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U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
/X/ QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES ACT OF 1934
FOR THE QUARTER BY PERIOD ENDED JULY 31, 1997
/ / TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
EXCHANGE ACT
FOR THE TRANSITION PERIOD FROM _________ TO __________.
COMMISSION FILE NUMBER: 0-22369
BEA SYSTEMS, INC.
(Exact name of small business issuer as specified in its charter)
DELAWARE 77-0394711
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification Number)
385 MOFFETT PARK DRIVE, SUNNYVALE, CALIFORNIA 90489
(Address of Principal Executive Office)
(408) 743-4000
(Issuer's telephone number)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 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
----- -----
The number of shares outstanding of each of the issuer's classes of common
equity, as of September 1, 1997 was: Common Stock, 40,629,256 shares; Class B
Common Stock, 23,425,554 shares.
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BEA SYSTEMS, INC.
FORM 10-QSB
QUARTER ENDED JULY 31, 1997
CONTENTS
PART I-FINANCIAL INFORMATION PAGE
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of July 31, 1997
and January 31, 1997 3
Condensed Consolidated Statements of Operations for
the Three Months Ended July 31, 1997 and 1996 4
Condensed Consolidated Statements of Operations for
the Six Months Ended July 31, 1997 and 1996 5
Condensed Consolidated Statements of Cash Flows for the
Six Months Ended July 31, 1997 and 1996 6-7
Notes to Condensed Consolidated Financial Statements 8-11
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 12-17
PART II-OTHER INFORMATION
Item 5. Other Information 18-28
Item 6. Exhibits and Reports on Form 8-K 28
Signatures 29
2
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BEA SYSTEMS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
July 31, January 31,
1997 1997
(Unaudited)
ASSETS
Current assets
Cash and cash equivalents $107,368 $3,283
Accounts receivable, net of allowance
for doubtful accounts of $1,178 at
July 31, and $1,095 at January 31, 1997 32,845 24,778
Other current assets 3,983 3,083
------- ------
Total current assets 144,169 31,144
Property and equipment, net 6,753 6,648
Acquired intangible assets, net 17,340 17,226
Other assets 2,941 2,955
------- ------
Total assets $171,230 $57,973
------- ------
------- ------
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities
Borrowings under line of credit $ - $9,050
Accounts payable 5,931 3,488
Accrued payroll and related liabilities 8,530 6,597
Accrued sales tax 1,583 1,573
Other accrued liabilities 10,321 6,357
Other current liability 2,728 -
Deferred revenue 9,194 8,697
Current portion of long-term debt
& capital lease obligations 25,043 28,180
------ ------
Total current liabilities 63,330 63,942
Long-term debt and capital lease obligations 42,401 49,540
Commitments - -
Series B redeemable convertible preferred stock, - 20,780
Stockholders' equity (deficit):
Series A preferred stock - 17
Common stock 39 11
Class B common stock 23 -
Additional paid-in capital 197,991 32,335
Notes receivable from stockholders (544) (544)
Deferred compensation (723) (845)
Cumulative translation adjustment (189) 74
Accumulated deficit (131,098) (107,337)
-------- ---------
Stockholders' equity (deficit) 65,499 (76,289)
-------- ---------
Total liabilities and stockholders'
equity (deficit) $171,230 $ 57,973
-------- ---------
-------- ---------
See accompanying notes
3
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BEA SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except for per share data)
(Unaudited)
Three months ended
July 31,
1997 1996
Revenues
License $26,112 $9.674
Service 8,043 3,804
------ ------
Total revenues 34,155 13,482
------ ------
Cost of revenues
License 3,401 2,417
Service 4,938 1,826
----- -----
Total cost of revenues 8,339 4,243
----- -----
Gross margin 25,816 9,239
Operating expenses
Research and development 5,779 4,673
Sales and marketing 16,724 6,450
General and administrative 4,000 2,778
Write-off of in-process research
and development - 1,300
------ ------
Total operating expenses 26,503 15,201
------ ------
Loss from operations (687) (5,962)
Other income (expense) 221 1
Interest expense (2,055) (1,765)
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Loss before provision for income taxes (2,521) (7,726)
Provision for income taxes 600 116
------- ------
Net loss $ (3,121) $ (7,842)
--------- ---------
--------- ---------
Net loss per share $(0.06) -
-------
-------
Shares used in computing
net loss per share 56,035 -
-------
-------
Pro forma net loss per share - $(0.16)
-------
-------
Shares used in computing pro forma
net loss per share - 50,376
-------
-------
See accompanying notes
4
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BEA SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except for per share data)
(Unaudited)
Six months ended
July 31,
1997 1996
Revenues
License $50,590 $15,162
Service 13,954 5,171
------ ------
Total revenues 64,544 20,333
------ ------
Cost of revenues
License 6,582 4,453
Service 8,792 2,284
------ ------
Total cost of revenues 15,374 6,737
------ ------
Gross margin 49,170 13,596
Operating expenses
Research and development 10,922 7,770
Sales and marketing 32,641 10,362
General and administrative 7,611 5,357
Write-off of in-process research
and development 16,000 62,248
------ ------
Total operating expenses 67,174 85,737
------ ------
Loss from operations (18,004) (72,141)
Other income (expense) (296) (116)
Interest expense (4,020) (2,882)
------- -------
Loss before provision for income taxes (22,320) (75,139)
Provision for income taxes 1,172 154
-------- ------
Net loss $(23,492) $(75,293)
--------- ---------
--------- ---------
Net loss per share $(0.45)
-------
-------
Shares used in computing
net loss per share 53,373 -
---------
---------
Pro forma net loss per share - $(1.50)
-------
-------
Shares used in computing pro forma
net loss per share - 50,197
-------
-------
See accompanying notes
5
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CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
Six months ended
July 31,
1997 1996
OPERATING ACTIVITIES
Net Loss $(23,492) $(75,293)
Adjustments to reconcile net loss to cash
used in operating activities:
Depreciation 1,047 965
Amortization of deferred compensation 122 -
Loss on sale of assets 255 -
Amortization of intangible assets acquired
and write-off of in process research and
development 21,554 66,071
Changes in assets and liabilities:
Interest accrued - 2,665
Accounts receivable (8,067) (2,971)
Prepaid expenses and other current assets 4,850 (3,864)
Other assets 14 -
Accounts payable 2,443 1,274
Accrued payroll and related liabilities 1,933 2,289
Other accrued liabilities 3,508 (2,507)
Accrued sales tax 10 566
Other current liability (8,107) -
Deferred revenue 497 2,919
------- ------
Net cash used in operating activities (3,433) (7,886)
------- -------
INVESTING ACTIVITIES
Acquisition of intangible assets (1,519) -
Cash paid with acquisition of businesses - (2,568)
Acquisition of property and equipment (396) (1,955)
------- -------
Net cash used in investing activities (1,915) (4,523)
------- -------
FINANCING ACTIVITIES
Net payments on line of credit (9,050) 4,177
Proceeds from long term debt 3,500 845
Payments on long term debt and capital
lease obligations (24,044) -
Proceeds from issuances of stock 139,290 9,124
------- ------
Net cash provided by financing activities 109,696 13,301
------- ------
Net increase in cash and cash equivalents 104,348 892
Cumulative translation adjustment (263) -
Cash and cash equivalents at the beginning
of the period 3,283 4,549
------- -------
Cash and cash equivalents at end of period $107,368 $ 5,441
-------- -------
-------- -------
See accompanying notes
6
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BEA SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
Six months ended
July 31,
1997 1996
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for interest $ 4,158 $ 217
------- -------
------- -------
Cash paid for income taxes $ 475 $ -
------- -------
------- -------
Notes issued to acquire businesses $13,985 $77,301
------- -------
------- -------
Line of credit converted to common stock $ 4,561 $ -
------- -------
------- -------
Incurrence of capital lease obligations
related to acquisition of equipment $ 580 $ -
------- -------
------- -------
7
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BEA SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Basis of Presentation
The accompanying unaudited condensed consolidated financial statements of BEA
Systems, Inc. (the "Company"), include all adjustments (consisting only of
normal recurring items) which, in the opinion of management, are necessary for a
fair presentation of financial position, results of operations and cash flows.
