002, 350,001 of the4,500,000500,000 additional options were vested. On May 25, 2001, the CEO was granted additional options to purchase 500,000 shares of common stock at an exercise price of $66.51 per share. The options vest ratably over the next 48 months, commencing on grant. As of December 31, 2002, 197,917 options from the May 25, 2001 grant were vested. On89
November 27, 2001, the CEO was granted additional options to purchase 4,444 shares of common stock at an exercise price of $35.01 per share. The options vest ratably over the next 24 months, commencing on grant. As of December 31, 2002, 2,407 options from the November 27, 2001 grant were vested. On February 19, 2002, the CEO was granted additional options to purchase 55,555 shares of common stock at an exercise price of $18.63 per share. The options vest ratably over the next 48 months, commencing on grant. As of December 31, 2002, 11,574 options from the February 19, 2002 grant were vested. On October 30, 2002, the CEO was granted additional options to purchase 1,160,000 shares of common stock at an exercise price of $2.16 per share. The options vest ratably over the next 48 months, commencing on grant. As of December 31, 2002, 48,333 options from the October 30, 2002 grant were vested.
Activity in the Company's stock option plan is as follows:
Years ended December 31, ------------------------------------------------------------------------- 2000 1999 1998 ---------------------- ---------------------- ---------------------- Weighted- Weighted- Weighted- Average Average Average Options Exercise Options Exercise Options Exercise Fixed Options (000's) Price (000's) Price (000's) Price - ------------- ------- --------- -------- --------- -------- ---------Outstanding at beginning of period 39,978 $ 6.36 31,482 $ 0.96 26,163 $0.50 Granted 10,899 30.93 20,565 11.42 14,292 1.52 Exercised (7,378) 1.83 (9,759) 0.71 (5,193) 0.40 Forfeited (3,105) 14.21 (2,310) 1.67 (3,780) 0.64 ------ ------- ------- Outstanding at end of period 40,394 $13.23 39,978 $ 6.36 31,482 $0.96 ====== ------ ======= ======= Options exercisable at end of period 10,115 $ 5.63 6,195 $ 0.82 7,227 $0.48 ====== ------ ======= ======= Weighted-average fair value of options Granted during the period $28.67 $ 9.36 $0.99 ------ ------ =====53
Years ended December 31, 2002 2001 2000 Fixed Options Options
(000's)Weighted-Average
Exercise PriceOptions
(000's)Weighted-Average
Exercise PriceOptions
(000's)Weighted-Average
Exercise PriceOutstanding at beginning of period 5,239 $ 44.73 4,488 $ 119.07 4,442 $ 57.24 Granted 3,635 4.76 3,511 44.82 1,211 278.37 Exercised (226 ) 4.52 (417 ) 12.15 (820 ) 16.47 Forfeited (2,612 ) 34.57 (2,343 ) 190.17 (345 ) 127.89 Outstanding at end of period 6,036 $ 26.32 5,239 $ 44.73 4,488 $ 119.07 Options exercisable at end of period 1,861 $ 45.02 1,558 $ 41.31 1,124 $ 50.67
Weighted-average fair value of options Granted during the period
$
4.16
$
41.13
$
258.0390
The following table summarizes stock options outstanding under the plan as of December 31,
2000:2002:
Outstanding --------------------------------------------- Exercisable Weighted-Avg. ---------------------------- Remaining Weighted-Avg. Weighted-Avg. Range of Options Contractual Life Exercise Options Exercise Exercise Prices (000's) In Years Price (000's) Price - --------------- ------------ ---------------- ------------ ------------ -------------$0.01 -- $ 1.22 8,052 6.33 0.69 4,565 $ 0.59 1.29 -- 4.40 7,857 7.69 2.51 1,891 2.49 4.42 -- 6.67 8,266 8.44 5.85 2,158 5.97 13.55 -- 28.00 8,395 9.25 19.93 992 19.35 29.33 -- 52.83 7,824 8.49 37.50 509 34.41 ------ ------ 40,394 8.05 13.23 10,115 $ 5.63 ====== ======
Exercisable Outstanding
Weighted-Average
Remaining Contractual
Life in YearsRange of
Exercise PricesOptions
(000's)Weighted-Average
Exercise PriceOptions
(000's)Weighted-Average
Exercise Price$1.50—1.50 423 9.81 1.50 14 1.50 2.16—2.16 1,494 9.83 2.16 54 2.16 2.36—7.92 877 8.89 5.20 136 6.86 8.50—12.15 626 9.06 10.07 82 11.95 12.50—30.50 433 6.42 19.03 318 17.96 35.01—35.01 686 8.91 35.01 412 35.01 35.25—60.00 674 6.45 55.33 484 54.98 66.51—66.51 662 8.40 66.51 267 66.51 87.19—448.31 160 7.36 188.34 93 182.87 475.31—475.31 1 7.49 475.31 1 475.31 6,036 8.66 26.32 1,861 $ 45.02 The Company grants options outside of the Company's stock option plan. The terms of these options are generally identical to those granted under the Company's plan. A summary of options outside of the plan is presented below:
Years ended December 31, ---------------------------------------------------------------------------- 2000 1999 1998 -------------------- ---------------------- ---------------------- Weighted- Weighted- Weighted- Average Average Average Options Exercise Options Exercise Options Exercise Fixed Options (000's) Price (000's) Price (000's) Price - ------------- ------- ----- ------- ----- ------- -----Outstanding at beginning of period 15,657 $ 6.06 6,651 $ 0.47 7,155 $ 0.45 Granted 11,569 23.54 9,405 9.84 -- -- Exercised (2,384) 6.28 (333) 0.74 (504) 0.21 Forfeited (2,544) 13.36 (66) 7.49 -- -- ------ ------ ----- Outstanding at end of period 22,298 $14.27 15,657 $ 6.06 6,651 $ 0.47 ====== ===== Options exercisable at end of Period 8,210 $ 3.06 5,433 $ 0.45 4,473 $ 0.45 ====== ===== Weighted-average fair value of options granted during the period $31.04 $ 8.06 $ -- ====== ====== ======
