<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q/A
(Mark One)
X Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange
- ---
Act of 1934 For the quarterly period ended April 30, 1998
OR
Transition report pursuant to Section 13 or 15(d) of the Securities Exchange
- --
Act of 1934
Commission File Number: 0-22369
BEA SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
Delaware 77-0394711
(State or other jurisdiction of (I. R. S. Employer
incorporation or organization) Identification No.)
2315 North First Street
San Jose, California 95131
(Address of principal executive offices)
(408) 570-8000
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
--- ---
As of May 28, 1998, there were approximately 66,442,000 shares of the
Registrant's Common Stock outstanding.
1
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BEA SYSTEMS, INC.
EXPLANATORY NOTE
The Registrant's quarterly report on Form 10-Q for the three month period ended
April 30, 1998 has been amended to include the results of operations, financial
position and cash flows for the Leader Group, Inc. See Note 1 and Note 4 to the
Notes to Condensed Consolidated Financial Statements.
INDEX
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION
<S> <C>
Item 1. Financial Statements: Page No.
--------
Condensed Consolidated Statements of Operations
Three months ended April 30, 1998 and 1997.................... 3
Condensed Consolidated Balance Sheets
April 30, 1998 and January 31, 1998........................... 4
Condensed Consolidated Statements of Cash Flows Three months
ended April 30, 1998 and 1997................................. 5
Notes to Condensed Consolidated Financial Statements............. 6
Item 2. Management's Discussion and Analysis of Financial Condition
And Results of Operations .................................... 10
Item 3. Quantitative and Qualitative Disclosure about Market Risks....... 22
PART II. OTHER INFORMATION
Item 5. Other Information................................................ 23
Item 6. Exhibits and Reports on Form 8-K................................. 23
Signatures....................................................... 23
</TABLE>
2
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PART I. FINANCIAL INFORMATION
ITEM I. FINANCIAL STATEMENTS
BEA SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
Three months ended
April 30,
---------------------------------
1998 1997
------------ ------------
<S> <C> <C>
Revenues:
License fees $ 39,741 $ 24,478
Services 17,709 6,968
------------ ------------
Total revenues 57,450 31,446
Cost of revenues:
Cost of license fees 775 578
Cost of services 11,113 4,498
Amortization of certain acquired intangible assets 3,182 2,603
------------ ------------
Total cost of revenues 15,070 7,679
------------ ------------
Gross margin 42,380 23,767
Operating expenses:
Sales and marketing 25,299 15,980
Research and development 9,268 5,143
General and administrative 5,341 3,664
Acquisition-related charges 491 16,000
------------ ------------
Total operating expenses 40,399 40,787
------------ ------------
Income (loss) from operations 1,981 (17,020)
Interest and other, net 214 (2,477)
------------ ------------
Income (loss) before provision for income taxes 2,195 (19,497)
Provision for income taxes 623 572
------------ ------------
Net income (loss) $ 1,572 $ (20,069)
============ ============
Net income (loss) per share:
Basic $ 0.02 $ (0.97)
============ ============
Diluted $ 0.02 $ (0.97)
============ ============
Pro forma $ (0.39)
============
Shares used in computing:
Basic net income (loss) per share 66,005 20,884
============ ============
Diluted net income (loss) per share 72,145 20,884
============ ============
Pro forma net income (loss) per share 51,271
============
</TABLE>
See accompanying notes.
3
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BEA SYSTEMS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
<TABLE>
<CAPTION>
April 30, 1998 January 31, 1998
----------------- -----------------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 92,521 $ 90,651
Short-term investments 4,759 8,708
Accounts receivable, net 52,441 47,422
Other current assets 4,369 2,970
----------------- -----------------
Total current assets 154,090 149,751
Computer equipment, furniture and leasehold improvements, net 8,136 7,845
Acquired intangible assets, net 14,631 12,315
Other assets 5,365 2,905
================= =================
Total assets $ 182,222 $ 172,816
================= =================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Borrowing under lines of credit $ 2,843 $ 1,879
Accounts payable 7,337 5,040
Accrued payroll and related liabilities 14,956 14,590
Accrued liabilities 12,261 10,841
Accrued income taxes 2,909 2,741
Deferred revenues 17,946 14,639
Current portion of notes payable and capital lease obligations 38,037 42,301
----------------- -----------------
Total current liabilities 96,289 92,031
Notes payable and capital lease obligations 595 691
Stockholders' equity:
Common stock 66 66
Additional paid-in capital 214,755 210,253
Accumulated deficit (127,928) (128,508)
Notes receivable from shareholders (544) (544)
Deferred compensation (540) (601)
Accumulated other comprehensive loss (471) (572)
----------------- -----------------
Total stockholders' equity 85,338 80,094
----------------- -----------------
Total liabilities and stockholders' equity $ 182,222 $ 172,816
================= =================
</TABLE>
See accompanying notes.
