Back to GetFilings.com
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934.
(Mark One)
[X]ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended January 31, 2000
OR
[_]TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
Commission file number: 0-22369
----------------
BEA SYSTEMS, INC.
(Exact Name of Registrant as Specified in Its Charter)
Delaware 77-0394711
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
2315 North First Street
San Jose, California 95131
(Address of Principal Executive Offices, Zip Code)
(408) 570-8000
(Registrant's telephone number, including area code)
----------------
Securities registered under Section 12(b) of the Act:
None
Securities registered under Section 12(g) of the Act:
Common Stock
----------------
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes [X] No [_]
Indicate by check mark if 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 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. [_]
The aggregate market value of the voting and non-voting common equity held
by non-affiliates of the registrant, computed by reference to the closing
price at which the common equity was sold on March 31, 2000, as reported on
the Nasdaq National Market, was approximately $10,794,968,000. Shares of
common equity held by each officer and director have been excluded in that
such persons may be deemed to be affiliates. This determination of affiliate
status does not reflect a determination that such persons are affiliates for
any other purposes.
As of March 31, 2000, there were approximately 371,585,000 shares of the
Registrant's common stock outstanding, as adjusted to reflect the Registrant's
two-for-one stock split effected on April 24, 2000.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
BEA SYSTEMS, INC.
FORM 10-K
For the Fiscal Year Ended January 31, 2000
INDEX
Page
----
PART I.
Item 1. Business................................................................................ 1
Item 2. Properties.............................................................................. 7
Item 3. Legal Proceedings....................................................................... 7
Item 4. Submission of Matters to a Vote of Security Holders..................................... 8
PART II.
Item 5. Market for Registrant's Common Stock and Related Stockholder Matters.................... 8
Item 6. Selected Financial Data................................................................. 9
Item 7. Management's Discussion and Analysis of Financial Conditions and Results of Operations.. 10
Item 7A. Quantitative and Qualitative Disclosures about Market Risk.............................. 25
Item 8. Consolidated Financial Statements and Supplementary Data................................ 27
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.... 55
PART IV.
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K........................ 55
Signatures....................................................................................... 58
i
PART I
FORWARD-LOOKING INFORMATION
This Annual Report on Form 10-K includes "forward-looking statements"
within the meaning of Section 27A of the Securities Act and Section 21E of the
Exchange Act. All statements in this Annual Report other than statements of
historical fact are "forward-looking statements" for purposes of these
provisions, including any statements of the plans and objectives for future
operations and any statement of assumptions underlying any of the foregoing.
Statements that include the use of terminology such as "may," "will,"
"expects," "plans," "anticipates," "estimates," "potential," or "continue," or
the negative thereof or other comparable terminology are forward-looking
statements. Forward-looking statements include (i) in Item 1, all text under
the heading "Business--Strategy" and statements regarding continued hiring in
direct sales, support and professional services, devoting substantial
resources to product development, and continuing to license and acquire
software technologies and businesses, and (ii) in Item 7, statements regarding
additional acquisitions, return on investment, investing in services
offerings, expected timing and amount of amortization expenses, investment in
sales channel expansion and marketing programs, and future hiring. These
forward-looking statements involve risks and uncertainties, and it is
important to note that BEA's actual results could differ materially from those
projected or assumed in such forward-looking statements. Among the factors
that could cause actual results to differ materially are the factors detailed
under the heading "Management's Discussion and Analysis of Financial Condition
and Results of Operations--Factors That May Impact Future Operating Results."
All forward-looking statements and risk factors included in this document are
made as of the date hereof, based on information available to BEA as of the
date hereof, and BEA assumes no obligation to update any forward-looking
statement or risk factor. You should consult the risk factors listed from time
to time in the Company's Reports on Forms 10-Q and 8-K.
ITEM 1. BUSINESS.
Overview
BEA Systems, Inc. ("BEA" or the "Company") is a leading provider of e-
commerce infrastructure software that helps companies of all sizes build e-
commerce systems that extend investments in existing computer systems and
provide the foundation for running a successful integrated e-business. BEA's
products are marketed and sold worldwide through a network of BEA sales
offices, as well as hardware vendors, independent software vendors ("ISVs")
and systems integrators ("SIs") that are BEA partners and distributors. The
Company's products have been adopted in a wide variety of industries,
including commercial and investment banking, securities trading,
telecommunications, airlines, retail, manufacturing, package delivery,
insurance and government, in many cases using the Internet as a system
component. BEA's products serve as a platform or integration tool for
applications such as billing, provisioning, customer service, electronic funds
transfers, ATM networks, securities trading, Web-based banking, Internet
sales, supply chain management, scheduling and logistics, and hotel, airline
and rental car reservations. Licenses for BEA products are typically priced on
a per-user, per-application basis, but BEA also offers licenses priced per
server and time-based enterprise licenses.
The Company's core business has been providing infrastructure for high-
volume transaction systems, such as telecommunications billing applications,
commercial bank ATM networks and account management systems, credit card
billing systems and securities trading account management systems. These
distributed systems must scale to process high transaction volumes and
accommodate large numbers of users. As the Internet and e-commerce continue to
develop, increasing transaction loads are being placed on Web-based systems,
such as retail and business-to-business e-commerce sites. In addition, systems
that historically had been strictly internal are now being extended to the
Internet, such as telecommunications, bank and credit card account
information.
BEA provides an e-commerce transaction platform that is designed to address
this demand and help companies quickly develop and integrate e-business
initiatives and reliably deliver a wider range of dynamic, personalized
services.
1
Industry Background
Over the past decade, the information systems of many large organizations
have evolved from traditional mainframe-based systems to distributed computing
environments. This evolution has been driven by the benefits offered by
distributed computing, including lower incremental technology costs, faster
application development and deployment, increased flexibility, and improved
access to business information. Despite these benefits, large-scale mission-
critical applications that enable and support fundamental business processes,
such as airline reservations, credit card processing, and customer billing and
support systems, have largely remained in mainframe environments. For several
decades, the high levels of reliability, scalability, security, manageability
and control required for these complex, transaction-intensive systems have
been provided by application server functionality included in the mainframe
operating system. Mainframe environments, however, suffer from several
shortcomings, including inflexibility, lengthy development and maintenance
cycles, and limited, character-based user interfaces. Increasingly, these
shortcomings are forcing many organizations to seek solutions, such as those
offered by BEA, that will enable them to overcome the limitations of
distributed computing for mission-critical applications while providing the
robust computing infrastructure previously unavailable outside the mainframe
environment.
In addition, many businesses are using the World Wide Web as a node of
these infrastructures. Businesses use the Internet as a means of selling
products to consumers and distributors, buying components or whole products
from suppliers, opening new customer accounts, scheduling service
installation, providing account information and customer care, enabling
reservations, funds transfers, bill payments and securities trading, and
gathering information about customers and their buying habits. Many businesses
also use intranets for functions such as inventory control, decision support,
logistics, reservations, customer care and provisioning, and sometimes use
extranets to make similar information and applications available to their
suppliers or distributors. Achieving the full benefits of the Internet and e-
commerce requires fully integrating business-to-consumer or business-to-
business Web-based applications with existing enterprise applications, such as
shipping, inventory control, billing, payroll, and general ledger. In order to
fully integrate these internal applications with Web-based systems, the
internal applications must be electronically linked to each other and must be
built on a flexible, reliable, scalable, secure infrastructure that can
connect to the Web and support the demanding loads that result from heavy
Internet traffic.
An e-commerce transaction involves much more than simply the purchase of an
item over the Web. In order to perform a single e-business transaction, a
robust e-commerce system must process several distinct computer transactions.
A typical e-commerce request, whether a consumer purchase, a corporate
procurement of supplies, or an information search, generates a series of
interconnected computer transactions. These computer transactions may include
determining whether the ordered item is in stock, determining where the item
is located, scheduling the item for shipping, processing payment and recording
the transaction in the Company's financial records. In addition, many Web
sites now gather information about users as they navigate the site. This
information is stored, identified with the particular user, and compared with
past behavior of the same and other users in order to personalize online
interaction by recommending specific merchandise, offering personalized
pricing, and displaying targeted advertising, all based on the user's profile.
As e-commerce grows, an increasing number of e-business transactions generates
increasing numbers of computer transactions, driving the demand for more
scalable and reliable systems for managing them.
BEA provides a broad family of cross-platform software and services for
creating robust, reliable, personalized e-commerce sites, for robust, reliable
back-end systems that support e-commerce sites and distributed operations, and
for integrating these environments. BEA's products and services enable
mission-critical, distributed applications to work seamlessly in
client/server, Internet and legacy environments. Customers use BEA products as
a deployment platform for Web-based applications, as a deployment platform for
custom and packaged applications, and as a means for robust enterprise
application integration ("EAI") among mainframe, client/server and Web-based
applications. BEA also provides Enterprise Java Bean ("EJB") based
2
components that perform common e-commerce functions, such as personalization,
shopping cart, order tracking, inventory, and pricing. These components can be
rapidly assembled into Web-based applications, and the application
functionality provided by these components can easily be augmented with
additional Java-based components developed by the end user, a systems
integrator, a packaged application vendor, or BEA's consulting group.
Customers also rely on BEA professional services offerings to develop system
architectures, application designs, components or custom applications, to
customize packaged applications and to integrate applications. Using BEA
platforms, application components and services, BEA customers have been able
to create robust e-commerce sites in a matter of weeks.
Strategy
Our strategy is to extend our current leadership position in distributed
transaction processing and Java-based Web application servers by penetrating
new customer accounts, particularly e-commerce sites, through any of our three
product lines or our professional services, and then to proliferate within
those customers, servicing higher usage volumes and selling additional
products. Key elements of our strategy include:
. Increasing our direct and indirect sales capacity by hiring more direct
sales representatives and by partnering with hardware vendors, systems
integrators and value-added resellers. At the end of fiscal 2000, BEA
had over 340 quota-bearing sales representatives, a 70 percent increase
over the end of fiscal 1999.
. Continuing to aggressively promote the embedding of our Web application
server products in Web applications being developed by ISVs. ISVs who
build on BEA application server products become resellers of those
products, tied to sales of the ISV's packaged applications, and BEA
typically receives a royalty on those sales.
. Generating repeat business from existing customers through servicing
increasing usage volumes and selling additional products or services.
BEA often generates repeat business as customers increase their system
capacity, expand into new territories or lines of business, or increase
the number of applications installed on BEA platforms.
. Enhancing our technology leadership through research and development
efforts and through acquisition of complementary companies, products and
technologies, to strengthen our end-to-end e-commerce platform offering
and to offer increasing e-commerce application functionality. Through
BEA's research and development efforts or acquisitions, BEA has embraced
new standards, such as extensible markup language ("XML") and wireless
application protocol ("WAP"), and has added important features and
functionality to its product line. BEA products have won several key
industry awards and have received strong recommendations from key
industry analysts.
. Developing new services offerings that focus on accelerating delivery of
end-to-end e-commerce solutions based on robust transaction and
application platforms. BEA continues to enhance its services offerings
through acquisitions and aggressive hiring.
. Driving the continuing adoption of enterprise Java, object-based
solutions and e-commerce through development of products and
participation in standards-setting bodies. BEA believes that EJB,
object-based computing at the enterprise level, and electronic commerce
will be important drivers for boosting demand for BEA solutions. BEA is
participating in EJB standards setting groups, and is also providing the
most complete implementation of EJB available today.
Customers
The total number of licensees of BEA products and solutions is greater than
4,000 worldwide. BEA's target end-user customers are organizations with
sophisticated, high-end information systems with numerous, often
3
geographically-dispersed, users and diverse, heterogeneous computing
environments. Typical customers are mainframe-reliant, have large-scale
client/server implementations that handle very high volumes of business
transactions, or have Web-based applications with large and unpredictable
usage volumes. No customer accounted for more than 10 percent of total
revenues in any of the fiscal years 2000, 1999 or 1998.
Sales and Marketing
BEA's sales strategy is to pursue opportunities worldwide within large
organizations and organizations that are establishing e-commerce businesses,
through its direct sales, professional services and technical support
organizations, complemented by indirect sales channels such as hardware OEMs,
ISVs and systems integrators. The Company currently intends to continue to add
to its direct sales, support and professional services organizations in major
worldwide markets.
Direct Sales Organization. BEA markets its software and services primarily
through its direct sales organization. As of January 31, 2000, BEA had over
1250 employees in consulting, training, sales, support and marketing,
including over 340 sales representatives, located in 70 offices in 29
countries. The Company typically uses a consultative, solution-oriented sales
model that entails the collaboration of technical and sales personnel to
formulate proposals to address specific customer requirements, often in
conjunction with hardware, software and services providers. Because the
Company's solutions are typically used as a platform or integration tool for
e-commerce initiatives or other applications that are critical to a customer's
business, the Company focuses its initial sales efforts on senior executives
and information technology department personnel who are responsible for such
initiatives and applications.
Targeting Developers. BEA also markets its software directly to system and
application developers. BEA makes trial developers copies of many of its
products available for free download over its Web site. Over 100,000 copies
were downloaded in fiscal 2000. In addition, BEA periodically provides
developer training and trial licenses through technical seminars in various
locations worldwide.
Strategic Relations. An important element of the Company's sales and
marketing strategy is to expand its relationships with third parties and
strategic partners to increase the market awareness, demand and acceptance of
BEA and its solutions. Partners have often generated and qualified sales
leads, made initial customer contacts, assessed needs and recommended use of
BEA solutions prior to BEA's introduction to the customer. A strategic partner
can provide customers with additional resources and expertise, especially in
vertical markets in which the partner has expertise, to help meet customers'
system definition and application development requirements. Types of strategic
alliances include:
System platform companies. BEA's partners often act as resellers of BEA
solutions, either under the BEA product name or integrated with the platform
vendor's own software products, or recommend BEA products to their customers
and prospects who are planning to implement high-end, mission-critical
applications and Web-based applications on their hardware platform.
Packaged application software developers. BEA licenses its software to
packaged application software vendors. These vendors embed BEA software as an
infrastructure for the applications they supply; giving these applications
increased distribution, scalability and portability across all platforms on
which the embedded BEA product runs. Customers can also easily integrate other
applications built using BEA solutions into these packaged applications.
Systems integrators and independent consultants. Systems integrators often
refer their customers to BEA, utilize BEA as a subcontractor in some
situations, and build custom solutions on BEA products. BEA also works
cooperatively with independent consulting organizations, often being referred
to prospective customers by professional services organizations with expertise
in high-end transactional applications.
Distributors. To supplement the efforts of its direct sales force, BEA uses
software distributors to sell its products in Europe, Asia, Latin America and,
to a lesser degree, North America. As of January 31, 2000, the Company was
represented by over 30 distributors.
4
Professional Services. The Company believes that its professional services
organization plays a key role in facilitating initial license sales and
enabling customers to successfully architect, design, develop, deploy and
manage systems and applications. Fees for professional services are generally
charged on a time and materials basis and vary depending upon the nature and
extent of services to be performed.
Marketing. The Company's marketing efforts are directed at broadening the
demand for BEA products and solutions by increasing awareness of the benefits
of using the Company's products to build mission-critical distributed and Web-
based applications. Marketing efforts are also aimed at supporting the
Company's worldwide direct and indirect sales channels. Marketing personnel
engage in a variety of activities including conducting public relations and
product seminars, issuing newsletters, sending direct mailings, preparing
sales collateral and other marketing materials, coordinating the Company's
participation in industry trade shows, programs and forums, and establishing
and maintaining relationships with recognized industry analysts and press. The
Company's senior executives are frequent speakers at industry forums in many
of the major markets the Company serves.
Customer and Distributor Support
The Company believes that a high level of customer support is integral to
the successful marketing and sale of BEA solutions. Mission-critical
applications require rapid support response and problem resolution. The
Company's world-wide support and sales presence enhances its ability to
rapidly respond, and to handle support in local languages, which the Company
believes gives it an advantage over many of its competitors. The Company's
direct sales to customers include a basic level of support. Comprehensive 7x24
support contracts are also available, typically on an annual fee basis. In
addition, the Company offers introductory and advanced classes and training
programs at the Company's offices, customer sites and training centers
worldwide. Telephone hot line support is offered worldwide at either a
standard or around-the-clock level, depending on customer requirements. The
Company maintains product and technology experts on call at all times
worldwide and has support call centers located in San Jose, California; Paris,
France; Yokohama, Japan; Seoul, Korea and Brisbane, Australia.
Competition
The market for application server and integration software, and related
software components and services, is highly competitive. Our competitors are
diverse and offer a variety of solutions directed at various segments of this
marketplace. These competitors include operating system vendors such as IBM,
Sun Microsystems and database vendors such as Oracle. Microsoft has released
products that include certain application server functionality and has
announced that it intends to include application server and integration
functionality in future versions of its operating systems, including future
versions of Windows 2000. Oracle is the primary relational database vendor
offering products that are intended to serve as alternatives to our enterprise
application server and integration solutions. In addition, there are companies
offering and developing application server and integration software products
and related services that directly compete with products we offer. Further,
software development tool vendors typically emphasize the broad versatility of
their tool sets and, in some cases, offer complementary software that supports
these tools and performs basic application server and integration functions.
Last, internal development groups within prospective customers' organizations
may develop software and hardware systems that may substitute for those we
offer. A number of our competitors and potential competitors have longer
operating histories, significantly greater financial, technical, marketing and
other resources, greater name recognition and a larger installed base of
customers than us.
Our principal competitors currently include hardware vendors who bundle
their own application server and integration software products, or similar
products, with their computer systems and database vendors that advocate
client/server networks driven by the database server. IBM and Sun Microsystems
are the primary hardware vendors who offer a line of application server and
integration solutions for its customers. IBM's sale of application server and
integration functionality along with its IBM proprietary hardware systems
requires us to compete with IBM in its installed base, where IBM has certain
inherent advantages due to its significantly
5
greater financial, technical, marketing and other resources, greater name
recognition and the integration of its enterprise application server and
integration functionality with its proprietary hardware and database systems.
These inherent advantages allow IBM to bundle, at a discounted price,
application functionality with computer hardware and software sales. Due to
these factors, if we do not differentiate our products based on functionality,
interoperability with non-IBM systems, performance and reliability, and
establish our products as more effective solutions to customers' needs our
revenues and operating results will suffer.
Microsoft has announced that it intends to include certain application
server and integration functionality in future versions of its Windows 2000
operating system. Microsoft has also introduced a product that includes
certain basic application server functionality. The bundling of competing
functionality in versions of Windows requires us to compete with Microsoft in
the Windows marketplace, where Microsoft has certain inherent advantages due
to its significantly greater financial, technical, marketing and other
resources, its greater name recognition, its substantial installed base and
the integration of its application server and integration functionality with
Windows. We need to differentiate our products from Microsoft's based on
scalability, functionality, interoperability with non-Microsoft platforms,
performance and reliability, and need to establish our products as more
effective solutions to customers' needs. We may not be able to successfully
differentiate our products from those offered by Microsoft, and Microsoft's
entry into the application server and integration market could materially
adversely affect our business, operating results and financial condition.
In addition, current and potential competitors may make strategic
acquisitions or establish cooperative relationships among themselves or with
third parties, thereby increasing the ability of their products to address the
needs of our current and prospective customers. Accordingly, it is possible
that new competitors or alliances among current and new competitors may emerge
and rapidly gain significant market share. Such competition could materially
adversely affect our ability to sell additional software licenses and
maintenance, consulting and support services on terms favorable to us.
Further, competitive pressures could require us to reduce the price of our
products and related services, which could materially adversely affect our
business, operating results and financial condition. We may not be able to
compete successfully against current and future competitors and any failure to
do so would have a material adverse effect upon our business, operating
results and financial condition. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Factors That May Impact Future
Operating Results--If we do not effectively compete with new and existing
competitors, our revenues and operating margins will decline."