Years ended December 31, 2002 2001 2000 Fixed Options Options
(000's)Weighted-Average
Exercise PriceOptions
(000's)Weighted-Average
Exercise PriceOptions
(000's)Weighted-Average
Exercise PriceOutstanding at beginning of period 975 $ 78.26 2,478 $ 128.43 1,740 $ 54.54 Granted 2,123 2.26 330 28.35 1,286 211.86 Exercised (9 ) 7.50 (653 ) 6.66 (265 ) 56.52 Forfeited (618 ) 56.94 (1,180 ) 213.66 (283 ) 120.24 Outstanding at end of period 2,471 $ 18.49 975 $ 78.30 2,478 $ 128.43 Exercisable at end of Period 458 $ 59.49 418 $ 74.70 913 $ 27.54 Weighted-average fair value of options granted during the period $ 1.96 $ 32.04 $ 279.36 91
The following table summarizes stock options, granted outside the plan, outstanding as of December 31,
2000:
Outstanding ------------------------------------------------- Weighted-Avg. Exercisable Remaining ------------------------- Range of Options Contractual Life Weighted-Avg. Options Weighted-Avg. Exercise Prices (000's) In Years Exercise Price (000's) Exercise Price - --------------- ------------ ---------------- -------------- --------- --------------$0.09 -- $0.44 4,950 5.16 $ 0.41 4,950 $ 0.41 0.61 -- 7.16 4,352 5.57 4.19 2,115 2.76 7.22 -- 12.97 5,494 8.68 11.36 932 10.65 13.48 -- 26.88 5,087 9.28 26.68 78 23.24 28.74 -- 50.38 2,415 9.09 41.36 135 40.94 ------ ----- 22,298 7.47 $14.27 8,210 $ 3.06 ====== =====542002:
Exercisable Outstanding
Weighted-Average
Remaining Contractual
Life in YearsRange of
Exercise PricesOptions
(000's)Weighted-Average
Exercise PriceOptions
(000's)Weighted-Average
Exercise Price$0.80—$.80 50 3.16 $ .80 50 $ .80 1.50—1.50 1,773 9.81 1.50 66 1.50 2.55—30.50 255 7.97 12.41 108 18.68 31.93—116.75 334 7.42 74.11 197 77.81 164.25—241.88 48 7.29 240.82 29 240.44 258.66—258.66 1 7.01 258.66 — 258.66 310.50—310.50 5 2.67 310.50 5 310.50 381.94—381.94 4 7.09 381.94 2 381.94 435.98—453.46 1 7.09 435.98 1 435.98 2,471 9.10 $ 18.49 458 $ 59.49 During the year ended December 31, 2002 the Company recorded compensation expense of $846,000. This charge was recorded as a result of granting terminated employees continued vesting of their stock options for a period beyond their actual termination date. The compensation charge was calculated using the Black-Scholes model. $739,000 of the charge is recorded in general and administrative expense and the remaining $107,000 is included in restructuring charge as it related to employees terminated under the Company's restructuring plan.
During the year ended December 31, 2001 the Company recorded compensation expense of $1.0 million. This charge was recorded as a result of granting terminated employees continued vesting of their stock options for a period beyond their actual termination date. The compensation charge was calculated using the Black-Scholes model. $350,000 of the charge is recorded in general and administrative expense and the remaining $664,000 is included in restructuring charge as it related to employees terminated under the Company's restructuring plan.
During the second quarter of 2001, the Company announced a voluntary stock option exchange program, or Offer, for its employees and directors. Under the program, BroadVision employees and directors had the opportunity, if they so chose, to cancel outstanding "underwater" stock options, which were options that had an exercise price that was higher than the price of the Company's Common Stock on the date that the Offer expired, previously granted to them in exchange for an equal number of new options to be granted at a future date. The Offer remained outstanding until 5:00p.m., Pacific Daylight Time, on May 25, 2001 (the "Expiration Date"). The exercise price of the new options was equal to the fair market value of our common stock on the date of grant, which was November 27, 2001. Acceptance of the Offer required a participant electing to exchange any underwater options to also exchange any other options granted to him or her during the six months before or after the Expiration Date. The exchange program was designed to comply with FASB Interpretation No. 44, Accounting for Certain Transactions Involving Stock Compensation, and is not expected to result in any additional compensation charges or variable plan accounting. Employees located in Sweden were not eligible for this program. A total of 937 individuals elected to participate in the Offer. These
92
individuals tendered a total of 2.7 (just divided by 9) million options to purchase common stock in return for the Company's promise to grant new options on the grant date of November 27, 2001. A total of 1.1 million options were granted at the fair market value of $35.01 per share, the opening price of the Company's common stock on November 27, 2001, to those employees who had been continuously employed with the Company from the date they tendered their original options through November 27, 2001.
