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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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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, 2001
OR
[_]TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
Commission file number: 0-22369
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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)
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Securities registered under Section 12(b) of the Act:
None
Securities registered under Section 12(g) of the Act:
Common Stock
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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 30, 2001, as reported on
the Nasdaq National Market, was approximately $10,245,747,000. 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 30, 2001, there were approximately 392,420,640 shares of the
Registrant's common stock outstanding.
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DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for the Registrant's 2001 Annual Meeting of
Stockholders to be held July 11, 2001 are incorporated by reference in Part
III of this Form 10-K Report.
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BEA SYSTEMS, INC.
FORM 10-K
For the Fiscal Year Ended January 31, 2001
INDEX
Page
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PART I
Item 1. Business...................................................... 1
Item 2. Properties.................................................... 8
Item 3. Legal Proceedings............................................. 8
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.... 27
Item 8. Consolidated Financial Statements and Supplementary Data...... 30
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure..................................... 61
PART IV
Item 10. Directors and Executive Officers of the Registrant............ 61
Item 11. Executive Compensation........................................ 61
Item 12. Security Ownership of Certain Beneficial Owners and
Management................................................... 61
Item 13. Certain Relationships and Related Transactions................ 61
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form
8-K.......................................................... 61
Signatures.............................................................. 64
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 of 1933 (the
"Securities Act") and Section 21E (this "Annual Report") of the Securities and
Exchange Act of 1934 (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," statements regarding continued hiring in direct sales, support and
services, indirect distribution channels, devoting substantial resources to
product development, continuing to license and acquire software technologies
and businesses, and continuing to recruit and hire experienced software
developers, (ii) in Item 2, the statement regarding the adequacy of the
Company's existing facilities to meet anticipated needs, (iii) in Item 3, the
statement regarding the non-materiality of the liability of claims arising in
the ordinary course of business, (iv) in Item 5, the statement regarding
payment of cash dividends in the future, (v) in Item 7, statements regarding
seasonal impacts, additional acquisitions, return on investment, investing in
services offerings, improvement of total gross margins, expected timing and
amount of amortization expenses, investment in sales channel expansion and
marketing programs, commitment of substantial resources to product development
and engineering, increase in general and administrative expenses, expansion of
operations, sufficiency of cash to meet cash requirements, continuation of
certain products accounting for the majority of revenues, distribution
arrangements, 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 e-business
infrastructure software company. BEA's customers use BEA products as a
deployment platform for Internet-based applications, including custom-built
and packaged applications, and as a means for robust enterprise application
integration among mainframe, client/server and Internet-based applications. In
addition, BEA provides Enterprise Java Bean ("EJB")-based components which
perform functions such as personalization, shopping cart, order tracking,
inventory and pricing that are used in developing custom applications.
The Company's products have been adopted in a wide variety of industries,
including commercial and investment banking, securities trading, insurance,
telecommunications, services, airlines, package delivery, software, retail,
manufacturing, government, healthcare, communications and utilities. The BEA
WebLogic E-Business Platform(TM) provides infrastructure for building an
integrated e-business, allowing customers to integrate private client/server
networks, the Internet, intranets, extranets, and mainframe and legacy systems
as system components. 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-central processing unit basis, but BEA also offers licenses priced on a
per-user basis.
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BEA's products are marketed and sold worldwide through a network of BEA
sales offices, the Company's Web site at www.bea.com, as well as distributors
and alliances with hardware vendors, independent software vendors ("ISVs"),
application service providers ("ASPs") and systems integrators ("SIs").
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.
Products
BEA provides a broad family of cross-platform software and services.
BEA E-Commerce Server Products. BEA's application servers are software
programs that function as the platform for applications that run in Internet
or client/server environments, much like the operating system is the
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platform for applications that run on personal computers. In its role as an
application platform, BEA's application server products perform a wide variety
of services for applications, such as balancing loads among the hardware in
the system, detecting and accommodating hardware unavailability (either
through crashes or planned maintenance), brokering transactions within e-
business systems between the Web-based user, the application and the database.
By delegating a substantial portion of processing logic from the application
to the application server, application servers create a standardized
transaction processing environment which leads to extremely high levels of
scalability, enhanced performance, increased availability and improved
reliability.
BEA E-Commerce Application Component Products. BEA's commerce servers help
enable adaptable e-commerce applications that personalize customer
interactions. With out-of-the-box commerce and personalization functionality,
BEA customers can quickly build e-commerce sites that capture their customers'
preferences and enhance their customer experience.
BEA E-Commerce Integration Products. BEA delivers a comprehensive
integration solution that enables businesses to manage interactions among
their customers, suppliers and trading partners as well as among internal
computer systems and legacy applications.
BEA E-Commerce Services. Customers also rely on BEA's 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
BEA's strategy is to extend its current leadership position in Java-based
Web application servers and distributed transaction processing by penetrating
new customer accounts, particularly e-commerce sites, through its products or
services, and then to proliferate within those customers, servicing higher
usage volumes and selling additional products. Key elements of BEA's strategy
include:
. Increasing direct sales capacity by hiring more direct sales
representatives and by enabling the Web as an effective sales and
communication channel. At the end of fiscal 2001, BEA had over 600
quota-bearing sales representatives, a 60 percent increase over the end
of fiscal 2000. In addition, system and application developers are able
to download free trial versions through the Company's Web site at
www.bea.com.
. Increasing indirect sales capacity by aggressively allying with ISVs,
ASPs, SIs, hardware vendors and value added resellers. At the end of
fiscal 2001, BEA had signed more than 1,500 customer and channel
partnerships and alliances to promote, sell and service BEA products.
. 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 technology leadership through research and development efforts
and through acquisition of complementary companies, products and
technologies. Through BEA's research and development efforts or
acquisitions, BEA has embraced new standards, such as Wireless
Application Protocol ("WAP"), Simple Object Access Protocol ("SOAP") and
Electronic Business XML ("ebXML"), 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.
. Driving the continuing adoption of Enterprise Java, object-based
solutions and e-business through development of products and
participation in standards-setting bodies. BEA believes that EJB,
object-based computing at the enterprise level, and electronic business
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.
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Customers
The total number of licensees of BEA products and solutions is greater than
9,400 worldwide. BEA's target end-user customers are organizations with
sophisticated, high-end information systems with numerous, often
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 2001, 2000 or 1999.
Sales and Marketing
BEA's sales strategy is to pursue opportunities worldwide within large
organizations and organizations that are establishing e-businesses, through
its direct sales, services and technical support organizations, complemented
by indirect sales channels such as hardware original equipment manufacturers
("OEMs"), ISVs, ASPs and SIs. The Company currently intends to continue to add
to its direct sales and support organizations in major worldwide markets, as
well as investing in building its indirect distribution channel through
relationships with SIs, packaged application developers and others.
Direct Sales Organization. BEA markets its software and services primarily
through its direct sales organization. As of January 31, 2001, BEA had over
1,970 employees in consulting, training, sales, support and marketing,
including over 600 sales representatives, located in 90 offices in 30
countries. BEA is currently investing in building its direct sales capacity by
aggressively hiring sales and technical sales support personnel. 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 available trial developer copies of many of
its products available for free download over its Web site. There were over
900,000 downloads of BEA software in fiscal 2001. In addition, BEA
periodically provides developer training and trial licenses through technical
seminars in various locations worldwide. BEA also maintains a developers' Web
site, with over 180,000 registered developers as of the end of fiscal 2001.
The developers' Web site is designed to create a community among developers
who use BEA products, providing a forum to exchange technical information and
sample code, as well as feedback to BEA on BEA products and industry
directions that BEA should pursue.
Strategic Relations. An important element of the Company's sales and
marketing strategy is to expand its relationships with third parties and
strategic allies to increase the market awareness, demand and acceptance of
BEA and its solutions. Allies have often generated and qualified sales leads,
made initial customer contacts, assessed needs, recommended use of BEA
solutions prior to BEA's introduction to the customer, and introduced BEA at
high levels within the customer organization. A strategic ally can provide
customers with additional resources and expertise, especially in vertical or
geographic 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 allies 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.
Packaged application software developers. BEA licenses its software to
packaged application software vendors. These vendors build on BEA software
as an infrastructure for the applications they supply, giving these
applications increased distribution, scalability and portability across all
platforms on
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which the BEA platform runs. Customers can also easily integrate other
applications built using BEA solutions with these packaged applications.
Application service providers. ASPs buy and maintain the hardware,
infrastructure software and application software necessary for Web sites
and e-businesses, and rent access to these systems to their customers,
primarily small and medium sized businesses, who do not have the resources
or the desire to buy and maintain these systems themselves. BEA licenses
its software to ASPs who use it as an exclusive or optional feature in
their systems.
Systems integrators and independent consultants. SIs 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 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, 2001, the
Company was represented by 36 distributors.
Services. The Company believes that its services organization plays an
important role in facilitating initial license sales and enabling customers to
successfully architect, design, develop, deploy and manage systems and
applications. Fees for services are generally charged on a time and materials
basis and vary depending upon the nature and extent of services to be
performed. BEA's services organization works directly with end user customers
and also with SIs. In addition, the Company offers introductory and advanced
classes and training programs at the Company's offices, customer sites and
training centers worldwide. These classes and training programs cover the use
of BEA products and are designed for end user customers, SIs and packaged
application developers.
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
offers a variety of support offerings. Broad support offerings such as 7x24
support contracts are also available, typically on an annual fee basis.
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. BEA's competitors are
diverse and offer a variety of solutions directed at various segments
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of this marketplace. These competitors include operating system vendors such
as IBM, Sun Microsystems and Hewlett-Packard 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 its .NET Web services initiative. In addition, there are
other companies offering and developing application server and integration
software products and related services that directly compete with products the
Company offers. 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 the Company offers. A number of
BEA's 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 the
Company.
BEA's 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, Sun Microsystems
and Hewlett-Packard are the primary hardware vendors who offer a line of
application server and integration solutions for their customers. IBM's sale
of application server and integration functionality along with its IBM
proprietary hardware systems requires BEA 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 the Company does not differentiate its products based on
functionality, interoperability with non-IBM systems, performance and
reliability, and establish its products as more effective solutions to
customers' needs, its revenues and operating results will suffer.
Microsoft has announced that it intends to include certain application
server and integration functionality in its .NET Web services initiative. The
bundling of competing functionality in versions of .NET servers requires BEA
to compete with Microsoft in the Web services 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 broad product line and
features into a Web services environment. The Company needs to differentiate
its products from Microsoft's based on scalability, functionality,
interoperability with non-Microsoft platforms, performance and reliability,
and needs to establish its products as more effective solutions to customers'
needs. The Company may not be able to successfully differentiate its products
from those offered by Microsoft, and Microsoft's entry into the application
server and integration market could materially adversely affect the Company's
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 its 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 the Company's ability to sell additional software licenses
and maintenance, consulting and support services on terms favorable to us.
Further, competitive pressures could require BEA to reduce the price of its
products and related services, which could materially adversely affect its
business, operating results and financial condition. The Company 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 its 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."
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Product Development
BEA's total research and development expenses were approximately $89.2
million, $61.0 million and $42.6 million in fiscal 2001, 2000 and 1999,
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 of 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.
BEA continues to invest in product development, particularly BEA WebLogic
Collaborate(TM), BEA WebLogic Commerce Server(TM), BEA WebLogic
Personalization Server(TM) and new releases of BEA WebLogic Server(TM). BEA
WebLogic Collaborate(TM) is business-to-business integration software that
provides an open, scalable and dynamic way to rapidly create and manage multi-
party trading exchanges. BEA WebLogic Commerce Server(TM) and BEA WebLogic
Personalization Server(TM) help enable companies to quickly deliver highly
personalized e-commerce applications. BEA WebLogic Server(TM) accounts for the
majority of BEA's license revenues and is a platform for Java and EJB
applications. BEA recently announced a major release of BEA WebLogic
Server(TM), which adds new transaction, multicasting, Java messaging services
and XML support, as well as other features. BEA's planned investment in these
efforts may affect BEA's anticipated overall financial results, particularly
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 investments do not materialize. 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; Plano, Texas; Maynard, Massachussetts; Liberty Corner, New Jersey;
Nashua, New Hampshire; Boulder, Colorado; and Toronto, Canada. As of January
31, 2001, the Company had a research and software development staff of over
500 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 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.
Intellectual Property and Licenses
BEA's success depends upon its proprietary technology. The Company relies
on a combination of patent, copyright, trademark and trade secret rights,
confidentiality procedures and licensing arrangements to establish and protect
its proprietary rights. It is possible that other companies could successfully
challenge the validity or scope of BEA's patents and that BEA's patents may
not provide a competitive advantage to BEA.
As part of its confidentiality procedures, the Company generally enters
into non-disclosure agreements with its employees, distributors and corporate
partners and into license agreements with respect to its software,
documentation and other proprietary information. Despite these precautions,
third parties could copy or otherwise obtain and use its products or
technology without authorization, or develop similar technology independently.
In particular, the Company has, in the past, provided certain hardware OEMs
with access to its source code, and any unauthorized publication or
proliferation of this source code could materially adversely affect its
business, operating results and financial condition. It is difficult for BEA
to police unauthorized use of its products, and
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although the Company is unable to determine the extent to which piracy of its
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 its proprietary rights may not be
adequate and its competitors could independently develop similar technology,
duplicate its products, or design around patents and other intellectual
property rights the Company holds. 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, 2001, BEA had approximately 3,000 full-time employees,
including 500 in research and development, 1,970 in consulting, training,
sales, support and marketing and 530 in administration. None of BEA's
employees are 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 subleased approximately 36,000 square feet of such offices. 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 15 of Notes to Consolidated Financial Statements for information
regarding the Company's lease obligations. In the first quarter of fiscal
2002, the Company entered into a lease agreement for the lease of
approximately 40 acres of land adjacent to its San Jose, California offices to
construct additional corporate offices and research and development
facilities. See Note 17 of Notes to Consolidated Financial Statements for
information regarding the Company's lease agreement in fiscal 2002.
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 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.