Product Development
BEA's total research and development expenses were approximately $61.0
million, $42.6 million and $29.2 million in fiscal 2000, 1999 and 1998,
respectively. The Company believes that its success will depend largely upon
its ability to enhance existing products and develop or acquire new products
that meet the needs of the rapidly evolving application server and application
component marketplaces, and increasingly sophisticated and demanding
customers. The Company intends to continue to devote substantial resources to
expanding its product offerings, introducing new products and services, and
offering higher levels of integration among its products.
The Company has made substantial investments in technology acquisitions and
product development. BEA TUXEDO was originally developed by AT&T Bell Labs,
and had been revised by UNIX System Labs and Novell before BEA became the
developer of the product in February 1996. BEA WebLogic was acquired through
BEA's merger with WebLogic, Inc. in September 1998. Important additional
products and technologies were gained through other of the Company's
acquisitions. The Company intends to continue to consider the licensing and
acquisition of complementary software technologies and businesses where
appropriate. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations--Factors That May Impact Future Operating Results--
If we cannot successfully integrate our past and future acquisitions, our
revenues may decline and expenses may increase."
The Company's software development activities are conducted in various
sites throughout the United States including San Jose and San Francisco,
California; Dallas, Texas; Maynard, Massachussetts; Liberty Corners,
6
New Jersey; and Nashua, New Hampshire. As of January 31, 2000, the Company had
a research and software development staff of over 340 professionals. The
Company intends to continue to recruit and hire experienced software
developers. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations--Factors That May Impact Future Operating Results--
If the market for application servers, application integration and application
component software does not grow as quickly as we expect, our revenues will be
harmed."
Intellectual Property and Licenses
Our success depends upon our proprietary technology. We rely on a
combination of patent, copyright, trademark and trade secret rights,
confidentiality procedures and licensing arrangements to establish and protect
our proprietary rights. It is possible that other companies could successfully
challenge the validity or scope of our patents and that our patents may not
provide a competitive advantage to us.
As part of our confidentiality procedures, we generally enter into non-
disclosure agreements with our employees, distributors and corporate partners
and into license agreements with respect to our software, documentation and
other proprietary information. Despite these precautions, third parties could
copy or otherwise obtain and use our products or technology without
authorization, or develop similar technology independently. In particular, we
have, in the past, provided certain hardware OEMs with access to our source
code, and any unauthorized publication or proliferation of this source code
could materially adversely affect our business, operating results and
financial condition. It is difficult for us to police unauthorized use of our
products, and although we are unable to determine the extent to which piracy
of our software products exists, software piracy is a persistent problem.
Effective protection of intellectual property rights is unavailable or limited
in certain foreign countries. The protection of our proprietary rights may not
be adequate and our competitors could independently develop similar
technology, duplicate our products, or design around patents and other
intellectual property rights we hold. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Factors That May
Impact Future Operating Results--If we fail to adequately protect our
intellectual property rights, competitors may use our technology and
trademarks, which could weaken our competitive position, reduce our revenues
and increase our costs."
Employees
As of January 31, 2000, BEA had approximately 1,900 full-time employees,
including 340 in research and development, 1250 in consulting, training,
sales, support and marketing and 330 in administration. None of BEA's
employees is represented by a collective bargaining agreement, and BEA has
never experienced any work stoppage. BEA considers its relations with its
employees to be good.
ITEM 2. PROPERTIES.
BEA's executive offices and those related to product development, corporate
marketing and administrative functions, totaling approximately 224,000 square
feet, are located in San Jose, California under leases expiring in 2007. The
Company has signed agreements to sublease approximately 87,000 square feet.
The Company also leases office space in various locations throughout the
United States for sales, support and development personnel and BEA's foreign
subsidiaries lease space for their operations. The Company owns substantially
all of the equipment used in its facilities, except equipment held under
capitalized lease arrangements. The Company believes its existing facilities
will be adequate to meet its anticipated needs for the foreseeable future. See
Note 16 of Notes to Consolidated Financial Statements for information
regarding the Company's lease obligations.
ITEM 3. LEGAL PROCEEDINGS.
The Company is not currently party to any material legal proceedings. The
Company is subject to legal proceedings and claims that arise in the ordinary
course of its business. While management currently believes the amount of
ultimate liability, if any, with respect to these actions will not materially
affect the financial
7
position, results of operations, or liquidity of the Company, the ultimate
outcome of any litigation is uncertain. Were an unfavorable outcome to occur,
the impact could be material to the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
On April 6, 2000, a special meeting of stockholders of BEA was held to
consider an amendment to the Company's Amended and Restated Certificate of
Incorporation to increase the number of shares of Common Stock and Class B
Common Stock, par value $0.001 per share, which the Company is authorized to
issue to 1,035,000,000 shares. The Company's Board of Directors had previously
authorized a two-for-one stock split, to be effected in April 2000 in the form
of a stock dividend, conditional upon stockholder approved of the amendment.
The number of votes cast for the amendment was 285,882,348. The number of
votes cast against or withheld for the amendment was 14,852,742. The number of
abstentions and broker non-votes for the amendment was 37,712. The amendment
was approved.
PART II
Note: On each of December 19, 1999 and April 24, 2000, the Company effected
two-for-one common stock splits in the form of stock dividends. All common
stock share information and per share amounts in this Annual Report on Form
10-K have been retroactively adjusted to reflect the effects of the stock
splits.
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS.
Since its initial public offering on April 11, 1997, the Company's common
stock has traded on the Nasdaq National Market under the symbol "BEAS."
According to the Company's transfer agent, the Company had approximately 716
stockholders of record as of March 31, 2000. Because many of such shares are
held by brokers and other institutions on behalf of stockholders, the Company
is unable to estimate the total number of stockholders represented by these
record holders.
The following table sets forth the high and low sales prices, as adjusted
to reflect the two-for-one stock splits on each of December 19, 1999 and April
24, 2000, reported on the Nasdaq National Market for BEA common stock for the
periods indicated:
Low High
------ ------
Fiscal year ended January 31, 2000:
Fourth Quarter.............................................. $11.46 $47.50
Third Quarter............................................... 5.25 11.60
Second Quarter.............................................. 3.67 8.03
First Quarter............................................... 3.33 4.63
Fiscal year ended January 31, 1999:
Fourth Quarter.............................................. $ 2.17 $ 6.63
Third Quarter............................................... 3.13 6.32
Second Quarter.............................................. 4.57 6.97
First Quarter............................................... 4.88 7.41
The Company has never declared or paid any cash dividends on its common
stock. The Company currently intends to invest cash generated from operations,
if any, to support the development of its business and does not anticipate
paying cash dividends for the foreseeable future. Payment of future dividends,
if any, will be at the discretion of the Company's Board of Directors after
taking into account various factors, including the Company's financial
condition, operating results and current and anticipated cash needs.
8
During fiscal 2000, the Company had the following issuances of equity
securities that were not either registered under the Securities Act of 1933,
as amended, (the "Securities Act") or exempt from registration under
Regulation S of the Securities Act:
On November 19, 1999, the Company acquired The Theory Center ("TTC")
through the issuance of 7,270,828 shares of BEA common stock and the exchange
of TTC options for options to purchase 3,642,400 shares of BEA common stock.
In issuing such securities, the Company relied upon Section 4(2) of the
Securities Act as transactions by an issuer not involving any public offering.
In connection with each such transaction, the purchasers represented their
intention to acquire the securities for investment only and not with a view
to, or for sale in connection with, any distribution thereof, and appropriate
legends were affixed to the securities issued in such transactions. The
purchasers had adequate access to information about the Company.
In December 1999, the Company issued $550 million principal amount of 4%
Convertible Subordinated Notes due December 15, 2006 ("2006 Notes"), which are
convertible, at the option of the debt holders, into approximately 15,873,000
shares of common stock. Such notes were sold to Qualified Institutional
Buyers, as that term is defined in Rule 144A under the Securities Act.
ITEM 6. SELECTED FINANCIAL DATA:
The following selected consolidated financial data should be read in
conjunction with the Consolidated Financial Statements and Notes thereto and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" appearing elsewhere in this Annual Report on Form 10-K.
As of or for the fiscal year ended January 31,
--------------------------------------------------
2000 1999(1) 1998(1) 1997(1) 1996
---------- -------- -------- -------- --------
(in thousands, except per share data)
Net revenues............ $ 464,410 $289,042 $166,447 $ 64,566 $ 5,133
Net loss................ (19,574) (51,582) (22,912) (87,834) (17,740)
Net loss per share,
basic and diluted...... (0.06) (0.18) (0.11) (2.21) (0.19)
Total assets............ 1,258,841 403,011 174,203 59,276 18,953
Long-term obligations... 578,489 250,112 766 49,540 4,287
Redeemable convertible
preferred stock........ - - - 83,120 24,448
- --------
(1) Restated to include the results of Leader Group, Inc. and WebLogic, Inc.,
which were acquired in pooling of interests transactions.
9
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
Overview
BEA Systems, Inc. ("BEA" or the "Company") is a leading provider of e-
commerce infrastructure software for e-commerce applications. BEA's products
and services enable scalable and reliable e-commerce applications to work
seamlessly in client/server, Internet, and legacy environments. BEA provides
transactional, messaging, and distributed object-based software, as well as an
industry-leading Java Web application server, for developing and deploying
these e-commerce applications and for connecting e-commerce applications to
legacy and mainframe applications. BEA also provides component-based
application solutions for delivering scalable and reliable e-commerce
applications. In addition to its broad software product line, BEA provides
complete solutions to its customers through its extensive alliance network,
and a full range of services, including consulting, training, and support.
BEA's revenues are derived from fees for software licenses, customer support,
education and consulting services.
Acquisitions. Since its inception, BEA has acquired several companies and
product lines, and distribution rights to product lines. Through these
acquisitions, BEA has added additional product lines, additional functionality
to its existing products, additional direct distribution capacity and
additional service capacity. These acquisitions have resulted in significant
charges to BEA's operating results in the periods in which the acquisitions
were completed and have added intangible assets to BEA's balance sheet, the
values of which are being amortized and charged to BEA's operating results
over periods ranging from eight to twenty quarters after completion of the
acquisitions. BEA's management views the e-commerce infrastructure software
market as growing but that companies serving that market are consolidating,
and that this consolidation presents an opportunity for BEA to further expand
its product lines and functionality, distribution capacity and service
offerings and to add new, related lines of business. BEA anticipates that it
will make additional, perhaps material, acquisitions in the future. The timing
of any such acquisitions is impossible to predict and the charges associated
with any such acquisitions could materially adversely affect BEA's results of
operations beginning in the periods in which any such acquisitions are
completed.
Investment in Distribution Channel. BEA has been and is currently investing
in building its sales capacity by aggressively hiring sales and technical
sales support personnel, as well as aggressively pursuing partnerships with
system platform companies, packaged application software developers, systems
integrators and independent consultants, independent software tool vendors,
and distributors. This investment results in an immediate increase in
expenses, especially in sales and marketing, although the return on such
investment, if any, is not anticipated to occur until future periods.
Product Development. In April 1999, BEA announced a project to develop and
market a set of solutions for enterprise application integration and
component-based application development, especially in the area of electronic
commerce. These efforts were significantly expanded with the acquisition of
The Theory Center, Inc. ("TTC") in November 1999, and the announcement of an
internal development project known as "Project E-Collaborate" in February
2000. BEA's planned investment in these efforts may affect BEA's anticipated
overall financial results, particularly services revenues as a percentage of
total revenues, cost of revenues as a percentage of total revenues, and
research and development expense as a percentage of total revenues, and may
create product transition concerns in BEA's customer base. In addition,
investment in these projects results in an immediate increase in expenses,
especially in research and development, although the return on such
investment, if any, is not anticipated to occur until future periods. These
expenses adversely affect BEA's operating results in the short-term and also
in the long-term if the anticipated benefits of such investment do not
materialize.
Change in Sales Cycles. Since mid fiscal 1999, BEA has experienced changes
in sales cycles for its products. In September 1998, BEA completed its merger
with WebLogic, Inc. ("WebLogic"), whose products tend to have a shorter sales
cycle than BEA products at that time. Beginning in the second half of fiscal
1999, an increasing number of BEA customers began negotiating licenses to use
BEA products as an architectural
10
platform for several applications. These architectural commitments are larger
in scope and potential revenue than single project transactions. In some
cases, these architectural commitments have longer sales cycles than BEA's
typical transactions, both because of the customer's decision cycle in
adopting an architectural platform and because of heightened corporate
approval requirements for larger contracts. In some cases, architectural
commitment transactions have a shorter than usual sales cycle, in order for
the customer to proceed with development of the new applications. These
contrasting changes in the sales cycles and product mix may affect BEA's
future quarterly revenues, revenue mix and operating results.
Employer Payroll Taxes. The Company is subject to employer payroll taxes
when employees exercise stock options. These payroll taxes are assessed on the
stock option gain, which is the difference between the common stock price on
the date of exercise and the exercise price. The tax rate varies depending
upon the employees' taxing jurisdiction. Because we are unable to predict how
many stock options will be exercised, at what price and in which country, we
are unable to predict what, if any, expense will be recorded in a future
period.
Results of Operations
The following table sets forth BEA's revenues, cost of revenues, operating
expenses, interest expense and net loss as a percentage of total revenues for
the fiscal years ended January 31, 2000, 1999, and 1998.
Fiscal year ended
January 31,
---------------------
2000 1999 1998
----- ----- -----
Revenues:
License fees..................................... 63.1 % 66.9 % 73.9 %
Services......................................... 36.9 33.1 26.1
----- ----- -----
Total revenues................................. 100.0 100.0 100.0
Cost of revenues:
Cost of license fees(1).......................... 2.2 1.7 2.0
Cost of services(1).............................. 57.1 59.8 62.7
Amortization of certain acquired intangible
assets.......................................... 6.5 8.1 6.8
----- ----- -----
Total cost of revenues......................... 29.0 29.0 24.7
----- ----- -----
Gross margin....................................... 71.0 71.0 75.3
Operating expenses:
Sales and marketing.............................. 45.5 48.1 46.7
Research and development......................... 13.1 14.7 17.5
General and administrative....................... 8.2 8.6 10.7
Amortization of goodwill......................... 3.4 1.0 0.3
Acquisition related charges...................... 0.7 14.6 9.6
----- ----- -----
Income (loss) from operations...................... 0.1 (16.0) (9.5)
Interest income (expense) and other, net........... (1.3) (0.2) (2.6)
----- ----- -----
Loss before provision for income taxes............. (1.2) (16.2) (12.1)
----- ----- -----
Provision for income taxes......................... 3.0 1.6 1.7
----- ----- -----
Net loss........................................... (4.2)% (17.8)% (13.8)%
===== ===== =====
- --------
(1) Cost of license fees and cost of services are stated as a percentage of
license fees and services, respectively.
11
Revenues
BEA's revenues are derived from fees for software licenses, consulting and
education services and customer support. Total revenues increased $175.4
million or 60.7 percent from fiscal 1999 to fiscal 2000, and $122.6 million or
73.7 percent from fiscal 1998 to fiscal 1999. These increases reflect
additional sales to existing customers, addition of new customer accounts,
increases in product and service offerings, and a number of strategic
acquisitions.
License Revenues. License revenues increased 51.3 percent from fiscal 1999
to fiscal 2000 and increased 57.3 percent from fiscal 1998 to fiscal 1999.
These increases were mainly due to continued customer and market acceptance of
the Company's products, expansion of the Company's direct sales force, and
introduction of new products and new versions of existing products.
Service Revenues. Service revenues increased 79.6 percent from fiscal 1999
to fiscal 2000 and increased 119.8 percent from fiscal 1998 to fiscal 1999.
Service revenues as a percentage of total revenues increased from 33.1 percent
in fiscal 1999 to 36.9 percent in fiscal 2000 and increased from 26.1 percent
in fiscal 1998 to 33.1 percent in fiscal 1999. The increases were primarily
due to increased charges for customer support resulting from increased license
sales, an increase in the types of consulting services sold by the Company,
and increased number of service personnel and consultants as a result of the
Company's increased focus on service offerings. We expect to continue
investing in our services offerings, especially consulting services.
International Revenues. International revenues accounted for $187.7 million
or 40.4 percent of total revenues in fiscal 2000 compared with $115.7 million
or 40.0 percent of total revenues in fiscal 1999 and $70.3 million or 42.2
percent in fiscal 1998. The increases were the result of expansion of the
Company's international sales force and the acquisition of foreign
distributors.
During fiscal 2000 and 1999, Europe, Middle East and Africa ("EMEA")
experienced a 50.4 and 107.4 percent revenue growth, respectively. Increased
revenues from EMEA were due to increased demand for our products in Europe as
well as growth of our European sales force. Asia/Pacific ("APAC") experienced
a 125.9 percent revenue growth and a 15.2 percent decline in revenue in fiscal
2000 and 1999, respectively. Increased revenues from APAC in fiscal 2000 were
due to increased demand for our products in Asia as well as growth of our Asia
sales force. Decreased revenues from APAC in fiscal 1999 were due to the
weakening of the Asian economy, which began in late fiscal 1998.
Cost of Revenues
Total cost of revenues represented 29.0 percent of total revenues in fiscal
2000 and 1999, and 24.7 percent in fiscal 1998, respectively. The increase in
fiscal 1999 was due to the increase in cost of services, which carry a
substantially higher cost of revenues than software licenses. Amortization
charges included in cost of revenues also contributed to the increase in
fiscal 1999, due to the Company's acquisition of TOP END from NCR Corporation.
Cost of Licenses. Cost of licenses includes expenses related to the
purchase of compact discs, costs associated with transferring the Company's
software to electronic media, the printing of user manuals, packaging and
distribution costs as well as royalties paid to third parties. Cost of
licenses represented 2.2 percent, 1.7 percent and 2.0 percent of license
revenues in fiscal 2000, 1999 and 1998, respectively. The decrease in fiscal
1999 as a percentage of license revenue was due to increased use of electronic
delivery. The increase in fiscal 2000 as a percentage of license revenue was
due to increased royalties paid to third parties, primarily resulting from
license agreements signed in the third quarter. We expect cost of licenses to
increase as a percentage of license revenue in fiscal 2001 because these
license agreements will be in place for the full year.
Cost of Services. Cost of services consists primarily of salaries and
benefits for consulting, education and product support personnel. Cost of
services represented 57.1 percent, 59.8 percent and 62.7 percent of service
12
revenues in fiscal 2000, 1999 and 1998, respectively. Cost of services as a
percentage of service revenues decreased in fiscal 2000 and 1999 as a result
of spreading the fixed costs associated with the support centers over a larger
revenue base. If consulting revenues increase as a percentage of service
revenues, then cost of services could increase as a percentage of service
revenues in fiscal 2001.
Amortization of Certain Acquired Intangible Assets. The amortization of
certain acquired intangible assets, consisting of developed technology,
distribution rights, trademarks and tradenames, totaled $30.4 million,
$23.3 million and $11.3 million for fiscal 2000, 1999 and 1998, respectively.
The increase is primarily due to intangible assets resulting from a number of
strategic acquisitions, particularly the fiscal 2000 acquisition of TTC and
the fiscal 1999 acquisition of TOP END. In the future, amortization expense
associated with intangible assets recorded prior to January 31, 2000 is
expected to total $34.8 million, $13.9 million, $7.9 million, and $5.1 million
for the fiscal years ending January 31, 2001, 2002, 2003 and thereafter,
respectively.