These financial statements should be read in conjunction with the "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the audited financial statements for the fiscal year ended January 31, 1997
included in the Company's Registration Statement on Form SB-2 (Registration
Statement File No. 333-29961) and related prospectus for the Company's offering
of its Common Stock, which was completed in July, 1997.
The balance sheet at January 31, 1997 has been derived from audited financial
statements at that date but does not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. The results of operations for interim periods are not
necessarily indicative of results to be expected for a full year.
Note 2. Net Loss Per Share
Except as noted below, net loss per share is computed using the weighted average
number of shares of common stock outstanding during the period. Common stock
equivalents relating to stock options, the convertible preferred stock and the
convertible line of credit are excluded from the computation as their effect is
antidilutive. However, for the three and six month periods ended July 31, 1996,
the calculation includes those common equivalent shares required by the
Securities and Exchange Commission's staff accounting bulletins and guidelines.
Per share information calculated on the above noted basis is as follows:
Three months ended Six months ended
July 31, 1996 July 31, 1996
Net loss per share $(0.29) $(2.70)
------- -------
------- -------
Shares used in calculating net
loss per share (in thousands) 28,176 27,997
------- -------
------- -------
For the three and six month periods ended July 31, 1996, pro forma net loss per
share has been computed as described above and also gives effect, pursuant to
SEC policy, to common equivalent shares from convertible preferred stock issued
more than twelve months prior to the initial public offering and converted upon
completion of the offering.
8
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BEA SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 2. Net Loss Per Share (continued)
In February 1997, the Financial Accounting Standards Board issued Statement No.
128, "Earnings Per Share" (EPS). The Statement is effective for both interim
and annual financial statements for periods ending after December 15, 1997.
Under the Statement, primary EPS computed in accordance with Accounting
Principle Board Opinion No. 25 will be replaced with a new simpler calculation
called "basic EPS" and the Company will be required to restate comparative EPS
amounts for all prior periods. Under the new requirements, basic loss per share
for the three and six month periods ended July 31, 1997 would be unchanged from
the loss per share of $0.06 and $0.45 presented above. For the three and six
month periods ended July 31, 1996, the basic loss per share under the new
requirements would be $0.93 based on weighted average shares outstanding of
8,651,826 and $8.92 based on weighted average shares outstanding of 8,473,503,
respectively.
Note 3. Transaction with Digital Equipment Corporation ("DEC")
On March 26, 1997, the Company completed an agreement with DEC to acquire
exclusive worldwide rights to MessageQ, ObjectBroker and other related products
from DEC. The purchase price (including direct acquisition costs) was
approximately $19.8 million. Of the aggregate consideration for the products,
$5 million was payable in cash and aggregate payments of $17 million are due
pursuant to a convertible promissory note. Interest was imputed at 8% which
resulted in the recorded liability of approximately $14 million at July 31,
1997. The promissory note provides for payments of $2 million, $4 million and
$11 million payable on or before February 1, 1998, 1999 and 2000, respectively.
Of the final installment of $11 million, only $5 million is convertible. In
addition, the Company has granted DEC a warrant to purchase 500,000 shares of
Common Stock at a price of $6.00 per share, exerciseable for a one year period,
commencing in October, 1997.
Subsequent to the quarter ended July 31, 1997, the Company and DEC entered into
an agreement whereby the Company issued 925,925 shares of Common Stock and paid
$4,925,000 as a full settlement of the convertible promissory note.
Additionally, the Company issued 364,022 shares of Common Stock to DEC in
connection with DEC's "cashless exercise" of the entire warrant as provided for
in the warrant agreement.
9
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BEA SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 4. Public Offerings
During the quarter ended July 31, 1997, the Company successfully completed a
public offering (the "Offering"). The Offering generated net proceeds of
approximately $110.7 million from the sale of 6,900,000 shares of Common Stock.
The proceeds from the Offering will be used to fund scheduled payments on the
Novell note payable, reduce the balance of the revolving credit arrangement, and
fund operating activities.
During the quarter ended April 30, 1997, the Company successfully completed its
initial public offering of securities. The offering generated net proceeds of
approximately $25.6 million from the sale of 5,000,000 shares of Common Stock.
Subsequent to the end of the quarter, the underwriters exercised a portion of
their over-allotment option, generating additional net proceeds of approximately
$2.1 million from the sale of 372,633 shares of Common Stock.
10
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BEA SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 5. Notes Payable and Capital Lease Obligations
Notes Payable and capital lease obligations consist of the following:
July 31, January 31,
1997 1997
Subordinated notes payable to founders of an acquired
company. The notes were due upon the completion of
the initial public offering, and were repaid on May 1,
1997. Accrued interest of $430 was included at
January 31 1997. $ - $ 4,589
Note payable to Novell 50,744 69,900
Note payable to DEC (See Note 3). The balance at July
31, 1997 includes accrued interest of $394. 14,379 -
Credit arrangement from the Company's majority stock-
holder. During the quarter ended April 30, 1997, an
additional $3.5 million was borrowed. Upon the
completion of the initial public offering, the aggregate
principal balance of $4.5 million plus the accrued
interest of approximately $61,000 was converted into
817,334 shares of Common Stock. - 1,000
Note payable to the former shareholders of Bay
Technologies Pty., Ltd. 710 928
Other notes payable 311 79
Capital lease obligations 1,300 1,004
------ ------
67,444 77,720
Less amounts due within one year (25,043) (28,180)
-------- --------
Long-term debt and capital lease obligations $42,401 $49,540
------- -------
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11
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
THE FOLLOWING DISCUSSION OF THE FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF
THE COMPANY SHOULD BE READ IN CONJUNCTION WITH THE MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS AND THE CONSOLIDATED
FINANCIAL STATEMENTS AND THE NOTES THERETO INCLUDED IN THE COMPANY'S
REGISTRATION STATEMENT ON FORM SB-2(REGISTRATION STATEMENT FILE NO. 333-29961)
AND RELATED PROSPECTUS FOR THE COMPANY'S PUBLIC OFFERING OF ITS COMMON STOCK,
WHICH WAS COMPLETED IN JULY, 1997. THIS DISCUSSION CONTAINS FORWARD LOOKING
STATEMENTS WITHIN THE MEANING OF SECTION 27A OF THE SECURITIES ACT OF 1933, AS
AMENDED, AND SECTION 21E OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED.
FORWARD LOOKING STATEMENTS INCLUDE, BUT ARE NOT LIMITED TO, STATEMENTS
REGARDING THE SUFFICIENCY OF THE COMPANY'S CURRENT CASH BALANCES, FUTURE
AMORTIZATION AND OTHER EXPENSE LEVELS. THESE STATEMENTS INVOLVE RISKS AND
UNCERTAINTIES AND ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE DISCUSSED IN
THE FORWARD LOOKING STATEMENTS.