No matters were submitted to a vote of security holders during the fourth
quarter of fiscal year 2001.
PART II
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
8
approximately 717 stockholders of record as of March 30, 2001. 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, 2001:
Fourth Quarter.............................................. $41.75 $84.13
Third Quarter............................................... 41.00 89.50
Second Quarter.............................................. 29.38 62.50
First Quarter............................................... 25.50 78.88
Fiscal year ended January 31, 2000:
Fourth Quarter.............................................. $11.45 $47.50
Third Quarter............................................... 5.25 11.59
Second Quarter.............................................. 3.67 8.03
First Quarter............................................... 3.33 4.63
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.
During the fourth quarter of fiscal 2001, the Company had no 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.
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,
-----------------------------------------------------
2001(2) 2000(2) 1999(1)(2) 1998(1)(2) 1997(1)(2)
--------- --------- ---------- ---------- ----------
(in thousands, except per share data)
Total revenues.......... $ 819,760 $ 464,410 $289,042 $166,447 $64,566
Net income (loss)....... 17,082 (19,574) (51,582) (22,912) (87,834)
Net income (loss) per
share:
Basic................... 0.05 (0.06) (0.18) (0.11) (2.21)
Diluted................. 0.04 (0.06) (0.18) (0.11) (2.21)
Total assets............ 1,592,336 1,258,841 403,011 174,203 59,276
Long-term obligations
(3).................... 564,082 578,489 250,112 766 49,540
Redeemable convertible
preferred stock........ - - - - 83,120
- --------
(1) Restated to include the results of Leader Group, Inc. and WebLogic, Inc.,
which were acquired in pooling of interests transactions. In addition, all
share and per-share amounts have been restated to reflect the two-for-one
common stock splits on each of December 19, 1999 and April 24, 2000.
(2) No cash dividends have been declared or paid in any period presented.
(3) Excludes any long-term deferred tax liabilities.
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-
business infrastructure software that helps companies of all sizes build e-
business 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 primarily through BEA's direct sales
force, and also through hardware vendors, independent software vendors
("ISVs") and systems integrators ("SIs") that are BEA partners and
distributors. BEA's products have been adopted in a wide variety of
industries, including commercial and investment banking, securities trading,
telecommunications, airlines, services, retail, manufacturing, package
delivery, insurance and government. The BEA WebLogic E-Business Platform(TM)
provides infrastructure for building an integrated e-business, allowing
customers to integrate private client/server networks, the Internet,
intranets, extranets, and mainframe and legacy systems as system components.
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-central
processing unit basis, but BEA also offers licenses priced on a per-user
basis.
The Company's core business has been providing infrastructure for e-
business systems and high-volume transaction systems, such as Web-based retail
sites, inventory systems, telecommunications billing applications, commercial
bank ATM networks and account management systems, credit card billing systems
and securities trading account management systems. These Web-based and
distributed systems must be highly available, scale to process high
transaction volumes and accommodate large numbers of users. As the Internet
and e-commerce continue to develop and become more richly integrated, 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-business 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. In addition,
BEA provides a personalization engine and components used to build common e-
commerce functionality, such as online catalog, dynamic pricing, shopping cart
and order processing.
Seasonality. As is common in the software industry, we believe that our
fourth quarter orders are favorably impacted by a variety of factors including
year-end capital purchases by larger corporate customers and the commission
structure for our sales force. This increase typically results in first
quarter customer orders being lower than orders received in the immediately
preceding fourth quarter. BEA anticipates that this seasonal impact is likely
to continue.
Investment in Distribution Channels. BEA is currently expanding its direct
sales capacity by aggressively hiring sales and technical sales support
personnel. In addition, in August 2000, BEA announced a major planned
investment in expansion of its indirect distribution network through stronger
relationships with system platform companies, packaged application software
developers, SIs and independent consultants, ISVs, and distributors. These
investments result in an immediate increase in expenses, especially in sales
and marketing.
Service Revenues as a Percentage of Total Revenues. For the year ended
January 31, 2001, service revenues increased as a percentage of total
revenues. BEA believes that its customer base has been in the process of
transitioning to mission-critical applications based on Java, Enterprise Java
Beans ("EJB"), and, in some cases, CORBA programming models, but that
customers typically have not had sufficient numbers of system architects and
application developers experienced in building large, reliable systems on
these programming models. BEA believes that by providing its customers with
additional services, especially in architecting, building and deploying Java,
EJB and CORBA systems, and training system architects and customers'
application developers to develop these systems, BEA can help facilitate
customers' deployment of systems
10
based on our platform products. An important element of our strategy of
investing in an indirect distribution channel is to supplement BEA's service
offerings through relationships with SIs and other strategic partners,
allowing BEA to focus on architecture services and increase the number of
projects available for licensing BEA's products through SIs' application
development efforts. Investment in these efforts results in an immediate
increase in expenses, 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 investments do not materialize.
Over the four quarters of fiscal 2001, as we have increased our focus on
using strategic partners to provide services related to the deployment and use
of our software solutions, we have experienced a slowdown in the growth rate
of our services revenue, particularly revenue derived from our lower-margin
consulting services. As a result, services revenue as a percentage of total
revenue has dropped from 44.5 percent in the first quarter of fiscal 2001 to
37.9 percent in the fourth quarter of fiscal 2001. This trend may continue or
even worsen, particularly if the recent industry-wide oversupply in software
infrastructure consultants further increases the willingness and ability of
our strategic partners to provide such services or if the current economic
slowdown continues or worsens.
Product Development. In fiscal 2001, BEA continued to invest in product
development, particularly BEA WebLogic Collaborate(TM), BEA WebLogic Commerce
Server(TM), BEA WebLogic Personalization Server(TM) and new releases of BEA
WebLogic Server(TM). BEA WebLogic Collaborate(TM) is business-to-business
integration software that provides an open, scalable and dynamic way to
rapidly create and manage multi-party trading exchanges. BEA WebLogic Commerce
Server(TM) and BEA WebLogic Personalization Server(TM) help enable companies
to quickly deliver highly personalized e-commerce applications. BEA WebLogic
Server(TM) accounts for the majority of BEA's license revenues and is a
platform for Java and EJB applications. BEA recently announced a major release
of BEA WebLogic Server(TM), which adds new transaction, multicasting, Java
messaging services and XML support, as well as other features. This release
became generally available in the fourth quarter of fiscal 2001. BEA's planned
investment in these efforts may affect BEA's anticipated overall financial
results, particularly 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 investments do not
materialize.
Acquisitions. Since its inception, BEA has acquired several companies and
product lines, as well as 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 two to five years after completion of the
acquisitions. BEA's management views the markets for its products as growing,
and that companies serving those markets are consolidating. 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 may make additional,
perhaps material, acquisitions in the future. The timing of any such
acquisition is impossible to predict and the charges associated with any such
acquisition could materially adversely affect BEA's results of operations,
beginning in the periods in which any such acquisition is completed.
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. During fiscal 2001, the Company
incurred $13.3 million of employer payroll tax expense resulting from employee
exercises of stock options. Because we are unable to predict how many stock
11
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 certain line items in BEA's consolidated
statements of operations as a percentage of total revenues for the fiscal
years ended January 31, 2001, 2000, and 1999.
Fiscal year ended
January 31,
--------------------
2001 2000 1999
----- ----- -----
Revenues:
License fees...................................... 58.1% 63.1% 66.9%
Services.......................................... 41.9 36.9 33.1
----- ----- -----
Total revenues.................................. 100.0 100.0 100.0
Cost of revenues:
Cost of license fees(1)........................... 4.1 2.2 1.7
Cost of services(1)............................... 57.6 57.1 59.8
Amortization of certain acquired intangible
assets........................................... 4.7 6.5 8.1
----- ----- -----
Total cost of revenues.......................... 31.2 29.0 29.0
----- ----- -----
Gross margin........................................ 68.8 71.0 71.0
Operating expenses:
Sales and marketing............................... 40.9 45.5 48.1
Research and development.......................... 10.9 13.1 14.7
General and administrative........................ 7.0 8.2 8.6
Amortization of goodwill.......................... 7.2 3.4 1.0
Acquisition-related charges....................... 0.3 0.6 14.6
----- ----- -----
Income (loss) from operations....................... 2.5 0.1 (16.0)
Interest income (expense) and other, net............ 3.3 (1.3) (0.2)
----- ----- -----
Income (loss) before provision for income taxes..... 5.8 (1.2) (16.2)
Provision for income taxes.......................... 3.7 3.0 1.7
----- ----- -----
Net income (loss)................................... 2.1% (4.2)% (17.8)%
===== ===== =====
- --------
(1) Cost of license fees and cost of services are stated as a percentage of
license fees and services, respectively.
Revenues
BEA's revenues are derived from fees for software licenses, customer
support, education and consulting services. Total revenues increased 76.5
percent to $819.8 million in fiscal 2001 from $464.4 million in fiscal 2000,
when it increased 60.7 percent from $289.0 million in fiscal 1999. These
increases reflect the continued adoption of our software solutions.
License Revenues. License revenues increased 62.7 percent to $476.6 million
in fiscal 2001 from $292.9 million in fiscal 2000, when it increased 51.3
percent from $193.5 million in fiscal 1999. These increases were mainly due to
the rapid adoption of BEA WebLogic Server(TM) as well as the adoption of other
products in our WebLogic E-Business Platform(TM), expansion of our direct
sales force, introduction of new products and new versions of existing
products. License revenues as a percentage of total revenues decreased from
63.1 percent in fiscal 2000 to 58.1 percent in fiscal 2001 and from 66.9
percent in fiscal 1999 to 63.1 percent in fiscal 2000. These percentage
decreases were attributable to the significant increase in service revenues.
Service Revenues. Service revenues increased 100.0 percent to $343.2
million in fiscal 2001 from $171.6 million in fiscal 2000, when it increased
79.6 percent from $95.5 million in fiscal 1999. Service revenues
12
as a percentage of total revenues increased from 36.9 percent in fiscal 2000
to 41.9 percent in fiscal 2001 and increased from 33.1 percent in fiscal 1999
to 36.9 percent in fiscal 2000. The Company's service business experienced
very strong growth in support, education and consulting, particularly outside
the U.S. Over the four quarters of fiscal 2001, as we have increased our focus
on using strategic partners to provide services related to the deployment and
use of our software solutions, we have experienced a slowdown in the growth
rate of our services revenue, particularly revenue derived from our lower-
margin consulting services.
International Revenues. International revenues increased 81.8 percent to
$341.1 million in fiscal 2001 from $187.7 million in fiscal 2000 and increased
62.1 percent from $115.7 in fiscal 1999. International revenues as a percent
of total revenues were 41.6 percent, 40.4 percent and 40.0 percent in fiscal
2001, 2000 and 1999, respectively. Revenues from the Europe, Middle East and
Africa region ("EMEA") increased by 70.2 percent and 50.4 percent during
fiscal 2001 and 2000, respectively. Revenues from the Asia/Pacific region
("APAC") increased by 104.7 percent and 125.9 percent during fiscal 2001 and
2000, respectively. Revenues from other international regions were
insignificant. The increases were the result of expansion of the Company's
international sales force.
Cost of Revenues
Total cost of revenues increased 89.7 percent to $255.8 million in fiscal
2001 from $134.8 million in fiscal 2000, when it increased by 61.1 percent
from $83.7 million in fiscal 1999. Total cost of revenues as a percentage of
total revenues represented 31.2 percent in fiscal 2001 and 29.0 percent in
fiscal 2000 and 1999, respectively. The increase in fiscal 2001 was primarily
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.
Cost of Licenses. Cost of licenses increased 206.0 percent to $19.7 million
in fiscal 2001 from $6.4 million in fiscal 2000, when it increased 99.8
percent from $3.2 million in fiscal 1999. 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 4.1 percent, 2.2 percent and 1.7 percent of
license revenues in fiscal 2001, 2000 and 1999, respectively. The increases
were primarily due to increases in royalties paid to third parties primarily
resulting from license agreements signed in the third quarter of fiscal 2000
which were in place for all of fiscal 2001.
Cost of Services. Cost of services increased 101.6 percent to $197.6
million in fiscal 2001 from $98.0 million in fiscal 2000, when it increased by
71.4 percent from $57.2 million in fiscal 1999. Cost of services consists
primarily of salaries and benefits for consulting, education and product
support personnel. Cost of services represented 57.6 percent, 57.1 percent and
59.8 percent of service revenues in fiscal 2001, 2000 and 1999, respectively.
Cost of services as a percentage of service revenues increased slightly in
fiscal 2001 compared to fiscal 2000 due to an increase in consulting costs
offset by a higher mix of support revenues. In contrast, cost of services as a
percentage of service revenues decreased in fiscal 2000 as compared to fiscal
1999 due to spreading costs over a higher mix of support revenues versus
consulting revenues.
Amortization of Certain Acquired Intangible Assets, included in Cost of
Revenues. The amortization of certain acquired intangible assets, consisting
primarily of developed technology, non-compete agreements, distribution
rights, trademarks and tradenames, totaled $38.5 million, $30.4 million and
$23.3 million in fiscal 2001, 2000 and 1999, respectively. These increases
were primarily due to additional intangible assets acquired as a result of a
number of strategic acquisitions completed in fiscal 2000 and 2001,
particularly the acquisition of The Theory Center, Inc. ("TTC"), which was
completed in the fourth quarter of fiscal 2000. In the future, amortization
expense associated with intangible assets recorded prior to January 31, 2001
is expected to total approximately $26.1 million, $17.1 million, $9.0 million
and $129,000 for the fiscal years ending January 31, 2002, 2003, 2004 and
thereafter, respectively.
13
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 58.7 percent to
$335.5 million in fiscal 2001 from $211.4 million in fiscal 2000 and increased
52.2 percent in fiscal 2000 from $138.9 million in fiscal 1999. These
increases were due to the expansion of the Company's direct sales force,
increased commissions on the Company's increased revenue base, an increase in
marketing personnel, logo re-branding and advertising campaigns to build brand
awareness. Sales and marketing expenses decreased as a percentage of total
revenues to 40.9 percent in fiscal 2001 from 45.5 percent in fiscal 2000 and
from 48.1 percent in fiscal 1999. These decreases were due to spreading the
increased sales and marketing expenses over a larger revenue base. The Company
expects to continue to invest in the expansion of the direct and indirect
sales channels, as well as marketing programs to promote the Company's
products and brand. Accordingly, the Company expects sales and marketing
expenses to increase in absolute dollars.