4
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BEA SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Three months ended
April 30,
---------------------------------
1998 1997
------------ -------------
<S> <C> <C>
Operating activities:
Net income (loss) $ 1,572 $ (20,069)
Adjustments to reconcile net income (loss) to net cash provided by
(used in) operating activities:
Depreciation 569 590
Amortization of deferred compensation 61 61
Amortization of acquired intangible assets and certain
acquisition-related charges 3,383 18,660
Changes in operating assets and liabilities, net of
business combinations (2,143) (4,898)
Other (30) 255
------------ -------------
Net cash provided by (used in) operating activities 3,412 (5,401)
------------ -------------
Investing activities:
Purchase of computer equipment, furniture and
leasehold improvements (857) (99)
Payments for business combinations, net of cash acquired (1,575) -
Net sales of available-for-sale short-term investments 3,949 -
------------ -------------
Net cash provided by (used in) investing activities 1,517 (99)
------------ -------------
Financing activities:
Net borrowings (payments) under lines of credit 964 (4,595)
Net payments on notes payable and capital lease obligations (4,400) (12,514)
Proceeds from issuance of common stock, net 276 25,709
------------ -------------
Net cash provided by (used in) financing activities (3,160) 8,600
------------ -------------
Net increase in cash and cash equivalents 1,769 3,100
Cumulative foreign currency translation adjustment 101 137
Cash and cash equivalents at beginning of quarter 90,651 3,856
------------ -------------
Cash and cash equivalents at end of quarter $ 92,521 $ 7,093
============ =============
</TABLE>
See Notes 1 and 4 for supplemental information of noncash investing activity
relating to the Merger with the Leader Group, Inc.
See accompanying notes.
5
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BEA SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Basis of Presentation
The condensed consolidated financial statements included herein are
unaudited and reflect all adjustments (consisting only of normal recurring
adjustments) which are, in the opinion of management, necessary for a fair
presentation of the financial position, results of operations and cash flows for
the interim periods. These condensed consolidated financial statements should be
read in conjunction with the consolidated financial statements and notes
thereto, together with Management's Discussion and Analysis or Plan of
Operations contained in BEA Systems, Inc.'s ("BEA" or the "Company") Annual
Report on Form 10-KSB for the fiscal year ended January 31, 1998 and the
supplemental consolidated financial statements and notes thereto, contained in
the Company's current report on Form 8-K as filed with the Securities and
Exchange Commission on September 10, 1998, reflecting the merger with the
Leader Group, Inc. ("Leader Group"). The results of operations for the three
months ended April 30, 1998 are not necessarily indicative of the results for
the entire fiscal year ending January 31, 1999.
The consolidated balance sheet at January 31, 1998 has been derived from
the 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.
As described in Note 4, on April 30, 1998, the Company acquired all of the
outstanding shares of Leader Group in a transaction accounted for as a pooling
of interests. The Company's financial statements have been recast to 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 ended April 30, 1998.
The results of operations for the separate companies and the combined
amounts presented in the consolidated financial statements follow
(in thousands):
<TABLE>
<CAPTION>
Three months ended April 30,
1998 1997
------------- -------------
<S> <C> <C>
Total revenues:
BEA Systems, Inc. $ 56,343 $ 30,389
Leader Group, Inc. 1,107 1,057
------------- -------------
Combined $ 57,450 $ 31,446
============= =============
Net income (loss):
BEA Systems, Inc. $ 1,455 $ (20,371)
Leader Group, Inc. 117 302
------------- -------------
Combined $ 1,572 $ (20,069)
============= =============
</TABLE>
As required by generally accepted accounting principles, the effect of
transactions between the Company and Leader Group prior to the combination have
been eliminated.