Operating Expenses
Sales and Marketing. Sales and marketing expenses include salaries,
benefits, sales commissions, travel and facility costs for the Company's sales
and marketing personnel. These expenses also include programs aimed at
increasing revenues, such as advertising, public relations, trade shows and
user conferences. Sales and marketing expenses increased 52.2 percent in
fiscal 2000 compared with fiscal 1999 and increased 78.6 percent in fiscal
1999 compared with fiscal 1998. These increases were due to increased
commissions on the Company's increased revenue base, the expansion of the
Company's direct sales force and an increase in marketing personnel and
programs. Sales and marketing expenses decreased as a percentage of revenues
to 45.5 percent in fiscal 2000 from 48.1 percent in fiscal 1999 due to
spreading the increased sales and marketing expenses over a greater revenue
base. The Company expects to continue to invest in sales channel expansion and
marketing programs to promote the Company's products and brand. Accordingly,
the Company expects sales and marketing expenses to continue to increase in
future periods.
Research and Development. Research and development expenses consist
primarily of salaries and benefits for software engineers, contract
development fees, costs of computer equipment used in software development and
facilities expenses. Total expenditures for research and development increased
43.2 percent in fiscal 2000 compared with fiscal 1999 and increased 46.1
percent in fiscal 1999 compared with fiscal 1998. These increases were
attributed to an increase in software development personnel and related
expenses. The Company expects to continue to commit substantial resources to
product development and engineering in future periods. As a result, the
Company expects research and development expenses to continue to increase in
future periods. Additionally, management intends to continue recruiting and
hiring experienced software development personnel and to consider the
licensing and acquisition of technologies complementary to the Company's
business.
General and Administrative. General and administrative expenses include
costs for the Company's human resources, finance, legal, information
technology, facilities and general management functions. General and
administrative expenses increased 52.9 percent in fiscal 2000 compared with
fiscal 1999 and increased 52.8 percent in fiscal 1999 compared with fiscal
1998. The increases in general and administrative expenses were attributed to
the expansion of the Company's support infrastructure, including information
systems and associated expenses necessary to manage the Company's growth.
Amortization of Goodwill. Goodwill and amortization of goodwill increased
in fiscal 2000 due to various acquisitions completed in fiscal 1999 and fiscal
2000. In the future, amortization of goodwill recorded prior to February 1,
2000 is expected to total $46.5 million, $37.9 million, $31.1 million and
$25.9 million in fiscal 2001, 2002, 2003 and thereafter, respectively.
Acquisition related charges. In connection with certain acquisitions, the
Company acquired and expensed the cost of a number of research projects and
products that were in process on the acquisition dates, in accordance with
generally accepted accounting principles. In fiscal 2000, acquisition related
charges were related to the write-off associated with the acquired in-process
research and development relating to the acquisition of TTC.
13
In fiscal 1999, acquisition related charges were primarily related to the
write-off associated with the acquired in-process research and development
relating to the acquisition of TOP END. In fiscal 1998, acquisition related
charges were related to the write-off associated with the acquired in-process
research and development relating to the acquisition of certain products from
Digital Equipment Corporation.
In November 1999, BEA completed its merger with TTC. This resulted in the
issuance of approximately 10.9 million shares of BEA common stock and stock
options valued at approximately $156.9 million. The transaction was accounted
for as a purchase with $3.0 million allocated to in-process technology, $124.5
million to goodwill and the remaining $29.4 million representing other
intangible assets and liabilities assumed. The intangibles are being amortized
on a straight-line basis over lives ranging from two to four years.
An independent valuation of the purchased assets was performed to assist
the Company in determining the fair value of each identifiable tangible and
intangible asset and in allocating the purchase price among the acquired
assets, including the portion of the purchase price attributed to acquired in-
process research and development projects. Standard valuation procedures and
techniques were utilized in determining the fair value of the acquired
core/developed and in-process technology.
Core technology and in-process technology were identified and valued
through analysis of TTC's and BEA's current development projects, their
respective stage of development, the time and resources needed to complete
them, their expected income-generating ability, their target markets and the
associated risks.
The cost approach, which includes an analysis of the cost of reproducing or
replacing the asset, was the methodology utilized in valuing component
technology tools and assembled workforce. The income approach, which includes
an analysis of the markets, cash flows and risks associated with achieving
such cash flows, was the methodology utilized in valuing in-process
technology, completed technology, patents and non-compete agreements. Each
developmental project was evaluated to determine if there were any alternative
future uses. This evaluation consisted of a specific review of each project,
including the overall objectives of the project, progress toward such
objectives, and uniqueness of the project. The net after-tax cash flows
representing the cash flows generated by the respective core and in-process
technologies were then discounted to present value. The discount was based
upon an analysis of the weighted average cost of capital for the industry.
Interest Expense; Interest Income and Other, Net. Interest expense was
$20.4 million in fiscal 2000, compared to $10.4 million and $6.1 million in
fiscal 1999 and 1998, respectively. The increase in fiscal 2000 was due to a
higher average amount of outstanding borrowings, primarily due to the issuance
of $550 million 4% Convertible Subordinated Notes due December 15, 2006 ("2006
Notes") in fiscal 2000 and premiums paid in connection with the conversion of
a majority of the $250 million 4% Convertible Subordinated Notes due June 15,
2005 ("2005 Notes") which were outstanding for substantially all of fiscal
2000 but were issued during fiscal 1999. The increase in fiscal 1999 was due
to a higher average amount of outstanding borrowings, primarily due to the
issuance of the 2005 Notes. Interest income and other, net was $14.4 million,
$9.9 million and $1.7 million in fiscal 2000, 1999 and 1998, respectively. The
increase in interest income in fiscal 2000 and 1999 was due to the investment
of higher average cash, cash equivalents and short-term investment balances,
generated primarily from the Company's debt and equity offerings.
The Company has a hedging program to minimize the effect of foreign
exchange transaction gains and losses from recorded foreign currency-
denominated assets and liabilities. This program involves the use of forward
foreign exchange contracts in certain European and Asian currencies. The
Company does not currently hedge anticipated foreign currency-denominated
revenues and expenses not yet incurred. Gains (losses) on foreign currency
transactions, which are included in interest income and other, net, were
$(287,000), $340,000 and $(600,000) in fiscal 2000, 1999 and 1998,
respectively.
The Company's international operations generally consist of sales and
support organizations that generate revenues and incur service costs and
marketing, general and administrative expenses in local currencies. Product
costs, research and development, and corporate marketing and administrative
expenses are primarily incurred in
14
U.S. dollars. Thus, a strengthening of local currencies against the U.S.
dollar has a positive influence on international revenues translated into
dollars and a negative effect on translated local costs and expenses. A
weakening of local currencies has a negative effect on translated
international revenues and a positive effect on translated local costs and
expenses. BEA's hedging program is intended to moderate the impact of exchange
rate changes on operating results and cash flow.
Provision for Income Taxes. Although the Company has experienced operating
losses to date, the Company has incurred income tax expense of approximately
$13.9 million, $4.9 million and $2.8 million for fiscal 2000, 1999 and 1998,
respectively. The income tax expense consists primarily of domestic minimum
taxes, foreign withholding taxes and foreign income tax expense incurred as a
result of local country profits. The increase in income taxes for fiscal 2000
relative to fiscal 1999 is primarily due to an overall increase in foreign
corporate income taxes and service revenues and an increase in domestic state
current taxes due to the book/tax differences in the amortization of acquired
intangibles and the timing of revenue recognition. The increase in income
taxes for fiscal 1999 relative to fiscal 1998 is primarily due to an overall
increase in foreign corporate income taxes.
Under Statement of Financial Accounting Standards No.109 Accounting for
Income Taxes ("FAS 109"), deferred tax assets and liabilities are determined
based on the difference between financial reporting and tax bases of assets
and liabilities and are measured using the enacted tax rates and laws that
will be in effect when the differences are expected to reverse. FAS 109
provides for the recognition of deferred tax assets if realization of such
assets is more likely than not. Based upon the available evidence, which
includes BEA's historical operating performance and the reported cumulative
net losses from prior years, the Company has provided a valuation allowance
against its net deferred tax assets to the extent they are dependent upon
future taxable income for realization. The Company intends to evaluate the
realizability of the deferred tax assets on a quarterly basis. A deferred tax
asset has been established in fiscal 2000 to the extent of refundable US
current federal income taxes payable. See Note 9 to the consolidated financial
statements.
Liquidity and Capital Resources
As of January 31, 2000, cash, cash equivalents and short-term investments
totaled $803.1 million, up from $236.5 million at January 31, 1999. The
increase in cash, cash equivalents and short-term investments was primarily
due to proceeds from the 2006 Notes and cash generated from operations.
Cash generated from operating activities rose to $95.2 million in fiscal
2000, compared with $27.4 million generated in fiscal 1999 and $2.4 million
generated in fiscal 1998.
Investing activities consumed $119.9 million in cash during fiscal 2000,
compared with $107.8 million and $15.0 million in fiscal 1999 and 1998,
respectively. Cash used for investing activities in fiscal 2000 was primarily
for a number of strategic acquisitions amounting to $66.0 million, capital
expenditures of $17.8 million and purchases of short-term investments of $38.0
million. Cash used for investing activities in fiscal 1999 was primarily for a
number of strategic acquisitions amounting to $99.4 million, capital
expenditures of $13.2 million and net sales of short-term investments of $4.8
million. Cash used for investing activities in fiscal 1998 was primarily for
short-term investment purchases of $8.7 million, capital expenditures of $3.3
million and $2.9 million for a number of strategic acquisitions.
The Company generated $554.2 million from financing activities in fiscal
2000, compared with $221.0 million and $100.4 million in fiscal 1999 and 1998,
respectively. The primary source of cash from financing activities in fiscal
2000 was the issuance of the $550 million 2006 Notes, net of $14.7 million
debt issuance costs. The primary source of cash from financing activities in
fiscal 1999 was the issuance of the $250 million 2005 Notes net of $5.3
million debt issuance costs. The main use of cash for financing activities in
fiscal 1999 was for the payment in full of the $38.7 million outstanding note
payable to Novell related to acquisition of distribution rights for Tuxedo.
The primary source of cash from financing activities in fiscal 1998 was from
the issuance of common and preferred stock, partially offset by payments on
the Company's outstanding notes payable and capital lease obligations.
15
As of January 31, 2000, the Company's outstanding short and long-term debt
obligations were $582.9 million, up from $250.8 million at January 31, 1999.
At January 31, 2000, the Company's outstanding debt obligations consisted
principally of the $572.5 million of convertible notes and $10.5 million of
other short-term and long-term debt. During fiscal 2000, approximately $227.5
million of the 2005 Notes were converted into common stock. As of March 31,
2000, approximately 8.0 million shares of the 2005 Notes were converted into
common stock. In addition, the Company is committed to a total of $84.1
million of lease payments under operating leases through 2007.
In addition to normal operating expenses, cash requirements are anticipated
for financing anticipated growth, payment of outstanding debt obligations and
the acquisition or licensing of products and technologies complementary to the
Company's business. The Company believes that its existing cash, cash
equivalents, short-term investments and cash generated from operations, if
any, will be sufficient to satisfy its currently anticipated cash requirements
through January 31, 2001. However, the Company expects to make additional
acquisitions and may need to raise additional capital through future debt or
equity financing to the extent necessary to fund any such acquisitions. There
can be no assurance that additional financing will be available, at all, or on
terms favorable to the Company.
Year 2000 Compliance
Impact of Year 2000
In prior years, the Company discussed the nature and progress of its plans
to become Year 2000 ready. In late fiscal 2000, the Company completed its
remediation and testing of systems. As a result of those planning and
implementation efforts, the Company experienced no significant disruptions in
mission-critical information technology and non-information technology systems
and believes those systems successfully responded to the Year 2000 date
change. The Company expensed approximately $1.1 million during fiscal 2000 in
connection with remediating its systems. The Company is not aware of any
material problems resulting from Year 2000 issues, either with its products,
its internal systems, or the products and services of third parties. The
Company will continue to monitor its mission-critical computer applications
and those of its suppliers and vendors throughout fiscal 2001 to ensure that
any latent Year 2000 matters that may arise are addressed promptly.
Effect of New Accounting Pronouncements
In December 1999, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial
Statements" ("SAB 101") and amended it in March 2000. BEA is required to adopt
the provisions of SAB 101 in its second fiscal quarter of 2000. The Company is
currently reviewing the provisions of SAB 101 and has not fully assessed the
impact of its adoption; however, the Company does not expect the adoption of
SAB 101 to have a material impact to its financial position.
In December 1998, the American Institute of Certified Public Accountants
("AICPA") issued Statement of Position ("SOP") 98-9, which amends certain
provisions of SOP 97-2 and extends the deferral of the application of certain
passages of SOP 97-2 provided by SOP 98-4 until the beginning of BEA's fiscal
year 2001. The Company is currently evaluating the impact of SOP 98-9 on its
financial statements and related disclosures.
In June 1998, the Financial Accounting Standards Board released Statement
of Financial Accounting Standards No. 133, Accounting for Derivative
Instruments and Hedging Activities ("FAS 133"), FAS 133 establishes the
accounting and reporting standards for derivative instruments, including
certain derivative instruments embedded in other contracts (collectively
referred to as derivatives) and for hedging activities. It requires that an
entity recognize all derivatives as either assets or liabilities in the
statement of financial position and measure those instruments at fair value.
In July 1999, FAS No. 137, "Accounting for Derivative Instruments and Hedging
Activities--Deferral of the Effective Data of FASB Statement 133" ("FAS 137")
was issued. FAS
16
137 deferred the effective date of FAS 133 until the first fiscal quarter of
fiscal years beginning after June 15, 2000. The Company expects to adopt FAS
133 effective February 1, 2001. The Company does not expect the adoption of
FAS 133 to have a material impact to its financial position on results of
operations.
Factors That May Impact Future Operating Results
This Annual Report on Form 10-K includes "forward-looking statements"
within the meaning of Section 27A of the Securities Act and Section 21E of the
Exchange Act. All statements in this Annual Report other than statements of
historical fact are "forward-looking statements" for purposes of these
provisions, including any statements of the plans and objectives for future
operations and any statement of assumptions underlying any of the foregoing.
Statements that include the use of terminology such as "may," "will,"
"expects," "plans," "anticipates," "estimates," "potential," or "continue," or
the negative thereof or other comparable terminology are forward-looking
statements. Forward-looking statements include (i) in Item 1, all text under
the heading "Business-Strategy" and statements regarding continued hiring in
direct sales, support and professional services, devoting substantial
resources to product development, and continuing to license and acquire
software technologies and businesses, and (ii) in Item 7, statements regarding
additional acquisitions, return on investment, investing in service offerings,
expected timing and amount of amortization expenses, investment in sales
channel expansion and marketing programs, and future hiring. These forward-
looking statements involve risks and uncertainties, and it is important to
note that BEA's actual results could differ materially from those projected or
assumed in these forward-looking statements. Among the factors that could
cause actual results to differ materially are the risks and uncertainties
described in the risk factors below. All forward-looking statements and risk
factors included in this document are made as of the date hereof, based on
information available to BEA as of the date hereof, and BEA assumes no
obligation to update any forward-looking statement or risk factor. You should
consult the risk factors listed from time to time in the Company's Reports on
Forms 10-Q and 8-K.
Significant unanticipated fluctuations in our actual or anticipated quarterly
revenues and operating results may cause us not to meet securities analysts'
or investors' expectations and may result in a decline in our stock price.
Although we have had significant revenue growth in recent quarters, our
growth rates may not be sustainable. If our revenues, operating results,
earnings or future projections are below the levels expected by investors or
securities analysts, our stock price is likely to decline. Our stock price is
also subject to the volatility generally associated with Internet, software
and technology stocks and may also be affected by broader market trends
unrelated to our performance.
We expect to experience significant fluctuations in our future quarterly
revenues and operating results as a result of many factors, including:
. difficulty predicting the size and timing of customer orders
. introduction or enhancement of our products or our competitors' products
. the mix of our products and services sold and mix of distribution
channels
. general economic conditions, which can affect our customers' capital
investment levels and the length of our sales cycle
. changes in our competitors' product offerings and pricing policies, and
customer order deferrals in anticipation of new products and product
enhancements from BEA or competitors
. whether we are able to develop, introduce and market new products on a
timely basis
. any slowdown in use of the Internet for commerce
. recent hiring may prove excessive if growth rates are not maintained
. the structure, timing and integration of acquisitions of businesses,
products and technologies, including The Theory Center
. the terms and timing of financing activities
. market acceptance of our products
17
. the lengthy sales cycle for our products
. technological changes in computer systems and environments
. whether we are able to successfully expand our sales and marketing
programs
. whether we are able to meet our customers' service requirements
. costs associated with acquisitions, including the acquisition of The
Theory Center
. the impact and duration of deteriorated economic and political
conditions in Asia
. loss of key personnel
. fluctuations in foreign currency exchange rates
. interpretations of the accounting pronouncements on software revenue
recognition.
As a result of all of these factors, we believe that quarterly revenues and
operating results are difficult to forecast and period-to-period comparisons
of our results of operations are not necessarily meaningful and should not be
relied upon as indications of trends or future performance.
An increasing portion of our revenues has been derived from large orders,
as customers deployed our products throughout their organizations or chose to
standardize on our products for their system architecture. Increases in the
dollar size of individual license transactions have also increased the risk of
fluctuation in future quarterly results. If we cannot generate large customer
orders, or customers delay or cancel such orders in a particular quarter, it
will have a material adverse effect on our revenues and, more significantly on
a percentage basis, our net income or loss in that quarter. Moreover, we
typically receive and fulfill a majority of our orders within the quarter,
with the substantial majority of our orders received in the last month of each
fiscal quarter. As a result, we may not learn of revenue shortfalls until late
in a fiscal quarter, after it is too late to adjust expenses for that quarter.
Additionally, our operating expenses are based in part on our expectations for
future revenues and are difficult to adjust in the short term. Any revenue
shortfall below our expectations could have an immediate and significant
adverse effect on our results of operations. Further, we are subject to
employer payroll taxes when our employees exercise their stock options. The
employer payroll taxes are assessed on each employee's gain, which is the
difference between the price of our common stock on the date of exercise and
the exercise price. During a particular period, these payroll taxes could be
material. These employer payroll taxes would be recorded as an expense and are
assessed at tax rates that varies depending upon the employee's taxing
jurisdiction in the period such options are exercised based on actual gains
realized by employees. However, because we are unable to predict how many
stock options will be exercised, at what price and in which country during any
particular period, we cannot predict, the amount, if any, of employer payroll
expense will be recorded in a future period or the impact on our future
financial results.
Although we use a standard license agreement, which meets the revenue
recognition criteria under current generally accepted accounting principles,
we must often negotiate and revise terms and conditions of this standard
agreement, particularly in larger license transactions. Negotiation of
mutually acceptable terms and conditions can extend the sales cycle and, in
certain situations, may require us to defer recognition of revenue on the
license. In addition, while we believe that we are in compliance with
Statement of Position 97-2, Software Revenues Recognition, ("SOP 97-2") and
SOP 98-4 and SOP 98-9, which amend certain provisions of SOP 97-2, the
American Institute of Certified Public Accountants has only issued some
implementation guidelines for these standards and the accounting profession is
still discussing a wide range of potential interpretations. These
implementation guidelines, once finalized, could lead to unanticipated changes
in our current revenue accounting practices that could cause us to recognize
lower revenue and profits.