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
46.4 percent to $89.2 million in fiscal 2001 from $61.0 million in fiscal 2000
and increased 43.2 percent in fiscal 2000 from $42.6 million in fiscal 1999.
These increases were attributed to an increase in product development
personnel and expenses associated with the release of several new products and
product versions. Research and development expenses represented 10.9 percent
of total revenues in fiscal 2001 and 13.1 percent and 14.7 percent in fiscal
2000 and 1999, respectively. These decreases were primarily due to spreading
the increased research and development expenses over a larger revenue base.
The Company believes that a significant level of research and development is
required to remain competitive and 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 absolute dollars 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 51.3 percent to $57.6 million in fiscal 2001
from $38.1 million in fiscal 2000 and increased 52.9 percent in fiscal 2000
from $24.9 million in fiscal 1999. These increases were attributed to the
expansion of the Company's support infrastructure, including information
systems and associated expenses necessary to manage the Company's growth. We
expect general and administrative expenses to increase in absolute dollars, as
we expand our operations.
Amortization of Goodwill. Amortization of goodwill increased in fiscal 2001
compared to fiscal 2000, due to goodwill resulting from various acquisitions
completed in fiscal 2001 and 2000. Amortization of goodwill totaled $59.2
million, $15.8 million and $3.0 million in fiscal 2001, 2000 and 1999,
respectively. In the future, amortization of goodwill recorded prior to
January 31, 2001 is expected to total approximately $53.9 million, $47.4
million, $36.1 million, and $1.0 million for the fiscal years ending January
31, 2002, 2003, 2004 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 fiscal 2001,
acquisition related charges were related to the write-off of the acquired in-
process research and development of approximately $2.2 million relating to The
Workflow Automation Corporation ("Workflow") acquisition, which occurred in
the first quarter of fiscal 2001. In fiscal 2000, acquisition related charges
of $3.0 million were related to the write-off of acquired in-process research
and development relating to the acquisition of The Theory Center ("TTC"),
while in fiscal 1999, acquisition related charges of $42.2 million were
primarily related to the acquisition of the TOP END enterprise middleware
technology and product family of the NCR Corporation.
14
In October 2000, the Company completed its purchase of Bauhaus Technologies
Inc. ("Bauhaus"), an IT and e-commerce consulting company. The purchase price
was approximately $19.8 million in cash, and the acquisition was accounted for
using the purchase method of accounting. Substantially all of the purchase
price was allocated to intangible assets, including assembled workforce, non-
compete agreements, customer base and goodwill. The intangibles are being
amortized on a straight-line basis over two to three years.
In April 2000, the Company completed its purchase of the services business
of The Object People, Inc. ("TOP"), headquartered in Ottawa, Canada. The
purchase price was approximately $20.5 million in cash. The acquisition was
accounted for using the purchase method of accounting with substantially all
of the purchase price allocated to intangible assets, including assembled
workforce and goodwill. The intangibles are being amortized on a straight-line
basis over three years.
In March 2000, the Company acquired Workflow, a software development
company based in Toronto, Canada. Workflow was purchased with a combination of
$4.9 million of cash and the issuance of 470,718 shares of BEA common stock,
valued at $49.41 per share, resulting in a total purchase price of
approximately $28.6 million. The acquisition was accounted for using the
purchase method with substantially all of the purchase price allocated to
intangible assets, including purchased technology, non-compete agreements,
assembled workforce and goodwill. 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 in
determining the fair value of each identifiable tangible and intangible asset
and in allocating the purchase price among the acquired assets. The Company
recorded a charge to income of $2.2 million or $0.01 per diluted share,
resulting from the write-off of acquired research and development. Standard
valuation procedures and techniques were utilized in determining the fair
value of the acquired core/developed, in-process technology, non-compete
agreements and assembled workforce.
Core technology and in-process technology were identified and valued
through analysis of Workflow'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 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 core technology, completed technology, in-
process technology, 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.
In November 1999, BEA completed its merger with TTC. TTC was purchased with
the issuance of approximately 10.9 million shares of BEA common stock and
stock options valued at approximately $154.9 million. An independent valuation
of the purchased assets was performed to assist the Company in determining the
fair value of each identifiable and intangible asset and in the allocation of
the purchase price. The transaction was accounted for using the purchase
method with $3.0 million allocated to in-process technology, $122.4 million to
goodwill and the remaining $29.5 million representing other intangible assets
and liabilities assumed. The intangibles, including purchased technology,
trademarks and tradenames, non-compete agreements, assembled workforce and
goodwill, are being amortized on a straight-line basis over lives ranging from
two to four years.
Interest Expense. Interest expense was $22.9 million in fiscal 2001,
compared to $20.4 million and $10.4 million in fiscal 2000 and 1999,
respectively. The increases in fiscal 2001 and 2000 as compared to fiscal 1999
were 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
15
premiums paid in connection with the conversion of a majority of the $250
million 4% Convertible Subordinated Notes due June 12, 2005 ("2005 Notes")
which were issued during fiscal 1999 and outstanding for substantially all of
fiscal 2000.
Interest Income and Other, Net. Interest income and other, net increased
247.2 percent to $50.1 million in fiscal 2001 from $14.4 million in fiscal
2000 and increased 44.7 percent from $10.0 million in fiscal 1999. These
amounts include interest income of $47.9 million, $15.7 million and $9.1
million in fiscal 2001, 2000 and 1999, respectively. The increases in interest
income were 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 recognized other income and expense of approximately $2.2
million during fiscal 2001. Other income related primarily to a net gain of
$18.6 million as a result of the sale of a portion of the Company's investment
in WebGain, Inc. ("WebGain") Series A Preferred Stock and an $18.0 million
convertible note receivable from WebGain to Warburg, Pincus Equity Partners,
LP ("WP Equity Partners"). In exchange for these Series A Preferred Shares and
the convertible note, the Company received a note receivable from WP Equity
Partners for approximately $50.0 million. The net gain in the aforementioned
transaction was offset by the write-down of approximately $16.2 million of
certain investments in equity securities which were determined to be other
than temporarily impaired.
The Company has a hedging 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
contracts in certain European and Asian currencies. The Company does not
currently hedge anticipated foreign currency-denominated revenues and expenses
not yet incurred. Net gains and losses on foreign currency transactions, which
are included in interest income and other, net, were $(787,000), $287,000, and
$340,000 in fiscal 2001, 2000 and 1999, respectively.
The Company's international operations generally consist of sales,
distribution and support organizations that generate revenues and incur
product and service costs, marketing and general and administrative expenses
in local currencies. Research and development, corporate marketing and
administrative expenses are primarily incurred in 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. The Company has provided for income taxes of
$30.4 million, $13.9 million and $4.9 million for fiscal 2001, 2000, and 1999,
respectively. The income tax expense provided in each year consists primarily
of domestic minimum taxes, foreign withholding taxes and foreign income tax
expense incurred as a result of local country profits. The increases in income
taxes for fiscal 2001 relative to fiscal 2000 and fiscal 2000 relative to
fiscal 1999 are primarily due to an overall increase in foreign corporate
income taxes and service revenues and an increase in domestic state current
taxes due to book/tax differences in the amortization of acquired intangibles
and the timing of revenue recognition.
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 that 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. See Note 9 of
Notes to Consolidated Financial Statements.
16
Liquidity and Capital Resources
As of January 31, 2001, cash, cash equivalents and short-term investments
totaled $940.9 million, up from $801.4 million at January 31, 2000. The
increase in cash, cash equivalents and short-term investments was primarily
due to cash generated from increased operating profitability and the sale of
common stock.
Cash generated from operating activities rose to $225.3 million in fiscal
2001, compared with $95.2 million in fiscal 2000 and $27.4 million in fiscal
1999. The increases were primarily due to increased operating profitability,
increases in deferred revenues and accrued liabilities, offset partially by an
increase in accounts receivable.
Investing activities consumed $156.7 million of cash during fiscal 2001,
compared with $119.9 million and $107.8 million in fiscal 2000 and 1999,
respectively. Cash used for investing activities in fiscal 2001 was primarily
for a number of strategic acquisitions and investments in equity and debt
securities amounting to approximately $122.8 million, capital expenditures of
$35.3 million, an increase in restricted cash of $3.4 million and purchases of
short-term investments of $186.9 million, offset by maturities of short-term
investments of $191.7 million. 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 $70.9 million, offset by maturities of short-term investments
of $32.9 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 purchases of short-term investments
of $1.4 million offset by maturities of short-term investments of $6.2
million.
The Company generated $81.7 million of cash from financing activities in
fiscal 2001, compared with $554.2 million and $221.1 million in fiscal 2000
and 1999, respectively. The primary source of cash from financing activities
in fiscal 2001 was the proceeds received from employee stock purchases and the
issuance of common stock by BEA pursuant to stock option exercises of $85.7
million, partially offset by payments on the Company's outstanding obligations
of $11.8 million. The primary source of cash from financing activities in
fiscal 2000 was the issuance of the $550 million 4% Convertible Subordinated
Notes due December 15, 2006 ("2006 Notes"), net of $14.6 million of debt
issuance costs. The primary source of cash from financing activities in fiscal
1999 was the issuance of the $250 million 4% Convertible Subordinated Notes
due June 15, 2005 ("2005 Notes") offset by $5.3 million of net 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,
Inc. related to the acquisition of distribution rights for Tuxedo(TM).
As of January 31, 2001, the Company's outstanding short and long-term
obligations were $577.4 million, up from $582.9 million at January 31, 2000.
At January 31, 2001, the Company's outstanding obligations consisted of $561.4
million of convertible notes and $16.0 million of other short-term and long-
term obligations. At January 31, 2000, the Company's outstanding obligations
consisted of $572.5 million of convertible notes and $10.4 million of other
short-term and long-term obligations.
During the first quarter of fiscal 2002, the Company entered into a lease
agreement for the lease of approximately 40 acres of land adjacent to the
Company's San Jose, California headquarters to construct additional corporate
offices and research and development facilities. The lease has an initial term
of five years with renewal options. Rent obligations commence at the beginning
of the third year. The total approximate minimum lease payments for the next
five years are currently estimated to be approximately $0 in fiscal 2002 and
2003 and $17.5 million in fiscal 2004, 2005 and 2006, respectively. The
minimum lease payments will fluctuate from time to time depending on short-
term interest rates. The Company has an option to purchase the land at the end
of the term of the lease for the lesser of $331 million or the outstanding
lease balance or, prior to the end of the lease, to arrange for the sale of
the property to a third party with the Company retaining an obligation to the
owner for the difference between the sales price and the guaranteed residual
value up to $328.7 million if the sales price is less than this amount,
subject to certain provisions of the lease. As part of the
17
lease transaction, the Company has restricted approximately $330 million of
its investment securities as collateral for specified obligations to the
lessor under the lease. The investment securities are restricted as to
withdrawal and are managed by a third party subject to certain limitations.
The Company must maintain certain covenants, as defined in the lease.
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, 2002. However, the Company may make additional
acquisitions and may need to raise additional capital through future debt or
equity financings 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.
Effect of New Accounting Pronouncements
In March 2000, the Financial Accounting Standards Board issued FASB
Interpretation No. 44, Accounting for Certain Transactions Involving Stock
Compensation--an Interpretation of APB Opinion No. 25, ("FIN 44"). FIN 44
clarifies the application of APB Opinion No. 25 and, among other issues,
clarifies the following: the definition of an employee for purposes of
applying APB Opinion No. 25; the criteria for determining whether a plan
qualifies as a noncompensatory plan; the accounting consequence of various
modifications to the terms of the previously fixed stock options or awards;
and the accounting for an exchange of stock compensation awards in a business
combination. FIN 44 was effective July 1, 2000. The application of FIN 44 has
not had a material impact on the Company's financial position or results of
operations.
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. The application of SAB 101 has not
had a material impact on the Company's financial position or results of
operations.
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 recognizes all derivatives as either assets or liabilities in the
statement of financial position and measures 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 will
adopt FAS 133 effective February 1, 2001. The Company does not currently
expect that the adoption of FAS 133 will have a material impact to its
financial position or results of operations.
Factors That May Impact Future Operating Results
BEA. operates in a rapidly changing environment that involves numerous
risks and uncertainties. The following section lists some, but not all, of
these risks and uncertainties which may have a material adverse effect on the
Company's business, financial condition or results of operations.
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
18
generally associated with Internet, software and technology stocks and may
also be affected by broader market trends unrelated to our performance, such
as the declines in the prices of many such stocks since March 2000 to March
2001.
We expect to experience significant fluctuations in our future quarterly
revenues and operating results as a result of many factors, including:
. recent adverse economic conditions, which may increase the likelihood
that customers will unexpectedly delay or cancel orders and result in
revenue shortfalls
. difficulty predicting the size and timing of customer orders
. the mix of our products and services sold
. mix of distribution channels
. whether our strategy to further establish and expand our relationships
with distributors is successful
. introduction or enhancement of our products or our competitors' products
. 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 and whether any new products are accepted in the market
. 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
. the terms and timing of financing activities
. potential fluctuations in demand or prices of our products and services
. 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
. loss of key personnel
. fluctuations in foreign currency exchange rates
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.
