<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): September 10, 1998
BEA SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
DELAWARE
(State or other jurisdiction of incorporation)
0-22369 77-0394711
(Commission File Number) (I.R.S. employer identification No.)
2315 NORTH FIRST STREET
SAN JOSE, CA 95131
(Address of principal executive offices)
(408) 570-8000
(Registrant's telephone number, including area code)
385 MOFFETT PARK DRIVE
SUNNYVALE, CA 94089
(Former name or former address, if changed since last report)
<PAGE>
INFORMATION TO BE INCLUDED IN REPORT
The undersigned Registrant hereby reports the following items related to the
restatement of the Registrant's financial statements to reflect the acquisition
of Leader Group, Inc. in a transaction accounted for as a pooling of interests:
ITEM 2. ACQUISITION OR DISPOSITION OF ASSETS.
On April 30, 1998, the Registrant issued 560,704 shares of its common stock
for all outstanding stock of 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.
The transaction was valued at approximately $14.5 million and has been accounted
for using the pooling of interests method.
ITEM 5. OTHER EVENTS.
(a) Supplemental consolidated financial statements.
See Exhibit 99.1 for the supplemental consolidated financial statements of
BEA Systems, Inc.
(b) Exhibits.
The following exhibits are filed herewith:
Exhibit 23.1 Consent of Ernst & Young LLP, Independent Auditors
Exhibit 99.1 BEA Systems, Inc. Supplemental Consolidated Financial
Statements
SIGNATURES
Pursuant to 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 hereunto duly authorized.
BEA SYSTEMS, INC.
(the Registrant)
By: /s/ Steve L. Brown
-----------------------------
Steve L. Brown
Executive Vice President,
Chief Financial Officer and Secretary
Dated: September 10, 1998
<PAGE>
Exhibit 23.1
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the use of our report dated February 24, 1998 except for Note 18,
as to which the date is April 30, 1998, with respect to the supplemental
consolidated financial statements of BEA Systems, Inc. included in this Form
8-K.
/s/ Ernst & Young LLP
ERNST & YOUNG LLP
Palo Alto, California
September 8, 1998
<PAGE>
Exhibit 99.1
BEA SYSTEMS, INC.
INDEX TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
-----------
<S> <C>
AUDITED FINANCIAL STATEMENTS
Report of Ernst & Young LLP, Independent Auditors............................................................. 2
Supplemental Consolidated Balance Sheets as of January 31, 1998 and 1997...................................... 3
Supplemental Consolidated Statements of Operations for the years ended January 31, 1998 and 1997.............. 4
Supplemental Consolidated Statements of Shareholders' Equity for the years ended January 31, 1998
and 1997...................................................................................................... 5
Supplemental Consolidated Statements of Cash Flows for the years ended January 31, 1998 and 1997.............. 6
Notes to Supplemental Consolidated Financial Statements....................................................... 7
</TABLE>
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Stockholders
BEA Systems, Inc.
We have audited the accompanying supplemental consolidated balance sheets of
BEA Systems, Inc. (formed as a result of the consolidation of BEA Systems, Inc.
and Leader Group, Inc.) as of January 31, 1998 and 1997, and the related
supplemental consolidated statements of operations, redeemable convertible
preferred stock and stockholders' equity (deficit), and cash flows for the years
then ended. The supplemental consolidated financial statements give retroactive
effect to the merger of BEA Systems, Inc. and Leader Group, Inc. on April 30,
1998, which has been accounted for using the pooling of interests method as
described in the notes to the supplemental consolidated financial statements.
These supplemental financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these supplemental
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the supplemental financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
BEA Systems, Inc. at January 31, 1998 and 1997, and the consolidated results of
its operations and its cash flows for the years then ended, after giving
retroactive effect to the merger of Leader Group, Inc. as described in the notes
to the supplemental consolidated financial statements, in conformity with
generally accepted accounting principles.
/s/ ERNST & YOUNG LLP
Palo Alto, California
February 24, 1998
Except for Note 18,
as to which the date is
April 30, 1998
2
<PAGE>
BEA SYSTEMS, INC.
Supplemental Consolidated Balance Sheets
(in thousands, except par value)
<TABLE>
<CAPTION>
January 31,
1998 1997
---------- ----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 90,651 $ 3,856
Short-term investments 8,708 -
Accounts receivable, net of allowance for doubtful accounts of
$1,984 at January 31, 1998; $1,095 at January 31, 1997 47,422 25,191
Other current assets 2,970 3,088
--------- ---------
Total current assets 149,751 32,135
Computer equipment, furniture and leasehold improvements, net 7,845 6,723
Acquired intangible assets, net 12,315 17,226
Other assets 2,905 2,958
--------- ---------
Total assets $ 172,816 $ 59,042
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Borrowings under lines of credit $ 1,879 $ 9,050
Accounts payable 5,040 3,824
Accrued liabilities 25,431 14,206
Accrued income taxes 2,741 321
Deferred revenues 14,639 8,697
Current portion of notes payable and capital lease obligations 42,301 28,180
--------- ---------
Total current liabilities 92,031 64,278
Notes payable and capital lease obligations 691 49,540
Series B redeemable convertible preferred stock - $0.001 par value, no shares authorized
or outstanding at January 31, 1998; 20,000 shares authorized, 19,848 shares issued and
outstanding at January 31, 1997 - 20,780
Stockholders' equity (deficit):
Preferred stock issuable in series - $0.001 par value, 5,000 shares authorized, none
outstanding at January 31, 1998; Series A 20,000 shares authorized, 17,166 shares
issued and outstanding at January 31, 1997 - 17
Common stock - $0.001 par value, 80,000 shares authorized, 35,365 shares
issued and outstanding at January 31, 1998; 11,289 shares issued and
outstanding at January 31, 1997 36 12
Class B common stock - $0.001 par value, 35,000 shares authorized, 30,224 shares
issued and outstanding at January 31, 1998; no shares authorized or
outstanding at January 31, 1997 30 -
Additional paid-in capital 210,253 32,449
Accumulated deficit (128,508) (106,719)
Notes receivable from stockholders (544) (544)
Deferred compensation (601) (845)
Foreign currency translation adjustment (572) 74
--------- ---------
Total stockholders' equity (deficit) 80,094 (75,556)
--------- ---------
Total liabilities and stockholders' equity (deficit) $ 172,816 $ 59,042
========= =========
</TABLE>
See accompanying notes.
3
<PAGE>
BEA SYSTEMS, INC.