6
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Note 2. Earnings Per Share
The Company adopted Statement of Financial Accounting Standard No. 128
("FAS 128"), "Earnings per Share," in the fourth quarter of the fiscal year
ended January 31, 1998. As a result, the Company has changed the method used to
compute net earnings per share and has restated net earnings 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
following is a reconciliation of the numerators and denominators of the basic
and diluted earnings per share computations (in thousands, except per share
data):
<TABLE>
<CAPTION>
Three months ended April 30,
1998 1997
------------- -------------
<S> <C> <C>
Numerator:
Net income (loss) $ 1,572 $ (20,069)
Effect of Series B redeemable convertible
preferred stock dividends - (268)
------------- -------------
Net income (loss) available to common stockholders
for basic earnings (loss) per share $ 1,572 $ (20,337)
============= =============
Denominator:
Weighted average shares - Basic 66,005 20,884
Dilutive effect of outstanding stock options 6,140 -
------------- -------------
Weighted average shares - Diluted 72,145 20,884
============= =============
Basic net income (loss) per share $ 0.02 $ (0.97)
============= =============
Diluted net income (loss) per share $ 0.02 $ (0.97)
============= =============
For the quarter ended April 30, 1997, the pro forma net loss per share
assuming conversion of preferred stock and convertible line of credit on an
as-converted basis as of the date of issuance is as follows:
Numerator:
Net loss $ (20,069)
=============
Denominator:
Weighted average shares 20,884
Dilutive effect of conversion of preferred stock and convertible line of credit 30,387
-------------
51,271
=============
Pro forma net loss per share $ (0.39)
=============
</TABLE>
7
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Note 3. Comprehensive Income
Effective February 1, 1998, the Company adopted Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income," ("FAS 130"). FAS
130 requires the reporting of comprehensive income (loss) and its components and
requires foreign currency translation adjustment and unrealized gains or losses
on the Company's available-for-sale investments, which prior to adoption were
reported in shareholders' equity, to be included in other comprehensive income.
Prior year financial statements have been restated to conform to the
requirements of FAS 130.
The components of comprehensive income, net of tax, are as follows (in
thousands):
<TABLE>
<CAPTION>
Three Months Ended April 30,
1998 1997
------------- ---------------
<S> <C> <C>
Net income (loss) $ 1,572 $ (20,069)
Foreign currency translation adjustment 71 96
Change in unrealized gain (loss)
on available-for-sale investments (21) -
------------- ---------------
Comprehensive income (loss) $ 1,622 $ (19,973)
============= ===============
</TABLE>
Note 4. Acquisitions
In March 1998, the Company acquired certain assets of Penta Systems
Technology, Inc. ("Penta"), a distributor of BEA TUXEDO in Korea. The purchase
price of the transaction was approximately $5.7 million, paid with a combination
of cash and common stock. The Company has accounted for the acquisition using
the purchase method.
On April 30, 1998, the Company issued 560,704 shares of its common stock
for all outstanding stock of 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. The Company's consolidated results of operations
for prior periods have been recast to reflect the pooling of interests with the
Leader Group.
Note 5. Notes Payable and Capital Lease Obligations
Notes payable and capital lease obligations consist of the following (in
thousands):
<TABLE>
<CAPTION>
April 30, January 31,
1998 1998
-------------- --------------
<S> <C> <C>
Note payable to Novell, Inc. $ 35,337 $ 38,734
Other notes payable 2,321 3,162
Capital lease obligations 974 1,096
-------------- --------------
38,632 42,992
Less amounts due within one year (38,037) (42,301)
-------------- --------------
Notes payable and capital lease obligations due after one year $ 595 $ 691
============== ==============
</TABLE>
Note 6. Subsequent Events
In June 1998, the Company completed the acquisition of the TOP END product
line from NCR Corporation ("NCR") for approximately $92.4 million in cash. The
transaction was accounted for as a purchase of assets and the Company will
record a one-time charge of $38.3 million for acquired in-process research and
development in its second quarter ended July 31, 1998.
8
<PAGE>
On June 12, 1998, the Company completed the sale of $200 million of its 4%
Convertible Subordinated Notes (the "Notes") due June 15, 2005 in an offering to
qualified institutional investors. On July 7, 1998, initial purchasers exercised
an option to purchase an additional $50 million to cover over-allotments. The
Notes are subordinated to all existing and future senior indebtedness of the
Company and are convertible into common stock of the Company at a conversion
price of approximately $26.41 per share. The Company has agreed to file a shelf
registration statement with respect to the Notes and the common stock issuable
upon conversion thereof within 90 days after the date of original issuance of
the Notes. The Notes are redeemable at the option of the Company in whole or in
part at any time on or after June 20, 2001, in cash plus accrued interest
through the redemption date, if any, subject to certain events.