18
Our limited operating history and need to continue to integrate our
acquisitions makes it difficult to predict our future results
We were incorporated in January 1995 and therefore have a limited operating
history. We have generated revenues to date primarily from sales of BEA
TUXEDO, a software product to which we acquired worldwide distribution rights
in February 1996, and from BEA WebLogic, a software product which we acquired
in September 1998, and fees for software products and services related to
TUXEDO and WebLogic. We have also acquired a number of businesses,
technologies and products, most recently The Theory Center, which was acquired
in November 1999 and The Workflow Automation Corporation, which was acquired
in March 2000. Our limited operating history and the need to integrate a
number of separate and independent business operations subject our business to
numerous risks. At January 31, 2000, we had an accumulated deficit of
approximately $203.0 million. In addition, in connection with certain
acquisitions completed prior to January 31, 2000, we recorded approximately
$424.5 million as intangible assets and goodwill. Under Generally Accepted
Accounting Principles, intangible assets and goodwill are required to be
amortized in future periods. Approximately $221.4 million of these assets have
been amortized as of January 31, 2000 and we expect to amortize the remaining
approximately $203.1 million in future periods through our fiscal year ending
January 31, 2005. We expect to amortize $81.3 million of such intangible
assets and goodwill in the fiscal year ending January 31, 2001. A substantial
portion of the $156.9 million purchase price for The Theory Center has been
recorded as intangible assets and goodwill and amortized in the fiscal year
ended January 31, 2000 and will be amortized over future periods. If we
acquire additional businesses, products and technologies in the future, we may
report additional, potentially significant expenses. If future events cause
the impairment of any intangible assets acquired in our past or future
acquisitions, we may have to expense such assets sooner than we expect.
Because of our limited operating history and ongoing expenses associated with
our prior acquisitions, there can be no assurance that we will be profitable
in any future period and recent operating results should not be considered
indicative of future financial performance.
Our revenues are derived primarily from two main product and services lines,
and a decline in demand or prices for either could substantially adversely
affect our operating results
We currently derive the majority of our license and service revenues from
BEA TUXEDO and BEA WebLogic and from related products and services. Although
we expect these products and services to continue to account for the majority
of our revenues in the immediate future, we believe that BEA WebLogic will
become an increasingly important revenue source. As a result, factors
adversely affecting the pricing of or demand for BEA TUXEDO and BEA WebLogic,
such as competition, product performance or technological change, could have a
material adverse effect on our business and consolidated results of operations
and financial condition.
The price of our common stock may fluctuate significantly
The market price for our common stock may be affected by a number of
factors, including developments in the Internet, software or technology
industry, general market conditions and other factors, including factors
unrelated to our operating performance or our competitors' operating
performance. In addition, stock prices for BEA and many other companies in the
Internet, technology and emerging growth sectors have experienced wide
fluctuations including recent rapid rises and declines in their stock prices,
that have often been unrelated to the operating performance of such companies.
Such factors and fluctuations, as well as general economic, political and
market conditions, such as recessions, may materially adversely affect the
market price of our common stock.
If we cannot successfully integrate our past and future acquisitions, our
revenues may decline and expenses may increase
From our inception in January 1995, we have made several strategic
acquisitions. Integration of acquired companies, divisions and products
involves the assimilation of potentially conflicting operations and products,
which divert the attention of our management team and may have a material
adverse effect on our operating results in future quarters. We acquired Leader
Group, Inc. ("Leader Group") and a business unit of Penta
19
Systems Technology, Inc. ("Penta") in the quarter ended April 30, 1998, NCR's
TOP END technology in June 1998, the Entersoft Systems Corporation
("Entersoft") in July 1998, WebLogic, Inc. ("WebLogic") in September 1998,
Component Systems, LLC in May 1999, Technology Resource Group, Inc. ("TRG") in
July 1999, Avitek, Inc. ("Avitek") in August 1999, and The Theory Center
("TTC") in November 1999. It is possible we may not achieve any of the
intended financial or strategic benefits of these transactions. While we
intend to make additional acquisitions in the future, there may not be
suitable companies, divisions or products available for acquisition. Our
acquisitions entail numerous risks, including the risk we will not
successfully assimilate the acquired operations and products, or retain key
employees of the acquired operations. There are also risks relating to the
diversion of our management's attention, and difficulties and uncertainties in
our ability to maintain the key business relationships the acquired entities
have established. In addition, if we undertake future acquisitions, we may
issue dilutive securities, assume or incur additional debt obligations, incur
large one-time expenses, and acquire intangible assets that would result in
significant future amortization expense. Any of these events could have a
material adverse effect on our business, operating results and financial
condition.
Recently, the Financial Accounting Standards Board ("FASB") voted to
eliminate pooling of interests accounting for acquisitions and the ability to
write-off in-process research and development has been limited by recent
pronouncements. The effect of these changes would be to increase the portion
of the purchase price for any future acquisitions that must be charged to
BEA's cost of revenues and operating expenses in the periods following any
such acquisitions. As a consequence, our results of operations in periods
following any such acquisitions could be materially adversely affected.
Although these changes would not directly affect the purchase price for any of
these acquisitions, they would have the effect of increasing the reported
expenses associated with any of these acquisitions. To that extent, these
changes may make it more difficult for us to acquire other companies, product
lines or technologies.
The lengthy sales cycle for our products makes our revenues susceptible to
substantial fluctuations
Our customers typically use our products to implement large, sophisticated
applications that are critical to their business, and their purchases are
often part of their implementation of a distributed or Web-based computing
environment. Customers evaluating our software products face complex decisions
regarding alternative approaches to the integration of enterprise
applications, competitive product offerings, rapidly changing software
technologies and limited internal resources due to other information systems
requirements. For these and other reasons, the sales cycle for our products is
lengthy and is subject to delays or cancellation over which we have little or
no control. We have experienced a significant increase in the number of
million and multi-million dollar license transactions. In some cases, this has
resulted in more extended customer evaluation and procurement processes, which
in turn have lengthened the overall sales cycle for our products. Moreover
during the second half of fiscal 1999, an increasing number of our customers
began negotiating licenses to use our enterprise application solutions as an
architectural platform for several applications. These architectural
commitments are larger in scope and potential revenue than single application
transactions. In some cases, these architectural commitments also have longer
sales cycles than our typical single application transactions, because of both
the customer's decision cycle in adopting an architectural platform and
heightened corporate approval requirements for larger contracts. We believe
general economic conditions that impact customers' capital investment
decisions also affect our sales cycles.
In addition, industry sources widely predicted that many corporations would
stop deploying new computer systems in late 1999 and early 2000, in order to
avoid disrupting their computer systems before the Year 2000. We have been
informed by some of our customers that they intended to freeze deploying new
computer systems in late December 1999 and early 2000. Furthermore, some of
our customers may have accelerated their purchases and deployments of our
products in advance of these freezes. These factors could cause an unusual
fluctuation in our orders, and our revenues could be materially reduced and
our operating results could be materially adversely affected, especially in
the first quarter of calendar 2000. Any significant change in customer buying
decisions or sales cycles for our products could have a material adverse
effect on our business, results of operations and financial condition.
20
If we do not effectively compete with new and existing competitors, our
revenues and operating margins will decline
The market for application server and integration software, and related
software components and services, is highly competitive. Our competitors are
diverse and offer a variety of solutions directed at various segments of this
marketplace. These competitors include operating system vendors such as IBM,
Sun Microsystems and database vendors such as Oracle. Microsoft has released
products that include certain application server functionality and has
announced that it intends to include application server and integration
functionality in future versions of its operating systems, including future
versions of Windows 2000. Oracle is the primary relational database vendor
offering products that are intended to serve as alternatives to our enterprise
application server and integration solutions. In addition, there are companies
offering and developing application server and integration software products
and related services that directly compete with products we offer. Further,
software development tool vendors typically emphasize the broad versatility of
their tool sets and, in some cases, offer complementary software that supports
these tools and performs basic application server and integration functions.
Last, internal development groups within prospective customers' organizations
may develop software and hardware systems that may substitute for those we
offer. A number of our competitors and potential competitors have longer
operating histories, significantly greater financial, technical, marketing and
other resources, greater name recognition and a larger installed base of
customers than us.
Our principal competitors currently include hardware vendors who bundle
their own application server and integration software products, or similar
products, with their computer systems and database vendors that advocate
client/server networks driven by the database server. IBM and Sun Microsystems
are the primary hardware vendors who offer a line of application server and
integration solutions for its customers. IBM's sale of application server and
integration functionality along with its IBM proprietary hardware systems
requires us to compete with IBM in its installed base, where IBM has certain
inherent advantages due to its significantly greater financial, technical,
marketing and other resources, greater name recognition and the integration of
its enterprise application server and integration functionality with its
proprietary hardware and database systems. These inherent advantages allow IBM
to bundle, at a discounted price, application functionality with computer
hardware and software sales. Due to these factors, if we do not differentiate
our products based on functionality, interoperability with non-IBM systems,
performance and reliability, and establish our products as more effective
solutions to customers' needs our revenues and operating results will suffer.
Microsoft has announced that it intends to include certain application
server and integration functionality in future versions of its Windows 2000
operating system. Microsoft has also introduced a product that includes
certain basic application server functionality. The bundling of competing
functionality in versions of Windows requires us to compete with Microsoft in
the Windows marketplace, where Microsoft has certain inherent advantages due
to its significantly greater financial, technical, marketing and other
resources, its greater name recognition, its substantial installed base and
the integration of its application server and integration functionality with
Windows. We need to differentiate our products from Microsoft's based on
scalability, functionality, interoperability with non-Microsoft platforms,
performance and reliability, and need to establish our products as more
effective solutions to customers' needs. We may not be able to successfully
differentiate our products from those offered by Microsoft, and Microsoft's
entry into the application server and integration market could materially
adversely affect our business, operating results and financial condition.
In addition, current and potential competitors may make strategic
acquisitions or establish cooperative relationships among themselves or with
third parties, thereby increasing the ability of their products to address the
needs of our current and prospective customers. Accordingly, it is possible
that new competitors or alliances among current and new competitors may emerge
and rapidly gain significant market share. Such competition could materially
adversely affect our ability to sell additional software licenses and
maintenance, consulting and support services on terms favorable to us.
Further, competitive pressures could require us to reduce the price of our
products and related services, which could materially adversely affect our
business, operating results and financial condition. We may not be able to
compete successfully against current and future competitors and any failure to
do so would have a material adverse effect upon our business, operating
results and financial condition.
21
If we fail to adequately protect our intellectual property rights,
competitors may use our technology and trademarks, which could weaken our
competitive position, reduce our revenues and increase our costs
Our success depends upon our proprietary technology. We rely on a
combination of patent, copyright, trademark and trade secret rights,
confidentiality procedures and licensing arrangements to establish and protect
our proprietary rights. It is possible that other companies could successfully
challenge the validity or scope of our patents and that our patents may not
provide a competitive advantage to us.
As part of our confidentiality procedures, we generally enter into non-
disclosure agreements with our employees, distributors and corporate partners
and into license agreements with respect to our software, documentation and
other proprietary information. Despite these precautions, third parties could
copy or otherwise obtain and use our products or technology without
authorization, or develop similar technology independently. In particular, we
have, in the past, provided certain hardware OEMs with access to our source
code, and any unauthorized publication or proliferation of this source code
could materially adversely affect our business, operating results and
financial condition. It is difficult for us to police unauthorized use of our
products, and although we are unable to determine the extent to which piracy
of our software products exists, software piracy is a persistent problem.
Effective protection of intellectual property rights is unavailable or limited
in certain foreign countries. The protection of our proprietary rights may not
be adequate and our competitors could independently develop similar
technology, duplicate our products, or design around patents and other
intellectual property rights we hold.
Third parties could assert that our software products and services infringe
their intellectual property rights, which could expose us to increased costs
and litigation
It is possible that third parties could claim our current or future
products infringe their rights. Any such claims, with or without merit, could
cause costly litigation that could absorb significant management time, which
could materially adversely effect our business, operating results and
financial condition. These types of claims might require us to enter into
royalty or license agreements. If required, we may not be able to obtain such
royalty or license agreements, or obtain them on terms acceptable to us, which
could have a material adverse effect upon our business, operating results and
financial condition.
Our international operations expose us to greater management, collections,
currency, intellectual property, regulatory and other risks
International revenues accounted for 40.4 percent, 40.0 percent and 42.2
percent of our consolidated revenues for the fiscal years ended January 31,
2000, 1999 and 1998, respectively. We sell our products and services through a
network of branches and subsidiaries located in 29 countries worldwide. In
addition, we also market through distributors. We believe that our success
depends upon continued expansion of our international operations. Our
international business is subject to a number of risks, including unexpected
changes in regulatory practices and tariffs, greater difficulties in staffing
and managing foreign operations, longer collection cycles, seasonality,
potential changes in tax laws, greater difficulty in protecting intellectual
property and the impact of fluctuating exchange rates between the US dollar
and foreign currencies in markets where we do business.
General economic and political conditions in these foreign markets may also
impact our international revenues. Since the late summer of 1997, a number of
Pacific Rim countries have experienced economic, banking and currency
difficulties that have led to economic downturns in those countries. Among
other things, the decline in value of Asian currencies, together with
difficulties obtaining credit, has resulted in a decline in the purchasing
power of our Asian customers, which in turn has resulted in the delay of
orders for our products from certain Asian customers and is likely to result
in further delays and, possibly the cancellation, of such orders. We
anticipate that weak Asian economic conditions may continue to adversely
impact our financial results. It is difficult for us to predict the extent of
the future impact of these conditions. There can be no assurances that these
factors and other factors will not have a material adverse effect on our
future international revenues and consequently on our business and
consolidated financial condition and results of operations.
22
If we are unable to manage our growth, our business will suffer
We have continued to experience a period of rapid and substantial growth
that has placed, and if such growth continues would continue to place, a
strain on the Company's administrative and operational infrastructure. We have
increased the number of our employees from 120 employees in three offices in
the United States at January 31, 1996 to over 1,900 employees in over 70
offices in 29 countries at January 31, 2000. Our ability to manage our staff
and growth effectively requires us to continue to improve our operational,
financial and management controls, reporting systems and procedures. In this
regard, we are currently updating our management information systems to
integrate financial and other reporting among our multiple domestic and
foreign offices. In addition, we intend to continue to increase our staff
worldwide and to continue to improve the financial reporting and controls for
our global operations. It is possible we will not be able to successfully
implement improvements to our management information and control systems in an
efficient or timely manner and that, during the course of this implementation,
we could discover deficiencies in existing systems and controls. If we are
unable to manage growth effectively, our business, results of operations and
financial condition will be materially adversely affected.
If the market for application servers, application integration and
application component software does not grow as quickly as we expect, our
revenues will be harmed
We sell our products and services in the application server, application
integration and application component markets. These markets are emerging and
are characterized by continuing technological developments, evolving industry
standards and changing customer requirements. Our success is dependent in
large part on acceptance of our products by large customers with substantial
legacy mainframe systems, customers establishing a presence on the Web for
commerce, and developers of web-based commerce applications. Our future
financial performance will depend in large part on continued growth in the
number of companies extending their mainframe-based, mission-critical
applications to an enterprise-wide distributed computing environment and to
the Internet through the use of application server and integration technology.
There can be no assurance that the markets for application server and
integration technology and related services will continue to grow. If these
markets fail to grow or grow more slowly than we currently anticipate, or if
we experience increased competition in these markets, our business, results of
operations and financial condition will be adversely affected.
If we lose key personnel or cannot hire enough qualified personnel, it will
adversely affect our ability to manage our business, develop new products and
increase revenue
We believe our future success will depend upon our ability to attract and
retain highly skilled personnel including our founders, Messrs. William T.
Coleman III and Alfred S. Chuang, and other key members of management.
Competition for these types of employees is intense, and it is possible that
we will not be able to retain our key employees and that we will not be
successful in attracting, assimilating and retaining qualified candidates in
the future. As we seek to expand our global organization, the hiring of
qualified sales, technical and support personnel will be difficult due to the
limited number of qualified professionals. Failure to attract, assimilate and
retain key personnel would have a material adverse effect on our business,
results of operations and financial condition.
Our failure to maintain ongoing sales through distribution channels will
result in lower revenues
To date, we have sold our products principally through our direct sales
force, as well as through indirect sales channels, such as computer hardware
companies, packaged application software developers (ISVs), systems
integrators and independent consultants, independent software tool vendors and
distributors. Our ability to achieve revenue growth in the future will depend
in large part on our success in expanding our direct sales force and in
further establishing and expanding relationships with distributors, ISVs, OEMs
and systems integrators. In particular, a significant part of our strategy is
to embed our technology in products our ISV customers offer. We intend to seek
distribution arrangements with additional ISVs to embed our Web application
servers in their
23
products. It is possible that we will not be able to successfully expand our
direct sales force or other distribution channels, secure license agreements
with additional ISVs on commercially reasonable terms or at all, and otherwise
further develop our relationships with indirect distribution channels.
Moreover, even if we succeed in these endeavors, it still may not increase our
revenues. If we invest resources in these types of expansion and our revenues
do not correspondingly increase, our business, results of operations and
financial condition will be materially and adversely affected.
We rely on informal relationships with a number of consulting and systems
integration firms to enhance our sales, support, service and marketing
efforts, particularly with respect to implementation and support of our
products as well as lead generation and assistance in the sales process. We
will need to expand our relationships with third parties in order to support
license revenue growth. Many such firms have similar, and often more
established, relationships with our principal competitors. It is possible that
these and other third parties will not provide the level and quality of
service required to meet the needs of our customers, that we will not be able
to maintain an effective, long term relationship with these third parties, and
that these third parties will not successfully meet the needs of our
customers.
If we do not develop and enhance new and existing products to keep pace with
technological, market and industry changes, our revenues may decline
The market for our products is highly fragmented, competitive with
alternative computing architectures, and characterized by continuing
technological developments, evolving industry standards and changing customer
requirements. The introduction of products embodying new technologies, the
emergence of new industry standards or changes in customer requirements could
render our existing products obsolete and unmarketable. As a result, our
success depends upon our ability to enhance existing products, respond to
changing customer requirements and develop and introduce in a timely manner
new products that keep pace with technological developments and emerging
industry standards. It is possible that our products will not adequately
address the changing needs of the marketplace and that we will not be
successful in developing and marketing enhancements to our existing products
or products incorporating new technology on a timely basis. Failure to develop
and introduce new products, or enhancements to existing products, in a timely
manner in response to changing market conditions or customer requirements,
will materially and adversely affect our business, results of operations and
financial condition.
If our products contain software defects, it could harm our revenues and
expose us to litigation
The software products we offer are internally complex and, despite
extensive testing and quality control, may contain errors or defects,
especially when we first introduce them. We may need to issue corrective
releases of our software products to fix any defects or errors. Any defects or
errors could also cause damage to our reputation, loss of revenues, product
returns or order cancellations, or lack of market acceptance of our products.
Accordingly, any defects or errors could have a material and adverse effect on
our business, results of operations and financial condition.
Our license agreements with our customers typically contain provisions
designed to limit our exposure to potential product liability claims. It is
possible, however, that the limitation of liability provisions contained in
our license agreements may not be effective as a result of existing or future
federal, state or local laws or ordinances or unfavorable judicial decisions.
Although we have not experienced any product liability claims to date, sale
and support of our products entails the risk of such claims, which could be
substantial in light of customers' use of such products in mission-critical
applications. If a claimant brings a product liability claim against us, it
could have a material adverse effect on our business, results of operations
and financial condition.
Our products interoperate with many parts of complicated computer systems,
such as mainframes, servers, personal computers, application software,
databases, operating systems and data transformation software. Failure of any
one of these parts could cause all or large parts of computer systems to fail.
In such circumstances, it may be difficult to determine which part failed, and
it is likely that customers will bring a lawsuit against several
24
suppliers. Even if our software is not at fault, we could suffer material
expense and material diversion of management time in defending any such
lawsuits.
We have a high debt balance and large interest obligations
At January 31, 2000, we had approximately $572.5 million of long-term
indebtedness in the form of convertible notes. As a result of this
indebtedness, we have substantial principal and interest payment obligations.