Pro Forma Disclosure
Employee Stock Purchase Plan
AsOn February 7, 2002, the Board of
December 31, 2000,Directors approved an increase by an amount not to exceed 5% of theCompany had reserved 9,900,000number of shares outstanding 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 the Purchase Plan, the Company issued approximately1,088,000, 1,833,000,555,278, 293,112 and2,052,000120,889 shares to employees in the years ended December 31,2000, 19992002, 2001 and1998,2000, respectively. Under SFAS No. 123, compensation cost is recognized for the fair value of the employees' purchase rights, which was estimated using the Black-Scholes option pricing model with no expected dividends, an expected life of approximately72 months, and the following weighted-average assumptions:
Years ended December 31, --------------------------- 2000 1999 1998 ---- ---- ----Risk-free interest rate 4.50% 6.00% 4.48% Volatility 136% 97% 112%
Years ended December 31, 2002 2001 2000 Risk-free interest rate 1.06 % 1.67 % 4.50 % Volatility 122 % 143 % 136 % The weighted-average fair value of the purchase rights granted in the years ended December 31, 2002, 2001, and 2000,
1999,was $2.94, $18.00, and1998, was $12.87, $3.24, and $0.46,$115.83, respectively.The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with no expected dividends and the following weighted-average assumptions:
Years ended December 31, -------------------------------------- 2000 1999 1998 --------- --------- ---------Expected life 4.4 years 4.1 years 3.0 years Risk-free interest rate 4.75% 6.55% 4.70% Volatility 136% 97% 112%
Years ended December 31, 2002 2001 2000 Expected life 3.5 years 4.0 years 4.4 years Risk-free interest rate 1.93 % 3.82 % 4.75 % Volatility 122 % 143 % 136 % Had compensation cost for the Company's stock option plan and stock purchase plan been determined consistent with SFAS No. 123, the Company's reported net income (loss) and net
incomeearnings93
(loss) per share would have been changed to the amounts indicated below (in thousands except per share data):
Years ended December 31, ----------------------------------------- 2000 1999 1998 ----------- ----------- -----------Net income (loss): As reported $ (161,629) $ 18,809 $ 4,039 Pro forma $ (484,587) $ (25,015) $ (1,885) Basic net income (loss) per share: As reported $ (0.62) $ 0.08 $ 0.02 Pro forma $ (1.87) $ (0.11) $ (0.01) Diluted net income (loss) per share: As reported $ (0.62) $ 0.07 $ 0.02 Pro forma $ (1.87) $ (0.11) $ (0.01)
Years ended December 31, 2002 2001 2000 Net (loss) income: As reported $ (170,522 ) $ (836,259 ) $ (161,629 ) Pro forma $ (217,655 ) $ (795,584 ) $ (484,587 ) Basic net (loss) earnings per share: As reported $ (5.32 ) $ (27.20 ) $ (5.60 ) Pro forma $ (6.80 ) $ (25.87 ) $ (16.79 ) Diluted net (loss) earnings per share: As reported $ (5.32 ) $ (27.20 ) $ (5.60 ) Pro forma $ (6.80 ) $ (25.87 ) $ (16.79 ) Note
9 --11—Employee Benefit PlanThe Company provides for a defined contribution employee retirement plan in accordance with section 401(k) of the Internal Revenue Code. Eligible employees are entitled to contribute up to
20%50% of their annual compensation, subject to certain limitations ($10,50012,000 for the year ended December 31,2000)2002).Effective January 1, 2000,As of August 15, 2001, the Company
provided adiscontinued the 50% match for all employeecontributions, up to 6% of the employees' annual compensation subject to certain limitations ($5,100 per employee for the year ended December 31, 2000). Employees vest in Company matching contributions based on years of service with the company, 50% upon the employees' first anniversary and 100% on the second anniversary and thereafter.contributions. The Company contributed$2.2$2.3 million for the year ended December 31,2000,2001, all of which has been funded or accrued as of December 31,2000. 552001. Note
10 --12—Geographic, Segment and Significant Customer InformationThe Company
adoptedoperates in one segment, electronic business commerce solutions. The Company's reportable segment includes theprovisions of SFAS No. 131, Disclosure about Segments of an EnterpriseCompany's facilities in North andRelated Information, during 1998. SFAS No. 131 establishes standards forSouth America (Americas), Europe and Asia Pacific and thereporting by public business enterprises of information about operating segments, products and services, geographic areas, and major customers. The method for determining what information to report is based on the way that management organizes the operating segments within the Company for making operational decisions and assessments of financial performance.Middle East (Asia/Pacific). The Company's chief operating decision maker is considered to be the Company's CEO. The CEO reviews financial information presented on a consolidated basis accompanied by disaggregated information about revenues by geographic region and by product for purposes of making operating decisions and assessing financial performance.The Company operates in one segment, electronic business commerce solutions.The disaggregated revenue information
on a product basisreviewed by the CEO is as follows (in thousands):
Years Ended December 31, ------------------------------------ 2000 1999 1998 --------- --------- -------Software licenses: One-To-One Enterprise $ 18,599 $ 14,569 $ 19,303 One-To-One Packaged Solutions 232,239 60,814 16,764 Services 116,928 26,737 9,739 Maintenance 46,150 13,394 5,105 -------- -------- -------- Total Company $413,916 $115,514 $ 50,911 ======== ======== ========
Years Ended December 31, 2002 2001 2000 Software licenses $ 40,483 $ 101,480 $ 250,838 Services 36,763 87,083 118,511 Maintenance 38,652 59,860 46,150 Total Revenues $ 115,898 $ 248,423 $ 415,499 94
The Company sells its products and provides services worldwide through a direct sales force and through a channel of independent distributors, value-added resellers ("VARs") and application service providers ("ASPs"). In addition, the sales of the Company's products are promoted through independent professional consulting organizations known as systems integrators. The Company provides services worldwide through its BroadVision Global Services Organization and indirectly through distributors, VARs, ASPs, and systems integrators. The Company currently operates in three primary geographical territories,
NASA, which includes NorthAmericas, Europe andSouth America, Europe which includes Europe, the Middle East, Africa and India andAsia/Pacific/Japan ("APJ") which includes the Pacific Rim and the Far East.Pacific.Disaggregated financial information regarding the Company's products and services and geographic revenues is as follows (in thousands):
Years Ended December 31, ------------------------------------------ 2000 1999 1998 -------- -------- -------- Revenues: Americas $281,331 $ 79,323 $ 29,330 Europe 103,611 26,211 16,944 Asia/Pacific 28,974 9,980 4,637 -------- -------- -------- Total Company $413,916 $115,514 $ 50,911 ======== ======== ======== December 31, ------------------------------ 2000 1999 ---------- ---------- Identifiable assets: Americas $1,102,343 $ 400,858 Europe 33,254 4,122 Asia/Pacific 7,427 1,148 ---------- ---------- Total Company $1,143,024 $ 406,128 ========== ==========
Years Ended December 31, 2002 2001 2000 Revenues: Americas $ 70,125 $ 150,248 $ 273,616 Europe 39,511 75,130 107,542 Asia/Pacific 6,262 23,045 34,341 Total Company $ 115,898 $ 248,423 $ 415,499
December 31,2002 2001 Long-lived assets: Americas $ 84,727 $ 131,874 Europe 1,175 3,547 Asia/Pacific 892 2,425 Total Company $ 86,794 $ 137,846 During the years ended December 31,
2000, 19992002, 2001 and19982000 no customer accounted for 10% or more of the Company's revenues.Note 13—Subsequent Events
In March 2003, the Company renewed and amended its revolving credit facility. The amount available under the revolving line of credit remains unchanged at $25.0 million. Borrowings under the revolving line of credit are collateralized by all of the Company's assets and bear interest at the bank's prime rate (4.25% as of March 1, 2003). At December 31, 2002, $25.0 million was outstanding and is due to expire in February, 2004. Interest is due monthly and principal is due at expiration. The amended and restated loan and security agreement requires the Company to maintain certain levels in cash and cash equivalents, short-term investment and long-term investments (excluding equity investments). Additionally, the amended and restated loan and security agreement requires the Company to maintain certain levels on deposit with the Company's commercial lender and certain quarterly net income (loss) levels.