9
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion of the financial condition and results of
operations of BEA Systems, Inc. should be read in conjunction with Management's
Discussion and Analysis or Plan of Operations and the Consolidated Financial
Statements and the Notes thereto included in the Company's Annual Report on Form
10-KSB for the year ended January 31, 1998 and the Company's audited
supplemental consolidated financial statements and notes thereto included in
the Company's current report on Form 8-K as filed with the Securities and
Exchange Commission on September 10, 1998. 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, including statements regarding beliefs, plans, expectations or
intentions regarding the future. All forward-looking statements included in
this document are made as of the date hereof, based on information available
to BEA as of the date thereof, and BEA assumes no obligation to update any
forward-looking statement. These forward-looking statements involve risks and
uncertainties and actual results could differ materially from those discussed
in the forward-looking statements. These risks and uncertainties include, but
are not limited to, those described under the heading "Factors That May Impact
Future Operating Results."
All financial information for dates and periods prior to the merger
with the Leader Group, Inc. ("Leader Group") have been recast to reflect the
combined operations of the Company and Leader Group.
Results of Operations
Revenues
The Company's consolidated revenues for the quarter ended April 30, 1998
were $57.5 million, which represented an 83 percent increase from the same
quarter of the prior fiscal year of $31.4 million. The increase in revenues was
due to continued customer acceptance of the Company's middleware products as
well as an increase in related consulting, education and support services. The
Company experienced revenue increases from customers in the Americas and Europe,
with the European region experiencing particularly strong performance. Revenues
from the Asia/Pacific region for the quarter ended April 30, 1998 comprised a
lower percentage of total revenues than the Company had historically experienced
due to economic, banking and currency difficulties in that region, which
resulted in the delay of orders for the Company's products from certain Asian
customers and is likely to result in further delays and possibly the
cancellation, of such orders. The Company anticipates that its financial results
will continue to be adversely impacted by weak Asian economic conditions.
The Company continues to derive the majority of its license revenues from
BEA TUXEDO and products that work in conjunction with BEA TUXEDO. Additionally,
service revenues, including software maintenance and support, training and
consulting, relate principally to the BEA TUXEDO product family. Management
expects that license and service revenues from BEA TUXEDO will continue to
account for the majority of the Company's revenues for the foreseeable future.
License Revenues. Consolidated license revenues in the quarter ended April
30, 1998 were $39.7 million, which represented a 62 percent increase from $24.5
million in the same period of the prior fiscal year. The increase was mainly due
to continued customer acceptance of and increase in market awareness for the
Company's products, expansion of the Company's direct sales force and the
development of indirect sales channels, such as value added resellers and
distributors. License revenues represented 69 percent and 78 percent of total
revenues in the first quarter of fiscal years 1999 and 1998, respectively. The
decrease in license revenues as a percentage of total revenues was primarily due
to the substantial increase in service revenues as a result of the Company's
increased focus on its service offerings.
10
<PAGE>
Service Revenues. For the quarter ended April 30, 1998, service revenues
were $17.7 million, an increase of 154 percent from $7.0 million in the same
period of the prior fiscal year. Service revenues represented 31 percent and 22
percent of total revenues in the first quarter of fiscal years 1999 and 1998,
respectively. The increase in service revenues was due to an increase in
consulting, education and support services offered by the Company and an
increase in the number of support and services personnel.
Cost of Revenues
Consolidated cost of revenues in the quarter ended April 30, 1998 was
$15.1 million as compared to $7.7 million for the same period in the prior
fiscal year, an increase of 96 percent. As a percent of total revenue, total
cost of revenues increased from 24 percent in the first quarter ended April 30,
1997 to 26 percent in the quarter ended April 30, 1998. This percentage increase
was primarily the result of the increase in services as a percentage of total
revenues and the fact that the cost of revenues for such services is
substantially higher than the cost of revenues for licenses.
Cost of Licenses. Cost of licenses includes expenses related to the
purchase of compact discs, costs associated with transferring the Company's
software to electronic media, the printing of user manuals, packaging and
distribution costs. Cost of licenses totaled $775,000 and $578,000 for the first
quarter of fiscal years 1999 and 1998, respectively, representing approximately
2 percent of license revenues for both periods.