The degree to which we are leveraged could significantly harm our ability to
obtain financing for working capital, acquisitions or other purposes and could
make us more vulnerable to industry downturns and competitive pressures. Our
ability to meet our debt service obligations will be dependent upon our future
performance, which will be subject to financial, business and other factors
affecting our operations, many of which are beyond our control. In addition,
our earnings are insufficient to cover our fixed charges.
We will require substantial amounts of cash to fund scheduled payments of
interest on the notes, payment of the principal amount of the notes, payment
of principal and interest on our other indebtedness, future capital
expenditures and any increased working capital requirements. If we are unable
to meet our cash requirements out of cash flow from operations, there can be
no assurance that we will be able to obtain alternative financing. In the
absence of such financing, our ability to respond to changing business and
economic conditions, to make future acquisitions, to absorb adverse operating
results or to fund capital expenditures or increased working capital
requirements would be significantly reduced. If we do not generate sufficient
cash flow from operations to repay the notes at maturity, we could attempt to
refinance the notes; however, no assurance can be given that such a
refinancing would be available on terms acceptable to us, if at all. Any
failure by us to satisfy our obligations with respect to the notes at maturity
(with respect to payments of principal) or prior thereto (with respect to
payments of interest or required repurchases) would constitute a default under
the indenture and could cause a default under agreements governing our other
indebtedness.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Foreign Exchange
BEA's revenue originating outside the United States was 40.4 percent, 40.0
percent and 42.2 percent of total revenues in fiscal 2000, 1999 and 1998,
respectively. International revenues from each geographic sub-region were less
than 10 percent of total revenues. International sales are made mostly from
the Company's foreign sales subsidiaries in the local countries and are
typically denominated in the local currency of each country. These
subsidiaries also incur most of their expenses in the local currency.
Accordingly, foreign subsidiaries use the local currency as their functional
currency.
The Company's international business is subject to risks typical of an
international business, including, but not limited to, differing economic
conditions, changes in political climate, differing tax structures, other
regulations and restrictions, and foreign exchange volatility. Accordingly,
the Company's future results could be materially adversely impacted by changes
in these or other factors.
The Company's exposure to foreign exchange rate fluctuations arise in part
from intercompany accounts in which certain costs of software development,
support and product marketing incurred in the United States are charged to the
Company's foreign subsidiaries. These intercompany accounts are typically
denominated in the functional currency of the foreign subsidiary in order to
centralize foreign exchange risk with the parent company in the United States.
The Company is also exposed to foreign exchange rate fluctuations as the
financial results of foreign subsidiaries are translated into U.S. dollars in
consolidation. As exchange rates vary, these results, when translated, may
vary from expectations and adversely impact overall financial results.
The Company has a program to reduce the effect of foreign exchange
transaction gains and losses from recorded foreign currency-denominated assets
and liabilities. This program involves the use of forward foreign exchange
contacts in certain European and Asian currencies, principally the U.K.,
France, Germany, Finland,
25
Sweden, Japan and Australia. A forward foreign exchange contract obligates the
Company to exchange predetermined amounts of specified foreign currencies at
specified exchange rates on specified dates or to make an equivalent U.S.
dollar payment equal to the value of such exchange. Each month the Company
marks to market the foreign exchange contracts based on the change in the
foreign exchange rates with any resulting gain or losses recorded in the
interest income and other, net line item.
The Company does not currently hedge anticipated foreign currency-
denominated revenues and expenses not yet incurred.
Interest Rates
The Company invests its cash in a variety of financial instruments,
consisting principally of investments in commercial paper, interest-bearing
demand deposit accounts with financial institutions, money market funds and
highly liquid debt securities of corporations, municipalities and the U.S.
Government. These investments are denominated in U.S. dollars. Cash balances
in foreign currencies overseas are operating balances and are only invested in
short-term time deposits of the local operating bank.
The Company accounts for its investment instruments in accordance with
Statement of Financial Accounting Standards No. 115, Accounting for Certain
Investments in Debt and Equity Securities, ("FAS 115"). All of the cash
equivalents, short-term and long-term investments are treated as "available-
for-sale" under FAS 115. Investments in both fixed rate and floating rate
interest earning instruments carry a degree of interest rate risk. Fixed rate
securities may have their market value adversely impacted due to a rise in
interest rates, while floating rate securities may produce less income than
expected if interest rates fall. Due in part to these factors, the Company's
future investment income may fall short of expectations due to changes in
interest rates or the Company may suffer losses in principal if forced to sell
securities which have seen a decline in market value due to changes in
interest rates. However, the Company reduces its interest rate risk by
investing its cash in instruments with short maturities. At January 31, 2000
the average maturity of the Company's cash equivalents and short-term
investments was 14 days.
The table below presents the principal amount, related weighted average
interest rates and maturities for the Company's investment portfolio. Short-
term investments are all in fixed rate instruments. The principal amounts
approximate fair value at January 31, 2000.
Table of investment securities (in thousands):
Principal Average
Amount Interest Rate
--------- -------------
Cash and cash equivalents............................ $763,294 5.81%
Restricted cash...................................... 1,631 5.45%
Short-term investments (0-1 years)................... 38,135 6.02%
--------
Total cash and investment securities............... $803,060
========
26
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA.
BEA SYSTEMS, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
----
AUDITED FINANCIAL STATEMENTS
Report of Ernst & Young LLP, Independent Auditors......................... 28
Consolidated Balance Sheets as of January 31, 2000 and 1999............... 29
Consolidated Statements of Operations and Comprehensive Loss for the years
ended January 31, 2000, 1999 and 1998.................................... 30
Consolidated Statements of Redeemable Convertible Preferred Stock and
Stockholders' Equity (Deficit) for the years ended January 31, 2000, 1999
and 1998................................................................. 31
Consolidated Statements of Cash Flows for the years ended January 31,
2000, 1999 and 1998...................................................... 32
Notes to Consolidated Financial Statements................................ 33
27
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Stockholders
BEA Systems, Inc.
We have audited the accompanying consolidated balance sheets of BEA
Systems, Inc. as of January 31, 2000 and 1999 and the related consolidated
statements of operations and comprehensive loss, redeemable convertible
preferred stock and stockholders' equity (deficit), and cash flows for each of
the three years in the period ended January 31, 2000. Our audits also included
the financial statement schedule listed in the index at Item 14(a). These
financial statements and schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and schedule 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 consolidated financial position of BEA Systems,
Inc. at January 31, 2000 and 1999, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
January 31, 2000, in conformity with accounting principles generally accepted
in the United States. Also, in our opinion, the related financial statement
schedule, 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/ ERNST & YOUNG LLP
Palo Alto, California
February 21, 2000 (except for Note 17 as to which the date is April 24, 2000)
28
BEA SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except par value)
January 31,
--------------------
2000 1999
---------- --------
ASSETS
Current assets:
Cash and cash equivalents................................ $ 763,294 $232,556
Restricted cash.......................................... 1,631 3,500
Short-term investments................................... 38,135 395
Accounts receivable, net of allowance for doubtful
accounts of $5,512 and $3,661 at January 31, 2000 and
1999, respectively...................................... 133,069 77,068
Other current assets..................................... 35,248 4,279
---------- --------
Total current assets................................... 971,377 317,798
Computer equipment, furniture and leasehold improvements,
net....................................................... 27,978 17,185
Goodwill, net of accumulated amortization of $19,200 and
$3,436 at January 31, 2000 and 1999, respectively......... 141,457 8,804
Acquired intangible assets, net............................ 61,600 50,097
Other long-term assets..................................... 56,429 9,127
---------- --------
Total assets........................................... $1,258,841 $403,011
========== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Borrowings under lines of credit......................... $ - $ 679
Accounts payable......................................... 14,848 7,615
Accrued liabilities...................................... 92,673 47,747
Accrued income taxes..................................... 27,021 5,991
Deferred revenues........................................ 96,537 33,784
Current portion of notes payable......................... 4,454 43
---------- --------
Total current liabilities.............................. 235,533 95,859
Notes payable and other long-term obligations.............. 6,005 112
Convertible subordinated notes............................. 572,484 250,000
Commitments and contingencies..............................
Stockholders' equity:
Preferred stock issuable in series-$0.001 par value,
20,000 shares authorized; no shares designated or issued
and outstanding......................................... - -
Common stock--$0.001 par value; 1,000,000 and 342,060
shares authorized at January 31, 2000 and 1999,
respectively; 290,568 and 235,280 shares issued and
outstanding at January 31, 2000 and 1999, respectively.. 290 235
Class B Common Stock--
$0.001 par value; 140,000 shares authorized; 71,296
shares issued and outstanding at January 31, 2000 and
1999.................................................... 71 71
Additional paid-in capital............................... 650,128 243,097
Accumulated deficit...................................... (202,951) (183,345)
Notes receivable from stockholders....................... (296) (544)
Deferred compensation.................................... (1,144) (1,880)
Accumulated other comprehensive loss..................... (1,279) (594)
---------- --------
Total stockholders' equity............................. 444,819 57,040
---------- --------
Total liabilities and stockholders' equity............. $1,258,841 $403,011
========== ========
See accompanying notes
29
BEA SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(in thousands, except per share data)
Fiscal year ended January
31,
----------------------------
2000 1999 1998
-------- -------- --------
Revenues:
License fees................................... $292,855 $193,511 $122,987
Services....................................... 171,555 95,531 43,460
-------- -------- --------
Total revenues............................... 464,410 289,042 166,447
-------- -------- --------
Cost of revenues:
Cost of license fees........................... 6,445 3,225 2,435
Cost of services............................... 98,005 57,167 27,261
Amortization of certain acquired intangible
assets........................................ 30,391 23,290 11,336
-------- -------- --------
Total cost of revenues....................... 134,841 83,682 41,032
-------- -------- --------
Gross profit..................................... 329,569 205,360 125,415
Operating expenses:
Sales and marketing............................ 211,445 138,926 77,765
Research and development....................... 60,972 42,584 29,151
General and administrative..................... 38,065 24,900 17,776
Amortization of goodwill....................... 15,764 2,981 466
Acquisition-related charges.................... 3,000 42,244 16,000
-------- -------- --------
Total operating expenses..................... 329,246 251,635 141,158
-------- -------- --------
Income (loss) from operations.................... 323 (46,275) (15,743)
Interest expense................................. (20,417) (10,426) (6,054)
Interest income and other, net................... 14,437 9,975 1,729
-------- -------- --------
Loss before provision for income taxes........... (5,657) (46,726) (20,068)
Provision for income taxes....................... 13,917 4,856 2,844
-------- -------- --------
Net loss......................................... (19,574) (51,582) (22,912)
Other comprehensive income (loss):
Foreign currency translation adjustments....... (395) 5 (646)
Unrealized loss on available-for-sale
investments, net of income taxes.............. (290) (8) (19)
-------- -------- --------
Comprehensive loss............................... $(20,259) $(51,585) $(23,577)
======== ======== ========
Basic and diluted net loss per share............. $ (0.06) $ (0.18) $ (0.11)
======== ======== ========
Shares used in computing basic and diluted net
loss per share.................................. 310,817 280,988 210,764
======== ======== ========
See accompanying notes
30
BEA SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF REDEEMABLE CONVERTIBLE PREFERRED STOCK AND
STOCKHOLDERS' EQUITY (DEFICIT)
(in thousands, except shares)
Stockholders' Equity (Deficit)
Series B ----------------------------------------------------------------------------------------------------
redeemable Class
convertible B Notes Accumulated Total
preferred Preferred Common common Additional receivable other stockholders'
stock stock stock stock paid-in Accumulated from Deferred comprehensive equity
amount amount amount amount capital deficit stockholders compensation income (loss) (deficit)
----------- --------- ------ ------ ---------- ----------- ------------ ------------ ------------- -------------
Balance at
January 31,
1997............ $ 20,780 $ 17 $ 57 $ - $ 32,694 $(106,879) $(544) $ (845) $ 74 $(75,426)
Issuance of
common stock,
net of issuance
costs of
$3,062.......... - - 51 - 138,156 (39) - - - 138,168
Common shares
issued under
stock option and
stock
purchase plans.. - - 7 - 3,887 (5) - - - 3,889
Issuance of
Series B
Preferred Stock,
net of issuance
costs of $10.... - 1 - - 989 - - - - 990
Issuance and
exercise of
common stock
warrants........ - - 1 - 790 (1) - - - 790
Accretion of
cumulative
dividends on
Series B
Redeemable
Convertible
Preferred
Stock........... 268 - - - - (268) - - - (268)
Conversion of
Series A and
Series B
Preferred
Stock........... (21,048) (17) 32 121 21,027 (115) - - - 21,048
Conversion of
debt
obligations..... - - 7 - 14,013 (5) - - - 14,015
Amortization of
deferred
compensation.... - - - - - - - 244 - 244
Cash
distributions to
Leader Group
Founders........ - - - - - (502) - - - (502)
Net loss........ - - - - - (22,912) - - - (22,912)
Foreign currency
translation
adjustment...... - - - - - - - - (646) (646)
Unrealized
losses on
available-for-
sale
investments, net
of tax.......... - - - - - - - - (19) (19)
-------- ---- ---- ---- -------- --------- ----- ------- ------- --------
Balance at
January 31,
1998............ - 1 155 121 211,556 (130,726) (544) (601) (591) 79,371
Issuance of
common stock.... - 3 - - 18,187 - - - - 18,190
Common shares
issued under
stock option and
stock
purchase plans.. - - 14 - 13,354 (10) - (1,650) - 11,708
Conversion of
preferred
stock........... - (4) 16 - - (12) - - - -
Conversion of
Series B and
Series A Common
Stock........... - - 50 (50) - - - - - -
Amortization of
deferred
compensation.... - - - - - - - 371 - 371
Cash
distributions to
Leader Group
Founders........ - - - - - (559) - - - (559)
Losses from
WebLogic for the
month ended
January 31,
1998............ - - - - - (456) - - - (456)
Net loss........ - - - - - (51,582) - - - (51,582)
Foreign currency
translation
adjustment...... - - - - - - - - 5 5
Unrealized
losses on
available-for-
sale
investments, net
of tax.......... - - - - - - - - (8) (8)
-------- ---- ---- ---- -------- --------- ----- ------- ------- --------
Balance at
January 31,
1999............ - - 235 71 243,097 (183,345) (544) (1,880) (594) 57,040
Issuance of
common stock.... - - 7 - 156,886 (4) - - - 156,889
Common shares
issued under
stock option and
stock
purchase plans.. - - 14 - 27,820 (11) - - - 27,823
Conversion of
debt
obligations..... - - 34 - 222,325 (17) - - - 222,342
Repayment of
notes receivable
from
shareholders.... - - - - - - 248 - - 248
Amortization of
deferred
compensation.... - - - - - - - 736 - 736
Net loss........ - - - - - (19,574) - - - (19,574)
Foreign currency
translation
adjustment...... - - - - - - - - (395) (395)
Unrealized
losses on
available-for-
sale
investments, net
of tax.......... - - - - - - - - (290) (290)
-------- ---- ---- ---- -------- --------- ----- ------- ------- --------
Balance at
January 31,
2000............ $ - $ - $290 $ 71 $650,128 $(202,951) $(296) $(1,144) $(1,279) $444,819
======== ==== ==== ==== ======== ========= ===== ======= ======= ========
See accompanying notes
31
BEA SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Fiscal year ended January
31,
------------------------------
2000 1999 1998
--------- --------- --------
Operating activities:
Net loss..................................... $ (19,574) $ (51,582) $(22,912)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation and amortization.............. 7,309 4,377 2,586
Amortization of deferred compensation...... 736 371 244
Amortization of certain acquired intangible
assets and goodwill and write-off of in-
process research and development.......... 49,155 66,643 27,796
Debt conversion premium.................... 8,054 - -
Other...................................... 309 (614) 358
Changes in operating assets and
liabilities, net of business combinations:
Accounts receivable...................... (54,386) (28,856) (22,631)
Other current assets..................... (9,365) (923) 5,765
Other long-term assets................... (913) 311 53
Accounts payable......................... 6,688 1,706 2,039
Accrued liabilities...................... 44,942 17,189 2,842
Deferred revenues........................ 62,231 18,821 6,219
--------- --------- --------
Net cash provided by operating activities...... 95,186 27,443 2,359
--------- --------- --------
Investing activities:
Purchases of computer equipment, furniture
and leasehold improvements.................. (17,807) (13,188) (3,322)
Payments for business combinations, net of
cash acquired............................... (65,980) (99,432) (2,925)
Decrease in restricted cash.................. 1,869 - -
Purchases of available-for-sale short-term
investments................................. (38,030) (1,374) (8,708)
Sales of available-for-sale short-term
investments................................. - 6,187 -
--------- --------- --------
Net cash used in investing activities.......... (119,948) (107,807) (14,955)
--------- --------- --------
Financing activities:
Net payments under lines of credit........... (679) (1,200) (7,171)
Proceeds from convertible debt, notes payable
and capital lease obligations............... 535,352 244,698 6,123
Payments on shareholder notes receivable..... 248 - -
Payments on notes payable and capital lease
obligations................................. (498) (45,717) (41,143)
Distributions................................ - (559) (502)
Debt conversion premium...................... (8,054) - -
Proceeds from issuance of common and
preferred stock, net........................ 27,823 23,902 143,047
--------- --------- --------
Net cash provided by financing activities...... 554,192 221,124 100,354
--------- --------- --------
Net increase in cash and cash equivalents...... 529,430 140,760 87,758
Effect of exchange rate changes on cash........ 1,308 812 (646)
Cash and cash equivalents at beginning of
year.......................................... 232,556 90,984 3,872
--------- --------- --------
Cash and cash equivalents at end of year....... $ 763,294 $ 232,556 $ 90,984
========= ========= ========
See accompanying notes
32
BEA SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Organization and Significant Accounting Policies
Description of business
BEA Systems, Inc. ("BEA" or the "Company") is a leading provider of e-
commerce infrastructure software for e-commerce applications. BEA's products
and services enable scalable and reliable e-commerce applications to work
seamlessly in client/server, Internet, and legacy environments. BEA provides
transactional, messaging, and distributed object-based software, as well as a
Java Web application server, for developing and deploying these e-commerce
applications and for connecting e-commerce applications to legacy and
mainframe applications. BEA also provides component-based solutions for
delivering scalable and reliable e-commerce applications. In addition to its
broad software product line, BEA provides complete solutions to its customers
through its extensive partner network and a full range of services including
consulting, training, and support.
Principles of consolidation
The accompanying consolidated financial statements include the accounts of
the Company and its subsidiaries. All significant intercompany transactions
and balances have been eliminated. Operations of businesses acquired and
accounted for as purchases are consolidated as of the date of acquisition. On
April 30, 1998, the Company acquired Leader Group Inc. ("Leader Group") and on
September 30, 1998 acquired WebLogic, Inc. ("WebLogic") in merger transactions
accounted for as poolings of interests. All financial information for all
dates and periods prior to these mergers has been restated to reflect the
combined operations of the Company, Leader Group and WebLogic.
Use of estimates
The preparation of the financial statements in accordance with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the consolidated financial
statements and the accompanying notes. Actual results could differ materially
from those estimates.
Foreign currencies
The assets and liabilities of foreign subsidiaries are translated from
their respective functional currencies at the rates in effect at the balance
sheet date while revenues and expense accounts are translated at weighted
average rates during the period. Foreign currency translation adjustments are
reflected as a separate component of accumulated other comprehensive income.
The Company hedges a portion of its exposure on certain intercompany
receivables and payables denominated in foreign currencies using forward
foreign exchange contracts, which are recorded at fair value based on spot
exchange rates at each balance sheet date. Gains and losses resulting from
exchange rate fluctuations on forward foreign exchange contracts are recorded
currently in interest and other expense and offset by corresponding gains and
losses on the foreign currency accounts being hedged. Net gains (losses)
resulting from foreign currency transactions, were approximately $(287,000),
$340,000 and $(600,000) in fiscal 2000, 1999 and 1998, respectively.