Supplemental Consolidated Statements of Operations
(in thousands, except per share data)
<TABLE>
<CAPTION>
Fiscal year ended January 31,
1998 1997
------------- -------------
<S> <C> <C>
Revenues:
License fees $ 118,906 $ 46,839
Services 43,192 17,501
--------- ---------
Total revenues 162,098 64,340
--------- ---------
Cost of revenues:
Cost of license fees 2,429 1,591
Cost of services 26,657 9,683
Amortization of certain acquired intangible assets 11,336 8,696
--------- ---------
Total cost of revenues 40,422 19,970
--------- ---------
Gross margin 121,676 44,370
Operating expenses:
Sales and marketing 75,438 31,282
Research and development 27,008 18,183
General and administrative 17,087 12,857
Write-off of in-process research and development 16,000 62,248
--------- ---------
Total operating expenses 135,533 124,570
--------- ---------
Loss from operations (13,857) (80,200)
Interest expense (6,054) (6,727)
Interest income and other, net 1,762 11
--------- ---------
Loss before provision for income taxes (18,149) (86,916)
Provision for income taxes 2,843 800
--------- ---------
Net loss $ (20,992) $ (87,716)
========= =========
Basic and diluted net loss per share $ (0.41) $ (8.86)
========= =========
Shares used in computing basic and diluted net loss per share 51,820 10,005
========= =========
</TABLE>
See accompanying notes.
4
<PAGE>
BEA SYSTEMS, INC.
Supplemental Consolidated Statement of Redeemable Convertible Preferred Stock
and Stockholders' Equity (Deficit)
Two-year period ended January 31, 1998
(in thousands)
<TABLE>
<CAPTION>
Stockholders' equity (deficit)
------------------------------------------------------
Series B
redeemable convertible Class B
preferred stock Preferred stock Common stock common stock
------------------------- -------------------- --------------------- -------------------
Shares Amount Shares Amount Shares Amount Shares Amount
----------- ----------- ---------- -------- ---------- --------- -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at January 31, 1996 6,060 $ 6,112 11,100 $11 8,815 $ 9 - $ -
Issuance of Series A preferred stock - - 6,066 6 - - - -
Issuance of common stock - - - - 2,000 2 - -
Common shares issued under
stock option plans - - - - 404 1 - -
Issuance of Series B redeemable
convertible preferred stock 13,788 13,788 - - - - - -
Accretion of cumulative dividends on
Series B redeemable convertible
preferred stock - 880 - - - - - -
Issuance of common stock for services - - - - 70 - - -
Deferred compensation related to grant
of stock options - - - - - - - -
Amortization of deferred compensation - - - - - - - -
Foreign currency translation adjustment - - - - - - - -
Leader Group distributions - - - - - - - -
Net loss - - - - - - - -
----------- ----------- ---------- -------- ---------- --------- -------- ---------
Balance at January 31, 1997 19,848 20,780 17,166 17 11,289 12 - -
Issuance of common stock, net of
issuance costs of $3,062 - - - - 12,277 12 - -
Common shares issued under stock
option and employee stock
purchase plans - - - - 1,812 2 - -
Issuance and exercise of common
stock warrant - - - - 364 - - -
Accretion of cumulative dividends on
Series B redeemable convertible
preferred stock - 268 - - - - - -
Conversion of Series A and Series B
preferred stock (19,848) (21,048) (17,166) (17) 7,880 8 30,224 30
Conversion of debt obligations - - - - 1,743 2 - -
Amortization of deferred compensation - - - - - - - -
Foreign currency translation adjustment - - - - - - - -
Unrealized losses on available-for-sale
investments - - - - - - - -
Leader Group distributions - - - - - - - -
Net loss - - - - - - - -
----------- ----------- ---------- -------- ---------- --------- -------- ---------
Balance at January 31, 1998 - $ - - $ - 35,365 $ 36 30,224 30
=========== =========== ========== ======== ========== ========= ======== =========
<CAPTION>
Stockholders' equity (deficit)
--------------------------------------------------------------------------------------------
Notes Foreign Total
Additional receivable currency stockholders
paid-in Accumulated from Deferred translation equity
capital deficit stockholders compensation adjustment (deficit)
------------ ------------- -------------- --------------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Balance at January 31, 1996 $ 20,469 $ (17,808) $ (544) $ - $ - $ 2,137
Issuance of Series A preferred stock 10,306 - - - - 10,312
Issuance of common stock 568 - - - - 570
Common shares issued under
stock option plans 113 - - - - 114
Issuance of Series B redeemable
convertible preferred stock - - - - - -
Accretion of cumulative dividends on
Series B redeemable convertible
preferred stock - (880) - - - (880)
Issuance of common stock for services 20 - - - - 20
Deferred compensation related to grant
of stock options 973 - - (973) - -
Amortization of deferred compensation - - - 128 - 128
Foreign currency translation adjustment - - - 74 74
Leader Group distributions - (315) - - - (315)
Net loss - (87,716) - - - (87,716)
------------ ------------ -------------- --------------- ------------ ------------
Balance at January 31, 1997 32,449 (106,719) (544) (845) 74 (75,556)
Issuance of common stock, net of
issuance costs of $3,062 138,087 - - - - 138,099
Common shares issued under stock
option and employee stock
purchase plans 3,887 - - - - 3,889
Issuance and exercise of common
stock warrant 790 - - - - 790
Accretion of cumulative dividends on
Series B redeemable convertible
preferred stock - (268) - - - (268)
Conversion of Series A and Series B
preferred stock 21,027 - - - - 21,048
Conversion of debt obligations 14,013 - - - - 14,015
Amortization of deferred compensation - - - 244 - 244
Foreign currency translation adjustment - - - - (646) (646)
Unrealized losses on available-for-sale
investments - (27) - - - (27)
Leader Group distributions - (502) - - - (502)
Net loss - (20,992) - - - (20,992)
------------ ------------ -------------- --------------- ------------ ------------
Balance at January 31, 1998 $ 210,253 $ (128,508) $ (544) $ (601) $ (572) $ 80,094
============ ============ ============== =============== ============ ============
</TABLE>
See accompanying notes.
5
<PAGE>
BEA SYSTEMS, INC.
Supplemental Consolidated Statements of Cash Flows
(in thousands)
<TABLE>
<CAPTION>
Fiscal year ended January 31,
1998 1997
--------------- ---------------
<S> <C> <C>
Operating activities:
Net loss $ (20,992) $ (87,716)
Adjustments to reconcile net loss to net cash provided
by (used in) operating activities:
Depreciation and amortization 2,473 1,512
Amortization of deferred compensation 244 128
Amortization of acquired intangible assets and write-off
of in-process research and development 27,796 71,054
Other 358 20
Changes in operating assets and liabilities, net of
business combinations:
Accounts receivable (22,231) (14,290)
Other current assets 5,949 (2,029)
Other assets 53 (2,231)
Accounts payable 1,216 2,841
Accrued liabilities 2,842 3,555
Deferred revenues 5,942 6,378
--------- ---------
Net cash provided by (used in) operating activities 3,650 (20,778)
--------- ---------
Investing activities:
Purchases of computer equipment, furniture and
leasehold improvements (2,881) (4,724)
Payments for business combinations, net of cash acquired (2,925) (2,566)
Purchases of available-for-sale short-term investments (8,708) -
--------- ---------
Net cash used in investing activities (14,514) (7,290)
--------- ---------
Financing activities:
Net borrowings (payments) under lines of credit (7,171) 9,050
Proceeds from notes payable and capital lease obligations 6,123 1,264
Payments on notes payable and capital lease obligations (42,133) (7,540)
Proceeds from issuance of common and preferred stock, net 141,486 24,469
--------- ---------
Net cash provided by financing activities 98,305 27,243
--------- ---------
Net increase (decrease) in cash and cash equivalents 87,441 (825)
Foreign currency translation adjustment (646) 74
Cash and cash equivalents at beginning of year 3,856 4,607
--------- ---------
Cash and cash equivalents at end of year $ 90,651 $ 3,856
========= =========
</TABLE>
See accompanying notes.