FACTORS THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY INCLUDE RISKS
AND UNCERTAINTIES SUCH AS DIFFICULTY IN INTEGRATING NEW OR RECENTLY ACQUIRED
BUSINESSES OR PRODUCTS, LACK OF MARKET ACCEPTANCE OF COMMERCIAL MIDDLEWARE
TECHNOLOGY AND SOLUTIONS, DELAYS IN CUSTOMER ORDERS, COMPETITION FROM NEW OR
EXISTING COMMERCIAL MIDDLEWARE PROVIDERS OR IN-HOUSE SOLUTIONS, EXPENSES AND
NON-CASH CHARGES IN CONNECTION WITH ACQUISITIONS, FAILURE TO EFFECTIVELY
MANAGE ANTICIPATED GROWTH, FAILURE TO RAISE CASH SUFFICIENT TO SATISFY FUTURE
PAYMENT OBLIGATIONS AND CAPITAL NEEDS AND IMPAIRMENT OF THE VALUE OF
CAPITALIZED INTANGIBLE ASSETS. READERS SHOULD ALSO REFER TO THE RISK
DISCLOSURES OUTLINED IN ITEM 5. "OTHER INFORMATION" OF THIS FORM 10-QSB. ALL
FORWARD-LOOKING STATEMENTS AND REASONS WHY RESULTS MIGHT DIFFER INCLUDED IN
THIS FORM 10-QSB 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 SUCH FORWARD-LOOKING STATEMENT OR REASON WHY RESULTS MIGHT DIFFER.
The Company acquired TUXEDO from Novell during the quarter ended April 30,
1996. During the remainder of the year ended January 31, 1997 and the quarter
ended April 30, 1997 the Company acquired additional technologies as well as
acquired and further established distribution channels for the Company's
products and services. For these and other reasons, the Company's operations
have experienced significant growth.
CONSOLIDATED RESULTS OF OPERATIONS FOR THE THREE AND SIX MONTH PERIODS ENDED
JULY 31, 1997 AND 1996
Revenues
The Company's revenues are derived primarily from fees for software licenses and
to a lesser extent from services. The Company's revenues were $34.2 million and
$13.5 million for the fiscal quarters ended July 31, 1997 and 1996,
respectively. The Company's revenues were $64.5 million and $20.3 million for
the six months ended July 31, 1997 and 1996, respectively.
12
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License Revenues. License revenues were $26.1 million and $9.7 million for the
fiscal quarters ended July 31, 1997 and 1996, respectively, representing 76% and
72% of total revenues in the respective periods. License revenues were $50.6
million and $15.2 million for the six months ended July 31, 1997 and 1996,
respectively, representing 78% and 75% of total revenues in the respective
periods. The increase in dollar amount was primarily due to the impact of the
acquisitions described above as well as additional market acceptance of BEA
TUXEDO and related products.
Service Revenues. Service revenues were $8.1 million and $3.8 million for the
fiscal quarters ended July 31, 1997 and 1996, respectively, representing 24%
and 28% of total revenues in the respective periods. Service revenues were
$14.0 million and $5.2 million for the six months ended July 31, 1997 and 1996,
respectively, representing 22% and 25% of total revenues in the respective
periods. The increase in dollar amount was primarily due to the increase in
consulting, training and maintenance fees associated with the increased sales of
the Company's software licenses. The increase in services revenue as a
percentage of total revenue for the three months ended July 31, 1997 from 19%
for the three months ended April 30, 1997 is due in part to efforts to renew
certain support agreements, some of which had retroactive charges.
International revenues, which the Company defines as revenues from sales to
customers outside the United States, accounted for 46% and 37% of total revenues
in the fiscal quarters ended July 31, 1997 and 1996, respectively.
International revenues accounted for 48% and 30% of total revenues in the six
months ended July 31, 1997 and 1996, respectively. The increase was due
primarily to the Company's opening of local subsidiaries throughout Europe and
Asia.
Cost Of Revenues
Cost of Licenses. Cost of licenses consists primarily of amortization of
certain intangible assets related to acquisitions as well as product media,
product duplication and shipping. Cost of licenses totaled $3.4 million and $2.4
million for the fiscal quarters ended July 31, 1997 and 1996, respectively,
representing 13% and 25% of license revenues, respectively. Cost of licenses
totaled $6.6 million and $4.5 million for the six months ended July 31, 1997 and
1996, respectively, representing 13% and 29% of license revenues, respectively.
The increase in absolute dollars was due primarily to the amortization of
intangibles related to the Company's acquisitions. The decrease as a percentage
of revenues was due primarily to the substantial increase in license revenues
during the period and the fact that the cost of licenses is primarily fixed in
nature. Amortization of certain intangible assets included in cost of licenses
totaled $2.8 million and $2.2 million in the fiscal quarters ended July 31, 1997
and 1996, and $5.4 million and $3.8 million in the six months ended July 31,
1997 and 1996, respectively. In the future, amortization of intangible assets
acquired through July 31, 1997 is expected to total $3.0 million per quarter for
the rest of the fiscal year ending January 31, 1998; $7.2 million for the fiscal
year ended January 31, 1999; and $3.0 million for the remaining balance of
intangible assets through the fiscal year ended January 31, 2002. To the extent
future events result in the impairment of any capitalized intangible assets,
these amortization expenses would be accelerated.
13
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Cost of Services. Cost of services consists primarily of personnel-related
costs incurred in providing consulting services, training and maintenance to
customers. Cost of services were $4.9 million and $1.8 million for the fiscal
quarters ended July 31, 1997 and 1996, respectively, representing 61% and 48% of
total service revenues for each period, respectively. Cost of services were
$8.8 million and $2.3 million for the six months ended July 31, 1997 and 1996,
respectively, representing 63% and 44% of total service revenues for each
period, respectively. The increase in absolute dollars was due primarily to the
Company's growing customer base and increased operating activity resulting from
such growth. The increase in costs as a percentage of related service revenues
for the periods presented is the result of the hiring and training of additional
consulting and support personnel. The Company has also invested substantial
resources in a worldwide Customer Support organization to provide a high level
of maintenance service to the Company's customers.
Operating Expenses
The Company's expense levels are based, in part, on its expectations for future
revenues. The Company expects to increase expense levels in each of the next
several quarters, primarily to support increased sales, services and customer
support efforts and research and development efforts, and to build greater
infrastructure in its international offices, particularly in finance and
administrative functions.
Research and Development. Research and development expenses include engineering
personnel and related expenses, as well as consulting costs associated with new
product development and enhancement of existing products. Research and
development expenses were $5.8 million and $4.7 million for the fiscal quarters
ended July 31, 1997 and 1996, respectively, representing 17% and 35% of total
revenues in each period, respectively. Research and development expenses were
$10.9 million and $7.8 million for the six months ended July 31, 1997 and 1996,
respectively, representing 17% and 38% of total revenues in each period,
respectively. The increase in dollar amount was due to an increase in personnel
and related expenses. The decrease in research and development expenses as a
percentage of total revenues was primarily due to the substantial increase in
revenues. The Company expects that the dollar amount of research and
development expenses will continue to increase as the Company continues to
commit substantial resources to product development and engineering in future
periods.