95
On July 18, 2002, Avalon Partners, Inc., doing business as Cresa Partners ("Cresa"), filed a suit against the Company in the Superior Court of the State of California, San Mateo County, claiming broker commissions related to the Company's termination and restructuring of certain facilities leases associated with our restructuring plans taken during the second quarter of 2002. The matter was settled by way of a settlement agreement executed by both parties in March 2003 and the parties expect the lawsuit to be dismissed in the second quarter of fiscal 2003.
96
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURENone 56On April 8, 2002, we received notice from our independent public accountant Arthur Andersen LLP ("Andersen") of its resignation as our auditor as a result of our plans to change independent public accountants for the fiscal year ending December 31, 2002 due to an anticipated future non-audit business relationship between the two companies.
The reports of Andersen on our financial statements for the past two fiscal years contained no adverse opinion or disclaimer of opinion and were not qualified or modified as to uncertainty, audit scope or accounting principles.
During our two most recent fiscal years, and through April 8, 2002, there were no disagreements with Andersen on any matter of accounting principles or practices, financial statement disclosures or auditing scope or procedures, which disagreements if not resolved to the satisfaction of Andersen would have caused them to make reference thereto in their report.
During our two most recent fiscal years, except as described below, there were no reportable events (as defined in Regulation S-K Item 304(a)(1)(v)). In a letter dated March 30, 2001, Andersen informed us that they noted certain matters involving our internal controls that they considered to be reportable conditions under standards established by the American Institute of Certified Public Accountants. The reportable conditions related to our purchase requisition processes and invoice processing procedures. Members of our Audit Committee of the Board of Directors discussed this matter with Andersen. We have implemented procedures to address this matter. We have authorized Andersen to respond fully to the inquiries of the successor accountant concerning this matter.
On May 7, 2002, we engaged the services of BDO Seidman, LLP as our new independent auditors for our fiscal year ended December 31, 2002. Our Board of Directors, with the recommendation of the Audit Committee of the Board of Directors, authorized and approved the engagement of BDO Seidman. In deciding to select BDO Seidman, the Audit Committee and our management considered auditor independence issues raised by commercial relationships we have or may have with certain accounting firms. With respect to BDO Seidman, we do not have any commercial relationship with BDO Seidman that would impair its independence. During our two most recent fiscal years ended December 31, 2001, and the subsequent interim period through May 7, 2002, we did not consult with BDO Seidman regarding any of the matters or events set forth in Item 304(a)(2)(i) and (ii) of Regulation S-K.
Certain information required by Part III is incorporated by reference in this Report from the Company's definitive proxy statement for its