A material portion of our revenues has been derived from large orders, as
customers deployed our products. Increases in the dollar size of some
individual license transactions would also increase the risk of fluctuation in
future quarterly results. The majority of our revenue originates with a large
number of small development orders with the potential to turn into large
deployments. If we cannot generate large customer orders, turn development
orders into large deployments or customers delay or cancel such orders in a
particular quarter, it may 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 most of our orders within
the quarter, with the substantial majority of our orders typically received in
the last month of each fiscal quarter. As a result, we may not learn of
19
revenue shortfalls until late in a fiscal quarter, after it is too late to
adjust expenses for that quarter. Moreover, recent adverse economic conditions
in the United States, particularly those related to the technology industry,
may increase the likelihood that customers will unexpectedly delay or cancel
orders and result in revenue shortfalls. This risk is particularly relevant
with respect to large customer orders which are more likely to be cancelled or
delayed and also have a greater financial impact on our operating results. A
number of technology companies, particularly software companies that, like
BEA, sell enterprise-wide software solutions, have recently announced that
these conditions have adversely affected their financial results.
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.
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 are recorded as
an expense and are assessed at tax rates that vary 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 that will be recorded in a future period or the
impact on our future financial results.
As is common in the software industry, we believe that our fourth quarter
orders are favorably impacted by a variety of factors including year-end
capital purchases by larger corporate customers and the commission structure
for our sales force. This increase typically results in first quarter customer
orders being lower than orders received in the immediately preceding fourth
quarter. BEA anticipates that this seasonal impact is likely to continue.
Although we use standardized license agreements designed to meet current
revenue recognition criteria under generally accepted accounting principles,
we must often negotiate and revise terms and conditions of these standardized
agreements, 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. While we believe that we are in compliance with Statement of Position
97-2, Software Revenue Recognition, ("SOP 97-2") as amended, the American
Institute of Certified Public Accountants continues to issue implementation
guidelines for these standards and the accounting profession continues to
discuss a wide range of potential interpretations. In addition, the Securities
and Exchange Commission ("SEC") issued Staff Accounting Bulletin No. 101,
Revenue Recognition in Financial Statements ("SAB 101"). BEA has adopted the
provisions of SAB 101 in its fourth fiscal quarter of 2001. Additional
implementation guidelines and changes in interpretations of such guidelines
could lead to unanticipated changes in our current revenue accounting
practices that could cause us to defer the recognition of revenue to future
periods or to recognize lower revenue and profits.
Our revenues are derived primarily from two main products and related
services, and a decline in demand or prices for either products or services
could substantially adversely affect our operating results
We currently derive the majority of our license and service revenues from
BEA WebLogic(TM), BEA TUXEDO(TM) and from related products and services. We
expect these products and services to continue to account for the majority of
our revenues in the immediate future. As a result, factors adversely affecting
the pricing of or demand for BEA WebLogic(TM), BEA TUXEDO(TM) or related
services, such as a general economic slowdown, competition, product
performance or technological change, could have a material adverse effect on
our business and consolidated results of operations and financial condition.
As we have increased our focus on using strategic partners to provide services
related to the deployment and use of our software solutions, we have recently
experienced a slowdown in the growth rate of our services revenue,
particularly revenue derived from our lower-margin consulting services. This
trend may continue or even worsen, particularly if the recent industry-wide
oversupply in software infrastructure consultants further increases the
willingness and ability of our strategic partners to provide such services or
if the current economic slowdown continues or worsens.
20
Any failure to maintain ongoing sales through distribution channels could
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, SIs 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, original equipment
manufacturers ("OEMs") and SIs. In particular, in August 2000, we announced a
significant initiative to further establish and expand relationships with our
distributors through these sales channels, especially ISVs and SIs. A
significant part of this initiative is to recruit and train a large number of
consultants employed by SIs and induce these SIs to more broadly use our
products in their consulting practices, as well as 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 products.
It is possible that we will not be able to successfully expand our direct
sales force or other distribution channels, secure agreements with additional
SIs and ISVs on commercially reasonable terms or at all, and otherwise
adequately develop our relationships with indirect sales channels. Moreover,
even if we succeed in these endeavors, it still may not increase our revenues.
In particular, we need to carefully monitor the development and scope of our
indirect sales channels and create appropriate pricing, sales force
compensation and other distribution parameters to help ensure these indirect
channels complement our direct channels. If we invest resources in these types
of expansion and our overall revenues do not correspondingly increase, our
business, results of operations and financial condition will be materially and
adversely affected.
In addition, we already 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.
It is difficult to predict our future results for a variety of reasons
including our limited operating history and need to continue to integrate our
acquisitions
We were incorporated in January 1995 and therefore have a limited operating
history. We have generated revenues to date primarily from sales of BEA
WebLogic(TM), a software product which we acquired in September 1998, and from
BEA TUXEDO(TM), a software product to which we acquired worldwide distribution
rights in February 1996, and fees for software products and services related
to WebLogic(TM) and TUXEDO(TM). We have also acquired a number of additional
businesses, technologies and products. 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, 2001, we had an
accumulated deficit of approximately $185.9 million. In addition, in
connection with certain acquisitions completed prior to January 31, 2001, we
recorded approximately $511.0 million as intangible assets and goodwill. Under
current generally accepted accounting principles, intangible assets and
goodwill are required to be amortized in future periods. Approximately $320.3
million of these assets have been amortized as of January 31, 2001, and we
expect to amortize the remaining amount of approximately $190.7 million in
future periods through our fiscal year ending January 31, 2005. 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. We
first reported an operating profit under generally accepted accounting
principles in the second quarter of fiscal 2001. Because of our limited
operating history and ongoing expenses associated with our prior acquisitions,
there can be no assurance that we will continue to be profitable in any future
period, and recent operating results should not be considered indicative of
future financial performance.
21
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 timely and effectively enhance existing
products (such as our WebLogic Server product), respond to changing customer
requirements and develop and introduce in a timely manner new products (such
as our WebLogic Collaborate product) that keep pace with technological and
market developments and emerging industry standards. We are also developing
products designed to provide components for applications (such as our WebLogic
Commerce Server(TM), WebLogic Personalization Server(TM) and Campaign Manager
products) in an effort to further build out and increase the value of the e-
business software infrastructure platform we provide. 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.
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 often have not been directly related to the operating performance of such
companies, such as the declines in the stock prices of BEA and many such
companies since March 2000 to March 2001. 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 a number of 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. 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") proposed 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
22
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.
Recently, FASB proposed that purchased goodwill should not be amortized,
but rather, it should be periodically reviewed for impairment. FASB proposed
that at the time goodwill is considered impaired an amount equal to the
impairment loss should be charged as an operating expense in the income
statement. The timing of such an impairment (if any) of goodwill acquired in
past and future transactions is uncertain and difficult to predict. If this
proposal is adopted, our results of operations in periods following any such
impairment could be materially adversely affected.
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 an 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. This delay or
failure to complete large orders and sales in a particular quarter could
significantly reduce revenue that quarter, as well as subsequent quarters over
which revenue for the sale would likely be recognized.
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. BEA's 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 Hewlett-Packard 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 its .NET Web services initiative. In addition, there are other
companies offering and developing application server and integration software
products and related services that directly compete with products the Company
offers. 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 the Company offers. A number of BEA's 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.
BEA's 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, Sun Microsystems
and Hewlett-Packard are the primary hardware vendors who offer a line of
application server and integration solutions for their customers. IBM's sale
of application server and integration functionality along with its IBM
proprietary hardware systems requires BEA 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
23
functionality with computer hardware and software sales. Due to these factors,
if the Company does not differentiate its products based on functionality,
interoperability with non-IBM systems, performance and reliability, and
establish its products as more effective solutions to customers' needs, its
revenues and operating results will suffer.
Microsoft has announced that it intends to include certain application
server and integration functionality in its .NET Web services initiative. The
bundling of competing functionality in versions of .NET servers requires BEA
to compete with Microsoft in the Web services 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 broad product line and
features into a Web services environment. The Company needs to differentiate
its products from Microsoft's based on scalability, functionality,
interoperability with non-Microsoft platforms, performance and reliability,
and needs to establish its products as more effective solutions to customers'
needs. The Company may not be able to successfully differentiate its products
from those offered by Microsoft, and Microsoft's entry into the application
server and integration market could materially adversely affect the Company's
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 its 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 the Company's ability to sell additional software licenses
and maintenance, consulting and support services on terms favorable to us.
Further, competitive pressures could require BEA to reduce the price of its
products and related services, which could materially adversely affect the
Company's business, operating results and financial condition. The Company 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 its business,
operating results and financial condition.
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. Even if
they do grow they may grow more slowly than we anticipate, particularly in
view of the recent economic downturn affecting the technology sector in the
United States. 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 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.
24
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 including their patent rights. Any such claims,
with or without merit, could cause costly litigation that could absorb
significant management time, which could materially adversely affect our
business, operating results and financial condition. These types of claims
could cause us to pay substantial damages on settlement amounts, cease
offering any subject technology and 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 41.6 percent, 40.4 percent and 40.0
percent of our consolidated revenues for the fiscal years ended January 31,
2001, 2000 and 1999, respectively. We sell our products and services through a
network of branches and subsidiaries located in 30 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. 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.
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 3,000 employees in 90 offices in
30 countries at January 31, 2001. 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; and information
technology infrastructure. 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. We are also
continuing to develop and roll out information technology initiatives. It is
possible we will not be able to
25
successfully implement improvements to our management information, control
systems and information technology infrastructure 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 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.
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
anyone 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
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.
Our strategy of investing in development-stage companies involves a number of
risks and uncertainties
We have invested, and expect to continue to invest, in development-stage
companies. Each of these investments involves risks and uncertainties,
including:
. diversion of management attention from our core business;
. failure to leverage our relationship with these companies to access new
technologies and new markets;
. inability to value investments appropriately or to predict changes to
the future value of investments;
. inability to manage investments effectively; and
. loss of cash invested
26
We have a high debt balance and large interest obligations
At January 31, 2001, we had approximately $561.4 million of long-term
indebtedness, consisting 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. Also, in connection
with a lease transaction for real estate in San Jose, California, we have
restricted approximately $330 million out of $940.9 million of our otherwise
unrestricted cash and cash equivalents and investment securities as collateral
for specified obligations to the lessor under the lease. The investment
securities are restricted as to withdrawal and are managed by a third party
subject to a number of limitations. We will require substantial amounts of
cash to fund scheduled payments of interest on the convertible notes, payment
of the principal amount of the convertible notes, payment of principal and
interest on our other indebtedness, future capital expenditures, payments on
our lease 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.
Power outages in California may adversely affect us.
We have significant operations, including our headquarters, in the state of
California and are dependent on a continuous power supply. California's
current energy crisis could substantially disrupt our operations and increase
our expenses. California has recently implemented, and may in the future
continue to implement, rolling blackouts throughout the state. If blackouts
interrupt our power supply, we may be temporarily unable to continue
operations at our California facilities. Any such interruption in our ability
to continue operations at our facilities could delay the development and
delivery of our products and services and otherwise disrupt communications
with our customers or other third parties on whom we rely, such as SIs. Future
interruptions could damage our reputation and could result in lost revenue,
either of which could substantially harm our business and results of
operations. Furthermore, shortages in wholesale electricity supplies have
caused power prices to increase. If energy prices continue to increase, our
operating expenses will likely increase which could have a negative effect on
our operating results.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Foreign Exchange
BEA's revenues originating outside the United States were 41.6 percent,
40.4 percent and 40.0 percent of total revenues in fiscal 2001, 2000 and 1999,
respectively. The only geographic sub-region with revenues greater than 10
percent of total revenues in fiscal 2001 was the United Kingdom with 10.3
percent. International revenues from each geographic sub-region were less than
10 percent of total revenues in each of fiscal 2000 and 1999. International
sales were 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
27
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
contracts in certain European and Asian currencies, principally the U.K.,
Korea, Canada, 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. Under
this program, increases or decreases in the Company's foreign currency
transactions are partially offset by gains and losses on the forward
contracts, so as to mitigate the possibility of significant foreign currency
transaction gains and losses. The Company does not use foreign currency
contracts for trading purposes. The Company does not currently hedge
anticipated foreign currency-denominated revenues and expenses not yet
incurred. All foreign currency transactions and all outstanding forward
contracts are marked-to-market on a monthly basis with realized gains and
losses included in interest income and other, net. Net losses resulting from
foreign currency transactions were approximately $787,000 for fiscal 2001.
The Company's outstanding forward contracts as of January 31, 2001 are
presented in the table below. This table presents the notional amount in U.S.
dollars using the spot exchange rate in January 2001 and the weighted average
contractual foreign currency exchange rates. Notional weighted average
exchange rates are quoted using market conventions where the currency is
expressed in units per U.S. dollar. All of these forward contracts mature
within 90 days or less as of January 31, 2001.
Notional
Weighted
Average
Notional Exchange
Amount Rate
-------------- ---------
(in thousands)
Functional Currency--US Dollar
Euros............................................... $46,800 1.070
British pounds...................................... 6,900 0.675
Japanese yen........................................ 14,000 118.161
Canadian dollars.................................... 4,900 1.512
Swiss francs........................................ 100 1.630
Korean won.......................................... 5,400 1,291.306
Australian dollars.................................. 2,700 1.840
-------
Total........................................... $80,800
-------
Functional Currency--EURO
British pounds...................................... $ 6,600 0.680
Swiss francs........................................ 4,000 1.650
Swedish krona....................................... 1,300 9.591
-------
Total........................................... $11,900
-------
Grand Total..................................... $92,700
=======
28
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 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. The Company's
exposure, on its portfolio of marketable investments, to changes in short term
interest rates is insignificant as of January 31, 2001 because the average
holding period until maturity of the Company's cash equivalents and short-term
investments was approximately 12 days.
The table below presents the principal amount and related weighted average
interest rates for the Company's investment portfolio. Short-term investments
are all in fixed rate instruments.
Table of investment securities (in thousands) at January 31, 2001:
Average
Fair Interest
Value Rate
-------- --------
Cash and cash equivalents.................................. $907,635 6.17%
Restricted cash............................................ 4,998 6.05%
Short-term investments (0-1 year).......................... 33,294 6.42%
Long-term investments (1 year)............................. 14,908 6.83%
--------
Total cash and investment securities....................... $960,835
========
The Company is exposed to changes in short term interest rates through a
lease the company entered into on February 13, 2001, which includes a variable
short-term interest rate based on LIBOR. The annual lease expense will
fluctuate from time to time depending on changes in LIBOR. A 1.64% increase in
LIBOR will generate an increase in annual lease expense of approximately
$287,000 beginning in year 3 of the lease.