Cost of Services. Cost of services, which consists primarily of salaries
and benefits for the Company's consulting and product support personnel, were
$11.1 million and $4.5 million for the first quarter of fiscal years 1999 and
1998, respectively, representing 63 percent and 65 percent of total service
revenues in each period. The increase in cost of services in absolute dollars
was partially due to the hiring of additional consulting, education and support
personnel in response to the increased demand for the Company's services.
Additionally, support costs increased due to the costs associated with expansion
of customer support centers in Europe and Asia and costs to improve the
Company's overall customer support infrastructure. In the future, management
expects the cost of services as a percentage of total service revenue to range
between 65 percent and 70 percent as the Company continues to build its support
and service organization, although there can be no assurance that the Company
will be able to maintain such percentages.
Amortization of Certain Acquired Intangible Assets. The amortization of
certain acquired intangible assets, consisting of developed technology,
distribution rights, trademarks and tradenames, totaled $3.2 million and $2.6
million for the first quarter of fiscal years 1999 and 1998, respectively. As a
percentage of total revenues, amortization expense decreased from 8 percent in
the first quarter of fiscal year 1998 to 6 percent in the first quarter of
fiscal year 1999 as a result of the Company's higher total revenues. In the
future, amortization expense associated with intangible assets acquired through
April 30, 1998 (excluding amounts, relating to the acquisition of TOP END
enterprise middleware technology and product family from NCR) is expected to
total approximately $2.7 million, $2.0 million and $1.4 million for the second,
third and fourth quarter of fiscal year 1999, approximately $4.5 million for the
fiscal year ending January 31, 2000 and approximately $2.0 million in aggregate
through the fiscal year ending January 31, 2002.
Operating Expenses
Sales and Marketing. Sales and marketing expenses include salaries, sales
commissions, travel and facility costs for the Company's sales and marketing
personnel. These expenses also include programs aimed at increasing revenues,
such as advertising, public relations, trade shows and expositions. Sales and
marketing expenses were $25.3 million and $16.0 million for the first quarter of
fiscal years 1999 and 1998, respectively, representing 44 percent and 51 percent
of total consolidated revenues in each period. While decreasing as a percentage
of total revenues, sales and marketing expenses increased in absolute dollars
due to the expansion of the Company's direct sales force and an increase in
marketing personnel and programs. The Company expects to continue to invest in
sales channel expansion and marketing
11
<PAGE>
programs to promote the Company's products and competitive position.
Accordingly, the Company expects sales and marketing expenses to continue to
increase in future periods in absolute dollars while remaining constant as a
percentage of total revenues, although there can be no assurance that total
revenues will increase to maintain such percentage.
Research and Development. Research and development expenses consist
primarily of salaries and benefits for software engineers, contract development
fees, costs of computer equipment used in software development and facilities
expenses. For the fiscal quarters ended April 30, 1998 and 1997, research and
development expenses were $9.3 million and $5.1 million, respectively,
representing 16 percent of total revenues in each period. The increase in
research and development spending in absolute dollars was attributed to an
increase in software development personnel and related expenses. The Company
expects to continue to commit substantial resources to product development and
engineering in future periods. As a result, the Company expects research and
development expenses to continue to increase in absolute dollars in future
periods. Additionally, management intends to continue recruiting and hiring
experienced software development personnel and to consider the licensing and
acquisition of technologies complementary to the Company's business.
General and Administrative. General and administrative expenses include
costs for the Company's human resources, finance, information technology and
general management functions, as well as the amortization of goodwill associated
with various acquisitions. General and administrative expenses were $5.3 million
and $3.7 million for the first quarter of fiscal years 1999 and 1998,
respectively, representing 9 percent and 12 percent of total revenues for each
period. The increase in general and administrative expenses in absolute dollars
was attributed to the expansion of the Company's support infrastructure,
including information systems and associated expenses necessary to manage the
Company's growth. The decrease in general and administrative expenses as a
percentage of total revenue was due to the substantial increase in the Company's
total revenues and economies of scale achieved in its administrative functions.
Goodwill amortization totaled $201,000 and $57,000 in the first quarter of
fiscal years 1999 and 1998, respectively. In the future, amortization of
goodwill acquired prior to April 30, 1998 (excluding amounts relating to the
acquisition of TOP END enterprise middleware technology and product family from
NCR) is expected to total $201,000 for each of the remaining quarters in fiscal
year 1999, approximately $804,000 for the fiscal year ending January 31, 2000
and approximately $468,000 in aggregate through the fiscal year ending January
31, 2003. The Company anticipates that general and administrative expenses will
continue to decrease as a percentage of total revenues, while increasing in
absolute dollars in order to support the Company's anticipated growth.