20012003 Annual Meeting of Stockholders to be filed pursuant to Regulation 14A (the "Proxy Statement").
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANTDIRECTORS AND EXECUTIVE OFFICERS OUR DIRECTORS AND EXECUTIVE OFFICERS AND THEIR AGES AS OF APRIL 1, 2001 ARE AS FOLLOWS:
NAME Age Position - ---- --- --------------------------------------Pehong Chen.......................................... 43 Chief Executive Officer, President and Chairman of the Board David L. Anderson (3)................................ 57 Director Yogen K. Dalal (1)(2)................................ 50 Director Todd A. Garrett...................................... 59 Director Koh Boon Hwee (3).................................... 50 Director Klaus Luft........................................... 59 Director Carl Pascarella...................................... 58 Director Randall C. Bolten.................................... 48 Chief Financial Officer and Executive Vice President, Operations Chris Grejtak (4).................................... 52 Executive Vice President, Marketing and Business Development, and Chief Marketing Officer Nancy Mills-Turner (5)............................... 48 Executive Vice President and General Manager, Worldwide Products and Services Organization James Thanos (5)..................................... 52 Executive Vice President and General Manager, Worldwide Field Organization(1) Dr. DalalOther than the identification of executive officers, which is
not standing for re-election of the Board of Directorsset forth in2001. (2) Members of the Audit Committee - Upon the expiration of Dr. Dalal's term as a director, he will no longer serve on the Audit Committee. (3) Members of the Compensation Committee. (4) Became an executive officer in 2001. (5) Became an executive officer in 2000. Set forth below is biographical information for members of the Board of Directors whose biography information is not provided in Item 1. SeePart I, Item 1forhereof, thebiographicalinformationof the executive officers. DAVID L. ANDERSON has served as a director of the Company since November 1993. Since 1974, Mr. Anderson has been a managing director of Sutter Hill Ventures, a venture capital investment firm. Mr. Anderson currently serves on the Board of Directors of Cytel Corporation, Dionex Corporation, and Molecular Devices Corporation. He holds a B.S. in Electrical Engineering from the Massachusetts Institute of Technology and an M.B.A. from Harvard University. YOGEN K. DALAL has served as a director of the Company since November 1993. He joined Mayfield Fund ("Mayfield"), a venture capital firm, in September 1991 and has been a general partner of several venture capital funds affiliated with Mayfield since November 1992. Dr. Dalal holds a B.S. in Electrical Engineering from the India Institute of Technology, Bombay, and an M.S. and a Ph.D. in Electrical Engineering and Computer Science from Stanford University. Dr. Dalal sits on the boards of directors of Nuance Communications, Inc. and TIBCO Software, Inc. TODD A. GARRETT has served as director of the Company since January 1999. Mr. Garrettrequired by this Item iscurrently a private consultant. In 1999, Mr. Garrett retired from Procter & Gamble Company where he held various key executive positions within the company since joining it in 1985. These positions included: Vice President, Asia/Pacific; Vice President, US Beauty Care; Group President, President of Worldwide Strategic Planning, Beauty Care Products and Senior Vice President. In October 1996, he was appointedincorporated by reference to thepost of Chief Information Officer. Mr. Garrett holds a B.A. from the University of Rochester and an M.B.A. from Xavier University. 57KOH BOON HWEE has served as a director of the Company since February 1996. Since 1991, Mr. Koh has been Executive Chairman of the Wuthelam Group of Companies, a diversified Singapore company with subsidiaries engaged in, among other things, real estate development, hotel management and high technology. Since 1992, he has also served as Chairman of the Board of Singapore Telecommunications, Ltd. Mr. Koh currently serves on the Board of Directors of Excel Machine Tools Ltd., Raffles Medical Group Ltd. and Qad Inc. Mr. Koh holds a B.S. in Mechanical Engineering from the University of London and an M.B.A. from Harvard University. KLAUS LUFT has served as a director of the Company since February 2000. Mr. Luft is the founder, owner and President of MATCH (Market Access for Technology Services GmbH), a private company in Munich, Germany that provides sales and marketing services to high technology companies. He is also the founder and Chairman of the supervisory board of Artedona AG, a privately held e-commerce company established in 1999 and headquartered in Munich. Since August 1990, Mr. Luft has served as Vice Chairman and International Advisor to Goldman Sachs Europe Limited. He also serves on the Board of Directors of Dell Computer Corporation and Sagent Technology Inc. Mr. Luft is a member of the International Advisory Board of the Business School of International University of Germany. Mr. Luft received his German Arbitur in Bruchsal, Germany. CARL PASCARELLA has served as a director of the Company since September 1997. Since August 1993, Mr. Pascarella has been President and Chief Executive Officer of Visa USA. From January 1983 to August 1993, he was Assistant Chief General Manager of the Asia-Pacific region of Visa USA. Before joining Visa USA, Mr. Pascarella was Vice President of the International Division of Crocker National Bank. He also served as Vice President of Metropolitan Bank at BankersTrust Company. Mr. Pascarella holds a B.A. from the University of Buffalo and an M.B.A. from Harvard University.Proxy Statement.
ITEM 11. EXECUTIVE COMPENSATIONThe information required by this Item is incorporated by reference
fromto the sections entitled "Executive Compensation" in the Proxy Statement.97
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERSThe information required by this Item is incorporated by reference
fromto the section entitled "Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters" in the Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONSThe information required by this Item is incorporated by reference
fromto the sections entitled "Executive Compensation" and "Certain Transactions" in the Proxy Statement.58
ITEM 14. CONTROLS AND PROCEDURES(a) Based on his evaluation of our disclosure controls and procedures conducted within 90 days of the date of filing this report on Form 10-K, our Chief Executive Officer, who is also acting in the capacity of chief financial officer, has concluded that our disclosure controls and procedures (as defined in Rules 13a-14(c) and 15d-14(c) promulgated under the Securities Exchange Act of 1934) are effective.
(b) There have been no significant changes (including corrective actions with regard to significant deficiencies or material weaknesses) in our internal controls or in other factors that could significantly affect these controls subsequent to the date of the evaluation referenced in paragraph (a) above.
Limitations on the Effectiveness of Controls
The Company's management, including the Chief Executive Officer, does not expect that our disclosure controls and procedures or our internal controls will prevent all error and fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the control. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions; over time, control may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.
ITEM14.15. 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.Statements. The following Consolidated Financial Statements of the Company are included at Part II, Item 8, of this Annual Report on Form 10-K.
Reports of Independent
Auditors' ReportPublic AccountantsConsolidated Balance Sheets as of December 31,
20002002 and1999200198
Consolidated Statements of Operations for each of the years in the three-year period ended December 31,
2000.2002.Consolidated Statements of Stockholders' Equity for each of the years in the three-year period ended December 31,
2000.2002.Consolidated Statements of Cash Flows for each of the years in the three-year period ended December 31,
2000.2002.Notes to Consolidated Financial Statements
- 2.
- Financial Statement
Schedule.Schedule. Attached to this Annual Report on Form 10-K.
Report on Financial Statement Schedule
and Consent of Independent AuditorsSchedule
II --II—Valuation and Qualifying Accounts
- 3.
Exhibits.- 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.