6
<PAGE>
BEA SYSTEMS, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Description of business
BEA Systems, Inc. (the Company or BEA) is a leading provider of cross-platform
middleware solutions for enterprise applications. The Company's products and
services help enable mission-critical, distributed applications to work
seamlessly in client/server, Internet and legacy environments. BEA provides
transactional, messaging and distributed object-based software for developing
and deploying these enterprise applications. In addition to its product line,
BEA provides enterprise solutions through its partner network and a wide range
of services including consulting, education and support.
Principles of consolidation
The accompanying consolidated financial statements include the accounts of the
Company and its subsidiaries. All 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. in a merger transaction accounted for as
a pooling of interests (see Note 18). All financial information has been
restated to reflect the combined operations of the Company and Leader Group,
Inc.
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 from those
estimates.
Foreign currencies
The assets and liabilities of foreign subsidiaries are translated from their
respective functional currencies at the rates in effect at the balance sheet
date while revenue and expense accounts are translated at weighted average rates
during the period. Foreign currency translation adjustments are reflected as a
separate component of stockholders' equity (deficit).
The Company hedges a portion of its exposure on certain intercompany
receivables and payables denominated in foreign currencies using forward foreign
exchange contracts, which are recorded at fair value at each balance sheet date.
Gains and losses resulting from exchange rate fluctuations on forward foreign
exchange contracts are recorded currently in interest and other expense and
offset corresponding gains and losses on the foreign currency accounts being
hedged. Net losses resulting from foreign currency transactions, were
approximately $600,000 and $400,000 in fiscal years 1998 and 1997, respectively.
Cash, cash equivalents and short-term investments
Cash and cash equivalents consist of highly liquid investments with maturities
of 90 days or less from the date of purchase. The carrying amounts reported on
the consolidated balance sheets for cash and cash equivalents approximates their
fair market value.
Short-term investments consist principally of commercial paper and time
deposits with remaining maturities of one year or less. The Company determines
the appropriate classification of its short-term investments at the time of
purchase and re-evaluates such designations as of each balance sheet date. All
short-term investments in the Company's portfolio are classified as "available-
for-sale" and are stated at fair market value, with the unrealized gains and
losses reported in stockholders' equity (deficit) until disposition. The
amortized cost of debt securities is
7
<PAGE>
adjusted for amortization of premiums and accretion of discounts to maturity.
Such amortization is included in interest income along with interest earned.
Concentration of credit risk
The Company invests its cash, cash equivalents and short-term investments with
financial institutions with high credit standing and, by policy, limits the
amounts invested with any one financial 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.
Computer equipment, furniture and leasehold improvements
Computer equipment, furniture and leasehold improvements are stated at cost.
Depreciation is computed using the straight-line method over the estimated
useful lives of the assets which range from three to seven years. Assets under
capital leases are amortized over five years or the life of the lease; while
leasehold improvements are amortized over the shorter of the estimated useful
life or the lease term.
Acquired intangible assets
Acquired intangible assets consist of developed technology, distribution
rights, trademarks, tradenames and goodwill related to the Company's
acquisitions accounted for using the purchase method. Amortization of these
purchased intangibles is calculated on the straight-line basis over the
respective estimated useful lives of the intangible assets ranging from twenty-
four to thirty months for developed technology and distribution rights to sixty
months for trademarks and goodwill. Amortization of developed technology,
distribution rights, trademarks and tradenames is included as a component of
cost of revenues, while amortization of goodwill is included in general and
administrative expenses. Acquired in-process research and development without
alternative future use is expensed when acquired.
Long-lived assets
The Company has adopted Statement of Financial Accounting Standard No. 121,
Accounting for the Impairment of Long-Lived Assets to be Disposed of (FAS 121).
In accordance with FAS 121, the Company identifies and records impairment
losses, as circumstances dictate, on long-lived assets used in operations when
events and circumstances indicate that the assets might be impaired and the
undiscounted cash flows estimated to be generated by those assets are less than
the carrying amounts of those assets. No such events have occurred with respect
to the Company's long-lived assets, which consist primarily of acquired
intangible assets, computer equipment, furniture and leasehold improvements.
The adoption of FAS 121 did not have a material impact on the financial
position, results of operations or cash flows of the Company.
Capitalized software
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.
8
<PAGE>
BEA SYSTEMS, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
Product concentration
The Company currently derives the majority of its license and service revenues
from products in the BEA TUXEDO product line. These products and services are
expected to continue to account for the majority of the Company's revenues for
the foreseeable future. Furthermore, as discussed in Note 9 to the consolidated
financial statements, under the terms of its agreement with Novell, the Company
is obligated to make certain payments to Novell through January 1999 to acquire
perpetual rights to the BEA TUXEDO product. Failure by the Company for any
reason to make these payments could terminate the Company's continuing rights to
BEA TUXEDO.
Revenue recognition
The Company recognizes revenue in accordance with American Institute of
Certified Public Accountants Statement of Position 91-1, Software Revenue
Recognition. Revenues from software license agreements are recognized at the
time of product shipment, provided there are no significant vendor obligations
remaining to be fulfilled and collectibility is probable. Ongoing license
royalty revenues are recognized as reported by the Company's customers.
Service revenues include consulting services, post-contract customer support
and training. Consulting revenues and the related cost of services are
recognized on a time and materials basis; however, revenue 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 profitability on such contracts may be more or less
than planned. The amount of consulting contracts recognized on a percentage of
completion basis has not been material to date. Post-contract customer support
revenues are 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 reported 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 stock awards.
Net loss per share
On January 31, 1998, the Company adopted Statement of Financial Accounting
Standard No. 128, Earnings per Share (FAS 128). Under this standard, basic net
loss per share is computed based on the weighted average number of shares of the
Company's common stock. Diluted net loss per share is computed based on the
weighted average number of shares of the Company's common stock and common
equivalent shares (stock options, warrants, convertible notes and preferred
stock), if dilutive.
In addition, in 1998, the Securities and Exchange Commission (SEC) issued
Staff Accounting Bulletin No. 98 (SAB 98) which eliminates the inclusion in the
calculation of net loss per share of common and common equivalent shares issued
during the twelve month period prior to an initial public offering at prices
below the public offering price as if they were outstanding for all periods
presented.