Sales and Marketing. Sales and marketing expenses include salaries,
commissions, advertising, direct mail, seminars, public relations, trade shows,
travel and other related selling and marketing expenses. Sales and marketing
expenses were $16.7 million and $6.5 million for the fiscal quarters ended July
31, 1997 and 1996, respectively, representing 49% and 48% of total revenues for
each period, respectively. Sales and marketing expenses were $32.6 million and
$10.4 million for the six months ended July 31, 1997 and 1996, respectively,
representing 51% of total revenues for both periods. The increase in absolute
dollars was due primarily to the expansion of the Company's direct sales force
and an increase in marketing personnel and activities. The increase in costs as
a percentage of revenues for the three months ended July 31, 1997 over the same
period in 1996 is the result of the hiring of additional sales and marketing
personnel in response to an anticipated increase in the number of potential
customers. The Company believes that the dollar amount of
14
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sales and marketing expenses will continue to increase as the Company expands
its sales and marketing organization.
General and Administrative. General and administrative expenses include
personnel costs for administration, finance, human resources, information
technology and general management, as well as amortization of goodwill related
to certain acquisitions. General and administrative expenses were $4.0 million
and $2.8 million for the fiscal quarters ended July 31, 1997 and 1996,
respectively, representing 12% and 21% of total revenues for each period,
respectively. General and administrative expenses were $7.6 million and $5.4
million for the six months ended July 31, 1997 and 1996, respectively,
representing 12% and 26% of total revenues for each period, respectively. The
increase in dollar amount was attributed to the expansion of the Company's
general and administrative staff and associated expenses necessary to manage and
support the Company's growth. The decrease in general and administrative
expenses as a percentage of total revenues was primarily due to the substantial
increase in revenues. The Company expects that the dollar amount of general and
administrative expenses will continue to increase in the future as the Company
expands its staffing and incurs higher costs associated with being a public
company. Amortization of goodwill totaled $83,000 and $47,000 in the quarters
ended July 31, 1997 and 1996, respectively. Amortization of goodwill totaled
$140,000 and $94,000 in the six months ended July 31, 1997 and 1996,
respectively. Amortization of goodwill is expected to total $79,000 per quarter
for the rest of the fiscal year ending January 31, 1998 and $1.0 million for the
remaining balance of intangible assets through the fiscal year ended January 31,
2003. To the extent future events result in the impairment of goodwill, these
amortization expenses would be accelerated.
Write-Off of In-Process Research and Development. As a result of the
acquisitions of MessageQ, ObjectBroker and other related products from Digital
Equipment Corp. in the quarter ending April 30, 1997, and TUXEDO from Novell in
the quarter ending April 30, 1996, and CST (Finland) in the quarter ending July
31, 1996, the Company has acquired a number of projects and products that had
not reached technological feasibility at the date of purchase. Accordingly,
such costs ($16.0 million and $62.2 million in the six months ended July 31,
1997 and 1996, respectively) were expensed in the period incurred. There can be
no assurance that the Company will be successful in completing the development
of such in-process research and development or that development efforts will
result in viable products.
Provision For Income Taxes
The Company has experienced operating losses to date. The Company has incurred
income tax expense of $600,000 and $116,000 for the fiscal quarters ended July
31, 1997 and 1996, respectively. The Company has incurred income tax expense
of $1.2 million and $154,000 for the six months ended July 31, 1997 and 1996,
respectively. The income tax expense is comprised primarily of foreign
withholding tax and, to a lesser extent, foreign income tax expense incurred as
a result of local country profits.
15
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LIQUIDITY AND CAPITAL RESOURCES
Since inception, the Company has financed its operations, and acquisitions of
subsidiaries and the distribution rights to TUXEDO, primarily through public
offerings of securities aggregating approximately $136 million, the private sale
of equity securities of approximately $51 million, notes payable of
approximately $95 million, equipment financing under capital leases of
approximately $1.6 million, borrowings under a revolving credit arrangement, and
an unsecured credit arrangement of approximately $4.5 million with the Company's
majority stockholder.
During the quarter ended April 30, 1997, the Company successfully completed its
initial public offering of securities. The offering generated net proceeds of
approximately $25.6 million from the sale of 5,000,000 shares of Common Stock.
Subsequent to the end of the quarter, the underwriters exercised a portion of
their over-allotment option, generating additional net proceeds of approximately
$2.1 million from the sale of 372,633 shares of Common Stock. During the
quarter ended July 31, 1997, the Company completed a follow-on offering. The
follow-on offering generated net proceeds of approximately $110.7 million from
the sale of 6,900,000 shares of Common Stock.
Under the terms of the revolving credit arrangement, the Company has the ability
to borrow up to $20 million with the borrowing availability primarily based on a
percentage of certain accounts receivable. At July 31, 1997, the Company had no
borrowings outstanding and had a borrowing capability of $14.4 million. The
credit arrangement is collateralized by the assets of the Company. The credit
arrangement bears interest at the LIBOR rate plus 5.125% (10.845% in aggregate
at July 31, 1997) and is scheduled to expire in April 1998.
Under the terms of the unsecured credit arrangement with the Company's majority
stockholder, the Company had the ability to borrow up to $10 million. Through
April 30, 1997, the Company borrowed a total of $4.5 million. Upon the
completion of the Company's initial public offering in April 1997, the principal
balance of $4.5 million plus the accrued interest was converted into Common
Stock and the arrangement was terminated.
As of July 31, 1997, the balance of the note payable to Novell was $50.7
million. Scheduled payments for the next twelve months are $27 million, in
aggregate.
At July 31, 1997, the note payable to Digital Equipment Corp. ("DEC") (see Note
3 to the accompanying financial statements) had a balance of $14.4 million.
Subsequent to the quarter ended July 31, 1997, the Company and DEC entered into
an agreement whereby the Company issued 925,925 shares of Common Stock and paid
$4,925,000 as a full settlement of the convertible promissory note.
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During the six months ended July 31, 1997 and 1996, the Company used
approximately $396,000 and $1,955,000, respectively, of cash to purchase
property and equipment, primarily for leasehold improvements, computers,
furniture and other office equipment. The Company also acquired equipment with
a cost of approximately $580,000 under a capital lease line of credit during the
six months ended July 31, 1997. The Company has a remaining credit limit of
$420,000 under this lease line of credit. As of July 31, 1997, the Company had
no material commitments for capital expenditures.
Due to the relatively large dollar size of individual sales and the fact that
a substantial portion of the Company's accounts receivable from license
revenues have been generated within the month of each quarter, and that
percentage has fluctuated, the Company has experienced fluctuations in its
average days sales outstanding. The Company believes that such fluctuations
will continue in the future and will continue to affect its liquidity,
working capital and financial condition.
A significant portion of the Company's business is conducted in currencies other
than the U.S. dollar (the currency in which its financial statements are
stated), primarily the Japanese yen, the German mark, the French franc and the
British pound. Foreign currency transaction gains and losses arising from
normal business operations are credited to or charged against operations in the
period incurred. As a result, fluctuations in the value of the currencies in
which the Company conducts its business relative to the U.S. dollar have caused
and will continue to cause currency transaction gains and losses. The Company
has established a program to reduce its foreign currency exposure. However,
there can be no assurance that the Company will not continue to experience
currency losses in the future, nor can the Company predict the effect of future
exchange rate fluctuations on future operating results.
At July 31, 1997, the Company had $107.4 million in cash and cash equivalents
and working capital of $50.7 million. The Company believes that the current cash
balance will be sufficient to meet its working capital requirements for the next
twelve months. Although operating activities may provide cash in certain
periods, to the extent that the Company experiences growth in the future, the
Company anticipates that its operating and investing activities may use cash.
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BEA SYSTEMS, INC.