1. On January 31, 2000 we filed a Current Report on Form 8-K (File No. 0-28252) as notice of our definitive agreement to acquire Interleaf, Inc. ("Interleaf") in a stock-for-stock transaction announced on January 26, 2000. 2. On March 1, 2000 we filed a Current Report on Form 8-K (File No. 0-28252) as notice that the Company effected a three-for-one stock split in the form of a two-for-one stock dividend on October 11, 1999. 3. On May 1, 2000 we filed a Current Report on Form 8-K (File No. 0-28252) as notice that the Company completed an acquisition of Interleaf, Inc. ("Interleaf") in a stock-for-stock transaction. 5999
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
30th31st day of March2001. BroadVision, Inc. By: /s/ Pehong Chen -------------------------------------2003.
BROADVISION, INC.
By:
/s/ PEHONG CHEN
Pehong Chen
Chairman of the Board,President AndChief Executive Officer and PresidentKNOW 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//s/ PEHONG CHEN
Pehong ChenChairman of the Board, President March 30, 2001 - ----------------------------------- andChief Executive OfficerPehong Chenand President (Principal Executive Officer)/s/ Randall C. BoltenMarch 31, 2003
/s/ DAVID L. ANDERSON
David L. Anderson
Director
March 31, 2003
/s/ TODD A. GARRETT
Todd A. Garrett
Director
March 31, 2003
/s/ KOH BOON HWEE
Koh Boon Hwee
Director
March 31, 2003
/s/ JAMES D. DIXON
James D. Dixon
Director
March 31, 2003
/s/ CARL PASCARELLA
Carl Pascarella
Director
March 31, 2003100
I, Pehong Chen, certify that:
1. I have reviewed this annual report on Form 10-K of BroadVision, Inc.;
2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) Designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and
c) Presented in this annual report my conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions):
a) All significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this annual report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
Date: March 31, 2003 /s/ PEHONG CHEN
Pehong Chen
Chief ExecutiveVice President,Officer101
I, Pehong Chen, certify that:
1. I have reviewed this annual report on Form 10-K of BroadVision, Inc.;
2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) Designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and
c) Presented in this annual report my conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions):
a) All significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this annual report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
Date: March 30, 2001 - ----------------------------------- Operations,31, 2003/s/ PEHONG CHEN
Pehong Chen
Acting Chief FinancialRandall C. BoltenOfficer(Principal Financial and Accounting Officer) /s/ David L. Anderson Director March 30, 2001 - ----------------------------------- David L. Anderson /s/ Yogen K. Dalal Director March 30, 2001 - ----------------------------------- Yogen K. Dalal /s/ Todd A. Garrett Director March 30, 2001 - ----------------------------------- Todd A. Garrett /s/ Koh Boon Hwee Director March 30, 2001 - ----------------------------------- Koh Boon Hwee /s/ Klaus Luft Director March 30, 2001 - ----------------------------------- Klaus Luft /s/ Carl Pascarella Director March 30, 2001 - ----------------------------------- Carl Pascarella60102
REPORT ON FINANCIAL STATEMENT SCHEDULE
OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTSThe audit referred to in our report dated January 24, 2003, except for Note 13 and the penultimate paragraph of Note 6, as to which the date is March 28, 2003, relating to the consolidated financial statements of BroadVision, Inc., which is contained in Item 8 of this Form 10-K, included the audit of the financial statement schedule listed in the accompanying index. This financial statement schedule is the responsibility of the Company's management. Our responsibility is to express an opinion on this financial statement schedule based upon our audit. The financial statement schedule of BroadVision, Inc. as of December 31, 2001 and 2000 and for the two years then ended were audited by other auditors who have ceased operations. Those auditors expressed an unqualified opinion on this financial statement schedule, when considered in relation to the basic financial statements taken as a whole, in their report dated March 29, 2002.
In our opinion, the financial statement schedule as of and for the year ended December 31, 2002, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.
/s/ BDO Seidman, LLP
San Jose, California
January 24, 2003, except for Note 13
and the penultimate paragraph of Note 6,
as to which the date is March 28, 2003103
THIS IS A COPY OF THE REPORT PREVIOUSLY ISSUED IN CONNECTION WITH BROADVISION, INC.'S 2001 REPORT ON FORM 10-K AND HAS NOT BEEN REISSUED BY ARTHUR ANDERSEN LLP.
REPORT ON FINANCIAL STATEMENT SCHEDULE
OF INDEPENDENT PUBLIC ACCOUNTANTSTheTo the Board of Directors and Stockholders of BroadVision, Inc.
:and Subsidiaries:We have audited in accordance with auditing standards generally accepted in the United States of America, the consolidated financial statements of BroadVision, Inc. and subsidiaries included in this annual report on Form 10-K
for the years ended December 31, 2000 and 1999and have issued our report thereon datedMarch 30, 2001.January 23, 2002. Our audits were made for the purpose of forming an opinion on the basic financial statements taken as a whole. The schedule, Schedule II, is the responsibility of the Company's management, is presented for purposes of complying with the Securities and Exchange Commission's rules and is not part of the basic financial statements. This schedule has been subjected to the auditing procedures applied in the audits of the basic financial statements and, in our opinion, fairly states in all material respects the financial data required to be set forth therein in relation to the basic financial statements taken as a whole.
/s/ ARTHUR ANDERSEN LLP
San Jose, California
March30, 2001 6129, 2002 104
BROADVISION, INC. AND SUBSIDIARIES
SCHEDULEII --II—VALUATION AND QUALIFYING ACCOUNTS(in
(in thousands)
Balance at Charged to Beginning of Costs and Balance at Period Expenses Deductions (1) End of Period ------------ ---------- -------------- -------------Year Ended December 31, 2000 $1,446 $2,687 $ 118 $4,015 ====== ====== ====== ====== Year Ended December 31, 1999 $ 788 $ 758 $ 100 $1,446 ====== ====== ====== ====== Year Ended December 31, 1998 $ 671 $ 458 $ 341 $ 788 ====== ====== ====== ======
Balance at
Beginning of
PeriodCharged to
Costs and
ExpensesDeductions (1) Balance at End of
PeriodAllowance for doubtful accounts and reserves: Year Ended December 31, 2002 $ 8,194 $ 3,979 $ 6,671 $ 5,502 Year Ended December 31, 2001 $ 4,015 $ 8,298 $ 4,119 $ 8,194 Year Ended December 31, 2000 $ 1,446 $ 2,687 $ 118 $ 4,015
- (1)
- Represents net charge-offs of specific receivables.