All loss per share amounts for all periods have been calculated and, where
appropriate, restated to conform to
9
<PAGE>
BEA SYSTEMS, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
the requirements of FAS 128 and SAB 98.
Certain prior year amounts have been reclassified to conform to the current
year's presentation.
2. FINANCIAL INSTRUMENTS
Short-term investments
The following is a summary of available-for-sale securities at January 31,
1998; the Company had no available-for-sale securities at January 31, 1997 (in
thousands):
<TABLE>
<CAPTION>
January 31, 1998
--------------------------------------
Gross
Amortized unrealized Fair
cost losses value
--------------------------------------
<S> <C> <C> <C>
Commercial paper $40,460 $(27) $40,433
Money market 42,772 - 42,772
Time deposits 3,722 - 3,722
Forward foreign currency contracts (22) - (22)
--------------------------------------
$86,932 $(27) $86,905
======================================
</TABLE>
Included in the above table are securities with fair values totaling $78.2
million, which are classified as cash and cash equivalents and $8.7 million,
which are classified as short-term investments in the accompanying consolidated
balance sheets. All short-term investments mature within six months. At
January 31, 1998, short-term investments included restricted time deposits of
$2.5 million which collateralize borrowings (see Note 9).
Foreign currency contracts
The Company enters into forward foreign currency contracts to hedge the value
of certain intercompany assets and liabilities denominated in foreign currencies
to reduce the exposure to foreign currency fluctuations. At January 31, 1998,
the Company had outstanding forward foreign currency contracts with a notional
amount of approximately $20 million, predominantly to exchange British pounds,
German marks, Japanese yen, French francs and Swedish krona with notional
amounts of $3.5 million, $3.1 million, $8.0 million, $3.2 million, $1.2 million,
respectively. Substantially all of the Company's forward foreign currency
contracts have maturities of 90 days or less. The fair value of foreign
currency contracts is estimated based on the spot rate of the various hedged
currencies as of the end of the period.
10
<PAGE>
BEA SYSTEMS, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
Fair value of financial instruments
The carrying amounts and estimated fair values of the Company's financial
instruments were as follows (in thousands):
<TABLE>
<CAPTION>
January 31,
-------------------------------------------------
1998 1997
-------------------------------------------------
Carrying Fair Carrying Fair
amount value amount value
-------------------------------------------------
<S> <C> <C> <C> <C>
Financial assets:
Cash and cash equivalents $90,651 $90,651 $3,856 $3,856
Short-term investments 8,708 8,708 - -
Financial liabilities:
Borrowings under lines of credit 1,879 1,879 9,050 9,050
Notes payable and capital lease obligations
(including current portion) 42,992 42,992 77,720 77,720
Off balance sheet instruments:
Foreign currency forward contracts (22) (22) - -
</TABLE>
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.
For certain of the Company's financial instruments, including cash and cash
equivalents, short-term investments, notes payable, the carrying amounts
approximate fair value due to their short maturities. The fair value of foreign
currency forward contracts was based on the estimated amount at which they could
be settled based on quoted exchange rates.
3. COMPUTER EQUIPMENT, FURNITURE AND LEASEHOLD IMPROVEMENTS
Computer equipment, furniture and leasehold improvements consist of the
following (in thousands):
<TABLE>
<CAPTION>
January 31,
----------------------
1998 1997
----------------------
<S> <C> <C>
Computer equipment $5,382 $3,998
Furniture and equipment 2,375 1,653
Leasehold improvements 2,438 1,474
Furniture and equipment under capital leases 1,608 1,154
----------------------
11,803 8,279
Accumulated depreciation and amortization (3,958) (1,556)
----------------------
$7,845 $6,723
======================
</TABLE>
Accumulated amortization for furniture and equipment under capital leases was
approximately $432,000 and $154,000 at January 31, 1998 and 1997, respectively.
11
<PAGE>
BEA SYSTEMS, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
4. BUSINESS COMBINATIONS
Tuxedo Product Line
On February 23, 1996, the Company entered into a license agreement with
Novell, Inc. and acquired exclusive rights to distribute and make enhancements
to Novell's TUXEDO product on UNIX, Windows NT and all non-NetWare platforms.
In addition, the Company assumed Novell's obligations and rights under all
contracts with TUXEDO partners, distributors and customers and exclusive rights
to the TUXEDO trademark. The purchase price (including direct acquisition
costs) was approximately $77.5 million and consisted primarily of a note payable
to Novell with fixed payment terms (See Note 9).
The following is a summary of the purchase price allocation (in thousands):
<TABLE>
<S> <C>
Current assets and other tangible assets $ 4,270
Liabilities assumed (702)
Acquired in-process research and development 60,948
Developed technology 9,825
Trademarks and tradenames 3,159
-------
$77,500
=======
</TABLE>
USL Finance, S. A.
On May 5, 1996, the Company acquired all of the outstanding stock of USL
Finance, S.A. ("USL"), a distributor of BEA TUXEDO in France. The purchase
price (including direct acquisition costs) was approximately $3.3 million which
was paid in cash. The Company has accounted for the acquisition using the
purchase method.
The following is a summary of the purchase price allocation (in thousands):
<TABLE>
<S> <C>
Current assets and other tangible assets $ 6,060
Liabilities assumed (5,482)
Distribution rights 2,672
---------
$ 3,250
=========
</TABLE>
Client Server Technologies, OY
On June 12, 1996, the Company acquired all of the outstanding stock of Client
Server Technologies, OY ("CST"), a distributor of BEA TUXEDO in Finland. The
purchase price (including direct acquisition costs) was approximately $2.2
million which was paid in cash. The Company has accounted for the acquisition
using the purchase method.
The following is a summary of the purchase price allocation (in thousands):
<TABLE>
<S> <C>
Current assets and other tangible assets $ 1,483
Liabilities assumed (1,067)
Acquired in-process research and development 1,300
Distribution rights 389
Trademarks and tradenames 58
--------
$ 2,163
========
</TABLE>
12
<PAGE>
BEA SYSTEMS, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
Bay Technologies PTY, Limited.
On December 23, 1996, the Company acquired all of the outstanding stock of
Bay Technologies Pty., Limited ("Bay"), a distributor of BEA TUXEDO in
Australia. The purchase price (including direct acquisition costs) was
approximately $1.0 million and consisted primarily of a note payable of $916,000
(See Note 9). The Company has accounted for the acquisition using the purchase
method.
The following is a summary of the purchase price allocation (in thousands):
<TABLE>
<S> <C>
Current assets and other tangible assets $ 121
Liabilities assumed (293)
Distribution rights 1,178
-------
$1,006
=======
</TABLE>
Digital Equipment Corporation
On March 26, 1997, the Company completed an agreement with Digital Equipment
Corporation ("Digital") to acquire exclusive worldwide rights to MessageQ,
ObjectBroker and other related products. The purchase price (including $308,000
direct acquisition costs) was approximately $20.1 million. The acquisition was
accounted for using the purchase method. Of the aggregate consideration, $5.0
million was paid in cash on closing and aggregate payments of $17.0 million were
due pursuant to a convertible promissory note. Interest was imputed on the
convertible promissory note at 8 percent which resulted in the recorded
liability of approximately $14.0 million on a present value basis. In addition,
the Company granted Digital a warrant to purchase 500,000 shares of common stock
at a price of $6.00 per share, which resulted in recorded costs of $790,000.