Cash, cash equivalents and short-term investments
Cash and cash equivalents consist of highly liquid investments including
commercial paper, money market and taxable municipal bonds with maturities of
90 days or less from the date of purchase. The carrying amounts reported on
the consolidated balance sheets for cash and cash equivalents approximates
their fair market value.
33
BEA SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Short-term investments consist principally of commercial paper and time
deposits with remaining maturities of one year or less. The Company determines
the appropriate classification of its short-term investments at the time of
purchase and re-evaluates such designations as of each balance sheet date. All
short-term investments in the Company's portfolio are classified as
"available-for-sale" and are stated at fair market value, with the unrealized
gains and losses reported as a component of accumulated other comprehensive
income. The amortized cost of debt securities is adjusted for amortization of
premiums and accretion of discounts to maturity. Such amortization is included
in interest income.
Concentration of credit risk
The Company invests its cash, cash equivalents and short-term investments
with financial institutions with high credit standing and, by policy, limits
the amounts invested with any one institution, type of security and issuer.
The Company sells its products to customers, typically large corporations,
in a variety of industries in the Americas, Europe and the Asia/Pacific
region. The Company performs ongoing credit evaluations of its customers'
financial condition and limits the amount of credit extended as deemed
appropriate, but generally requires no collateral. The Company maintains
reserves for estimated credit losses and, to date, such losses have been
within management's expectations. No customer accounted for more than 10
percent of total revenues in any of the fiscal years 2000, 1999 or 1998. There
were no customers that accounted for more than 10 percent of accounts
receivable as of January 31, 1999.
Computer equipment, furniture and leasehold improvements
Computer equipment, furniture and leasehold improvements are stated at
cost. Depreciation is computed using the straight-line method over the
estimated useful lives of the assets, which range from three to seven years.
Assets under capital leases are amortized over the lesser of five years or the
life of the lease, while leasehold improvements are amortized over the shorter
of the estimated useful life or the lease term.
Acquired intangible assets and goodwill
Acquired intangible assets consist of purchased technology, purchased
software, distribution rights, patents, licenses, trademarks, non-compete
agreements, assembled workforce and customer base related to the Company's
acquisitions accounted for using the purchase method. Amortization of these
purchased intangibles and goodwill is calculated on the straight-line basis
over the respective estimated useful lives of the assets ranging from twenty-
four to sixty months. Amortization of purchased technology, purchased
software, distribution rights, patents, licenses, trademarks, non-compete
agreements, assembled workforce and customer base is included as a component
of cost of revenues, while amortization of goodwill is included in operating
expenses. Acquired in-process research and development without alternative
future use is charged to operations when acquired.
Long-lived assets
In accordance with Statement of Financial Accounting Standard No. 121,
Accounting for the Impairment of Long-Lived Assets to be Disposed of ("FAS
121"), the Company identifies and records impairment losses, as circumstances
dictate, on long-lived assets used in operations when events and circumstances
indicate that the assets might be impaired and the undiscounted cash flows
estimated to be generated by those assets are less than the carrying amounts
of those assets. No such impairments have been identified with respect to the
Company's long-lived assets, which consist primarily of acquired intangible
assets, computer equipment, furniture and leasehold improvements.
34
BEA SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Software development costs
Statement of Financial Accounting Standards No. 86, Accounting for the
Costs of Computer Software to be Sold, Leased or Otherwise Marketed, requires
the capitalization of certain software development costs subsequent to the
establishment of technological feasibility. Based on the Company's product
development process, technological feasibility is established upon the
completion of a working model.
Costs incurred by the Company between the completion of the working model
and the point at which the product is ready for general release have been
insignificant. Accordingly, the Company has charged all such costs to research
and development expense in the period incurred.
Equity investments
The Company invests in equity instruments of privately-held companies for
business and strategic purposes. These investments are included in other long-
term assets and are accounted for under the cost method when ownership is less
than 20 percent and the Company does not have the ability to exercise
significant influence over operations. For these investments in privately-held
companies, the Company's policy is to regularly review the assumptions
underlying the operating performance and cash flow forecasts in assessing the
carrying values. Investments in which ownership exceeds 20 percent, but which
are not majority-owned or controlled, are accounted for using the equity
method. Under the equity method, the Company's proportionate share of net
income or loss and amortization of the Company's net excess investment over
its equity in net assets is included in net income or loss.
Revenue recognition
The Company recognizes revenues in accordance with the American Institute
of Certified Public Accountants Statement of Position 97-2, Software Revenue
Recognition, as amended. Revenue from software license agreements is
recognized when persuasive evidence of an agreement exists, delivery of the
product has occurred, no significant vendor obligations are remaining to be
fulfilled, the fee is fixed or determinable, and collectibility is probable.
Services revenue includes consulting services, post-contract customer
support and training. Software maintenance agreements provide technical
support and the right to unspecified upgrades on an if-and-when available
basis. Consulting revenue and the related cost of services are recognized on a
time and materials basis; however, revenues from certain fixed-price contracts
are recognized on the percentage of completion basis, which involves the use
of estimates. Actual results could differ from those estimates and, as a
result, future gross margin on such contracts may be more or less than
anticipated. The amount of consulting contracts recognized on a percentage of
completion basis has not been material to date. Post-contract customer support
revenue is recognized ratably over the term of the support period (generally
one year) and training and other service revenues are recognized as the
related services are provided. The unrecognized portion of amounts paid in
advance for licenses and services is recorded as deferred revenues.
Stock-based compensation
The Company generally grants stock options to its employees for a fixed
number of shares with an exercise price equal to the fair market value of the
stock on the date of grant. As allowed under the Statement of Financial
Accounting Standard No. 123, Accounting for Stock-Based Compensation FAS 123,
the Company has elected to follow Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees ("APB 25") and related
interpretations in accounting for stock awards to employees. Accordingly, no
compensation expense is recognized in the Company's financial statements in
connection with employee stock awards.
35
BEA SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Net loss per share
The Company computes net loss per share under the provisions of Statement
of Financial Accounting Standard No. 128, Earnings per Share ("FAS 128").
Basic net loss per share is computed based on the weighted average number of
shares of the Company's common stock less the weighted average number of
shares subject to repurchase. Diluted net loss per share is computed based on
the weighted average number of shares of the Company's common stock and common
equivalent shares (stock options, warrants, convertible notes and preferred
stock), if dilutive.
The following is a reconciliation of the numerators and denominators of the
basic and diluted loss per share computations (in thousands, except per share
data):
Fiscal year ended January
31,
----------------------------
2000 1999 1998
-------- -------- --------
Basic and diluted net loss per share:
Numerator:
Net loss................................... $(19,574) $(51,582) $(22,912)
Effect of Series B Redeemable Convertible
Preferred Stock dividends................. - - (268)
-------- -------- --------
Net loss available to common stockholders.. $(19,574) $(51,582) $(23,180)
======== ======== ========
Denominator:
Weighted average shares.................... 314,126 287,064 218,852
Weighted average shares subject to
repurchase................................ (3,309) (6,076) (8,088)
-------- -------- --------
Weighted average shares, net............... 310,817 280,988 210,764
-------- -------- --------
Basic and diluted net loss per share....... $ (0.06) $ (0.18) $ (0.11)
======== ======== ========
The computation of diluted net loss per share for the fiscal years ended
January 31, 2000, 1999 and 1998 excludes the impact of options to purchase
52.3 million, 21.6 million and 23.7 million shares of common stock,
respectively; the conversion of the $550 million 4% Convertible Subordinated
Notes due December 15, 2006 ("2006 Notes") and the $250 million 4% Convertible
Subordinated Notes due June 15, 2005 ("2005 Notes"), which are convertible
into 15.8 million and 3.4 million shares of common stock, respectively; and
2.4 million shares of convertible preferred stock at January 31, 1998; as such
impact would be antidilutive for the periods presented.
Segment information
The Company follows Statement of Financial Accounting Standard No. 131,
Disclosures about Segments of an Enterprise and Related Information ("FAS
131"). FAS 131 establishes standards for reporting financial information about
operating segments in financial statements, as well as additional disclosures
about products and services, geographic areas, and major customers. The
Company operates in one operating segment.
Recent accounting pronouncements
In December 1999, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial
Statements" ("SAB 101") and amended it in March 2000. BEA is required to adopt
the provisions of SAB 101 in its second fiscal quarter of 2000. The Company is
currently reviewing the provisions of SAB 101 and has not fully assessed the
impact of its adoption, however, the Company does not expect the adoption of
SAB 101 to have a material impact to its financial position.
36
BEA SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
In December 1998, the American Institute of Certified Public Accountants
("AICPA") issued Statement of Position 98-9, which amends certain provisions
of Statement of Position ("SOP") 97-2 and extends the deferral of the
application of certain passages of SOP 97-2 provided by SOP 98-4 until the
beginning of BEA's fiscal year 2001. The Company is currently evaluating the
impact of SOP 98-9 on its financial statements and related disclosures.
In June 1998, the Financial Accounting Standards Board released Statement
of Financial Accounting Standards No. 133, Accounting for Derivative
Instruments and Hedging Activities ("FAS 133"). FAS 133 establishes the
accounting and reporting standards for derivative instruments, including
certain derivative instruments embedded in other contracts (collectively
referred to as derivatives) and for hedging activities. It requires that an
entity recognize all derivatives as either assets or liabilities in the
statement of financial position and measure those instruments at fair value.
In July 1999, FAS No. 137, Accounting for Derivative Instruments and Hedging
Activities--Deferral of the Effective Data of FASB Statement 133 ("FAS 137")
was issued. FAS 137 deferred the effective date of FAS 133 until the first
fiscal quarter of fiscal years beginning after June 15, 2000. The Company
expects to adopt FAS 133 effective February 1, 2001. The Company does not
expect the adoption of FAS 133 to have a material impact to its financial
position or results of operations.
2. Financial Instruments
Available-for-sale securities
The following is a summary of available-for-sale securities at January 31,
2000 and 1999 (in thousands):
January 31, 2000 January 31, 1999
----------------------------- -----------------------------
Gross Gross
Amortized unrealized Fair Amortized unrealized Fair
cost losses value cost losses value
--------- ---------- -------- --------- ---------- --------
Commercial paper........ $311,782 $(151) $311,631 $117,188 $(35) $117,153
Money market............ 446,106 - 446,106 82,476 - 82,476
Time deposits........... 602 - 602 3,895 - 3,895
-------- ----- -------- -------- ---- --------
$758,490 $(151) $758,339 $203,559 $(35) $203,524
======== ===== ======== ======== ==== ========
Included in the above table are securities with fair values totaling $718.5
million and $199.6 million at January 31, 2000 and 1999, respectively, which
are classified as cash and cash equivalents and $39.8 million and $3.9 million
at January 31, 2000 and 1999, respectively, which are classified as restricted
cash and short-term investments in the accompanying consolidated balance
sheets. All short-term investments mature within six months. At January 31,
2000 and 1999, restricted cash includes cash equivalents of $1.4 million, none
in 1999, respectively, which collaterize standby letters of credit and
restricted time deposits of $250,000 and $3.5 million, respectively, which
collateralize borrowings (see Note 8).
37
BEA SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Foreign currency contracts
The Company enters into forward foreign currency contracts to reduce the
exposure to foreign currency fluctuations as a result of certain intercompany
assets and liabilities denominated in foreign currencies. At January 31, 2000
and 1999, the Company had outstanding forward foreign currency contracts with
a notional amount of approximately $44.2 million and $20.0 million,
respectively. Substantially all of the Company's forward foreign currency
contracts have maturities of 90 days or less. The fair value of forward
foreign currency contracts is estimated based on the spot rate of each of the
various hedged currencies as of the end of the period.
The Company's forward foreign currency contracts notional amounts
outstanding at January 31, 2000 and 1999 were as follows (in thousands):
January 31,
---------------
2000 1999
------- -------
Contracts to purchase foreign currency (sell U.S. dollars)
during the following year:
Euro dollars............................................ $21,800 $ -
British pounds.......................................... 10,300 1,600
German marks............................................ - 3,100
Japanese yen............................................ 2,700 2,500
French francs........................................... - 5,100
Swiss francs............................................ 2,800 100
Swedish krona........................................... 3,200 1,600
Finnish markka.......................................... - 2,600
Other................................................... 600 200
------- -------
$41,400 $16,800
======= =======
Contracts to sell foreign currency (purchase U.S. dollars)
during the following year:
Euro dollars............................................ $ 2,000 $ -
German marks............................................ - 300
Japanese yen............................................ - 600
Swiss francs............................................ - 400
Finnish markka.......................................... - 600
Other................................................... 800 1,300
------- -------
$ 2,800 $ 3,200
======= =======
38
BEA SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Fair value of financial instruments
The carrying amounts and estimated fair values of the Company's financial
instruments were as follows (in thousands):
January 31,
--------------------------------------
2000 1999
------------------ ------------------
Carrying Fair Carrying Fair
amount value amount value
-------- -------- -------- --------
Financial assets:
Cash and cash equivalents........ $763,294 $763,294 $232,556 $232,556
Restricted cash.................. 1,631 1,631 3,500 3,500
Short-term investments........... 38,135 38,135 395 395
Financial liabilities:
Borrowings under lines of
credit.......................... - - 679 679
Notes payable, capital lease
obligations and other long-term
obligations (including current
portion)........................ 10,459 10,459 155 155
Convertible subordinated 2006
Notes........................... 550,000 598,200 - -
Convertible subordinated 2005
Notes........................... 22,484 128,400 250,000 183,500
Forward foreign currency
contracts....................... (780) (780) (206) (206)
The estimated fair value amounts have been determined by the Company using
available market information and appropriate valuation methodologies. However,
judgment is required in interpreting market data to develop the estimates of
fair value. Accordingly, the estimates presented above are not necessarily
indicative of the amounts that the Company could realize in a current market
exchange. The fair value of the 2005 and 2006 notes exceeds the carrying
amount at January 31, 2000, however, the Company's obligation to settle the
notes will at no time be greater than their face or carrying value unless a
discretionary debt conversion premium is negotiated with the holders of the
notes.
For certain of the Company's financial instruments, including cash and cash
equivalents, restricted cash, short-term investments, and notes payable, the
carrying amounts approximate fair value due to their short maturities. The
fair value of forward foreign currency contracts was based on the estimated
amount at which they could be settled based on quoted exchange rates. The fair
values of the convertible subordinated notes are estimated using quoted market
prices.
3. Computer Equipment, Furniture and Leasehold Improvements
Computer equipment, furniture and leasehold improvements consist of the
following (in thousands):
January 31,
----------------
2000 1999
------- -------
Computer equipment......................................... $17,290 $ 8,953
Furniture and equipment.................................... 11,722 6,621
Leasehold improvements..................................... 13,269 8,273
Furniture and equipment under capital leases............... 1,510 1,789
------- -------
43,791 25,636
Accumulated depreciation and amortization.................. (15,813) (8,451)
------- -------
$27,978 $17,185
======= =======
Accumulated amortization for furniture and equipment under capital leases
was approximately $936,000 and $693,000 at January 31, 2000 and 1999,
respectively.
39
BEA SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
4. Business Combinations
The Theory Center
On November 19, 1999, BEA completed its acquisition of The Theory Center,
Inc. ("TTC"). Under the terms of the acquisition agreement, each outstanding
share of TTC common stock was converted into 0.7918276 shares of BEA common
stock. This resulted in the issuance of 7,270,828 shares of BEA common stock,
valued at $16.1875 per share. In addition, TTC options were exchanged for
options to purchase 3,642,400 shares of BEA common stock and TTC warrants were
exchanged for warrants to purchase 80,000 shares of BEA common stock. As of
January 31, 2000, approximately 763,436 shares were held in escrow, with
distributions in May 2000 and 2002. The transaction was accounted for as a
purchase. The total cost of the acquisition was approximately $156.9 million.
The following is a summary of the purchase price allocation (in thousands):
Current assets and other tangible assets........................... $ 2,122
Liabilities assumed................................................ (6,495)
Acquired in-process research and development....................... 3,000
Goodwill........................................................... 124,493
Intangible assets.................................................. 33,800
--------
$156,920
========
A valuation of the purchased assets was performed to assist in determining
the fair value of each identifiable tangible and intangible asset and in
allocating the purchase price among the acquired assets, including the portion
of the purchase price attributed to acquired in-process research and
development projects. Standard valuation procedures and techniques were
utilized in determining the fair value of the acquired core/developed and in-
process technology.
Core technology and in-process technology were identified and valued
through analysis of TTC's and BEA's current development projects, their
respective stage of development, the time and resources needed to complete
them, their expected income-generating ability, their target markets and the
associated risks.
The cost approach, which includes an analysis of the cost of reproducing or
replacing the asset, was the methodology utilized in valuing component
technology tools and assembled workforce. The income approach, which includes
an analysis of the markets, cash flows and risks associated with achieving
such cash flows, was the methodology utilized in valuing in-process
technology, completed technology, patents and non-compete agreements. Each
developmental project was evaluated to determine if there were any alternative
future uses. This evaluation consisted of a specific review of each project,
including the overall objectives of the project, progress toward such
objectives, and uniqueness of the project. The net after-tax cash flows
representing the cash flows generated by the respective core and in-process
technologies were then discounted to present value. The discount was based
upon an analysis of the weighted average cost of capital for the industry.
40
BEA SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Supplemental pro forma information reflecting the acquisition of TTC as if
it occurred at the beginning of each fiscal year (in thousands, unaudited):
January 31,
------------------
2000 1999
-------- --------
Revenue.................................................. $465,420 $289,042
Net loss................................................. (59,029) (86,980)
Net loss per share....................................... (0.19) (0.60)
This pro forma information assumes that the acquisition of TTC occurred as
of the beginning of each fiscal period presented. Such information is not
necessarily representative of the actual results that would have occurred for
those periods.
WebLogic, Inc. and Leader Group, Inc.
On September 30, 1998 the Company issued 30,572,480 shares of its common
stock to acquire WebLogic, Inc., a San Francisco-based software company, in a
transaction accounted for as a pooling of interests. The Company's financial
statements include WebLogic's results of operations and cash flows for all
periods presented. Prior to pooling with BEA, WebLogic's fiscal year followed
the calendar year. Accordingly, the Company's consolidated financial
statements for the fiscal year ended January 31, 1998 include the financial
position of WebLogic as of December 31, 1997, and its statement of operations,
stockholders equity and cash flows for the year ended December 31, 1997.
On April 30, 1998, the Company issued 2,242,816 shares of its common stock
to acquire Leader Group, Inc., a Denver-based private company specializing in
consulting solutions for the development, deployment and delivery of mission-
critical distributed object applications, in a transaction accounted for as a
pooling of interests. The Company's consolidated financial statements include
the results of operations, financial position and cash flows of Leader Group
for the periods presented. In connection with the transaction, the Company
incurred approximately $491,000 in merger-related expenses consisting
primarily of legal and other professional fees in the first quarter of fiscal
year 1999.
As required by generally accepted accounting principles, the effect of
transactions between the Company, Leader Group and WebLogic prior to the
combination have been eliminated. There were no significant conforming
accounting adjustments.
TOP END
On June 16, 1998, the Company completed an Asset Purchase Agreement with
NCR Corporation ("NCR") under which the Company purchased the TOP END
enterprise middleware technology and product family for approximately $92.4
million in cash. The Company has accounted for the acquisition as a purchase
of assets. In connection with the purchase, the Company recorded a charge of
$38.3 million relating to acquired in-process research and development.