62105
BROADVISION, INC. ANNUAL REPORT ON FORM 10-K DECEMBER 31,20002001
INDEX TO EXHIBITSExhibit Description - ------- ----------- 3.1(1) Amended and Restated Certificate of Incorporation. 3.2(6) Certificate of Amendment of Certificate of Incorporation, dated June 28, 2000. 3.3(1) Amended and restated Bylaws. 4.1(1) References are hereby made to Exhibits 3.1 to 3.2. 4.3(1) Second Amended and Restated Investor's Rights Agreement dated April 15, 1997 among the Company and certain of its stockholders. 10.1(1)(a) Form of Indemnity Agreement between the Company and each of its directors. 10.2(6)(a) Equity Incentive Plan as amended February 8, 2000 (the "Equity Incentive Plan"). 10.3(1)(a) Form of Incentive Stock Option under the Equity Incentive Plan. 10.4(1)(a) Form of Nonstatutory Stock Option under the Equity Incentive Plan. 10.5(1)(a) Form of Nonstatutory Stock Option (Performance-Based). 10.6(1)(a) 1997 Employee Stock Purchase Plan (the "Employee Stock Purchase Plan"). 10.7(1)(a) Employee Stock Purchase Plan Offering (Initial Offering). 10.8(1)(a) Employee Stock Purchase Plan Offering (Subsequent Offering). 10.9(1)(b) Terms and Conditions dated January 1, 1997 between IONA Technologies LTD and the Company. 10.10(1) Series D Preferred Stock Option Agreement dated February 27, 1997 between the Company and Pehong Chen. 10.11(1)(a) Stock Option Plan. 10.12(1)(a) Form of Incentive Stock Option under the Stock Option Plan. 10.13(1)(a) Form of Nonstatutory Stock Option under the Stock Option Plan. 10.14(1) Lease dated February 5, 1997 between the Company and Martin/Campus Associates, L.P. 10.15(2) Loan and Security, dated July 2, 1997, between Silicon Valley Bank and the Company. 10.16(3) First Amendment to Loan and Security Agreement, dated as of February 5, 1998 between the Company and Silicon Valley Bank. 10.17(4) Agreement and Plan of Merger and Reorganization dated January 26, 2000 among the Company, Infiniti Acquisition Sub, Inc. and Interleaf, Inc. 10.18(5) Triple Net Building Lease dated April 12, 2000 between Pacific Shores Development LLC, as Lessor, and BroadVision, Inc., as Lessee, for Premises at Pacific Shores Center, Building 4, Redwood City, California. 10.19(5) Triple Net Building Lease dated February 16, 2000 between Pacific Shores Development LLC, as Lessor, and BroadVision, Inc., as Lessee, for Premises at Pacific Shores Center, Building 5, Redwood City, California. 10.20(5) Triple Net Building Lease dated April 12, 2000 between Pacific Shores Development LLC, as Lessor, and BroadVision, Inc., as Lessee, for Premises at Pacific Shores Center, Building 6, Redwood City, California. 10.21(5)(a) 2000 Non-Officer Incentive Plan 10.22(6) Building Lease dated March 21, 2000 between VEF III Funding LLC, as Landlord, and Interleaf, Inc., as Tenant, for premises located at 400 Fifth Avenue, Waltham, Massachusetts. 10.23(6) Amendment, dated April 26, 2000, of lease dated March 21, 2000 between VEF III Funding LLC, as Landlord, and Interleaf, Inc., as Tenant, for premises located at 400 Fifth Avenue, Waltham, Massachusetts 21.1 Subsidiaries of the Company. 23.1 Report on Financial Statement Schedule and Consent of KPMG LLP, Independent Auditors. 23.2 Consent of Arthur Andersen LLP. 24.1 Power of Attorney. (See page 60)
Exhibit Description 3.1(1) Amended and Restated Certificate of Incorporation.
3.2(13)
Certificate of Amendment of Certificate of Incorporation.
3.3(1)
Amended and restated Bylaws.
4.1(1)
References are hereby made to Exhibits 3.1 to 3.2.
4.3(1)
Second Amended and Restated Investor's Rights Agreement dated April 15, 1996 among the Company and certain of its stockholders.
10.1(16)(a)
Equity Incentive Plan as amended May 1, 2002 (the "Equity Incentive Plan").
10.2(1)(a)
Form of Incentive Stock Option under the Equity Incentive Plan.
10.3(1)(a)
Form of Nonstatutory Stock Option under the Equity Incentive Plan.
10.4(1)(a)
Form of Nonstatutory Stock Option (Performance-Based).
10.5(16)(a)
1996 Employee Stock Purchase Plan as amended May 1, 2002 (the "Employee Stock Purchase Plan").
10.6(1)(a)
Employee Stock Purchase Plan Offering (Initial Offering).
10.7(1)(a)
Employee Stock Purchase Plan Offering (Subsequent Offering).
10.8(1)(b)
Terms and Conditions dated January 1, 1995 between IONA Technologies LTD and the Company.
10.9(1)
Series D Preferred Stock Option Agreement dated February 27, 1996 between the Company and Pehong Chen.
10.10(1)(a)
Stock Option Plan.
10.11(1)(a)
Form of Incentive Stock Option under the Stock Option Plan.
10.12(1)(a)
Form of Nonstatutory Stock Option under the Stock Option Plan.
10.13(2)
Lease dated February 5, 1997 between the Company and Martin/Campus Associates, L.P.