JULY 31, 1997 FORM 10-QSB
PART II-OTHER INFORMATION
ITEM 5. OTHER INFORMATION
Risk Factors That May Affect Future Operating Results:
RISK FACTORS
IN ADDITION TO THE OTHER INFORMATION CONTAINED IN THIS FORM 10-QSB,
INVESTORS SHOULD CAREFULLY CONSIDER THE FOLLOWING RISK FACTORS IN EVALUATING
AN INVESTMENT IN THE COMMON STOCK OFFERED HEREBY. THIS PROSPECTUS CONTAINS
CERTAIN FORWARD-LOOKING STATEMENTS, WITHIN THE MEANING OF SECTION 27A OF THE
SECURITIES ACT OF 1933, AS AMENDED, AND SECTION 21E OF THE SECURITIES
EXCHANGE ACT OF 1934, AS AMENDED, INCLUDING STATEMENTS REGARDING (i) THE
EXPECTED INCREASES IN LICENSE AND SERVICE REVENUES IN FUTURE PERIODS; (ii)
THE PLANNED EXPANSION OF THE COMPANY'S SALES, MARKETING AND RESEARCH AND
DEVELOPMENT ORGANIZATIONS; AND (iii) THE SPENDING REQUIRED TO DEVELOP
ACQUIRED IN-PROCESS RESEARCH AND DEVELOPMENT INTO VIABLE PRODUCTS. THESE
STATEMENTS INVOLVE RISKS AND UNCERTAINTIES AND ACTUAL RESULTS COULD DIFFER
MATERIALLY FROM SUCH RESULTS DISCUSSED IN THE FORWARD-LOOKING STATEMENTS AS A
RESULT OF CERTAIN OF THE RISK FACTORS SET FORTH BELOW AND FOR THE REASONS
DESCRIBED ELSEWHERE IN THIS PROSPECTUS. ALL FORWARD-LOOKING STATEMENTS AND
REASONS WHY RESULTS MAY DIFFER INCLUDED IN THIS PROSPECTUS ARE MADE AS OF THE
DATE HEREOF, AND THE COMPANY ASSUMES NO OBLIGATION TO UPDATE ANY SUCH
FORWARD-LOOKING STATEMENT OR REASON WHY ACTUAL RESULTS MIGHT DIFFER.
LIMITED OPERATING HISTORY; INTEGRATION OF ACQUISITIONS; NO ASSURANCE OF
PROFITABILITY
The Company was incorporated in January 1995 and, accordingly, has a
limited operating history upon which an evaluation of the Company and its
prospects can be based. Revenues generated by the Company to date have been
derived primarily from sales of BEA TUXEDO, a product to which the Company
acquired worldwide rights in February 1996, and from fees for related
services. Since its inception, the Company has acquired a number of
businesses and other products in addition to BEA TUXEDO. Prior to the
consummation of these acquisitions, the Company had no revenues and limited
business activities. Accordingly, the Company is subject to the risks
inherent both in the operation of a new business enterprise and the
integration of a number of previously separate and independent business
operations, and there can be no assurance that the Company will be able to
address these risks successfully. Although the Company has experienced recent
substantial revenue growth, the Company has incurred significant net losses
since its inception, including losses of approximately $17.7 million and
$88.7 million during the fiscal years ended January 31, 1996 and 1997,
respectively, and $23.5 million for the six months ended July 31, 1997. At
July 31, 1997, the Company had an accumulated deficit of approximately $131.1
million. In addition, in connection with certain acquisitions, the Company
recorded approximately $122.0 million as intangible assets, approximately
$104.1 million of which has already been amortized and expensed and
approximately $17.3 million of which is expected to be amortized and expensed
in future periods through the Company's fiscal year ending January 31, 2001.
The amounts of such intangible assets to be expensed in future periods, which
will not be separately reported but will be included primarily in cost of
sales, are expected to be $3.0 million per quarter during the remainder of
the fiscal year ending January 31, 1998 and are expected to average $1.9
million per fiscal quarter in the fiscal year ending January 31, 1999. To the
extent the Company makes additional acquisitions of businesses, products and
technologies in the future, the Company may report additional, potentially
significant, amortization expenses related thereto. To the extent future
events result in the impairment of any capitalized intangible assets,
amortization expenses may occur sooner than the Company expects. For the
foregoing reasons, there can be no assurance that the Company will be
profitable in any future period, and recent operating results should not be
considered indicative of future financial performance.
POTENTIAL FLUCTUATIONS IN QUARTERLY OPERATING RESULTS
The Company expects that it will experience significant fluctuations in
future quarterly operating results as a result of many factors, including,
among others: the size and timing of orders; introduction or enhancement of
products by the Company or its competitors; market acceptance of middleware
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products; the lengthy sales and implementation cycle for the Company's
products and the potential for significant delays; market acceptance of new
products and product enhancements; technological changes in computer systems
and environments; the structure and timing of future acquisitions of
businesses, products and technologies, if any; increased competition; the
ability of the Company to develop, introduce and market new products on a
timely basis; changes in the Company's or its competitors' pricing policies;
customer order deferrals in anticipation of future new products and product
enhancements, if any; the Company's success in expanding its sales and
marketing programs; mix of products and services sold; mix of distribution
channels; ability to meet the service requirements of its customers; costs
associated with acquisitions; loss of key personnel; fluctuations in foreign
currency exchange rates; and general economic conditions. As a result of all
of these factors, the Company believes that quarterly revenues and operating
results are difficult to forecast and period-to-period comparisons of its
results of operations are not necessarily meaningful and should not be relied
upon as indications of future performance.
Because the Company generally ships software products within a short
period after receipt of an order, it will not at any given time have a
material backlog of unfilled orders, and revenues in any quarter will be
substantially dependent on orders booked and shipped in that quarter. In
addition, the Company historically has recognized, and expects to continue to
recognize, a significant portion of license revenue in the last month of each
fiscal quarter. The Company anticipates that it will derive a substantial
portion of its revenues from increasingly large orders, as customers deploy
BEA products throughout their organizations. In certain circumstances, the
Company may grant favorable payment terms to strategic customers which the
Company believes are making significant purchase decisions. As a consequence,
accounts receivable and days sales outstanding may fluctuate in future
quarters. In order to manage the accounts receivable balance and days sales
outstanding, management may, from time to time, offer discounts to customers
for earlier payments and/or consider the sale of accounts receivable.
However, management does not expect that any such receivables sales or
discounts would have a material adverse effect on the Company's results of
operations. Any inability of the Company to generate large orders, or any
delay or loss of such orders in a particular quarter, will materially
adversely affect the Company's revenues and, more significantly on a
percentage basis, its net income or loss in that quarter. The Company's
expense levels are based, in part, on its expectations of future revenues.
The Company expects to increase expense levels in each of the next several
quarters, primarily to support increased sales, services and customer support
efforts and research and development efforts, and to build greater
infrastructure in its international offices, particularly in finance and
administration functions. The Company is generally unable to reduce expenses
significantly in the short term to compensate for any unexpected revenue
shortfall. Accordingly, any significant shortfall of revenues in relation to
the Company's expectations or any material delay of large orders would have a
material adverse effect on the Company's business, operating results and
financial condition. Due to all the foregoing factors, it is likely that in
some future quarters the Company's operating results will not meet the
expectations of public stock market analysts and investors. As a result, the
market price of the Company's Common Stock would be materially adversely
affected.