Investments in equity securities
The Company has made investments in several privately held companies
totaling $67.1 million, several of which can still be considered in the start-
up or development stages. These non-marketable investments are accounted for
using the cost method as the Company does not have the ability to exercise
significant influence. These investments are inherently risky as the market
for the technologies or products they have under development are typically in
the early stages and may never materialize. It is possible that the Company
could lose its entire initial investment in these companies. As a part of
management's process of regularly reviewing these investments for impairment,
the Company recorded a write-down of $16.2 million of certain investments
which were determined to be permanently impaired in the fourth quarter of
fiscal 2001.
29
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA.
Supplementary Quarterly Financial Data (unaudited):
Quarter Ended
---------------------------------------------------------------------------------------
January 31, October 31, July 31, April 30, January 31, October 31, July 31, April 30,
----------- ----------- -------- --------- ----------- ----------- -------- ---------
2001 2000 2000 2000 2000 1999 1999 1999
----------- ----------- -------- --------- ----------- ----------- -------- ---------
(in thousands, except per share data)
Total revenues.......... $256,043 $224,014 $186,021 $153,682 $149,169 $126,454 $103,212 $85,575
Gross profit............ $188,069 $152,980 $123,443 $ 99,511 $104,546 $ 90,837 $ 73,257 $60,929
Net income (loss)....... $ 18,953 $ 8,243 $ 2,269 $(12,383) $(13,686) $ 145 $ (2,068) $(3,965)
Net income (loss) per
share:
Basic.................. $ 0.05 $ 0.02 $ 0.01 $ (0.03) $ (0.04) $ 0.00 $ (0.01) $ (0.01)
Diluted................ $ 0.04 $ 0.02 $ 0.01 $ (0.03) $ (0.04) $ 0.00 $ (0.01) (0.01)
30
BEA SYSTEMS, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
----
AUDITED FINANCIAL STATEMENTS
Report of Ernst & Young LLP, Independent Auditors......................... 32
Consolidated Balance Sheets as of January 31, 2001 and 2000............... 33
Consolidated Statements of Operations and Comprehensive Income (Loss) for
the years ended January 31, 2001, 2000 and 1999.......................... 34
Consolidated Statements of Stockholders' Equity for the years ended
January 31, 2001, 2000 and 1999.......................................... 35
Consolidated Statements of Cash Flows for the years ended January 31,
2001, 2000 and 1999...................................................... 36
Notes to Consolidated Financial Statements................................ 37
31
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, 2001 and 2000 and the related consolidated
statements of operations and comprehensive income (loss), stockholders'
equity, and cash flows for each of the three years in the period ended January
31, 2001. 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, 2001 and 2000, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
January 31, 2001, 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, 2001
32
BEA SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except par value)
January 31,
----------------------
2001 2000
---------- ----------
ASSETS
Current assets:
Cash and cash equivalents............................ $ 907,635 $ 763,294
Restricted cash...................................... 4,998 1,631
Short-term investments............................... 33,294 38,135
Accounts receivable, net of allowance for doubtful
accounts of $9,399 and $5,512 at January 31, 2001
and 2000, respectively.............................. 214,706 133,069
Deferred tax assets.................................. 20,035 13,520
Other current assets................................. 26,223 21,728
---------- ----------
Total current assets............................... 1,206,891 971,377
Property and equipment, net............................ 51,223 27,978
Goodwill, net of accumulated amortization of $78,392
and $19,200 at January 31, 2001 and 2000,
respectively.......................................... 138,404 141,457
Acquired intangible assets, net........................ 52,288 61,600
Deferred tax assets.................................... 9,915 -
Other long-term assets................................. 133,615 56,429
---------- ----------
Total assets....................................... $1,592,336 $1,258,841
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable..................................... 15,233 14,848
Accrued liabilities.................................. 133,092 92,673
Accrued income taxes................................. 24,307 13,501
Deferred tax liabilities............................. - 13,520
Deferred revenues.................................... 203,947 96,537
Current portion of notes payable and other
obligations......................................... 13,321 4,454
---------- ----------
Total current liabilities.......................... 389,900 235,533
Deferred tax liabilities............................... 32,350 -
Notes payable and other long-term obligations.......... 2,661 6,005
Convertible subordinated notes......................... 561,421 572,484
Commitments and contingencies
Stockholders' equity:
Common stock--$0.001 par value; 1,000,000 shares
authorized; 390,196 and 290,568 shares issued and
outstanding at January 31, 2001 and 2000,
respectively........................................ 390 290
Class B common stock--$0.001 par value; 140,000
shares authorized; 0 and 71,296 shares issued and
outstanding at January 31, 2001 and 2000,
respectively........................................ - 71
Additional paid-in capital........................... 793,729 650,128
Accumulated deficit.................................. (185,873) (202,951)
Notes receivable from stockholders................... (198) (296)
Deferred compensation................................ (523) (1,144)
Accumulated other comprehensive loss................. (1,521) (1,279)
---------- ----------
Total stockholders' equity......................... 606,004 444,819
---------- ----------
Total liabilities and stockholders' equity......... $1,592,336 $1,258,841
========== ==========
See accompanying notes
33
BEA SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
(in thousands, except per share data)
Fiscal year ended January
31,
----------------------------
2001 2000 1999
-------- -------- --------
Revenues:
License fees................................... $476,573 $292,855 $193,511
Services....................................... 343,187 171,555 95,531
-------- -------- --------
Total revenues............................... 819,760 464,410 289,042
-------- -------- --------
Cost of revenues:
Cost of license fees........................... 19,724 6,445 3,225
Cost of services............................... 197,567 98,005 57,167
Amortization of certain acquired intangible
assets........................................ 38,466 30,391 23,290
-------- -------- --------
Total cost of revenues....................... 255,757 134,841 83,682
-------- -------- --------
Gross profit..................................... 564,003 329,569 205,360
Operating expenses:
Sales and marketing............................ 335,501 211,445 138,926
Research and development....................... 89,247 60,972 42,584
General and administrative..................... 57,611 38,065 24,900
Amortization of goodwill....................... 59,192 15,764 2,981
Acquisition-related charges.................... 2,200 3,000 42,244
-------- -------- --------
Total operating expenses..................... 543,751 329,246 251,635
-------- -------- --------
Income (loss) from operations.................... 20,252 323 (46,275)
Interest expense................................. (22,910) (20,417) (10,426)
Interest income and other, net................... 50,120 14,437 9,975
-------- -------- --------
Income (loss) before provision for income taxes.. 47,462 (5,657) (46,726)
Provision for income taxes....................... 30,380 13,917 4,856
-------- -------- --------
Net income (loss)................................ 17,082 (19,574) (51,582)
Other comprehensive income (loss):
Foreign currency translation adjustments....... (213) (395) 5
Unrealized loss on available-for-sale
investments, net of income taxes.............. (29) (290) (8)
-------- -------- --------
Comprehensive income (loss)...................... $ 16,840 $(20,259) $(51,585)
======== ======== ========
Net income (loss) per share:
Basic.......................................... $ 0.05 $ (0.06) $ (0.18)
======== ======== ========
Diluted........................................ $ 0.04 $ (0.06) $ (0.18)
======== ======== ========
Shares used in computing net income (loss) per
share:
Basic.......................................... 377,070 310,817 280,988
======== ======== ========
Diluted........................................ 412,700 310,817 280,988
======== ======== ========
See accompanying notes
34
BEA SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(in thousands)
Class Notes Accumulated
B Additional receivable other Total
Preferred Common common paid-in Accumulated from Deferred comprehensive stockholders'
stock stock stock capital deficit stockholders compensation income (loss) equity
--------- ------ ------ ---------- ----------- ------------ ------------ ------------- -------------
Balance at January
31, 1998.......... $ 1 $155 $121 $211,556 $(130,726) $(544) $ (601) $ (591) $ 79,371
Issuance of
preferred 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
Class B 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
stockholders...... - - - - - 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
Issuance of common
stock............. - 2 - 23,258 - - - - 23,260
Common shares
issued under stock
option and stock
purchase plans.... - 25 - 85,725 (4) - - - 85,746
Conversion of
Class B common
stock............. - 71 (71) - - - - - -
Conversion of debt
obligations....... - 2 - 10,823 - - - - 10,825
Repayment of notes
receivable from
stockholders...... - - - - - 98 - - 98
Amortization of
deferred
compensation...... - - - - - - 621 - 621
Return of shares
from escrow
previously issued
in connection with
acquisitions...... - - - (2,060) - - - - (2,060)
Tax benefit on
stock options..... - - - 25,855 - - - - 25,855
Net income........ - - - - 17,082 - - - 17,082
Foreign currency
translation
adjustment........ - - - - - - - (213) (213)
Unrealized losses
on available-for-
sale investments,
net of tax........ - - - - - - - (29) (29)
---- ---- ---- -------- --------- ----- ------- ------- --------
Balance at January
31, 2001.......... $ - $390 $ - $793,729 $(185,873) $(198) $ (523) $(1,521) $606,004
==== ==== ==== ======== ========= ===== ======= ======= ========
See accompanying notes
35
BEA SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Fiscal year ended January 31,
-------------------------------
2001 2000 1999
--------- --------- ---------
Operating activities:
Net income (loss)........................... $ 17,082 $ (19,574) $ (51,582)
Adjustments to reconcile net income (loss)
to net cash provided by operating
activities:
Depreciation.............................. 12,782 7,309 4,377
Amortization of deferred compensation..... 621 736 371
Amortization of certain acquired
intangible assets and goodwill and write-
off of in-process research and
development.............................. 99,858 49,155 66,643
Write-down of equity investments.......... 16,211 - -
Amortization of debt issuance costs....... 2,195 1,189 661
Net gain on sale of WebGain preferred
stock and note receivable................ (18,595) - -
Debt conversion premium................... 236 8,054 -
Other..................................... 4,170 (880) (1,275)
Changes in operating assets and
liabilities, net of business
combinations:
Accounts receivable..................... (78,121) (54,386) (28,856)
Other current assets.................... (9,105) (9,365) (923)
Other long-term assets.................. (12,617) (913) 311
Accounts payable........................ (130) 6,688 1,706
Accrued liabilities..................... 76,163 44,942 17,189
Deferred revenues....................... 107,631 62,231 18,821
Other long-term liabilities............. 6,909 - -
--------- --------- ---------
Net cash provided by operating activities..... 225,290 95,186 27,443
Investing activities:
Property and equipment...................... (35,305) (17,807) (13,188)
Payments for acquisitions, net of cash
acquired, and other equity investments..... (107,897) (65,980) (99,432)
Purchase of long-term investment security... (14,900) - -
Decrease (increase) in restricted cash...... (3,367) 1,869 -
Purchases of available-for-sale short-term
investments................................ (186,889) (70,897) (1,374)
Proceeds from maturities of available-for-
sale short-term investments................ 191,701 32,867 6,187
--------- --------- ---------
Net cash used in investing activities......... (156,657) (119,948) (107,807)
Financing activities:
Net payments under lines of credit.......... - (679) (1,200)
Proceeds from convertible debt and other
outstanding obligations.................... 7,878 535,352 244,698
Payments on outstanding obligations......... (11,825) (498) (45,717)
Payments received on stockholder notes
receivable................................. 98 248 -
Distributions............................... - - (559)
Debt conversion premiums.................... (236) (8,054) -
Proceeds from issuance of common and
preferred stock, net of issuance costs..... 85,746 27,823 23,902
--------- --------- ---------
Net cash provided by financing activities..... 81,661 554,192 221,124
--------- --------- ---------
Net increase in cash and cash equivalents..... 150,294 529,430 140,760
Effect of foreign exchange rate changes on
cash......................................... (5,953) 1,308 812
Cash and cash equivalents at beginning of
year......................................... 763,294 232,556 90,984
--------- --------- ---------
Cash and cash equivalents at end of year...... $ 907,635 $ 763,294 $ 232,556
========= ========= =========
See accompanying notes
36
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-
business infrastructure software that helps companies of all sizes build e-
business systems that extend investments in existing computer systems and
provide the foundation for running a successful integrated e-business. BEA's
customers use BEA products as a deployment platform for Internet-based
applications, including custom-built and packaged applications, and as a means
for robust enterprise application integration among mainframe, client/server
and Internet-based applications. In addition, BEA provides Enterprise Java
Bean ("EJB")-based components which perform functions such as personalization,
shopping cart, order tracking, inventory and pricing that are used in
developing custom applications.
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 in the ending
month of the period 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 (loss).
The Company hedges a portion of its exposure on certain foreign currency
denominated assets and liabilities, primarily intercompany amounts, using
forward foreign exchange contracts, which are recorded at fair value based on
spot exchange rates each month. Gains and losses resulting from exchange rate
fluctuations on forward foreign exchange contracts are recorded currently in
interest income and other, net and offset by the corresponding foreign
exchange transaction gains and losses from the foreign currency denominated
assets and liabilities being hedged. Net gains (losses) resulting from foreign
currency transactions were approximately $(787,000), $287,000 and $340,000 in
fiscal 2001, 2000 and 1999, respectively. Forward foreign currency are
accounted for at fair value and recorded in cash and cash equivalents.
Cash equivalents and short-term investments
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 equivalents approximates their fair
market value.
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 investments at the time of
37
BEA SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
purchase and re-evaluates such designations as of each balance sheet date. All
short-term investments and cash equivalents 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 (loss). 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 and other, net.
Realized gains and losses and declines in value judged to be other-than-
temporary on available-for-sale securities are included in the consolidated
statements of operations and comprehensive income (loss). The cost of
securities sold is based on the specific identification method. Interest and
dividends on short-term investments classified as available-for-sale are
included in interest income and other, net.
Concentration of credit risk
Financial instruments that potentially subject the Company to significant
concentrations of credit risk consist principally of investments in debt
securities and trade receivables. The Company invests its cash, cash
equivalents and short-term investments in commercial paper rated A-1/P-1 or
higher and money market instruments 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. Future credit losses may differ from the
Company's estimates and could have a material impact on the Company's future
results of operations.