10.14(3)
Loan and Security Agreement dated July 2, 1997 between the Company and Silicon Valley Bank.
10.15(4)
First Amendment to Loan and Security Agreement dated February 5, 1998 between the Company and Silicon Valley Bank.
10.16(5)
Agreement and Plan of Merger and Reorganization dated January 26, 2000 among the Company, Infiniti Acquisition Sub, Inc. and Interleaf, Inc.
10.17(6)
Triple Net Building Lease dated April 12, 2000 between Pacific Shores Development LLC, as Lessor, and the Company, as Lessee, for Premises at Pacific Shores Center, Building 4, Redwood City, California.
10.18(6)
Triple Net Building Lease dated February 15, 2000 between Pacific Shores Development LLC, as Lessor, and the Company, as Lessee, for Premises at Pacific Shores Center, Building 5, Redwood City, California.106
10.19(6)
Triple Net Building Lease dated February 15, 2000 between Pacific Shores Development LLC, as Lessor, and the Company, as Lessee, for Premises at Pacific Shores Center, Building 6, Redwood City, California.
10.20(7)(a)
2000 Non-Officer Incentive Plan.
10.21(8)
Lease dated March 21, 2000 between VEF III Funding LLC, as Landlord, and Interleaf, Inc., as Tenant, for premises located at 400 Fifth Avenue, Waltham, Massachusetts.
10.22(8)
Amendment of Lease dated April 26, 2000 between VEF III Funding LLC, as Landlord, and Interleaf, Inc., as Tenant, for premises located at 400 Fifth Avenue, Waltham, Massachusetts.
10.23(9)(b)
Independent Software Vendor Agreement dated June 30, 1998 between the Company and IONA Technologies, PLC, as amended.
10.24(10)
Fourth Loan Modification Agreement dated August 3, 2001 between the Company and Silicon Valley Bank.
10.25(11)
Loan Modification Agreement dated November 1, 2001 between the Company and Silicon Valley Bank.
10.26(11)(a)
Offer Letter dated October 19, 2001 between the Company and Francis Barton.
10.27(12)
Amended and Restated Loan and Security Agreement dated March 31, 2002 between the Company and Silicon Valley Bank.
10.28(14)
Agreement to Resolve Certain Tenant Improvement Disputes with Respect to B-4, B-5 & B-6 dated January 8, 2002 between the Company and Pacific Shores Development LLC.
10.29(14)
First Amendment to Lease (Building 4 and 5—1700 and 1800 Seaport Boulevard) (Lease Termination and Mutual General Release Agreement) dated May 9, 2002 between the Company and Pacific Shores Development LLC.
10.30(14)
First Amendment to Lease (Building 6—1600 Seaport Boulevard) dated May 9, 2002 between the Company and Pacific Shores Development LLC.
10.31(14)
Offer Letter dated May 14, 2002 between the Company and Andrew Nash.
10.32(15)
Offer Letter dated September 3, 2002 between the Company and Philip L. Oreste.
10.33(15)
Form of Indemnity Agreement between the Company and each of its directors and executive officers.
21.1
Subsidiaries of the Company.
23.2
Consent of BDO Seidman, LLP.
24.1
Power of Attorney, pursuant to which amendments to this Annual Report on 10-K may be filed, is included on the signature pages hereto.
99.1
CEO and Acting CFO Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C.§ 1350, as adopted)
- (1)
- Incorporated by reference to the Company's
ProxyRegistration Statement on Form S-1 filed onSeptember 13, 1999.April 19, 1996 as amended by Amendment No. 1 filed on May 9, 1996, Amendment No. 2 filed on May 29, 1996 and Amendment No. 3 filed on June 17, 1996.107
- (2)
- Incorporated by reference to the Company's Form 10-K for the fiscal year ended December 31, 1996 filed on March 31, 1997 (SEC File No. 000-28252).
- (3)
- Incorporated by reference to the Company's Form 10-Q for the quarter ended
SeptemberJune 30, 1997 filed onNovember 12, 1997. 63(3)August 14, 1997 (SEC File No. 000-28252).- (4)
- Incorporated by reference to the Company's Registration Statement on Form S-3 filed on March 4,
1998. (4)1998 (SEC File No. 333-47339).- (5)
- Incorporated by reference to the Company's Registration Statement on Form S-4 filed on March 6, 2000.
(5)- (6)
- Incorporated by reference to the Company's Form 10-Q for the quarter ended March 31, 2000 filed on May 15, 2000.
(6)- (7)
- Incorporated by reference to the Company's Registration Statement on Form S-8 filed on April 19, 2000.
- (8)
- Incorporated by reference to the Company's Form 10-Q for the quarter ended June 30, 2000 filed on August 14, 2000.
- (9)
- Incorporated by reference to the Company's Form 10-Q for the quarter ended June 30, 2001 filed on August 14, 2001.
- (10)
- Incorporated by reference to the Company's Form 10-Q for the quarter ended September 30, 2001 filed on November 14, 2001.
- (11)
- Incorporated by reference to the Company's Form 10-K for the fiscal year ended December 31, 2001 filed on April 1, 2002.
- (12)
- Incorporated by reference to the Company's Form 10-Q for the quarter ended March 31, 2002 filed on May 16, 2002.
- (13)
- Incorporated by reference to the Company's Proxy Statement filed on May 14, 2002.
- (14)
- Incorporated by reference to the Company's Form 10-Q for the quarter ended June 30, 2002 filed on August 14, 2002.
- (15)
- Incorporated by reference to the Company's Form 10-Q for the quarter ended September 30, 2002 filed on November 14, 2002.
- (16)
- Incorporated by reference to the Company's Registration Statement on Form S-8 filed on August 1, 2002.
- (a)
- Represents a management contract or compensatory plan or arrangement.
- (b)
- Confidential treatment requested.
64
108