The following is a summary of the purchase price allocation (in thousands):
<TABLE>
<S> <C>
Current assets and other tangible assets $ 6,017
Liabilities assumed (6,247)
Acquired in-process research and development 16,000
Developed technology 3,700
Goodwill 613
--------
$20,083
========
</TABLE>
In August 1997, the Company and Digital entered into an agreement whereby the
Company issued 925,925 shares of Common Stock and paid $4,925,000 in full
settlement of the convertible promissory note. Additionally, the Company issued
364,022 shares of common stock to Digital in accordance with the terms of
Digital's exercise of the entire warrant as provided for in the warrant
agreement.
13
<PAGE>
BEA SYSTEMS, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
Pro forma information
The following unaudited pro forma summary represents the consolidated results
of operations of the Company as if the acquisition of USL and BEA TUXEDO had
occurred at the beginning of fiscal 1997 and does not purport to be indicative
of what would have occurred had the acquisitions been made as of that date or
the results which may occur in the future. The operating results of the
acquisitions of CST and Bay have not been included in the pro forma amounts as
the effect of their inclusion would not be material.
<TABLE>
<CAPTION>
Fiscal year ended
January 31, 1997
----------------------
<S> <C>
Pro forma revenues (in thousands) $ 65,263
Pro forma net loss (in thousands) $(88,091)
Pro forma net loss per share $ (8.89)
</TABLE>
5. PUBLIC OFFERINGS OF COMMON STOCK
In April 1997, the Company completed its initial public offering of common
stock. The offering generated net proceeds of approximately $27.7 million from
the sale of 5.4 million shares. In July 1997, the Company completed a follow-on
public offering of its common stock. The offering generated net proceeds of
approximately $110.4 million from the sale of 6.9 million shares of common
stock.
6. ACQUIRED INTANGIBLE ASSETS
Values assigned to acquired in-process research and development, distribution
rights, developed technology, trademarks and tradenames were generally
determined by independent appraisals using discounted cash flow analysis. To
determine the value of the in-process research and development, the Company
considered, among other factors, the state of development of each project, the
time and cost needed to complete each project, expected income and associated
risks which included the inherent difficulties and uncertainties in completing
the project and thereby achieving technological feasibility and risks related to
the viability of and potential changes to future target markets. This analysis
results in amounts assigned to in-process research and development projects that
had not yet reached technological feasibility and does not have alternative
future uses. To determine the value of the distribution rights, the Company
considered, among other factors, the size of the current and potential future
customer base, quality of existing relationships with customers, the expected
income and associated risks. Associated risks included the inherent
difficulties and uncertainties in transitioning the business relationships from
the acquired entity to the Company and risks related to the viability of and
potential changes to future target markets. To determine the value of the
developed technology, the expected future cash flows of each existing technology
product were discounted taking into account risks related to the characteristics
and applications of each product, existing and future markets and assessments
of the life cycle stage of each product. Based on this analysis, the existing
technology that had reached technological feasibility was capitalized. Acquired
intangible assets consist of the following (in thousands):
<TABLE>
<CAPTION>
January 31,
--------------------
1998 1997
--------------------
<S> <C> <C>
Developed technology and distribution rights $ 27,610 $22,790
Trademarks and tradenames 3,417 3,417
Goodwill 2,784 933
------------------
33,811 27,140
Accumulated amortization (21,496) (9,914)
------------------
$ 12,315 $17,226
==================
</TABLE>
14
<PAGE>
BEA SYSTEMS, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
7. OTHER ASSETS
Included in other assets at January 31, 1998 and 1997 was $1.2 million and
$1.5 million, respectively, invested in bank certificates of deposit with
interest rates ranging from 3.90 percent to 4.25 percent. The certificates of
deposit's support letters of credit that are required as security deposits under
certain of the Company's facilities leases and other credit arrangements.
Also included in other assets at January 31, 1998 and 1997 was a note
receivable of $720,000 from an officer and founder of the Company for the
financing of real property. The note receivable, which is secured by a deed of
trust on the real property, bears interest at 7 percent per annum and is due and
payable on the earlier of January 1, 2001 or termination of the founder's
employment with the Company. The note may be repaid at any time prior to the
due date.
8. ACCRUED LIABILITIES
Accrued liabilities consist of the following (in thousands):
<TABLE>
<CAPTION>
January 31,
--------------------
1998 1997
--------------------
<S> <C> <C>
Accrued payroll and related liabilities $14,677 $ 6,597
Accrued sales and value added tax 3,422 3,547
Other accrued liabilities 7,332 4,062
-----------------
$25,431 $14,206
=================
</TABLE>
9. LINE OF CREDIT, NOTES PAYABLE AND CAPITAL LEASE OBLIGATIONS
Borrowings under lines of credit
At January 31, 1998, the Company had outstanding $1.9 million, pursuant to
revolving lines of credit arrangements with commercial lenders in Japan and
Korea. The maximum credit available under the arrangements was $3.1 million and
borrowings available under the lines totaled approximately $1.2 million at
January 31, 1998. Borrowings under the credit arrangements bear interest at
rates ranging from 2 percent to 24 percent with a weighted average interest rate
of 22 percent at January 31, 1998, and are secured by $2.5 million of
certificates of deposits.
At January 31, 1997, the Company had outstanding approximately $9.1 million,
pursuant to a revolving line of credit arrangement with a commercial lender.
The maximum credit available under this facility was $10.2 million and borrowing
availability was based on the aggregate of (i) a percentage of qualifying
accounts receivable and (ii) $4.0 million. Additional borrowings available
under the line totaled $1.0 million at January 31, 1997. Borrowings under the
credit arrangement bear interest adjusted monthly at the LIBOR plus 5.1 percent
(10.5 percent in aggregate at January 31, 1997) and was secured by substantially
all assets of the Company. In addition, the credit agreement prohibited the
Company from paying dividends without the lender's approval. The line of credit
expired in April 1997.
The Company has not renewed the primary capital lease line which expired in
June 1997 and, therefore, no longer has capital lease line availability.
15
<PAGE>
BEA SYSTEMS, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
Notes payable and capital lease obligations
Notes payable and capital lease obligations consist of the following (in
thousands):
<TABLE>
<CAPTION>
January 31,
-----------------------
1998 1997
-----------------------
<S> <C> <C>
Note payable to Novell, Inc. with interest imputed at 8 percent. The note
is due in quarterly installments of various amounts totaling $29.0 million,
which are guaranteed by the majority shareholder of the Company, with a
final payment of $12.0 million due in January 1999 upon the Company's
exercise of an option to purchase perpetual rights to BEA TUXEDO. $38,734 $69,900
Note payable to a commercial lender in Japan bearing interest at 2 percent.