No customer accounted for more than 10 percent of total revenues in any of
the fiscal years 2001, 2000 or 1999. There were no customers that accounted
for more than 10 percent of accounts receivable as of January 31, 2001, 2000
or 1999. The only geographic sub-region with revenues greater than 10 percent
of total revenues in fiscal 2001 was the United Kingdom with 10.3 percent or
$84.7 million. No one geographic sub-region outside of the United States
accounted for more than 10% of total revenues in either fiscal 2000 or 1999.
Property and equipment
Property and equipment are stated at cost. Depreciation is computed using
the straight-line method over the following estimated useful lives of the
assets:
Computer hardware and software 3 years
Furniture and equipment 3 years
Assets under capital leases are amortized over the lesser of three years or
the life of the lease, while leasehold improvements are amortized over the
shorter of five years or the lease term.
38
BEA SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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 following estimated useful lives of the assets:
Purchased technology 3-4 years
Purchased software 3 years
Patents, licenses and trademarks 4-5 years
Non-compete agreements 2 years
Assembled workforce 2-5 years
Customer base 3 years
Goodwill 2-5 years
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 are impaired and the undiscounted cash flows
estimated to be generated by those assets are less than the carrying amounts
of those assets. Such events or circumstances include, but are not limited to,
a significant decrease in the fair value of the underlying business, a
significant decrease in the benefits realized from the acquired business, or a
significant change in the operations of the acquired business. If assets are
considered to be impaired, the impairment to be recognized is measured by the
amount by which the carrying amount of the asset exceeds its fair market
value. The Company's long-lived assets, consist primarily of acquired
intangible assets, goodwill, equity investments and property and equipment.
Changes in the economy, the business in which the Company operates and BEA's
own relative performance could change the assumptions used to evaluate the
recovery of goodwill and other intangible assets. BEA monitors the preceding
factors to identify events or circumstances which would cause the Company to
test for impairment and revise its assumptions on the estimated recovery of
goodwill and intangible assets.
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 and debt 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
39
BEA SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
influence over operations. When BEA's ownership exceeds 20 percent but is less
than 50 percent, the investment is accounted for under the equity method.
Under the equity method, the investee's proportionate share of net income or
loss and amortization of the investee's net excess investment over its equity
in net assets is included in net income or loss. The Company regularly reviews
the assumptions underlying the operating performance and cash flow forecasts
in assessing the fair values. BEA monitors the preceding factors to identify
events or circumstances which would cause the Company to test for other than
temporary impairment and revise its assumptions for the estimated recovery of
equity investments.
Revenue recognition
The Company recognizes revenues in accordance with the American Institute
of Certified Public Accountants ("AICPA") 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, the fee is fixed or determinable, and collectibility is
probable. The Company uses the residual method to recognize revenue when a
license agreement includes one or more elements to be delivered at a future
date and evidence of the fair value of all undelivered elements exists. Under
the residual method, the fair value of the undelivered elements is deferred
and the remaining portion of the arrangement fee is recognized as revenue. If
evidence of the fair value of one or more undelivered elements does not exist,
revenue is deferred and recognized when delivery of those elements occurs or
when fair value can be established. When the Company enters into a license
agreement requiring that the Company provide significant customization of the
software products, the license and related consulting services revenue is
recognized in accordance with AICPA Statement of Position 81-1, Accounting for
Performance of Construction-Type and Certain Production-Type Contracts. If the
fee due from the customer is not fixed or determinable, revenue is recognized
as cash is received from the customer, assuming all other revenue recognition
criteria have been met. The Company considers all arrangements with payment
terms longer than normal not to be fixed or determinable. Revenue arrangements
with resellers are recognized on a sell-thru basis.
Services revenue includes consulting services, post-contract customer
support and training. 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. Software
maintenance agreements provide technical support and the right to unspecified
upgrades on an if-and-when available basis. 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 where the exercise price of the award is
equal to the fair market value of the stock at the date of the award.
Net income (loss) per share
The Company computes net income (loss) per share under the provisions of
Statement of Financial Accounting Standard No. 128, Earnings per Share ("FAS
128"). Basic net income (loss) per share is computed
40
BEA SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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
income (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 and warrants, using the treasury stock method, and convertible notes
and preferred stock, using the if-converted method), if dilutive.
The following is a reconciliation of the numerators and denominators of the
basic and diluted net income (loss) per share computations (in thousands,
except per share data):
Fiscal year ended January
31,
----------------------------
2001 2000 1999
-------- -------- --------
Numerator:
Numerator for basic net income (loss) per
share:
Net income (loss)........................... $ 17,082 $(19,574) $(51,582)
Numerator for diluted net income (loss) per
share:
Interest and amortization charges for 4%
Convertible Subordinated Notes due June
15, 2005, net of taxes................... 509 - -
-------- -------- --------
Net income (loss) available to common
stockholders............................... $ 17,591 $(19,574) $(51,582)
======== ======== ========
Denominator:
Denominator for basic net income (loss) per
share:
Weighted average shares outstanding....... 378,046 314,126 287,064
Weighted average shares subject to
repurchase............................... (976) (3,309) (6,076)
-------- -------- --------
Denominator for basic net income (loss)
per share, weighted average shares
outstanding.............................. 377,070 310,817 280,988
Weighted average dilutive potential common
shares:
Convertible shares on the 4% Convertible
Subordinated Notes due June 15, 2005... 1,331 - -
Options, warrants, shares subject to
repurchase............................. 34,299 - -
-------- -------- --------
Denominator for diluted net income (loss)
per share.................................. 412,700 310,817 280,988
======== ======== ========
Basic net income (loss) per share........... $ 0.05 $ (0.06) $ (0.18)
======== ======== ========
Diluted net income (loss) per share......... $ 0.04 $ (0.06) $ (0.18)
======== ======== ========
The computation of diluted net loss per share for the fiscal year ended
January 31, 2001 excludes the impact of options to purchase 9.0 million shares
of common stock and the conversion of the $550 million 4% Convertible
Subordinated Notes due December 15, 2006 ("2006 Notes") which are convertible
into 15.9 million shares of common stock at January 31, 2001, as such impact
would be antidilutive for this period.
The computation of diluted net loss per share for the fiscal year ended
January 31, 2000 excludes the impact of options to purchase 52.3 million
shares of common stock; the conversion of the $550 million 2006 Notes and the
$250 million 4% Convertible Subordinated Notes due June 15, 2005 ("2005
Notes"), which were convertible into 15.9 million and 3.4 million shares of
common stock, respectively, at January 31, 2000 as such impact would be
antidilutive for this period.
The computation of diluted net loss per share for the fiscal year ended
January 31, 1999 excludes the impact of options to purchase 21.6 million
shares of common stock; the conversion of the $250 million 2005 Notes, which
were convertible into 37.9 million shares of common stock, at January 31,
1999, as such impact would be antidilutive for this period.
41
BEA SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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, e-business infrastructure software.
The Company's chief operating decision maker evaluates the performance of the
Company based upon software product and service revenues by geographic
segments disclosed in Note 13.
Advertising costs
The Company expenses advertising costs as incurred. Total advertising
expenses were approximately $18.2 million, $9.9 million and $4.8 million in
fiscal 2001, 2000 and 1999, respectively.
Recent accounting pronouncements
In March 2000, the Financial Accounting Standards Board ("FASB") issued
FASB Interpretation No. 44, Accounting for Certain Transactions Involving
Stock Compensation--an Interpretation of APB Opinion No. 25, ("FIN 44"). FIN
44 clarifies the application of APB Opinion No. 25 and, among other issues
clarifies the following: the definition of an employee for purposes of
applying APB Opinion No. 25; the criteria for determining whether a plan
qualifies as a noncompensatory plan; the accounting consequence of various
modifications to the terms of the previously fixed stock options or awards;
and the accounting for an exchange of stock compensation awards in a business
combination. FIN 44 was effective July 1, 2000. The application of FIN 44 has
not had a material impact on the Company's financial position or results of
operations.
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 was required to adopt the
provisions of SAB 101 in its fourth quarter of fiscal 2001. The adoption of
SAB 101 did not have a material impact on the Company's financial position or
results of operations.
In June 1998, the FASB 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 recognizes all derivatives as either
assets or liabilities in the statement of financial position and measures
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 is required 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.
Reclassification of accounts
Certain prior year amounts have been reclassified to conform to the
presentation adopted in the current year. Such reclassifications did not
change the previously reported operating income (loss) or net income (loss)
amounts.
42
BEA SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
2. Financial Instruments
Available-for-sale securities
The following is a summary of available-for-sale securities at January 31,
2001 and 2000 (in thousands):
January 31, 2001 January 31, 2000
----------------------------- -----------------------------
Gross Gross
Amortized unrealized Fair Amortized unrealized Fair
cost losses value cost losses value
--------- ---------- -------- --------- ---------- --------
Commercial paper........ $367,069 $(494) $366,575 $311,782 $(151) $311,631
Money market............ 502,838 - 502,838 446,106 - 446,106
Time deposits........... - - - 602 - 602
-------- ----- -------- -------- ----- --------
$869,907 $(494) $869,413 $758,490 $(151) $758,339
======== ===== ======== ======== ===== ========
Included in the above table are securities with fair values totaling $816.2
million and $718.5 million at January 31, 2001 and 2000, respectively, which
are classified as cash and cash equivalents and $38.3 million and $39.8
million at January 31, 2001 and 2000, respectively, which are classified as
restricted cash and short-term investments and $14.9 million at January 31,
2001 which is classified as a long-term asset in the accompanying consolidated
balance sheets. All short-term investments mature within six months. At
January 31, 2001 and 2000, restricted cash includes cash equivalents of $5.0
and $1.4 million, respectively, which is used as collateral on standby letters
of credit and restricted time deposits of $0 and $250,000, respectively, which
is used as collateral on borrowings (see Note 8).
Foreign currency contracts
The Company enters into forward foreign currency contracts to reduce the
exposure to foreign currency transaction fluctuations as a result of certain
foreign currency denominated assets and liabilities. The contracts are marked-
to-market on a monthly basis and are not used for trading or speculative
purposes. At January 31, 2001 and 2000, the Company had outstanding forward
foreign currency contracts with notional amounts of approximately $92.7
million and $44.2 million, respectively. All of the Company's forward foreign
currency contracts have maturities of 90 days or less.
The Company's forward foreign currency contract notional amounts
outstanding at January 31, 2001 and 2000 were as follows (in thousands):
January 31,
---------------
2001 2000
------- -------
Contracts to sell foreign currency (purchase U.S. dollars)
during the following year:
Euros................................................... $35,300 $21,800
British pounds.......................................... - 10,300
Japanese yen............................................ 14,000 2,700
Canadian dollars........................................ 4,900 -
Swiss francs............................................ - 2,800
Swedish krona........................................... - 3,200
Korean won.............................................. 5,400 -
Australian dollars...................................... 2,700 600
------- -------
$62,300 $41,400
======= =======
43
BEA SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
January 31,
--------------
2001 2000
------- ------
Contracts to purchase foreign currency (sell U.S. dollars)
during the following year:
Euros.................................................... $11,500 $2,000
British pounds........................................... 6,900 -
Swiss francs............................................. 100 -
Australian dollars....................................... - 800
------- ------
$18,500 $2,800
======= ======
Contracts to sell foreign currency (purchase Euros) during
the following year:
British pounds........................................... $ 6,600 $ -
Swedish krona............................................ 1,300 -
Swiss francs............................................. 4,000 -
------- ------
$11,900 $ -
======= ======
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,
---------------------------------------
2001 2000
------------------- ------------------
Carrying Fair Carrying Fair
amount value amount value
-------- --------- -------- --------
Financial assets:
Cash and cash equivalents........ $907,635 $ 907,635 $763,294 $763,294
Restricted cash.................. 4,998 4,998 1,631 1,631
Short-term investments........... 33,294 33,294 38,135 38,135
Long-term investments (expected
realization 1 year)............. 14,908 14,908 - -
Financial liabilities:
Notes payable, capital lease
obligations and other long-term
obligations (including current
portion)........................ 15,982 15,982 10,459 10,459
Convertible subordinated 2006
Notes........................... 550,000 1,046,626 550,000 598,200
Convertible subordinated 2005
Notes........................... 11,421 114,075 22,484 128,400
Forward foreign currency
contracts....................... (924) (924) (780) (780)
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 Notes and 2006 Notes significantly
exceeds the carrying amount at January 31, 2001, 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
44
BEA SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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. Property and equipment
Property and equipment consist of the following (in thousands):
January 31,
----------------
2001 2000
------- -------
Computer hardware and software............................. $34,384 $17,290
Furniture and equipment.................................... 17,916 11,722
Leasehold improvements..................................... 26,543 13,269
Furniture and equipment under capital leases............... 1,510 1,510
------- -------
80,353 43,791
Accumulated depreciation and amortization.................. (29,130) (15,813)
------- -------
$51,223 $27,978
======= =======
Accumulated amortization for furniture and equipment under capital leases
was approximately $1.2 million and $936,000 at January 31, 2001 and 2000,
respectively.
4. Business Combinations
Bauhaus Technologies
On October 3, 2000, BEA purchased Bauhaus Technologies, Inc. ("Bauhaus").
The purchase price was approximately $19.8 million in cash. The acquisition
includes contingent consideration of approximately $7.9 million, payable in
cash, which will be earned based on achievement of performance goals. It is
considered probable beyond a reasonable doubt that $5.6 million of this amount
will be paid and, therefore, this amount has been included in the recorded
purchase price of $19.8 million. The remaining $2.3 million of contingent
consideration will be recorded when and if paid by BEA. As of January 31,
2001, $1.1 million of the purchase price is held in escrow for potential
claims until October 2001. The acquisition was accounted for using the
purchase method with a significant portion of the purchase price allocated to
intangible assets.