The following is a summary of the purchase price allocation (in thousands):
Current assets and other intangible assets.......................... $ 7,907
Liabilities assumed................................................. (1,007)
Developed technology................................................ 39,500
Acquired in-process research and development........................ 38,300
Goodwill............................................................ 7,700
-------
$92,400
=======
41
BEA SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Digital Equipment Corporation
On March 26, 1997, the Company completed an agreement with Digital
Equipment Corporation ("Digital") to acquire exclusive worldwide rights to
MessageQ, ObjectBroker and other related products. The purchase price
(including $308,000 direct acquisition costs) was approximately $20.1 million.
The acquisition was accounted for using the purchase method. Of the aggregate
consideration, $5.0 million was paid in cash on closing and aggregate payments
of $17.0 million were due pursuant to a convertible promissory note. Interest
was imputed on the convertible promissory note at 8 percent, which resulted in
the recorded liability of approximately $14.0 million on a present value
basis. In addition, the Company granted Digital a warrant to purchase
2,000,000 shares of common stock at a price of $1.50 per share.
The following is a summary of the purchase price allocation (in thousands):
Current assets and other tangible assets............................ $ 6,017
Liabilities assumed................................................. (6,247)
Acquired in-process research and development........................ 16,000
Developed technology................................................ 3,700
Goodwill............................................................ 613
-------
$20,083
=======
In August 1997, the Company and Digital entered into an agreement whereby
the Company issued 3,703,700 shares of Common Stock and paid $4,925,000 in
full settlement of the convertible promissory note. Additionally, the Company
issued 1,456,088 shares of common stock to Digital in accordance with the
terms of Digital's exercise of the entire warrant as provided for in the
warrant agreement.
5. Acquired Intangible Assets
Acquired intangible assets consist of the following (in thousands):
January 31,
------------------
2000 1999
-------- --------
Purchased technology, distribution rights and other..... $123,751 $ 89,157
Trademarks and tradenames............................... 12,317 5,017
-------- --------
136,068 94,174
Accumulated amortization................................ (74,468) (44,077)
-------- --------
$ 61,600 $ 50,097
======== ========
6. Other Long-Term Assets
Other assets consist of the following (in thousands):
January 31,
--------------
2000 1999
------- ------
Equity investment in WebGain, Inc. .......................... $37,000 $ -
Other equity investments in private companies................ 1,060 -
Notes receivable from executive officers..................... 1,787 1,120
Debt issuance costs.......................................... 14,962 6,641
Long-term prepaids and deposits.............................. 1,349 1,216
Other long-term assets....................................... 271 150
------- ------
$56,429 $9,127
======= ======
42
BEA SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
During fiscal 2000, the Company purchased 7,400,000 shares of WebGain, Inc.
Series A Preferred Stock for $37.0 million, representing a 48 percent
ownership interest. Warburg Pincus Equity Partners, L.P. and affiliated
entities, which are direct or indirect affiliates of BEA, hold the remaining
ownership of WebGain, Inc.
Notes receivable from executive officers of the Company are for the
financing of real property. These notes, which are secured by deeds of trust
on real property, bear interest at 7 percent per annum and are due and payable
on the earlier of dates ranging from January 1, 2001 to December 23, 2004 or
the termination of the executive's employment with the Company. The notes may
be repaid at any time prior to the due date. In March 2000, a note receivable,
for approximately $871,000, was repaid in full.
During fiscal 2000, the Company incurred $14.7 million debt issuance costs
in connection with the issuance of the 2006 Notes due December 15, 2006 (see
Note 8). The costs are being amortized to interest expense over 84 months, the
original life of the 2006 Notes. In fiscal 1999, the Company incurred $7.3
million debt issuance costs in connection with the issuance of the 2005 Notes
due June 15, 2005 (see Note 8). During fiscal 2000, approximately $227.5
million of the 2005 Notes were converted to common stock and related interest
of approximately $8.1 million was charged to interest expense. The remaining
costs are being amortized to interest expense on a straight-line basis, which
approximates the effective interest method over 84 months, the original life
of the 2005 Notes. The unamortized balance of debt issuance costs included in
other long-term assets at January 31, 2000 and 1999 were approximately $15.0
million and $6.6 million, respectively.
7. Accrued Liabilities
Accrued liabilities consist of the following (in thousands):
January 31,
---------------
2000 1999
------- -------
Accrued payroll and related liabilities..................... $43,059 $32,120
Accrued sales taxes......................................... 11,230 3,871
Other accrued liabilities................................... 38,384 11,756
------- -------
$92,673 $47,747
======= =======
8. Line of Credit, Notes Payable and Other Long-Term Obligations
Borrowings under lines of credit
At January 31, 2000, the Company had no borrowings under its line of credit
agreements. At January 31, 1999, the Company had outstanding $700,000,
pursuant to a revolving line of credit arrangement with commercial lenders in
Hong Kong. The maximum credit available under the arrangement was $2.5 million
and borrowings available under the line totaled approximately $1.8 million at
January 31, 1999. Borrowings under the credit arrangement bear interest at a
rate of 9.125 percent.
43
BEA SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Notes payable and other long-term obligations
Notes payable and other long-term obligations consist of the following (in
thousands):
January 31,
-------------
2000 1999
------- ----
Capital lease obligations................................... $ - $ 88
Other notes payable......................................... 36 67
Acquisition-related liabilities............................. 9,600 -
Other long-term obligations................................. 823 -
------- ----
10,459 155
Less amounts due within one year............................ (4,454) (43)
------- ----
Notes payable and other long-term obligations due after one
year....................................................... $ 6,005 $112
======= ====
Scheduled maturities of notes payable and other long-term obligations are
as follows (in thousands):
Other long-
Notes term
payable obligations
------- -----------
January 31,
2001................................................... $21 $ 4,433
2002................................................... 15 5,947
2003................................................... - 21
2004................................................... - 22
--- -------
$36 $10,423
=== =======
Convertible subordinated debt offerings
In December 1999, the Company completed the sale of the $550 million 4%
Convertible Subordinated Notes due December 15, 2006 ("2006 Notes") in an
offering to Qualified Institutional Buyers. The 2006 Notes are subordinated to
all existing and future senior indebtedness of the Company, and the principal
amount of the 2006 Notes is convertible at the option of the holder at any
time into common stock of the Company at a conversion rate of 28.86 shares per
$1,000 principal amount of 2006 Notes (equivalent to an approximate conversion
price of $34.65 per share). The 2006 Notes are redeemable at the option of the
Company in whole or in part at any time on or after December 20, 2002, in cash
plus accrued interest, if any, through the redemption date, subject to certain
events. Interest is payable semi-annually.
In June and July 1998, the Company completed the sale of the $250 million
4% Convertible Subordinated Notes due June 15, 2005 ("2005 Notes") in an
offering to Qualified Institutional Buyers. The 2005 Notes are subordinated to
all existing and future senior indebtedness of the Company, and the principal
amount of the 2005 Notes is convertible at the option of the holder at any
time into common stock of the Company at a conversion rate of 151.48 shares
per $1,000 principal amount of 2005 Notes (equivalent to an approximate
conversion price of $6.60 per share). The 2005 Notes are redeemable at the
option of the Company in whole or in part at any time on or after June 5,
2001, in cash plus accrued interest, if any, through the redemption date,
subject to certain events. Interest is payable semi-annually. During fiscal
2000, approximately $227.5 million of the 2005 Notes were converted to common
stock, leaving approximately $22.5 million as remaining principal. The Company
incurred $8.1 million of debt conversion premium, which was charged to
interest expense.
44
BEA SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
9. Income Taxes
The components of the provisions for income taxes consist of the following
(in thousands):
January 31,
----------------------
2000 1999 1998
------- ------ ------
Federal:
Current............................................ $ 5,731 $1,420 $ 879
Deferred........................................... (3,800) - -
State:
Current............................................ 5,093 804 300
Foreign:
Current............................................ 6,893 2,632 1,665
------- ------ ------
Provision for income taxes....................... $13,917 $4,856 $2,844
======= ====== ======
The reconciliation of income tax attributable to continuing operations
computed at the U.S. federal statutory tax rate (35 percent) to income tax
expense is as follows (in thousands):
January 31,
---------------------------
2000 1999 1998
-------- -------- -------
Tax benefit at U.S. statutory rate............ $ (1,980) $(16,355) $(7,023)
State income taxes, net of federal benefit.... 3,310 523 195
Nondeductible amortization of intangible
assets....................................... 2,336 6,511 2,720
Purchase adjustment........................... 11,830 - -
Valuation allowance........................... (16,585) 8,316 6,491
Unbenefitted foreign losses................... 5,173 3,442 -
Foreign income and withholding taxes.......... 6,893 1,056 397
Nondeductible transaction expenses............ 2,819 1,036 -
Other......................................... 121 327 64
-------- -------- -------
Provision for income taxes.................. $ 13,917 $ 4,856 $ 2,844
======== ======== =======
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components
of the Company's deferred tax assets for federal and state income taxes are as
follows (in thousands):
January 31,
------------------
2000 1999
-------- --------
Deferred tax assets:
Deferred revenue....................................... $ 8,486 $ 834
Accruals and reserves.................................. 13,195 5,915
Net operating loss carryforwards....................... 525 3,958
Property, equipment and intangible assets.............. 26,319 32,364
Other.................................................. - 1,332
-------- --------
Total deferred tax assets................................ 48,525 44,403
Valuation allowance...................................... (44,725) (44,403)
-------- --------
Net deferred tax assets.............................. $ 3,800 $ -
======== ========
45
BEA SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Realization of deferred tax assets is primarily dependent on future taxable
income, if any, the timing and amount of which are uncertain. Accordingly, a
valuation allowance, in an amount equal to the net deferred tax assets
dependent upon future taxable income at January 31, 2000 and 1999, has been
established to reflect these uncertainties. A deferred tax asset has been
established in fiscal 2000 to the extent of refundable U.S. current federal
income taxes payable. The valuation allowance increased by approximately
$322,000 and $16.6 million in fiscal years 2000 and 1999, respectively.
Approximately $25.5 million and $6.5 million of the valuation allowance at
January 31, 2000 and 1999, respectively, relates to tax benefits associated
with exercises of stock options which will reduce income taxes payable and be
credited to additional paid-in capital when realized.
As of January 31, 2000, the Company had federal net operating loss
carryforwards of approximately $1.5 million, which will expire in 2009 through
2019. Utilization of net operating loss carryforwards may be subject to
substantial limitations due to ownership change and other limitations provided
by the Internal Revenue Code and similar state provisions. These limitations
may result in the expiration of net operating loss carryforwards before full
utilization.
Pretax income (loss) from foreign operations was approximately $(25.2)
million, $(25.7) million and $8.5 million for fiscal 2000, 1999 and 1998,
respectively.
10. Series B Redeemable Convertible Preferred Stock
At January 31, 1997, the Company had outstanding 79,391,200 shares of
Series B Redeemable Convertible Preferred Stock (Series B Preferred Stock). At
the time of the Company's initial public offering of common stock in April
1997, all of the outstanding Series B Preferred Stock and accumulated
dividends were converted into common stock and Class B Common Stock.
46
BEA SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
11. Stockholders' Equity
Share activity
The following table represents changes in shares of preferred and common
stock:
Series B
redeemable
convertible Class B
preferred Preferred Common common
(in thousands) stock stock stock stock
- -------------- ----------- --------- ------- -------
Balance at January 31, 1997........... 79,392 69,644 56,920 -
Issuance of common stock, net of costs
of $3,062............................ - - 50,892 -
Shares issued under stock option and
stock purchase plans................. - - 7,248 -
Issuance of Series B Preferred Stock
net of issuance costs of $10......... - 1,428 - -
Issuance and exercise of common stock
warrants............................. - - 1,456 -
Conversion of Series A and Series B
Preferred Stock...................... (79,392) (68,664) 31,520 120,896
Conversion of debt obligations........ - - 6,972 -
------- ------- ------- -------
Balance at January 31, 1998........... - 2,408 155,008 120,896
Issuance of preferred and common
stock................................ - 14,476 764 -
Shares issued under stock option and
stock purchase plans................. - - 14,292 -
Repurchase of common shares........... - - (1,268) -
Conversion of preferred stock......... - (16,884) 16,884 -
Conversion of Class B Common Stock.... - - 49,600 (49,600)
------- ------- ------- -------
Balance at January 31, 1999........... - - 235,280 71,296
Issuance of common stock.............. - - 7,272 -
Shares issued under stock option and
stock purchase plans................. - - 13,552 -
Conversion of debt obligations........ - - 34,464 -
------- ------- ------- -------
Balance at January 31, 2000........... - - 290,568 71,296
======= ======= ======= =======
Stock splits
In December 1999, the Company completed a two-for-one common stock split in
the form of a stock dividend. All common stock share information and per share
amounts in the accompanying consolidated financial statements and notes have
been retroactively adjusted to reflect the effect of the stock split.
Series A and B convertible preferred stock
In April 1997, the Company completed its initial public offering of common
stock. The offering generated net proceeds of approximately $27.7 million from
the sale of 21.6 million shares. In July 1997, the Company completed a follow-
on public offering of its common stock. The offering generated net proceeds of
approximately $110.4 million from the sale of 27.6 million shares of common
stock. At the time of the initial public offering in April 1997, all
outstanding shares of Series A Preferred Stock were converted into common
stock and Class B Common Stock.
At January 31, 1997, WebLogic had outstanding 980,000 shares of Series A
Preferred Stock and no Series B Preferred Stock. At January 31, 1998, WebLogic
had outstanding 980,000 shares of Series A Preferred Stock and 1.4 million
shares of Series B Preferred Stock. Upon the merger of BEA and WebLogic (see
Note 4) all outstanding shares of WebLogic Series A and B Preferred Stock at
January 31, 1998 were converted into approximately 2.4 million shares of BEA
common stock.
47
BEA SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Common stock
In July 1999, the Company's stockholders approved an amendment to the
Company's certificate of Incorporation to increase the authorized shares of
common stock from 342,060,000 shares to 1,000,000,000 shares.
The Company has issued shares of its common stock to certain employees of
the Company, pursuant to which the Company has the right to repurchase shares
of common stock sold to such employees at the original issuance price upon the
employee's termination of employment. The repurchase option expires at the
rate of 1/48 of the total shares every month, subject to acceleration upon the
occurrence of certain events. As of January 31, 2000, approximately 3.3
million shares were subject to the Company's right of repurchase.
The Company has reserved shares of common stock for future issuance at
January 31, 2000 as follows (in thousands):
Shares reserved for Incentive Stock Option Plans.................... 103,614
Shares reserved for Employee Stock Purchase Plan.................... 6,492
Outstanding warrants................................................ 229
Shares reserved for conversion of convertible notes payable (2005
Notes and 2006 Notes).............................................. 19,279
-------
Total common stock reserved for future issuance................... 129,614
=======
Outstanding warrants have exercise prices ranging from $0.31 to $0.56 per
share with expiration dates ranging from January 28, 2003 to September 24,
2004.
Class B common stock
In March 1997, BEA's Board of Directors authorized 140 million shares of an
additional class of common stock (Class B Common Stock). The Class B Common
Stock has the same rights, preferences, privileges and restrictions as the
common stock, except that each share of Class B Common Stock is convertible
into one share of common stock, has no voting rights except as required by
Delaware law and has no right to vote for the election of directors. The
shares of Class B Common Stock are convertible at the option of the holder
into common stock, so long as such conversion does not result in the
converting stockholder holding more than 49 percent of the Company's
outstanding voting securities. The shares of Class B Common Stock could be
automatically converted into a like number of shares of common stock upon the
occurrence of certain events.
Deferred compensation
In fiscal years 1997 and 1999, the Company recorded deferred compensation
of approximately $973,000 and $1,650,000, respectively, for certain common
stock options granted at prices below the deemed fair market value of the
Company's common stock on the date of grant. The amount of deferred
compensation is being amortized as compensation expense over the vesting
period of the underlying stock options. For the fiscal years ended January 31,
2000, 1999 and 1998, compensation expense recognized totaled $736,000,
$371,000 and $244,000, respectively.
Stockholder notes receivable
In September 1995, the Company issued 12,200,000 shares of common stock to
certain officers in exchange for cash of $325,000 and notes receivable of
$544,000. The notes receivable are issued on full recourse terms and bear
interest at 7 percent compounded semi-annually. The notes receivable are due
on September 28, 2000
48
BEA SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
or within a specified period of time following termination of employment with
the Company. In fiscal 2000, $248,000 of these notes was repaid to the
Company.
12. Employee Benefit Plans
Stock option plans
Under the Company's stock option plans, incentive and nonqualified stock
options may be granted to eligible participants to purchase shares of the
Company's common stock. Options generally vest over a four-year period and
have terms of up to ten years. Annually, the number of shares available in the
plan is automatically increased by an amount up to 6.0 percent of the
outstanding shares of common stock on the last day of the immediately
preceding fiscal year less the number of shares of common stock added to the
stock purchase plan, not to exceed 24 million shares per fiscal year. The
exercise price of the stock options is determined by the Company's Board of
Directors on the date of grant and must be at least equal to the fair market
value of the stock on the grant date.
Upon the merger of BEA and WebLogic, all of the WebLogic outstanding stock
options were converted into BEA stock options. All such options were
immediately exercisable on the date of grant and are subject to vesting;
however, certain options became fully vested upon the merger. The Company has
the right to repurchase unvested shares, which right lapses ratably over the
vesting period.
Information with respect to option activity under the Company's stock
option plans are summarized as follows:
Weighted
average
exercise
Exercise price
Options price per per
(shares in thousands) outstanding share share
--------------------- ----------- ------------- --------
Options outstanding at January 31,
1997................................... 27,900 $0.003-$ 1.50 $0.24
Granted............................... 24,236 $0.01 -$ 6.04 $1.50
Exercised............................. (7,360) $0.01 -$ 1.50 $0.09
Canceled.............................. (4,704) $0.01 -$ 5.00 $0.47
-------
Options outstanding at January 31,
1998................................... 40,072 $0.01 -$ 6.04 $1.00
Granted............................... 19,132 $2.50 -$ 7.04 $5.00
Exercised............................. (8,328) $0.03 -$ 5.00 $0.38
Canceled.............................. (4,660) $0.07 -$ 6.75 $3.60
-------
Options outstanding at January 31,
1999................................... 46,216 $0.03 -$ 7.04 $2.56
Granted............................... 42,746 $0.07 -$41.35 $8.56
Exercised............................. (10,235) $0.03 -$ 6.75 $1.62
Canceled.............................. (11,041) $0.03 -$34.97 $4.54
-------
Options outstanding at January 31,
2000................................... 67,686 $0.03 -$41.35 $6.17
=======
Options exercisable at January 31,
2000................................... 18,564 $0.03 -$41.35 $1.71
=======
Options available for grant at January
31, 2000............................... 35,927
=======
The weighted average grant date fair value of stock options was $8.79,
$3.55 and $1.02 in fiscal years 2000, 1999 and 1998, respectively.