Principal payment is due in four equal installments with the last payment
scheduled in December 1998. 2,606 -
Subordinated notes payable to founders of an acquired business bearing
interest at 8 percent. Accrued interest of $430,000 is included at January
31, 1997. The note was paid in full in May 1997. - 4,589
Credit arrangement with the Company's majority stockholder. Borrowings under
the arrangement were unsecured, bear interest at 11 percent and are
convertible into common stock at the option of the lender. The outstanding
balance and accrued interest aggregating $4.6 million were converted into
817,334 shares of common stock concurrent with the Company's initial public
offering in April 1997. - 1,000
Notes payable to the former shareholders of Bay Technologies Pty., Limited,
with interest imputed at 8 percent and payable in quarterly installments. 482 928
Capital lease obligations 1,096 1,004
Other notes payable 74 299
---------------------
42,992 77,720
Less amounts due within one year (42,301) (28,180)
---------------------
Notes payable and capital lease obligations due after one year $ 691 $49,540
=====================
</TABLE>
Scheduled maturities of notes payable and capital lease obligations are as
follows (in thousands):
<TABLE>
<CAPTION>
Notes Capital lease
payable obligations
-------------- ---------------
<S> <C> <C>
Fiscal year ending January 31,
1999 $ 41,866 $ 580
2000 30 601
2001 - 101
--------- ------
$ 41,896 1,282
=========
Less amount representing interest (186)
------
Present value of minimum lease payments 1,096
Less current portion (435)
------
Long-term capital lease obligations $ 661
======
</TABLE>
Cash payments for interest were $6.2 million and $6.3 million for fiscal
years 1998 and 1997, respectively.
16
<PAGE>
BEA SYSTEMS, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
10. OPERATING LEASE COMMITMENTS
The Company leases its facilities under operating lease arrangements.
Certain of the leases provide for specified annual rent increases as well as
options to extend the lease beyond the initial term. Approximate annual minimum
operating lease commitments are as follows (in thousands):
<TABLE>
<CAPTION>
Fiscal year ending January 31,
<S> <C>
1999 $6,925
2000 9,732
2001 8,646
2002 7,378
2003 7,608
Thereafter 39,595
-------
Total minimum lease payments $79,884
=======
</TABLE>
In December 1997, the Company entered into a ten year lease agreement
for approximately 224,000 square feet of office space in San Jose, California to
house the Company's corporate headquarters, sales, marketing, research and
administrative personnel. The Company expects to occupy this space in the late
summer or fall of fiscal year 1999. While the Company intends to temporarily
sublease approximately 100,000 square feet, all of the required future lease
payments are included in the table of annual minimum operating lease commitments
above.
Total rent expense charged to operations for the fiscal years ended January
31, 1998 and 1997 was approximately $5.9 million and $3.4 million, respectively.
11. INCOME TAXES
The components of the provisions for income taxes consist of the following
(in thousands):
<TABLE>
<CAPTION>
Fiscal year ended
January 31,
-----------------------
1998 1997
-----------------------
<S> <C> <C>
Current provision:
Federal $ 878 $ -
State 300 -
Foreign 1,665 800
-------------------
Provision for income taxes $2,843 $800
===================
</TABLE>
17
<PAGE>
BEA SYSTEMS, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
The reconciliation of income tax attributable to continuing operations
computed at the U.S. federal statutory tax rate (34 percent) to income tax
expense is as follows (in thousands):
<TABLE>
<CAPTION>
Fiscal year ended
January 31,
---------------------------
1998 1997
---------------------------
<S> <C> <C>
Tax benefit at U.S. statutory rate $(6,171) $(29,551)
Nondeductible amortization of acquired intangible assets 2,720 11,842
Valuation allowance 4,890 18,304
Foreign withholding taxes, net 949 528
Foreign taxes in excess of U.S. rate 397 -
Leader Group S Corporation impact (341) (323)
Other 399 -
------------------------
Provision for income taxes $ 2,843 $ 800
========================
</TABLE>
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):
<TABLE>
<CAPTION>
Fiscal year ended
January 31,
---------------------------
1998 1997
---------------------------
<S> <C> <C>
Deferred tax assets:
Accruals and reserves $ 2,507 $ 3,275
Net operating loss carryforwards 5,017 7,279
Computer equipment, furniture, leasehold improvements
and acquired intangible assets 18,489 17,547
Other 950 -
-------------------------
Total deferred tax assets 26,963 28,101
Valuation allowance (26,963) (28,101)
-------------------------
Net deferred tax assets $ - $ -
=========================
</TABLE>
Realization of deferred tax assets is dependent on future taxable income, the
timing and amount of which are uncertain. Accordingly, a valuation allowance,
in an amount equal to the net deferred tax assets at January 31, 1998 and 1997,
has been established to reflect these uncertainties. The valuation allowance
decreased by $1.1 million and increased by $23.0 million in fiscal years 1998
and 1997, respectively. Approximately $752,000 of the valuation allowance at
January 31, 1998 relates to tax benefits associated with exercises of stock
options which will reduce taxes payable and be credited to additional paid-in
capital when realized.
As of January 31, 1998, the Company had federal net operating loss and
foreign tax credit carryforwards of approximately $14.7 million and $1.0 million
that will expire in fiscal years 2011 and 2003, respectively. Utilization of net
operating loss and credit carryforwards may be subject to substantial
limitations due to ownership change and other limitations provided by the
Internal Revenue Code and similar state provisions. These limitations may
result in the expiration of net operating loss carryforwards before full
utilization.
Pretax income (loss) from foreign operations was approximately $8.5 million
and $(1.5) million for fiscal years 1998 and 1997, respectively.
Cash refunds received, net of income taxes paid, were $57,000 for fiscal
year 1998, while cash payments for income taxes were $230,000 for fiscal year
1997.
18
<PAGE>
BEA SYSTEMS, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
12. SERIES B REDEEMABLE CONVERTIBLE PREFERRED STOCK
At January 31, 1997, the Company had outstanding 19,847,800 shares of
Series B Redeemable Convertible Preferred Stock (Series B Preferred Stock).
Holders of the Series B Preferred Stock were entitled to cumulative annual
dividends of $0.07 per share payable prior and in preference to any declaration
or payment of dividends on the Series A Convertible Preferred Stock (the Series
A Preferred Stock) and the common stock. The right to receive such dividends
was cumulative and accrued to the extent that such dividends were not declared
or paid in any year. No dividends had been declared or paid by the Company on
the Series B Preferred Stock. Total accumulated dividends on the Series B
Preferred Stock were approximately $932,000 at January 31, 1997.
At the time of the Company's initial public offering in April 1997, all of
the outstanding Series B Preferred Stock and accumulated dividends of $1.2
million were converted into 3,772,077 shares of common stock.