The following is a summary of the purchase price allocation (in thousands):
Current assets and other tangible assets............................ $ 4,491
Liabilities assumed................................................. (3,611)
Deferred taxes...................................................... (6,515)
Goodwill............................................................ 8,445
Intangible assets................................................... 17,000
-------
$19,810
=======
The operating results of Bauhaus were immaterial and would not have
materially altered the results of the Company if presented on a pro forma
basis.
45
BEA SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The Object People
On April 19, 2000, the Company completed its acquisition of the services
business of The Object People, Inc. ("TOP"). The purchase price was
approximately $20.5 million in cash. As of January 31, 2001, $2.1 million of
the purchase price was held in escrow for potential claims with expected
payout in May 2001. The acquisition was accounted for using the purchase
method with a significant portion of the purchase price allocated to
intangible assets.
The following is a summary of the purchase price allocation (in thousands):
Current assets and other tangible assets............................ $ 3,611
Liabilities assumed................................................. (3,485)
Goodwill............................................................ 12,274
Intangible assets................................................... 8,100
-------
$20,500
=======
The operating results of TOP were immaterial and would not have materially
altered the results of the Company if presented on a pro forma basis.
The Workflow Automation Corporation
On March 21, 2000, BEA purchased The Workflow Automation Corporation
("Workflow") with a combination of $4.9 million in cash and the issuance of
470,718 shares of BEA common stock, valued at $49.41 per share. The
acquisition was accounted for using the purchase method. As of January 31,
2001, approximately 86,920 shares were held in escrow for potential claims of
which 55,320 shares were distributed in March 2001 with expected distribution
of the remaining shares in September 2001. The total purchase price was
approximately $28.6 million.
The following is a summary of the purchase price allocation (in thousands):
Current assets and other tangible assets............................ $ 817
Liabilities assumed................................................. (868)
Deferred taxes...................................................... (2,400)
Acquired in-process research and development........................ 2,200
Goodwill............................................................ 22,887
Intangible assets................................................... 6,000
-------
$28,636
=======
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, in-
process technology, non-compete agreements and assembled workforce.
Core technology and in-process technology were identified and valued
through analysis of Workflow'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,
46
BEA SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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.
The operating results of Workflow were immaterial and would not have
materially altered the results of the Company if presented on a pro forma
basis.
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, 2001, approximately 445,608 shares were held in escrow for
potential claims, with distribution expected in May 2002. The transaction was
accounted for as a purchase. The total cost of the acquisition was
approximately $154.9 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........................................................... 122,433
Intangible assets.................................................. 33,800
--------
$154,860
========
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.
47
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):
Fiscal Year Ended
January 31,
-------------------
2000 1999
-------- ---------
Revenues................................................ $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. ("WebLogic"), a San Francisco-based privately
held 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.
On April 30, 1998, the Company issued 2,242,816 shares of its common stock
to acquire Leader Group, Inc. ("Leader Group"), 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.
As required by generally accepted accounting principles, the effect of
transactions between the Company, Leader Group and WebLogic prior to the
combinations 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)
Acquired in-process research and development........................ 38,300
Goodwill............................................................ 7,700
Intangible assets................................................... 39,500
-------
$92,400
=======
48
BEA SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
5. Acquired Intangible Assets
Acquired intangible assets consist of the following (in thousands):
January 31,
-------------------
2001 2000
--------- --------
Purchased technology and software....................... $ 97,985 $ 95,603
Other intangibles....................................... 54,920 28,148
Trademarks and tradenames............................... 12,317 12,317
--------- --------
165,222 136,068
Accumulated amortization ............................... (112,934) (74,468)
--------- --------
$ 52,288 $ 61,600
========= ========
6. Other Long-Term Assets
Other assets consist of the following (in thousands):
January 31,
----------------
2001 2000
-------- -------
Equity investment in WebGain, Inc.......................... $ 31,715 $37,000
Other equity investments in private companies.............. 19,209 1,060
Note receivable from WP Equity Partners, Inc. ............. 50,017 -
Notes receivable from executive officers................... 700 1,787
Debt issuance costs........................................ 12,730 14,962
Other long-term assets..................................... 19,244 1,620
-------- -------
$133,615 $56,429
======== =======
BEA has non-voting preferred stock (representing approximately 22.6 percent
ownership interest) in WebGain, Inc. ("WebGain"), a private company. Other
shareholders of WebGain include venture capital funds managed by E.M. Warburg,
Pincus & Co., Inc., of which certain BEA directors are managing directors. To
the extent that WebGain's aggregate losses exceed its common stockholders'
equity, BEA would begin recognizing losses in a manner similar to the equity
method of accounting, with such losses being limited to the extent of BEA's
investment in WebGain. During fiscal 2001, the Company purchased investments
in WebGain equity and debt securities of $23.0 million and sold investments in
WebGain equity and debt securities of $28.3 million to WP Equity Partners,
Inc. ("WP Equity Partners") in exchange for a note receivable due from WP
Equity Partners in the amount of approximately $50.0 million with an annual
interest rate of 7 percent. The terms of this sale also provide for additional
payments upon the occurrence of certain events. The principal amount is due in
full on January 31, 2003 and accrued interest is due on the last day of each
March, June, September, and December, beginning March 31, 2001. The Company
recorded a $18.6 million net gain in interest income and other, net.
Aside from its investment in WebGain, during fiscal 2000 and 2001, the
Company made a number of other strategic equity investments in privately-held
companies amounting to a total investment of $34.3 million. The Company
regularly reviews its portfolio of equity investments in private companies for
impairment. In the fourth quarter of fiscal 2001, the Company concluded that a
decline in value of the portfolio had occurred that was other than temporary.
Accordingly, a write-down of these investments of approximately $16.2 million
was recorded in interest income and other, net. At January 31, 2001, the
Company's net investment in private equity investments, including the
investment in WebGain, totaled $50.9 million.
49
BEA SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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 June 30, 2004 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.
During fiscal 2000, the Company incurred $14.6 million of debt issuance
costs in connection with the issuance of the 2006 Notes (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 of
debt issuance costs in connection with the issuance of the 2005 Notes (see
Note 8). During fiscal 2001 and 2000, approximately $11.1 million and $227.5
million, respectively, of the 2005 Notes were converted to common stock and
related debt conversion premiums of approximately $236,000 and $8.1 million,
respectively, were charged to interest expense. The debt issuance 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.
7. Accrued Liabilities
Accrued liabilities consist of the following (in thousands):
January 31,
----------------
2001 2000
-------- -------
Accrued payroll and related liabilities.................... $ 60,282 $43,059
Accrued sales taxes........................................ 20,554 11,230
Other accrued liabilities.................................. 52,256 38,384
-------- -------
$133,092 $92,673
======== =======
8. Line of Credit, Notes Payable and Other Long-Term Obligations
Borrowings under lines of credit
At January 31, 2001 and 2000, the Company had no line of credit agreements.
Notes payable and other obligations
Notes payable and other obligations consist of the following (in
thousands):
January 31,
-----------------
2001 2000
-------- -------
Other notes payable and short-term obligations.......... $ 69 $ 36
Acquisition-related liabilities......................... 14,422 9,600
Other long-term obligations............................. 1,491 823
-------- -------
15,982 10,459
Less amounts due within one year........................ (13,321) (4,454)
-------- -------
Notes payable and other long-term obligations due after
one year............................................... $ 2,661 $ 6,005
======== =======
50
BEA SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Scheduled maturities of notes payable and other obligations are as follows
(in thousands):
Principal
Amount
---------
Year ended January 31,
2002............................................................. $13,321
2003............................................................. 2,293
2004............................................................. 123
2005............................................................. 95
2006 and thereafter.............................................. 150
-------
$15,982
=======
Convertible subordinated debt offerings
In December 1999, the Company completed the sale of the 2006 Notes in an
offering to Qualified Institutional Buyers. The 2006 Notes are subordinated to
all existing and future senior indebtedness of the Company. 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 2005 Notes in
an offering to Qualified Institutional Buyers. The 2005 Notes are subordinated
to all existing and future senior indebtedness of the Company. 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
2001, approximately $11.1 million of the 2005 Notes were converted to common
stock, leaving approximately $11.4 million as remaining principal. The Company
incurred $236,000 million of debt conversion premium in fiscal 2001, which was
charged to interest expense. During fiscal 2000, approximately $227.5 million
of the 2005 Notes were converted to common stock. The Company incurred $8.1
million of debt conversion premium in fiscal 2000, which was charged to
interest expense.
9. Income Taxes
The components of the provisions for income taxes consist of the following
(in thousands):
January 31,
-------------------------
2001 2000 1999
-------- ------- ------
Federal:
Current......................................... $ 52,766 $ 5,731 $1,420
Deferred........................................ (52,622) (3,800) -
State:
Current......................................... 17,000 5,093 804
Deferred........................................ (10,888) - -
Foreign:
Current......................................... 24,124 6,893 2,632
-------- ------- ------
Provision for income taxes...................... $ 30,380 $13,917 $4,856
======== ======= ======
51
BEA SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Pretax income (loss) from foreign operations was approximately $32.1
million, $(25.2) million, and $(25.7) million for fiscal 2001, 2000 and 1999,
respectively.
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,
----------------------------
2001 2000 1999
-------- -------- --------
Tax benefit at U.S. statutory rate........... $ 16,612 $ (1,980) $(16,355)
State income taxes, net of federal benefit... 3,973 3,310 523
Nondeductible amortization of intangible
assets...................................... 14,389 2,336 6,511
Purchase adjustment.......................... - 11,830 -
Valuation allowance.......................... (18,156) (16,585) 8,316
Unbenefitted foreign losses.................. - 5,173 3,442
Foreign income and withholding taxes......... 14,493 6,893 1,056
Nondeductible transaction expenses........... - 2,819 1,036
Other........................................ (931) 121 327
-------- -------- --------
Provision for income taxes................. $ 30,380 $ 13,917 $ 4,856
======== ======== ========
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,
-------------------
2001 2000
--------- --------
Deferred tax assets:
Deferred revenue........ $ 32,248 $ 8,486
Accruals and reserves... 20,074 13,195
Net operating loss
carryforwards.......... 84,469 525
Property, equipment and
intangible assets...... 38,550 26,319
Other................... 657 -
--------- --------
Subtotal.................. 175,998 48,525
Valuation allowance....... (168,483) (44,725)
--------- --------
Total deferred tax
assets................... $ 7,515 $ 3,800
--------- --------
Deferred tax liabilities:
U.S. deferred taxes for
unremitted foreign
earnings............... (9,915) -
--------- --------
Net deferred tax
assets/(liabilities)... $ (2,400) $ 3,800
========= ========
Realization of deferred tax assets is primarily dependent on future taxable
income, if any, the timing and amount of which is uncertain in part due to the
potential impact of future stock option deductions. Accordingly, a valuation
allowance, in an amount equal to the net deferred tax assets dependent upon
future taxable income at January 31, 2001 and 2000, has been established to
reflect these uncertainties. The valuation allowance increased by
approximately $123.8 million and $322,000 in fiscal years 2001 and 2000,
respectively. Approximately $158.6 million and $25.5 million of the valuation
allowance at January 31, 2001 and 2000, 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.
52
BEA SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
As of January 31, 2001, the Company had federal net operating loss
carryforwards of approximately $206.2 million, which will expire in 2009
through 2021. 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.
10. Stockholders' Equity
Share activity
The following table represents changes in outstanding shares of preferred
and common stock:
Class B
Preferred Common common
(in thousands) stock stock stock
- -------------- --------- ------- -------
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
Issuance of common stock.......................... - 1,969 -
Conversion of Class B common stock................ - 71,296 (71,296)
Shares issued under stock option and stock
purchase plans................................... - 24,754 -
Repurchase of common shares....................... - (48) -
Return of shares from escrow previously issued in
connection with acquisitions..................... - (127) -
Shares issued from exercise of warrant............ - 109 -
Conversion of debt obligations.................... - 1,675 -
------- ------- -------
Balance at January 31, 2001....................... - 390,196 -
======= ======= =======
Stock splits
In each of December 1999 and April 2000, the Company completed two-for-one
common stock splits 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
these stock splits.
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 and Class B common stock from 482,060,000 shares to 1,140,000,000
shares which is adjusted for the two-for-one stock splits on December 1999 and
April 2000 per stockholder approval of an amendment in April 2000.
53
BEA SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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 of these shares
expires monthly over a four-year period, subject to acceleration upon the
occurrence of certain events. As of January 31, 2001, approximately 226,000
shares were subject to the Company's right of repurchase.
The Company has reserved shares of common stock for future issuance at
January 31, 2001, as follows (in thousands):
Shares reserved for Incentive Stock Option Plans.................... 102,693
Shares reserved for Employee Stock Purchase Plan.................... 6,132
Outstanding warrants................................................ 458
Shares reserved for conversion of convertible notes payable (2005
Notes and 2006 Notes).............................................. 17,603
-------
Total common stock reserved for future issuance................... 126,886
=======
Outstanding warrants, which are exercisable as of January 28, 1998 to
September 24, 1999, 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, provided that 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. During fiscal 2001, all remaining outstanding
shares of Class B common stock were converted into common stock.
Deferred compensation
In fiscal 1999, the Company recorded deferred compensation of approximately
$1.7 million, 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 deferred compensation is being amortized as compensation expense over the
vesting period of the underlying stock options. For the fiscal years ended
January 31, 2001, 2000 and 1999, compensation expense recognized totaled
$621,000, $736,000 and $371,000, 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 or before January 31, 2002 or within a specified period of time following
termination of employment with the Company. In fiscal 2001 and 2000, $98,000
and $248,000, respectively, of these notes were repaid to the Company.
54
BEA SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
11. 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 six 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,
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
Granted............................... 14,820 $29.33-$85.56 $48.53
Exercised............................. (20,486) $ 0.01-$58.19 $ 3.10
Canceled.............................. (6,731) $ 0.07-$85.56 $ 4.54
-------
Options outstanding at January 31,
2001................................... 55,289 $ 0.07-$85.56 $16.97
=======
Options exercisable at January 31,
2001................................... 17,925 $ 0.07-$83.50 $ 5.06
=======
Options exercisable at January 31,
2000................................... 18,564 $ 0.03-$41.35 $ 1.71
=======
Options exercisable at January 31,
1999................................... 15,740 $ 0.03-$ 7.03 $ 0.84
=======
Options available for grant at January
31, 2001............................... 47,404
=======
The weighted average grant date fair value of stock options was $35.80,
$8.79 and $3.55 in fiscal years 2001, 2000 and 1999, respectively.