PRODUCT CONCENTRATION; DEPENDENCE ON GROWTH OF MARKET FOR MIDDLEWARE; NOVELL
RELATIONSHIP
Revenues generated by the Company to date have been derived primarily
from sales of BEA TUXEDO, a product to which the Company acquired worldwide
rights in February 1996, and from fees for related services. These products
and services are expected to continue to account for a substantial majority
of the Company's revenues for the foreseeable future. As a result, factors
adversely affecting the pricing of or demand for BEA TUXEDO, such as
competition or technological change, could have a material adverse effect on
the Company's business, operating results and financial condition. The
Company's success is dependent in significant part on the Company's
middleware software products achieving market acceptance by large
organizations with substantial legacy mainframe systems. All of the Company's
business is in the market for middleware and related services, which is still
an emerging market that is characterized by continuing technological
developments, evolving industry standards and
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changing customer requirements. The Company's 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 through the use of
middleware technology. There can be no assurance that the market for
middleware technology and related services will continue to grow. If the
middleware market fails to grow or grows more slowly than the Company
currently anticipates, or if the Company experiences increased competition in
this market, the Company's business, operating results and financial
condition will be materially adversely affected.
Under the terms of the Company's license agreement with Novell for the
BEA TUXEDO product (the "Novell Agreement"), the Company is required to make
aggregate annual payments to Novell of $10.5 million and $33 million during
the remainder of calendar year 1997 and calendar year 1998, respectively,
and, to acquire perpetual rights to TUXEDO, a final payment of $12 million in
January 1999. In connection with the Novell Agreement, Warburg, Pincus
Ventures, L.P. ("Warburg"), the Company's principal stockholder, has
guaranteed payment obligations to Novell. In addition, the Novell Agreement
requires BEA to employ at least 47 developers devoted to BEA TUXEDO product
development at December 31, 1997 and 62 such developers at December 31, 1998.
There can be no assurance that the Company will employ the required minimum
number of BEA TUXEDO developers. Any failure to make the required payments or
any failure by the Company to achieve minimum contractual employment levels
under the Novell Agreement would result in a loss of the Company's rights to
BEA TUXEDO, which would have a material adverse effect on the Company's
business, operating results and financial condition.
LENGTHY SALES AND IMPLEMENTATION CYCLE
The Company's products are typically used to integrate applications that
are critical to a customer's business, and the purchase of the Company's
products is often part of a customer's implementation of a distributed
computing environment. In such cases, the sales and implementation of the
Company's middleware software products are included in a larger
decision-making process within a customer's organization which can cause
orders of the Company's products to be delayed or be subject to numerous
factors beyond the Company's control. In addition, customers which are
evaluating the purchase of the Company's products face complex decisions
regarding alternative approaches to the integration of enterprise
applications, competitors, product offerings, rapidly changing software
technologies and limited internal resources due to other information systems
requirements such as Year 2000 compliance. The Company expects that licenses
for BEA TUXEDO will increase in size and the implementation of the Company's
products will become more complex as customers use BEA TUXEDO for larger and
more sophisticated installations. For these and other reasons, the sales and
implementation cycle associated with the licensing of the Company's products
is very lengthy and is subject to a number of significant delays over which
the Company has little or no control. Following the signing of a license
contract for BEA products, a customer's implementation consists of a
pre-deployment and a deployment phase. Approximately 10 to 30 percent of the
revenues from most customers is realized during the pre-deployment phase and
is usually weighted toward professional services and training. The remaining
portion of revenues is realized during the deployment stage and predominantly
consists of license fees. During the fiscal year ended January 31, 1997,
license fees per customer for BEA products generally ranged from $84,000 to
$2.6 million and averaged approximately $395,000. While the sales and
implementation cycle varies substantially from customer to customer, for
initial sales it has ranged from 18 to 24 months from the initial contact to
the completion of the deployment phase. Any significant or ongoing failure by
the Company to achieve such sales or any delays in the implementation process
could have a material adverse effect on the Company's business, operating
results and financial condition.
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COMPETITION
The market for middleware software and related services is highly
competitive. The Company's competitors are diverse and offer a variety of
solutions directed at various segments of the middleware software
marketplace. These competitors include database vendors such as Oracle
Corporation ("Oracle"), IBM Corporation ("IBM") and others, which offer their
own development tools for use with their proprietary databases, as well as
companies offering and developing middleware software products and related
services or application development tools that compete with products offered
by the Company. In addition, Microsoft Corporation ("Microsoft") has
announced that it will provide middleware functionality in future versions of
its Windows NT operating system and has recently announced the release of a
product that includes certain middleware functionality. Further, internal
development groups within prospective customers' organizations may develop
software and hardware systems that may substitute for those offered by the
Company. A number of the Company'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.
The Company's principal competitors currently are database vendors that
advocate client/server networks driven by the database server and software
tool vendors that offer development tools designed to enable customers to
create distributed mission-critical applications. Oracle is the primary
relational database vendor offering products that are intended to serve as
alternatives to the Company's enterprise middleware solutions. Currently, the
software development tool vendors typically emphasize the broad versatility
of their toolsets and, in some cases, offer complementary middleware software
that supports these tools and performs messaging and other basic middleware
functions. There can be no assurance that the Company will compete
successfully with database vendors and software tool vendors, or that the
products offered by such vendors will not achieve greater market acceptance
than the Company's products.
Microsoft has announced that it will provide middleware functionality in
future versions of its Windows NT operating system and has recently announced
the release of a product that includes certain middleware functionality. The
bundling of middleware functionality in Windows NT will require the Company
to compete with Microsoft in the Windows NT marketplace, where Microsoft will
have certain inherent advantages due to its significantly greater financial,
technical, marketing and other resources, greater name recognition, its
substantial installed base and the integration of its enterprise middleware
functionality with Windows NT. If Microsoft successfully incorporates
middleware functionality into Windows NT or separately offers middleware
applications, the Company will need to differentiate its products based on
functionality, interoperability with non-Microsoft platforms, performance and
reliability and establish its products as more effective solutions to
customers' needs. There can be no assurance that the Company will be able to
successfully differentiate its products from those offered by Microsoft, or
that Microsoft's entry into the middleware market will not 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 the Company's 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 licenses and maintenance and support renewals on terms favorable
to the Company. Further, competitive pressures could require the Company to
reduce the price of its products and related services, which could materially
adversely affect the Company's business, operating results and financial
condition. There can be no assurance that the Company will be able to compete
successfully against current and future competitors, and the failure to do so
would have a material adverse effect upon the Company's business, operating
results and financial condition.
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MANAGEMENT OF GROWTH
The Company currently is experiencing a period of rapid and substantial
growth that has placed, and is expected to continue to place, a strain on the
Company's administrative, financial and operational resources. The Company's
revenues have increased from $5.1 million for the fiscal year ended January
31, 1996 to $61.6 million for the fiscal year ended January 31, 1997. Revenue
was $64.5 million for the six months ended July 31, 1997. The number of Company
employees has increased from 120 employees in three offices in the United
States at January 31, 1996 to over 650 employees in 38 offices in 18
countries at July 31, 1997. The Company's ability to manage its staff and
growth effectively will require it to continue to improve its operational,
financial and management controls, reporting systems and procedures, to
train, motivate and manage its employees and, as required, to install new
management information and control systems. In that regard, the Company is
currently installing and implementing a new management information system
that is designed to integrate financial and other reporting among the
Company's multiple domestic and foreign offices. In addition, the Company
intends to significantly increase its administrative staff in its foreign
offices, particularly in the area of finance, and to improve financial
reporting and controls for the Company's international operations. There can
be no assurance that the Company will be able to implement improvements to
its management information and control systems in an efficient or timely
manner or that, during the course of this implementation, deficiencies in
existing systems and controls will not be discovered. If management of the
Company is unable to manage growth effectively, the Company's business,
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operating results and financial condition will be materially adversely
affected.