13. STOCKHOLDERS' EQUITY
Series A convertible preferred stock
At January 31, 1997, the Company had outstanding 17,166,000 shares of
Series A Preferred Stock. Each share of Series A Preferred Stock was
convertible at any time at the option of the shareholder into two shares of
common stock or automatically at the time of the initial public offering.
Holders of Series A Preferred Stock were entitled to noncumulative annual
dividends, when and if declared by the Board of Directors, of $0.12 per share,
payable in preference to common stock dividends, but after all cumulative
dividends payable with respect to the Series B Preferred Stock had been declared
and paid. No dividends were declared or paid by the Company on the Series A
Preferred Stock.
At the time of the initial public offering in April 1997, all outstanding
shares of Series A Preferred Stock were converted into 34,332,000 shares of
common stock.
Class B common stock
On March 19, 1997, the Company's Board of Directors authorized 35 million
shares of an additional class of common stock (Class B Common Stock). All
outstanding shares of Class B Common Stock are held by the Company's majority
stockholder. The Class B Common Stock has the same rights, preferences,
privileges and restrictions as the common stock, except that the Class B Common
Stock is convertible into common stock, has no voting rights except as required
by Delaware law and has no right to vote for the election of directors. The
shares of Class B Common Stock are convertible at the option of the holder into
common stock, so long as such conversion results in the majority stockholder
holding equal to or less 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.
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. A maximum of 17 million shares of common stock have
been authorized for issuance under the plans. Annually the number of authorized
shares are automatically increased by an amount equal to 3.5 percent of the
outstanding shares of common stock on December 31 of the immediately preceding
calendar year. The exercise price of the stock options is determined by the
Company's Board of Directors on the date of grant and is at least equal to the
fair market value of the stock on the grant date.
19
<PAGE>
BEA SYSTEMS, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
Information with respect to option activity under the Company's stock
option plans are summarized as follows:
<TABLE>
<CAPTION>
Weighted
average
exercise
Options Exercise price price per
(shares in thousands) outstanding per share share
------------------------------------------------
<S> <C> <C> <C>
Options outstanding at January 31, 1996 2,244 $ 0.29 $ 0.29
Granted 5,368 $0.29 - $ 6.00 $ 1.21
Exercised (404) $ 0.29 $ 0.29
Canceled (527) $ 0.66 $ 0.66
-------
Options outstanding at January 31, 1997 6,681 $0.29 - $ 6.00 $ 1.00
Granted 3,194 $6.00 - $24.13 $11.13
Exercised (1,179) $0.29 - $ 6.00 $ 0.46
Canceled (480) $0.29 - $20.00 $ 4.50
-------
Options outstanding at January 31, 1998 8,216 $0.29 - $24.13 $ 4.80
=======
Options exercisable at January 31, 1998 1,708 $0.29 - $ 6.00 $ 1.00
=======
Options exercisable at January 31, 1997 405 $ 0.29 $ 0.29
=======
Options available for grant at
January 31, 1998 5,682
=======
</TABLE>
The weighted average grant date fair value of stock options was $5.58
and $0.36 in fiscal years 1998 and 1997, respectively.
The following table summarizes information about stock options
outstanding at January 31, 1998:
<TABLE>
<CAPTION>
Weighted
average Weighted
remaining average
Number of contractual exercise
shares life (in years) price
(shares in thousands) ---------------------------------------------
Range of per share exercise prices:
<S> <C> <C> <C>
$ 0.29 4,174 8.18 $0.29
$ 1.00 - $ 6.00 2,381 8.98 $5.00
$ 9.25 - $16.00 910 9.65 $13.45
$17.31 - $24.12 751 9.68 $18.80
-----
8,216
=====
</TABLE>
The following table summarizes information about outstanding and exercisable
stock options at January 31, 1998:
<TABLE>
<CAPTION>
Weighted
average
exercise
Number of price
shares
(shares in thousands) -------------------------------
<S> <C> <C>
Range of per share exercise prices:
$ 0.29 1,390 $ 0.29
$ 1.00 - $ 6.00 318 $ 4.12
------
1,708
======
</TABLE>
20
<PAGE>
BEA SYSTEMS, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
Employee stock purchase plan
In March 1997, the Company's Board of Directors approved an employee stock
purchase plan for all employees meeting certain eligibility criteria. Under the
plan, employees may purchase shares of the Company's common stock, subject to
certain limitations, at not less than 85 percent of fair market value as defined
in the plan. A total of 3,750,000 shares have been authorized for issuance
under the plan. For the fiscal year ended January 31, 1998, a total of 633,000
shares were issued at an average price of $5.29 per share. At January 31, 1998,
a total of 3,117,000 shares were reserved and available for future issuance
under the plan.
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
year 1998, subsequent to the Company's initial public offerings, have been
valued using the Black-Scholes option pricing model. Among other things, the
Black-Scholes model considers the expected volatility of the Company's stock
price, determined in accordance with FAS 123, in arriving at an option
valuation. The minimum value method does not consider stock price volatility.
Further, certain other assumptions necessary to apply the Black-Scholes model
may differ significantly from assumptions used in calculating the value of stock
based awards granted in fiscal years 1998 and 1997 under the minimum value
method.
The fair value of the Company's stock based awards to employees was
estimated assuming no expected dividends and the following weighted-average
assumptions:
<TABLE>
<CAPTION>
Employee stock Employee stock
options purchase plan
----------------------------------------------------------------------
1998 1997 1998 1997
----------------------------------------------------------------------
<S> <C> <C> <C> <C>
Expected life (in years) 4.5 4.0 .5 -
Risk-free interest rate 6.12% 5.00% 6.25% -
Volatility .6 - .6 -
</TABLE>
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.
21
<PAGE>
BEA SYSTEMS, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
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):
<TABLE>
<CAPTION>
Fiscal year ended January 31,
----------------------------------
1998 1997
----------------------------------
<S> <C> <C>
Pro forma basic and diluted net loss $(23,452) $(87,859)
Pro forma, net loss per share $ (0.46) $ (8.87)
</TABLE>
The fiscal year ending January 31, 2000 will be the first fiscal year in
which the pro forma effects of FAS 123 will reflect the expense of four years'
vesting. Therefore, the pro forma effects of FAS 123 for fiscal years 1998 and
1997 are not likely to be representative of the pro forma effects of future
fiscal years.
Deferred compensation
In fiscal year 1997, the Company recorded deferred compensation $973,000 for
certain common stock options granted at prices below the deemed fair market
value of the Company's common stock on the date of grant. The amount of
deferred compensation is being amortized as compensation expense over the
vesting period of the underlying stock options. For the fiscal years ended
January 31, 1998 and 1997, compensation expense recognized totaled $244,000 and
$128,000, respectively.
Stockholder notes receivable
In September 1995, the Company issued 3,050,000 shares of common stock to
certain officers in exchange for cash of $325,000 and notes receivable of
$544,000. The notes receivable are issued on full recourse terms and bear
interest at 7 percent compounded semi-annually. The notes receivable are due on
September 28, 2000 or within a specified period of time following termination
from the Company.