55
BEA SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The following table summarizes information about outstanding and
exercisable stock options at January 31, 2001:
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
$0.07-$1.50.................. 5,813 6.10 $ 0.70 5,440 $ 0.69
$1.58-$3.81.................. 6,093 7.78 $ 3.37 2,612 $ 3.41
$3.84-$4.33.................. 8,738 8.19 $ 4.17 3,227 $ 4.17
$4.33-$5.89.................. 6,759 7.70 $ 5.36 2,775 $ 5.26
$5.95-$6.72.................. 5,799 8.12 $ 6.45 1,750 $ 6.38
$6.75-$24.75................. 6,822 8.68 $13.29 1,443 $11.55
$28.17-$37.69................ 6,097 9.06 $34.43 669 $32.68
$37.88-$59.63................ 5,656 9.44 $46.18 8 $41.34
$61.00-$83.50................ 3,376 9.77 $68.14 1 $62.97
$85.56....................... 136 9.73 $85.56 - $ -
------ ------
55,289 17,925
====== ======
Employee stock purchase plan
In March 1997, the Company's stockholders approved an Employee Stock
Purchase Plan (the "ESPP Plan") for all employees meeting certain eligibility
criteria. Under the ESPP Plan, employees may purchase shares of the Company's
common stock, subject to certain limitations, at 85 percent of the lower of
the closing sale price of BEA's Common Stock reported on the Nasdaq National
Market ("Nasdaq") at the beginning or the end of each six-month offering
period. Additionally, the price paid by the employee will not exceed 85% of
the closing sale price as reported on Nasdaq at the beginning of a 24 month
period that restarts in January and July of every second year determined by
the employee's enrollment date in the plan. Eligible employees may purchase
common stock through payroll deductions by electing to have between 1% and 15%
of their compensation withheld. Annually, the number of shares available in
the ESPP Plan automatically increase by an amount equal to six 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.
Approximately, 4.3 million, 3.3 million and 6.0 million shares for proceeds of
$22.8 million, $11.0 million and $6.9 million were sold through the ESPP Plan
in fiscal 2001, 2000 and 1999, respectively. At January 31, 2001, 16.1 million
shares had been issued under the ESPP Plan and 6.1 million shares were
reserved for issuance.
401(k) plan
The Company has a 401(k) Profit Sharing Plan (the "401K Plan") that allows
eligible employees to contribute up to 15 percent of their annual compensation
to the 401K Plan, subject to certain limitations. The Company matches employee
contributions at a rate of 3 percent of salary, up to a maximum of $3,000.
Employee contributions vest immediately, whereas the Company's matching
contributions vest at a rate of 25 percent per year of employment. The 401K
Plan also allows the Company to make discretionary contributions; however,
none have been made to date. The Company recognized matching contribution
expense of $1.4 million, $838,000 and $0 in fiscal 2001, 2000 and 1999,
respectively.
56
BEA SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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 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 2001, 2000 and 1999, subsequent to the Company's
initial public offering, 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
---------------- ----------------
2001 2000 1999 2001 2000 1999
---- ---- ---- ---- ---- ----
Expected life (in years)................ 4.30 4.30 4.71 .5 .5 .5
Risk-free interest rate................. 5.99% 5.93% 5.14% 5.68% 5.62% 5.10%
Expected volatility..................... .98 .81 .66 .98 .81 .66
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,
-----------------------------
2001 2000 1999
--------- -------- --------
Pro forma net loss.......................... $(109,979) $(61,707) $(86,884)
Pro forma basic and diluted net loss per
share...................................... $ (0.29) $ (0.20) $ (0.31)
57
BEA SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
12. Accumulated Other Comprehensive Loss
The components of accumulated other comprehensive loss are as follows (in
thousands):
January 31,
----------------
2001 2000
------- -------
Foreign currency translation adjustment................... $(1,175) $ (962)
Unrealized loss on available-for-sale investments, net of
tax of $12 and $124 in fiscal 2001 and 2000,
respectively............................................. (346) (317)
------- -------
Total accumulated other comprehensive loss................ $(1,521) $(1,279)
======= =======
The related income tax effect allocated to each component of other
comprehensive income (loss) are as follows (in thousands):
Amount Income Amount
before tax net of
tax benefit taxes
------ ------- ------
Fiscal 2001
Foreign currency translation adjustment........... $(213) $ - $(213)
Unrealized loss on available-for-sale
investments...................................... (41) 12 (29)
----- ---- -----
Total other comprehensive loss.................. $(254) $ 12 $(242)
===== ==== =====
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 income (loss)......... $ (7) $ 4 $ (3)
===== ==== =====
13. Geographic Segment Information
Information regarding the Company's operations by geographic areas at
January 31, 2001, 2000 and 1999 and for the fiscal years then ended is as
follows (in thousands):
January 31,
--------------------------
2001 2000 1999
-------- -------- --------
Total revenues:
United States.................................. $478,634 $276,755 $173,305
Europe, Middle East and Africa................. 240,137 141,097 93,825
Asia/Pacific and other......................... 100,989 46,558 21,912
-------- -------- --------
$819,760 $464,410 $289,042
======== ======== ========
Long-lived assets (at end of year):
United States (1).............................. $352,787 $264,865 $340,481
Europe, Middle East and Africa................. 5,936 3,610 44,407
Asia/Pacific and other......................... 16,807 18,989 18,123
-------- -------- --------
$375,530 $287,464 $403,011
======== ======== ========
- --------
(1) Long-lived assets include all long-term assets except those specifically
excluded under SFAS No. 131, such as deferred income taxes.
58
BEA SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The Company assigns revenues to geographic areas based on the location from
which the invoice is generated. The only geographic sub-region with revenues
greater than 10 percent of total revenues in fiscal 2001 was the United
Kingdom with 10.3 percent or $84.7 million. No one geographic sub-region
outside the United States accounted for more than 10% of total revenues in
both fiscal 2000 and 1999. No one geographic sub-region outside the United
States accounted for more than 10% of total long-lived assets in any of fiscal
2001, 2000 and 1999.
14. Supplemental Cash Flow Disclosures
Cash payments for interest were $22.4 million (exclusive of the debt
conversion premium of $236,000), $11.0 million (exclusive of the debt
conversion premium of $8.1 million), and $7.2 million in fiscal 2001, 2000 and
1999, respectively. Cash payments for income taxes were approximately
$285,000, $6.3 million and $1.6 million for fiscal 2001, 2000 and 1999,
respectively. In fiscal 2001 and 2000, the convertible holders converted
approximately $11.1 million and $227.5 million of the 2005 Notes into common
stock. The value of stock issued in connection with business acquisitions in
fiscal 2001 and 2000 was $23.3 million and $117.7 million. During fiscal 2001,
the Company sold of $10.3 million of the carrying value of its investment in
WebGain and transferred a $18.0 million convertible note plus accrued interest
to WP Equity Partners, LP in exchange for a note receivable due from WP Equity
Partners in the amount of approximately $50.0 million.
15. Commitments and Contingencies
Operating Leases
The Company leases its facilities under operating lease arrangements with
remaining terms ranging from less than 1 year up to 10.5 years. 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 for additional terms ranging from 2
to 15 years.
Approximate annual minimum operating lease commitments and sublease rental
income are as follows (in thousands):
Sublease
January 31, Commitments income
----------- ----------- --------
2002.................................................. $ 26,182 $2,168
2003.................................................. 26,568 763
2004.................................................. 25,213 40
2005.................................................. 22,723 -
2006.................................................. 26,390 -
Thereafter............................................ 55,254 -
-------- ------
Total minimum lease payments........................ $182,330 $2,971
======== ======
Total rent expense charged to operations for the fiscal years ended January
31, 2001, 2000 and 1999 was approximately $24.2 million, $16.9 million and
$11.8 million, respectively. Rental income for the facilities under sublease
was $4.2 million and $3.6 million for the fiscal years ended January 31, 2001
and 2000, respectively, and insignificant for the fiscal year ended January
31, 1999.
Capital leases
The company has equipment under capital lease for which the remaining
payments of principal and interest are not significant.
59
BEA SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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 2001
and 2000, the Company recorded employer payroll taxes related to stock option
exercises of approximately $13.3 million and $2.0 million, respectively.
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.
16. 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, 2001 and 2000,
there were no outstanding borrowings under the lines of credit. As of January
31, 2001 and 2000, accrued interest on promissory notes to executive officers
included in current assets totaled $136,000 and $371,000, respectively.
17. Subsequent Events (unaudited)
During the first quarter of fiscal 2002, the Company entered into a lease
agreement for the lease of approximately 40 acres of land adjacent to the
Company's headquarters in San Jose, California to construct additional
corporate offices and research and development facilities. The lease has an
initial term of five years with renewal options. Rent obligations commence at
the beginning of the third year. The total approximate minimum lease payments
for the next five years are currently estimated to be approximately $0 in
fiscal 2002 and 2003 and $17.5 million in fiscal 2004, 2005 and 2006,
respectively. The minimum lease payments will fluctuate from time to time
depending on short term interest rates. The Company has an option to purchase
the land at the end of the term of the lease for the lesser of $331 million or
the outstanding lease balance or, prior to the end of the lease, to arrange
for the sale of the property to a third party with the Company retaining an
obligation to the owner for the difference between the sales price and the
guaranteed residual value up to $328.7 million if the sales price is less than
this amount, subject to certain provisions of the lease. As part of the lease
transaction, the Company has restricted approximately $330 million of its
investment securities as collateral for specified obligations to the lessor
under the lease. The investment securities are restricted as to withdrawal and
are managed by a third party subject to certain limitations. The Company must
maintain certain covenants, as defined in the lease.
In February 2001, the Company sold additional shares of WebGain Series A
Preferred Stock to WP Equity Partners, further reducing the Company's
ownership interest to below 20 percent. In accordance with the agreement
regarding the sale of the Company's investment in WebGain executed in January
2001, the Company recorded an additional gain of $18.0. See Note 6.
60
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Not Applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information regarding directors and executive officers of the Company is
incorporated by reference to the sections entitled "Election of Directors,"
"Management" and "Section 16(a) Beneficial Ownership Reporting Compliance" in
the Company's definitive Proxy Statement with respect to the Registrant's 2001
Annual Meeting to be filed with the SEC within 120 days of January 31, 2001
(the "Proxy Statement").
ITEM 11. EXECUTIVE COMPENSATION
The information in the sections entitled "Executive Compensation and
Related Information" and "Election of Directors" and related information in
the Proxy Statement is incorporated herein by this reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information in the section entitled "Security Ownership of Certain
Beneficial Owners and Management" in the Proxy Statement is incorporated
herein by this reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information in the section entitled "Certain Relationships and Related
Transactions" and the Proxy Statement is incorporated herein by this
reference.
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
61
Exhibit Description
------- -----------
3.3(10) 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. Peotter, 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
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(10)* Employment Agreement between the Registrant and Alfred S.
Chuang dated as of September 1, 1999
10.16(10)* Employment Agreement between the Registrant and William T.
Coleman III dated as of September 1, 1999
10.17(10) Promissory Note secured by deed of trust entered into between
the Registrant and Joe Menard and Laura Menard, dated December
15, 1999
62
Exhibit Description
------- -----------
10.18(10) Lease agreement between the Registrant and Russ Building for
premise located at 235 Montgomery Street, San Francisco, dated
September 24, 1999
10.19(10) 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(10)* Registrant's 2000 Non-Qualified Stock Incentive Plan, including
forms of agreements thereunder
10.21(10) Promissory Note secured by deed of trust entered into between
the Registrant and Ivan Koon and Irene Li-Ping Chueng, dated
December 7, 1999
10.22 Form of Lease agreement between the Registrant and ABN AMRO
Leasing, Inc., dated February 13, 2001
10.23 2001 Executive Staff Bonus Plan
10.24 Registrant's Amended 1997 Employee Stock Purchase Plan
11.1 Statement re: computation of loss per share (included on page
41 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
- --------
(1) Incorporated by reference to such exhibit as filed in the Registrant's
Registration Statement on Form SB-2, filed January 31, 1997
(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
(10) Incorporated by reference to such exhibit as filed in the Registrant's
Registration Statement on Form 10-K, filed May 1, 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 not filed by the Company during the
last quarter of the fiscal year ended January 31, 2001.]
63
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.
/s/ William T. Coleman III
William T. Coleman III
Chief Executive Officer and
Chairman of the Board
April 30, 2001
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 30, 2001
------------------------------------ and Chairman of the
Board
William T. Coleman III
/s/ Alfred S. Chuang President, Chief April 30, 2001
------------------------------------ Operating Officer
Alfred S. Chuang and Director
/s/ William M. Klein Chief Financial Officer April 30, 2001
------------------------------------ and Executive Vice
President--
Administration
William M. Klein
/s/ Carol A. Bartz Director April 30, 2001
------------------------------------
Carol A. Bartz
/s/ Cary J. Davis Director April 30, 2001
------------------------------------
Cary J. Davis
/s/ Stewart K. P. Gross Director April 30, 2001
------------------------------------
Stewart K. P. Gross
/s/ William H. Janeway Director April 30, 2001
------------------------------------
William H. Janeway
/s/ Robert L. Joss Director April 30, 2001
------------------------------------
Robert L. Joss
/s/ Dean O. Morton Director April 30, 2001
------------------------------------
Dean O. Morton
64
BEA SYSTEMS, INC.
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
Year Ended January 31, 2001, 2000 and 1999
(in thousands)
Balance at Balance at
beginning end of
of period Additions Deductions period
---------- --------- ---------- ----------
January 31, 2001
Allowance for doubtful accounts.... $5,512 $5,045 $1,158 $9,399
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
65