DEPENDENCE ON KEY PERSONNEL AND NEED TO HIRE ADDITIONAL PERSONNEL
The Company's future performance depends to a significant degree upon the
continued service of its key members of management, as well as marketing,
sales, consulting and product development personnel. The loss of any of
William T. Coleman III, the Company's President, Chairman and Chief Executive
Officer, Edward W. Scott, Jr., the Company's Executive Vice President of
Worldwide Field Operations, or Alfred S. Chuang, the Company's Chief
Technical Officer and Executive Vice President of Product Development, or one
or more of the Company's other key personnel, would have a material adverse
effect on the Company's business, operating results and financial condition.
The Company believes its future success will also depend in large part upon
its ability to attract and retain highly skilled management, marketing,
sales, consulting and product development personnel. Competition for such
personnel is intense, and there can be no assurance that the Company will be
able to retain its key employees or that it will be successful in attracting,
assimilating and retaining them in the future. As the Company seeks to expand
its worldwide support organization, hiring of qualified technical personnel
in foreign countries 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 the Company's business, operating results
and financial condition. In addition, the Novell Agreement requires the
Company to employ a minimum number of research and development personnel.
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EXPANDING DISTRIBUTION CHANNELS AND RELIANCE ON THIRD PARTIES
To date, the Company has sold its products principally through its direct
sales force, as well as through indirect sales channels, such as ISVs,
hardware OEMs, systems integrators, independent consultants and distributors.
Of the Company's revenues in the fiscal year ended January 31, 1997,
approximately $52.2 million resulted from sales by the Company's direct sales
force, and approximately $9.4 million resulted from sales through indirect
channels. The Company's ability to achieve significant revenue growth in the
future will depend in large part on its success in expanding its direct sales
force and in further establishing and maintaining relationships with
distributors, OEMs and ISVs. In particular, a significant element of the
Company's strategy is to embed its technology in products offered by the
Company's ISV customers. The Company intends to seek distribution
arrangements with other ISVs to embed the Company's technology in their
products and expects that these arrangements will account for a significant
portion of the Company's revenues in future periods.
Although the Company is currently investing, and plans to continue to
invest, significant resources to expand its direct sales force and to develop
relationships with distributors and ISVs, the Company has at times
experienced and continues to experience difficulty in recruiting qualified
sales personnel and in establishing necessary third-party relationships.
There can be no assurance that the Company will be able to successfully
expand its direct sales force or other distribution channels, secure license
agreements with additional ISVs on commercially reasonable terms or at all,
or otherwise further develop its relationships with distributors and ISVs, or
that any such expansion or additional license agreements would result in an
increase in revenues. Although the Company believes that its investments in
the expansion of its direct sales force and in the establishment of other
distribution channels through third parties ultimately will improve the
Company's operating results, to the extent that such investments are made and
revenues do not correspondingly increase, the Company's business, operating
results and financial condition will be materially and adversely affected.
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TECHNOLOGICAL CHANGE; DEPENDENCE ON NEW PRODUCTS AND PRODUCT ENHANCEMENTS
The market for the Company's products is highly fragmented, competitive
with alternative computing architectures, and characterized by continuing
technological development, 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 the Company's existing products obsolete and unmarketable. As a
result, the Company's success depends upon its ability to enhance existing
products, respond to changing customer requirements, and develop and
introduce in a timely manner new products that keep pace with technological
developments and emerging industry standards. Customer requirements include,
but are not limited to, operability across distributed and changing
heterogeneous hardware platforms, operating systems, relational databases and
networks. For example, although BEA TUXEDO interoperates with applications on
over 40 operating platforms, as certain of the Company's customers start to
utilize emerging platforms, it will be necessary for the Company to further
enhance its products to interoperate with applications on these emerging
platforms. There can be no assurance that the Company's products will
adequately address the changing needs of the marketplace or that the Company
will be successful in developing and marketing enhancements to its existing
products or new 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 the Company's
business, operating results and financial condition.
The Company's BEA Jolt product is designed to enable the extension of
enterprise-wide, mission-critical applications to Internet and intranet
environments. Although BEA Jolt has not accounted for a significant portion
of the Company's revenues to date, the Company intends to release enhanced
versions of BEA Jolt with greater functionality during the fiscal year ended
January 31, 1998, and the Company's objective is to increase license revenues
from the BEA Jolt product, both in absolute dollars and as a percentage of
the Company's revenues in future periods, although there can be no assurance
of such increase. The success of BEA Jolt depends upon, among other things,
the future growth of the Internet for commercial transactions. There can be
no assurance that communication or commerce over the Internet will become
widespread, or that the Internet will prove to be a viable commercial
marketplace. If BEA Jolt fails to adequately address customer concerns
regarding the use of the Internet for commerce, or if the Internet otherwise
does not prove to be a viable commercial marketplace, the success of the BEA
Jolt product will be materially and adversely affected. In addition, the
current version
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of BEA Jolt operates through Java-based applets, and the Company anticipates
that future versions of BEA Jolt will similarly operate through Java.
Accordingly, the success of BEA Jolt depends upon the continued widespread
demand for Java-enabled World Wide Web browsers.
SOFTWARE DEFECTS
Software products as complex as those offered by the Company frequently
contain errors or defects, especially when first introduced or when new
versions or enhancements are released. Despite product testing, the Company's
recently introduced products or any products may contain defects or software
errors and, as a result, the Company may experience delayed or lost revenues
during the period required to correct any defects or errors. Any such defects
or errors could result in adverse customer reactions, negative publicity
regarding the Company and its products, harm to the Company's reputation, or
loss of or delay in market acceptance, or could require expensive product
changes, any of which could have a material adverse effect upon the Company's
business, operating results and financial condition.
PRODUCT LIABILITY
The Company markets its products to customers for developing, building,
deploying and managing distributed mission-critical computer software
applications. The Company's license agreements with its customers typically
contain provisions designed to limit the Company's exposure to potential
product liability claims. It is possible, however, that the limitation of
liability provisions contained in the Company's 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 the Company has not
experienced any product liability claims to date, the sale and support of its
products by the Company may entail the risk of such claims, which could be
substantial in light of the use of such products in mission-critical
applications. A successful product liability claim brought against the
Company could have a material adverse effect upon the Company's business,
operating results and financial condition.
DEPENDENCE ON PROPRIETARY TECHNOLOGY; RISK OF INFRINGEMENT
The Company's success depends upon its proprietary technology. The
Company relies on a combination of copyright, trademark and trade secret
rights, confidentiality procedures and licensing arrangements to establish
and protect its proprietary rights. The Company presently has three issued
patents and two pending patent applications, as well as an exclusive license
to two patents and three pending patent applications. No assurance can be
given that competitors will not successfully challenge the validity or scope
of the Company's patents and that such patents will provide a competitive
advantage to the Company. As part of its confidentiality procedures, the
Company generally enters into non-disclosure agreements with its employees,
distributors and corporate partners, and license agreements with respect to
its software, documentation and other proprietary information. Despite these
precautions, it may be possible for a third party to copy or otherwise obtain
and use the Company's products or technology without authorization, or to
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 the Company's business, operating results and
financial condition. Policing unauthorized use of the Company's products is
difficult and, although the Company is unable to determine the extent to
which piracy of its software products exists, software piracy can be expected
to be a persistent problem. Effective protection of intellectual property
rights is unavailable or limited in certain foreign countries. There can be
no assurance that the Company's protection of its proprietary rights will be
adequate or that the Company's competitors will not independently develop
similar technology, duplicate the Company's products or design around any
patents issued to the Company or other intellectual property rights of the
Company.