14. NET LOSS PER SHARE
On January 31, 1998, the Company adopted FAS 128, as a result, the Company
has changed the method used to compute net loss per share and has restated net
loss per share for all prior periods as required by FAS 128. The adoption of
FAS 128 did not have a material impact on the Company's consolidated results of
operations. The impact of outstanding stock options has not been included in
the net loss per share as their effect would be antidillutive. The following is
a reconciliation of the numerators and denominators of the basic and diluted
loss per share computations (in thousands, except per share data):
<TABLE>
<CAPTION>
Fiscal year ended January 31,
-----------------------------
1998 1997
-----------------------------
<S> <C> <C>
Basic and Diluted loss per share:
Numerator:
Net loss $(20,992) $(87,716)
Effect of Series B redeemable convertible
Preferred stock dividends (268) (880)
-----------------------------
Net loss available to common stockholders $(21,260) $(88,596)
=============================
Denominator:
Weighted average shares 51,813 10,005
=============================
Basic and diluted net loss per share $ (0.41) $ (8.86)
=============================
</TABLE>
22
<PAGE>
BEA SYSTEMS, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
For fiscal year January 31, 1997, the pro forma net loss per share assuming
conversion of preferred stock on an as-converted basis as of the date of
issuance is as follows:
<TABLE>
<CAPTION>
Numerator:
<S> <C>
Net loss
$(87,716)
=========
Denominator:
Weighted average share 10,005
Dilutive effect of conversion of preferred stock 29,719
---------
39,724
=========
Pro forma net loss per share $ (2.21)
=========
</TABLE>
Securities (including those issuable pursuant to contingent stock agreements)
that could potentially dilute basic EPS in the future that were not included in
the computation of diluted EPS because to do so would have been antidilutive for
the periods presented.
15. EMPLOYEE BENEFIT PLAN
The Company has a pre-tax savings plan to provide retirement and incidental
benefits for its employees that qualifies under Section 401(k) of the Internal
Revenue Code. Eligible participants may make voluntary contributions to the
plan of up to 15 percent of their compensation, subject to certain limitations.
The plan permits Company contributions; however, none have been made to date.
16. INDUSTRY AND GEOGRAPHIC SEGMENT INFORMATION
Information regarding the Company's operations by geographic areas at January
31, 1998 and 1997 and for the fiscal years then ended is as follows (in
thousands):
<TABLE>
<CAPTION>
Fiscal year ended
January 31,
--------------------------
1998 1997
--------------------------
<S> <C> <C>
Total revenues:
United States $121,793 $50,994
Europe 45,229 18,761
Asia/Pacific and other 25,048 3,494
Consolidating eliminations (29,972) (8,909)
--------------------------
$162,098 $64,340
==========================
Income (loss) from operations:
United States $(15,221) $(78,552)
Europe 1,120 120
Asia/Pacific and other 244 (1,768)
--------------------------
$(13,857) $(80,200)
==========================
Identifiable assets (at end of year):
United States $126,462 $38,487
Europe 29,046 16,241
Asia/Pacific and other 17,308 4,314
--------------------------
$172,816 $59,042
==========================
</TABLE>
23
<PAGE>
BEA SYSTEMS, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
Intercompany revenues consist of license revenues payable by the Company's
subsidiaries under software license agreements with the U.S. parent company.
17. RECENT ACCOUNTING PRONOUNCEMENTS
In October 1997, the Accounting Standards Executive Committee issued
Statement of Position No. 97-2, Software Revenue Recognition (SOP 97-2), as
amended by Statement of Position No. 98-4 (SOP 98-4) which provides guidance on
applying generally accepted accounting principles in recognizing revenue on
software sales license transactions. The Company is required to adopt these
statements for all software sales license transactions entered into subsequent
to January 31, 1998. The adoption of the SOPs may, in certain circumstances,
result in the deferral of software license revenues that would have been
recognized upon delivery of the related software under the preceding accounting
standard, Statement of Position 91-1. Detailed implementation guidelines for
the new standard have not yet been issued. Once issued, such detailed guidance
could lead to unanticipated changes in the Company's current revenue recognition
practices and material adverse changes in the Company's reported revenues and
earnings. In the event implementation guidance is contrary to the Company's
revenue recognition practices, the Company believes it can adapt current
business practices to comply with this guidance and avoid any material adverse
effect. However, there can be no assurances that this will be the case.
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard No. 130 Reporting Comprehensive Income (FAS 130)
and No. 131 Disclosures about Segments of an Enterprise and Related Information
(FAS 131). These statements are effective for fiscal years commencing after
December 15, 1997. The Company will be required to comply with the provisions
of these statements in fiscal year 1999. The Company has not fully assessed the
effect these new standards will have but it is not expected to have a material
impact on the consolidated financial position or results of operations.
18. SUBSEQUENT EVENT
On April 30, 1998, the Company issued 560,704 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 supplemental
consolidated financial statements include the results of operations, financial
position and cash flows of Leader Group for the periods presented. In
connection with the transaction, the Company incurred approximately $491,000 in
merger-related expenses consisting primarily of legal and other professional
fees in the first quarter of fiscal year 1999.
The results of operations for the separate companies and the combined amounts
presented in the consolidated financial statements follow (in thousands):
<TABLE>
<CAPTION>
Fiscal year ended January 31,
---------------------------------------
1998 1997
---------------- ----------------
<S> <C> <C>
Total revenues:
BEA Systems, Inc. $157,189 $ 61,598
Leader Group, Inc. 4,909 2,742
--------- ---------
Combined $162,098 $ 64,340
========= =========
Net income (loss):
BEA Systems, Inc. $(21,995) $(88,665)
Leader Group, Inc. 1,003 949
--------- ---------
Combined $(20,992) $(87,716)
========= =========
</TABLE>
24
<PAGE>
BEA SYSTEMS, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
As required by generally accepted accounting principles, the effect of
transactions between the Company and Leader Group prior to the combination have
been eliminated. There were no significant conforming accounting adjustments.
19. EVENTS SUBSEQUENT TO DATE OF AUDITOR'S REPORT
In June 1998, the Company completed an acquisition of the TOP END product
line from NCR Corporation for approximately $92.4 million in cash. The
transaction was accounted for as a purchase of assets and the Company recorded a
one-time charge of $38.3 million for acquired in-process research and
development in its second quarter ended July 31, 1998.
In June 1998, the Company completed the sale of $200 million of its 4%
Convertible Subordinated Notes (Notes) due June 15, 2005 in an offering to
qualified institutional investors. In July 1998, initial purchasers exercised
an option to purchase an additional $50 million to cover over-allotments. The
Notes are convertible into the Company's common stock at any time on or after
the 90th day following June 8, 1998 and prior to the close of business on the
maturity date unless previously redeemed or repurchased, at a conversion price
of approximately $26.41 per share. On or after June 20, 2001, the Notes will be
redeemable at the option of the Company, subject to certain limitations.
25