49
BEA SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
The following table summarizes information about outstanding and
exercisable stock options at January 31, 2000:
Outstanding Exercisable
--------------------------- ---------------
Weighted
average
remaining Weighted Weighted
Number contractual average Number average
of life (in exercise of exercise
(shares in thousands) shares years) price shares price
--------------------- ------ ----------- -------- ------ --------
Range of per share exercise
prices
$ 0.03-$ 0.07................ 7,516 6.83 $ 0.07 6,526 $0.07
$ 0.12-$ 1.00................ 5,176 7.70 $ 0.38 4,350 $0.35
$ 1.50-$ 2.75................ 4,814 8.60 $ 1.70 2,568 $1.61
$ 2.88-$ 3.72................ 5,006 8.52 $ 3.36 870 $3.31
$ 3.75-$ 3.94................ 4,452 8.95 $ 3.82 474 $3.84
$ 3.97-$ 4.28................ 5,002 9.11 $ 4.04 36 $4.10
$ 4.33....................... 5,008 9.29 $ 4.33 14 $4.33
$ 4.41-$ 5.49................ 5,480 8.43 $ 5.05 1,798 $5.02
$ 5.50-$ 5.99................ 5,490 9.19 $ 5.77 634 $5.62
$ 6.03-$ 6.61................ 4,642 8.91 $ 6.23 1,208 $6.24
$ 6.72-$ 7.89................ 5,292 9.42 $ 6.91 86 $6.75
$ 8.24-$18.13................ 4,576 9.73 $11.55 - $ -
$20.32-$41.35................ 5,232 9.40 $29.35 - $ -
------ ------
67,686 18,564
====== ======
Employee stock purchase plan
In March 1997, the Company's Stockholders approved an Employee Stock
Purchase Plan (the "Plan") for all employees meeting certain eligibility
criteria. Under the Plan, employees may purchase shares of the Company's
common stock, subject to certain limitations, at 85 percent of fair market
value as defined in the Plan. Annually, the number of shares available in the
Plan automatically increase by an amount equal to 6.0 percent of the
outstanding shares of common stock on the last day of the immediately
preceding fiscal year less the number of shares of common stock added to the
stock option plan, not to exceed 24 million shares per fiscal year. At January
31, 2000, 5.4 million shares had been issued under the Plan and 6.5 million
shares were reserved for issuance.
401(k) plan
The Company has a 401(k) Profit Sharing Plan (the "Plan") that allows
eligible employees to contribute up to 15 percent of their annual compensation
to the Plan, subject to certain limitations. The Company matches employee
contributions at a rate of 3 percent of salary, up to a maximum of $1,500.
Employee contributions vest immediately, whereas Company matching
contributions vest at a rate of 25 percent per year of employment. The Plan
also allows the Company to make discretionary contributions; however, none
have been made to date.
Accounting for stock-based compensation
The Company has elected to follow APB 25 and related interpretations in
accounting for its employee stock options because, as discussed below, the
alternative fair value accounting provided for under FAS 123 requires use of
option valuation models that were not developed for use in valuing employee
stock options. Under
50
BEA SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
APB 25, because the exercise price of the Company's employee stock options
equals the market price of the underlying stock on the date of grant, no
compensation expense is recognized in the Company's financial statements.
Pro forma information regarding net loss and net loss per share is required
by FAS 123. This information is required to be determined as if the Company
had accounted for its employee stock options (including shares issued under
the Employee Stock Purchase Plan, collectively called "stock based awards")
granted subsequent to January 31, 1995, under the fair value method of that
statement. The fair value of the Company's stock based awards granted to
employees in fiscal years 1998 and 1997, prior to the Company's initial public
offering, was estimated using the minimum value method. Stock based awards
granted in fiscal years 2000, 1999 and 1998, subsequent to the Company's
initial public offerings, have been valued using the Black-Scholes option
pricing model. Among other things, the Black-Scholes model considers the
expected volatility of the Company's stock price, determined in accordance
with FAS 123, in arriving at an option valuation. The minimum value method
does not consider stock price volatility. Further, certain other assumptions
necessary to apply the Black-Scholes model may differ significantly from
assumptions used in calculating the value of stock based awards granted in
fiscal years 1998 and 1997 under the minimum value method.
The fair value of the Company's stock based awards to employees was
estimated assuming no expected dividends and the following weighted-average
assumptions:
Employee stock Employee stock
options purchase plan
---------------- ----------------
2000 1999 1998 2000 1999 1998
---- ---- ---- ---- ---- ----
Expected life (in years)................. 4.30 4.71 4.50 .5 .5 .5
Risk-free interest rate.................. 5.93% 5.14% 6.12% 5.62% 5.10% 6.25%
Expected volatility...................... .81 .66 .60 .81 .66 .60
Dividends................................ - - - - - -
The Black-Scholes option-pricing model was developed for use in estimating
the fair value of traded options that have no vesting restrictions and are
fully transferable. In addition, option valuation models require the input of
highly subjective assumptions, including the expected volatility of the stock
price. Because the Company's stock based awards have characteristics
significantly different from those of traded options and because changes in
the subjective input assumptions can materially affect the fair value
estimates, in the opinion of management, the existing models do not
necessarily provide a reliable single measure of the fair value of its stock
based awards.
For purposes of pro forma disclosures, the estimated fair value of the
above stock-based awards is amortized to expense over the awards' vesting
period. The Company's pro forma information follows (in thousands, except per
share amount):
January 31,
----------------------------
2000 1999 1998
-------- -------- --------
Pro forma net loss........................... $(61,707) $(86,884) $(25,713)
Pro forma basic and diluted net loss per
share....................................... $ (0.20) $ (0.31) $ (0.12)
51
BEA SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
13. Comprehensive Loss
The components of accumulated comprehensive loss are as follows (in
thousands):
January 31,
--------------
2000 1999
------- -----
Foreign currency translation adjustment..................... $ (962) $(567)
Unrealized loss on available-for-sale investments, net of
tax of $124 and $12 in fiscal 2000 and 1999, respectively.. (317) (27)
------- -----
Total accumulated other comprehensive loss.................. $(1,279) $(594)
======= =====
The related income tax effect allocated to each component of other
comprehensive income are as follows (in thousands):
Income
Amount tax Amount
before (expense) net of
tax benefit taxes
------ --------- ------
Fiscal 2000
Foreign currency translation adjustment......... $(395) $ - $(395)
Unrealized loss on available-for-sale
investments.................................... (414) 124 (290)
----- ---- -----
Total other comprehensive loss................ $(809) $124 $(685)
===== ==== =====
Fiscal 1999
Foreign currency translation adjustment......... $ 5 $ - $ 5
Unrealized loss on available-for-sale
investments.................................... (12) 4 (8)
----- ---- -----
Total other comprehensive loss................ $ (7) $ 4 $ (3)
===== ==== =====
Fiscal 1998
Foreign currency translation adjustment......... $(646) $ - $(646)
Unrealized loss on available-for-sale
investments.................................... (27) 8 (19)
----- ---- -----
Total other comprehensive loss................ $(673) $ 8 $(665)
===== ==== =====
14. Industry and Geographic Segment Information
Information regarding the Company's operations by geographic areas at
January 31, 2000, 1999 and 1998 and for the fiscal years then ended is as
follows (in thousands):
Fiscal year ended January
31,
--------------------------
2000 1999 1998
-------- -------- --------
Total revenues:
United States.................................. $276,755 $173,305 $ 96,170
Europe, Middle East and Africa................. 141,097 93,825 45,229
Asia/Pacific and other......................... 46,558 21,912 25,048
-------- -------- --------
$464,410 $289,042 $166,447
======== ======== ========
Long-lived assets (at end of year):
United States.................................. $264,865 $340,481 $127,849
Europe, Middle East and Africa................. 3,610 44,407 29,046
Asia/Pacific and other......................... 18,989 18,123 17,308
-------- -------- --------
$287,464 $403,011 $174,203
======== ======== ========
52
BEA SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The Company assigns revenues and assets to geographic areas based on the
location from which the invoice is generated.
15. Supplemental Cash Flow Disclosures
Cash payments for interest were $11.0 million (exclusive of the debt
conversion premium of $8.1 million), $7.2 million and $6.2 million for fiscal
2000, 1999 and 1998, respectively. Cash payment for income taxes were
approximately $6.3 million, $1.6 million and $422,000 for fiscal 2000, 1999
and 1998, respectively. In fiscal 2000, the holders converted approximately
$227.5 million of the 2005 Notes into common stock. The value of stock issued
in business acquisitions for fiscal 2000 was $117.7 million.
16. Commitments and Contingencies
Operating Leases
The Company leases its facilities under operating lease arrangements. The
Company entered into agreements to sublease portions of this space. Certain of
the leases provide for specified annual rent increases as well as options to
extend the lease beyond the initial term.
Approximate annual minimum operating lease commitments and sublease rental
income are as follows (in thousands):
Sublease
January 31, Commitments income
----------- ----------- --------
2001.................................................. $14,367 $3,716
2002.................................................. 12,114 1,299
2003.................................................. 11,341 369
2004.................................................. 10,907 43
2005.................................................. 9,804 -
Thereafter............................................ 25,530 -
------- ------
Total minimum lease payments........................ $84,063 $5,427
======= ======
Total rent expense charged to operations for the fiscal years ended January
31, 2000, 1999 and 1998 was approximately $16.9 million, $11.8 million and
$6.0 million, respectively. Rental income for the facilities under sublease
was $3.6 million for the year ended January 31, 2000 and insignificant for the
years ended January 31, 1999 and 1998.
Litigation
The Company is subject to legal proceedings and claims that arise in the
ordinary course of its business. While management currently believes the
amount of ultimate liability, if any, with respect to these actions will not
materially affect the financial position, results of operations, or liquidity
of the Company, the ultimate outcome of any litigation is uncertain. Were an
unfavorable outcome to occur, the impact could be material to the Company.
Employer Payroll Taxes
The Company is subject to employer payroll taxes when employees exercise
stock options. The payroll taxes are assessed on the stock option gain, which
is the difference between the common stock price on the date of exercise and
the exercise price. The tax rate varies depending upon the employees' taxing
jurisdiction. The timing and amount of employer payroll taxes is directly
related to the timing and number of options exercised by employees, the gain
thereon and the tax rate in the applicable jurisdiction. During fiscal 2000,
the Company
53
BEA SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
recorded employer payroll taxes related to stock option exercises of
approximately $2.0 million. Because the Company is unable to predict these
employer payroll taxes the Company is unable to predict what, if any, expense
will be recorded in a future period.
Related Party Transactions
During fiscal 2000, the Company extended two $5.0 million unsecured lines
of credit to certain officers of the Company. As of January 31, 2000, there
were no outstanding borrowings under the lines of credit.
17. Subsequent Events
In April 2000, the Company's stockholders approved an increase in the
number of authorized shares of common stock and Class B Common Stock to
1,035,000,000 shares.
In addition, in April 2000, the Company's Board of Directors approved a
two-for-one common stock split effected as a stock dividend. Shareholders of
record on April 7, 2000 (the record date) received a dividend of one share for
every share held on that date. The shares were distributed on April 24, 2000.
All share information and per share amounts in the accompanying consolidated
financial statements and notes have been retroactively adjusted to reflect the
effect of the stock split.
18. Subsequent Events (unaudited)
On March 21, 2000, the Company purchased Workflow Automation Corporation,
Inc. ("Workflow") through the issuance of 470,718 shares of BEA common stock,
valued at $49.41 per share. The acquisition will be accounted for using the
purchase method. While the Company expects a significant portion of the
purchase price to be allocated to intangible assets, the valuation of the
intangible assets and the allocation of the purchase price have not been
completed.
During March 2000, the Company made an additional $5.0 million investment
in WebGain, Inc. In April 2000, the Company issued an $18.0 million 8%
Convertible Note to WebGain, Inc., due April 2005. The Note is convertible, at
the option of the lender, at any time into Series A Preferred Stock.
Subsequent to these investments, the Company's ownership percentage remains at
48%.
On April 19, 2000, the Company completed its acquisition of The Object
People, Inc. ("TOP"). The purchase price was approximately $20.5 million in
cash. The acquisition will be accounted for using the purchase method and the
Company expects a significant portion of the purchase price to be allocated to
intangible assets.
54
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Not Applicable.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) Documents filed as a part of this Report
(1) Index to Financial Statements
The index to the financial statements included in Part II, Item 8 of
this document is filed as part of this Report.
(2) Financial Statement Schedules
The financial statement schedule included in Part II, Item 8 of this
document is filed as part of this Report. All of the other schedules
are omitted as the required information is inapplicable or the
information is presented in the consolidated financial statements or
related notes.
(3) Exhibits
Exhibit Description
------- -----------
2.1(5) Agreement and Plan of Reorganization among BEA Systems, Inc.,
WebLogic, Inc. and Charlotte acquisition Corp., dated as of
September 24, 1998
2.1(8) Asset Purchase Agreement by and between NCR Corporation and BEA
Systems, Inc.
3.1(3) Form of Registrant's Amended and Restated Certificate of
Incorporation
3.2(1) Registrant's Bylaws, as currently in effect along with
Certificate of Amendment of Bylaws
3.3 Form of Registrant's Amended and Restated Certificate of
Incorporation
4.1(1) Investor Rights Agreements by and among the Registrant and the
investors and the founders named therein
4.3(4) Form of Indenture Agreement for the 4% Convertible Notes due June
15, 2005
4.4(4) Form of Promissory Note for the 4% Convertible Notes due June 15,
2005
4.5(4) Form of Purchase Agreement for the 4% Convertible Notes due June
15, 2005
4.6(4) Form of Registration Rights Agreement for the 4% Convertible
Notes due June 15, 2005
4.7(9) Form of Indenture Agreement for the 4% Convertible Notes due
December 15, 2006
4.8(9) Form of Promissory Note for the 4% Convertible Notes due December
15, 2006
4.9(9) Form of Purchase Agreement for the 4% Convertible Notes due
December 15, 2006
4.10(9) Form of Registration Rights Agreement for the 4% Convertible
Notes due December 15, 2006
10.1(1)* Form of Indemnification Agreement between the Registrant and each
of its executive officers and directors
10.1(5) Agreement and Plan of Reorganization among BEA Systems, Inc. and
WebLogic, Inc. and Charlotte Acquisition Corp., dated as of
September 24, 1998.
10.1(7) Stock Purchase Agreement among BEA Systems, Inc. and Leader
Group, Inc., Jeffrey D. Peotler, Jeffrey M. Ryan, Kenneth R.
Allen and Shareholders.
10.1(1)* Employment Agreement between the Registrant and the three
founders dated as of September 28, 1995
55
Exhibit Description
------- -----------
10.2(1) Form of Promissory Notes entered into between the Registrant,
William T. Coleman III, Edward W. Scott, Jr. and Alfred S.
Chuang each dated September 28, 1995
10.3(1) Promissory Note secured by deed of trust entered into between
the Registrant and Edward W. Scott, Jr. and Cheryl S. Scott,
dated December 12, 1995
10.4(1) Agreement between the Registrant and Novell, dated January 24,
1996, and Amendments thereto
10.5(1) Lease Agreement between the Registrant and William H. and Leila
A. Cilker dated November 15, 1995 and First Amendment thereto
10.6(1) Stock Purchase Agreement between the Registrant and Warburg,
Pincus Ventures, L.P. dated September 28, 1995, and Amendments
thereto
10.7(1)* Registrant's 1995 Flexible Stock Incentive Plan, including forms
of agreements thereunder
10.8(3)* Registrant's 1997 Stock Incentive Plan, including forms of
agreements thereunder
10.9(3)* Registrant's 1997 Employee Stock Purchase Plan, including forms
of agreements thereunder
10.10(1) Subordinated Bridge Line of Credit between the Registrant and
Warburg, Pincus Ventures, L.P., dated January 22, 1997
10.11(2) License Agreement between the Registrant and Digital Equipment
Corporation, dated January 31, 1997 and Amendments thereto
10.12(2)* 1997 Management Bonus Plan
10.13(6) Lease agreement between the Registrant and Sobrado Interest III
for premise located at 2315 North First Street, San Jose, dated
December 26, 1997
10.14(6) Lease agreement between the Registrant and Sobrado Interest III
for premise located at 2345 North First Street, San Jose, dated
December 26, 1997
10.15 Employment Agreement between the Registrant and Alfred S. Chuang
dated as of September 1, 1999
10.16 Employment Agreement between the Registrant and William T.
Coleman III dated as of September 1, 1999
10.17 Promissory Note secured by deed of trust entered into between
the Registrant and Joe Menard and Laura Menard, dated December
15, 1999
10.18 Lease agreement between the Registrant and Russ Building for
premise located at 235 Montgomery Street, San Francisco, dated
September 24, 1999
10.19 First amendment to lease between the Registrant and Russ
Building for premise located at 235 Montgomery Street, San
Francisco, dated March 15, 2000
10.20 Registrant's 2000 Non-Qualified Stock Incentive Plan, including
forms of agreements thereunder
10.21 Promissory Note secured by deed of trust entered into between
the Registrant and Ivan Koon and Irene Li-Ping Chueng, dated
December 7, 1999
11.1 Statement re: computation of loss per share (included on page 36
of this Report)
12.1 Ratio of Earnings to Fixed Charges
21.1 Subsidiaries of the Registrant
23.1 Consent of Ernst & Young LLP, Independent Auditors
27.1 Financial Data Schedules
- --------
(1) Incorporated by reference to such exhibit as filed in the Registrant's
Registration Statement on Form SB-2, filed January 31, 1997
56
(2) Incorporated by reference to such exhibit as filed in the Registrant's
Registration Statement on Form SB-2/A, filed March 20, 1997
(3) Incorporated by reference to such exhibit as filed in the Registrant's
Registration Statement on Form SB-2/A, filed April 3, 1997
(4) Incorporated by reference to such exhibit as filed in the Registrant's
Registration Statement on Form S-3, filed September 9, 1998
(5) Incorporated by reference to such exhibit as filed in the Registrant's
Registration Statement on Form S-3, filed October 30, 1998
(6) Incorporated by reference to such exhibit as filed in the Registrant's
Registration Statement on Form 10-KSB, filed April 30, 1998
(7) Incorporated by reference to such exhibit as filed in the Registrant's
Registration Statement on Form S-3, filed August 10, 1998
(8) Incorporated by reference to such exhibit as filed in the Registrant's
Registration Statement on Form 8-K, filed June 30, 1998
(9) Incorporated by reference to such exhibit as filed in the Registrant's
Registration Statement on Form S-3, filed March 13, 2000.
* Denotes a management contract or compensatory plan or arrangement.
(b) Reports on Form 8-K and 8-K/A
Reports on Form 8-K and 8-K/A were filed by the Company during the last
quarter of the fiscal year ended January 31, 2000 for the acquisition of
The Theory Center. Proforma financial statements were filed on January 18,
2000 for the period ended October 31, 1999.
57
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
BEA Systems, Inc.
By: /s/ William T. Coleman III ___
William T. Coleman III
Chief Executive Officer and
Chairman of the Board
April 28, 2000
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, this report has been signed below by the following
persons on behalf of the registrant and in capacities and on the dates
indicated.
Signature Title Date
--------- ----- ----
/s/ William T. Coleman III Chief Executive Officer April 28, 2000
------------------------------------ and Chairman of the
Board
William T. Coleman III
/s/ Alfred S. Chuang President, Chief April 28, 2000
------------------------------------ Operating Officer
Alfred S. Chuang and Director
/s/ William M. Klein Chief Financial Officer April 28, 2000
------------------------------------ and Executive Vice
President--
Administration
William M. Klein
/s/ Carol A. Bartz Director April 28, 2000
------------------------------------
Carol A. Bartz
/s/ Cary J. Davis Director April 28, 2000
------------------------------------
Cary J. Davis
/s/ Stewart K. P. Gross Director April 28, 2000
------------------------------------
Stewart K. P. Gross
/s/ William H. Janeway Director April 28, 2000
------------------------------------
William H. Janeway
/s/ Robert L. Joss Director April 28, 2000
------------------------------------
Robert L. Joss
/s/ Dean O. Morton Director April 28, 2000
------------------------------------
Dean O. Morton
58
BEA SYSTEMS, INC.
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
Year Ended January 31, 2000, 1999 and 1998
(in thousands)
Balance at Balance at
beginning of end of
period Additions Deductions period
------------ --------- ---------- ----------
January 31, 2000
Allowance for doubtful
accounts............... $3,661 $3,312 $1,461 $5,512
January 31, 1999
Allowance for doubtful
accounts............... 2,033 2,806 1,178 3,661
January 31, 1998
Allowance for doubtful
accounts............... 1,098 1,336 401 2,033
59