The Company is not aware that any of its products infringe the
proprietary rights of third parties. There can be no assurance, however, that
third parties will not claim such infringement by the Company
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with respect to current or future products. The Company has received
correspondence claiming that its ObjectBroker product infringes certain
third-party patents. The Company is investigating this claim and currently
believes it to be without merit and that the Company is entitled to
indemnification for such claim. The Company expects that software product
developers will increasingly be subject to such claims as the number of
products and competitors in the Company's industry segment grows and the
functionality of products in the industry segment overlaps. Any such claims,
with or without merit, could result in costly litigation that could absorb
significant management time, which could have a material adverse effect on
the Company's business, operating results and financial condition. Such
claims might require the Company to enter into royalty or license agreements.
Such royalty or license agreements, if required, may not be available on
terms acceptable to the Company or at all, which could have a material
adverse effect upon the Company's business, operating results and financial
condition.
POSSIBLE VOLATILITY OF STOCK PRICE
The market price for the Common Stock is affected by a number of factors,
including the announcement of new products or product enhancements by the
Company or its competitors, quarterly variations in the Company's or its
competitors' results of operations, changes in earnings estimates or
recommendations by securities analysts, developments in the Company's
industry, general market conditions and other factors, including factors
unrelated to the operating performance of the Company or its competitors. In
addition, stock prices for many companies in the technology and emerging
growth sectors have experienced wide fluctuations that have often been
unrelated to the operating performance of such companies. Such factors and
fluctuations, as well as general economic, political and market conditions,
such as recessions, may materially adversely affect the market price of the
Company's Common Stock.
POTENTIAL EFFECT OF SHARES ELIGIBLE FOR FUTURE SALE ON MARKET PRICE OF THE
COMMON STOCK
Sales of a substantial number of shares of Common Stock could adversely
affect the market price of the Common Stock and could impair the Company's
ability to raise capital through the sale of equity securities. On July 31,
1997, the Company had 62,694,206 shares of Common Stock outstanding
(including 23,425,554 shares of Common Stock issuable upon conversion of the
Class B Common Stock). Of these shares, the 6,900,000 shares sold in the
offering completed in July, 1997, the 5,372,633 shares sold in the Company's
initial public offering and 193,130 shares issued pursuant to the Company's
Employee Stock Purchase Plan, are freely transferable without restriction
under the Securities Act, unless they are held by "affiliates" of the Company
as that term is used under the Securities Act and the Regulations promulgated
thereunder.
The remaining 50,228,443 outstanding shares were sold by the Company in
reliance on exemptions from the registration requirements of the Securities
Act and are restricted securities within the meaning of Rule 144 under the
Securities Act. None of these shares will be eligible for sale in the public
market at the effective date of the Registration Statement of which this
Prospectus is a part (the "Effective Date"). On October 8, 1997,
approximately 1,870,721 shares will become eligible for sale subject to the
provisions of Rule 144 or Rule 701, on November 19, 1997, and January 18,
1998, an additional 6,204,727 shares and 42,093,550 shares, respectively,
will become eligible for sale subject to such provisions, in each case upon
the expiration of agreements not to sell such shares entered into with
Goldman, Sachs & Co. or the Company. On October 8, 1997, 2,375,989 additional
shares subject to vested options will be available for sale subject to
compliance with Rule 701, and on November 19, 1997, an additional 305,683
shares subject to vested options will become eligible for sale subject to
such provisions, in each case upon the expiration of agreements not to sell
such shares entered into with Goldman, Sachs & Co. or the Company. An
additional 925,925 shares were issued to Digital in August, 1997 upon
conversion of a portion of a certain note payable to Digital.
27
<PAGE>
Upon issuance, such shares became eligible for immediate resale. In addition,
364,022 additional shares were issued subject to the full exercise of a
warrant and are eligible for sale. Any shares subject to lock-up agreements
may be earlier released at any time without notice by Goldman, Sachs & Co.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
The following exhibits are filed by attachment to this Form 10-QSB:
Exhibit
Number Description of Exhibit
------- ----------------------
11 Statement re: computation of earnings per share
27 Financial Data Schedule
(b) Reports on Form 8-K:
A report on Form 8-K dated July 21, 1997, was filed on August 1, 1997
disclosing the international tranche of the Company's follow-on offering.
28
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Dated: September 12, 1997
BEA Systems, Inc.
- ------------------
(Registrant)
By: /s/ Steve L. Brown
--------------------
Steve L. Brown
Executive Vice President and Chief Financial Officer
(Duly Authorized Officer and Principal Financial Officer)
29
<PAGE>
EXHIBIT 11
BEA SYSTEMS, INC.
JULY 31, 1997 FORM 10-QSB
COMPUTATION OF NET LOSS PER SHARE
(in thousands, except for per share amounts)
(unaudited)
<TABLE>
<CAPTION>
Six months ended Three months ended
July 31, July 31,
1997 1996 1997 1996
<S> <C> <C> <C> <C>
Net Loss Per Share:
Weighted average common shares outstanding for the period 53,373 8,473 56,035 8,652
Common equivalent shares pursuant to Staff Accounting Bulletin
Nos. 64 and 83 - 19,524 - 19,524
------- ------- ------ ------
Shares used in historical per share computation 53,373 27,997 56,035 28,176
------- ------- ------ ------
------- ------- ------ ------
Net loss $(23,492) $(75,293) $(3,121) $(7,842)
Cumulative dividends on Series B redeemable convertible
preferred stock (268) (311) ( - ) (192)
------- ------- ------ ------
Net loss applicable to common stockholders $(23,760) $(75,604) $(3,121) $(8,034)
------- ------- ------ ------
------- ------- ------ ------
Net loss per share $ (0.45) $ (2.70) $ (0.06) $ (0.29)
------- ------- ------ ------
------- ------- ------ ------
Pro Forma Net Loss Per Share:
Shares used in historical per share computation - 27,997 - 28,176
Common equivalent shares assuming conversion of preferred stock - 22,200 - 22,200
------- ------
Shares used in per share computation - 50,197 - 50,376
------- ------
------- ------
Net loss - $(75,293) - $(7,842)
------- ------
------- ------
Pro forma net loss per share - $ (1.50) - $ (0.16)
------- ------
------- ------
</TABLE>
31
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS INCLUDED IN THIS FORM 10-QSB AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JAN-31-1998
<PERIOD-START> FEB-01-1997
<PERIOD-END> JUL-31-1997
<CASH> 107,368
<SECURITIES> 0
<RECEIVABLES> 34,023
<ALLOWANCES> 1,178
<INVENTORY> 0
<CURRENT-ASSETS> 144,196
<PP&E> 8,177
<DEPRECIATION> 1,529
<TOTAL-ASSETS> 171,230
<CURRENT-LIABILITIES> 63,330
<BONDS> 42,401
0
0
<COMMON> 62
<OTHER-SE> 65,437
<TOTAL-LIABILITY-AND-EQUITY> 171,230
<SALES> 50,559
<TOTAL-REVENUES> 64,544
<CGS> 6,582
<TOTAL-COSTS> 15,374
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 258
<INTEREST-EXPENSE> 4,020
<INCOME-PRETAX> (22,320)
<INCOME-TAX> 1,172
<INCOME-CONTINUING> (23,492)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (23,492)
<EPS-PRIMARY> (0.45)
<EPS-DILUTED> 0
</TABLE>