Acquisition-related Charges. Acquisition-related charges for the quarter
ended April 30, 1998 consist of costs associated with the merger with Leader
Group. For the quarter ended April 30, 1997, the Company incurred a $16.0
million charge associated with the write-off of acquired in-process research and
development expenses relating to certain technologies and products purchased
from Digital Equipment Corporation.
Interest and Other, Net. Interest expense was approximately $1.3 million
in the first quarter of fiscal year 1999 and $2.0 million in the same period of
the prior fiscal year, while interest income was $1.3 million in the quarter
ended April 30, 1998 and not material in the same period of the prior fiscal
year. The decrease in interest expense was due to a lower average amount of
outstanding borrowings in the first quarter of fiscal year 1999 compared to the
prior year. Interest income increased due to the investment of higher average
cash, cash equivalents and short-term investment balances, generated primarily
from the Company's initial public offering and follow-on offering of its common
stock in fiscal year 1998.
Provision for Income Taxes. The Company recorded an income tax provision
of $623,000 and $572,000 in the first quarter of fiscal years 1999 and 1998,
respectively. The tax provision in the first quarter of fiscal year 1999 was
primarily due to the Company's transition to profitable operations, after giving
consideration to federal and state net operating loss carryforwards. The tax
provision for the three
12
<PAGE>
months ended April 30, 1997 primarily resulted from taxable income and
withholding taxes payable in certain foreign jurisdictions.
The Company's effective income tax rate for fiscal year 1999 will be
impacted by the acquisition of assets from NCR, as well as he benefit of net
operating losses and tax credit carryovers. The effective income tax rate could
fluctuate based on a change in the estimated amount or geographic mix of the
Company's earnings, the amount of permanent reinvestment offshore of a portion
of the Company's fiscal year 1999 earnings, changes in U.S. tax law and the tax
effect of future acquisitions, including the acquisition of the TOP END
enterprise middleware technology and product family from NCR.
Liquidity and Capital Resources
At April 30, 1998, cash, cash equivalents and short-term investments
totaled $97.3 million as compared to $99.4 million at January 31, 1998, a
decrease of $2.1 million. While the Company generated approximately $3.4 million
of cash from operations, cash was used to repay portions of the Company's
outstanding notes payable and capital lease obligations and as partial
consideration to acquire certain assets of Penta, a distributor of BEA products
in Korea. Working capital totaled $57.8 million at April 30, 1998, as compared
to $57.7 million at January 31, 1998.
At April 30, 1998, the Company's outstanding short and long-term debt
obligations were $41.5 million, representing a decrease of $3.4 million from
$44.9 million at January 31, 1998. At April 30, 1998, the Company's outstanding
debt obligations consist principally of $35.3 million ($38.7 million at January
31, 1998) due to Novell, Inc. in connection with the acquisition of TUXEDO.
In addition to the Company's outstanding debt obligations, the Company has
outstanding lease commitments for facilities. In December 1997, the Company
entered into a ten-year lease agreement for approximately 225,000 square feet of
office space in San Jose, California to house the Company's corporate
headquarters, sales, marketing and research personnel. The Company occupied the
facility at the end of August 1998. Initially, the Company intends to
temporarily sublease as much as 100,000 square feet.
In June 1998, the Company completed an acquisition of the TOP END product
line from NCR for approximately $92.4 million in cash. The transaction was
accounted for as a purchase of assets and the Company will record a one-time
charge of $38.3 million for acquired in-process research and development in its
second quarter ended July 31, 1998.
On June 12, 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. On July 7, 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.
In addition to normal operating expenses, cash requirements are
anticipated for development of new software products and enhancement of existing
products, financing anticipated growth, payment of outstanding debt obligations
and the acquisition of products and technologies complementary to the Company's
business. The Company believes that its existing cash, cash equivalents,
short-term investments, borrowing from the Notes, and cash generated from
operations, if any, will be sufficient to satisfy its currently anticipated cash
requirements for fiscal year 1999. However, the Company intends to make
additional acquisitions and may need to raise additional capital through future
debt or equity financings to the extent necessary to fund any such acquisitions.
There can be no assurance that additional financings will be available, if at
all, or on terms favorable to the Company.
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Impact of the Year 2000
The Company has designed, developed and tested the most current version of
BEA TUXEDO and its other software products to be Year 2000 compliant. However,
some of the Company's customers may be using software versions that are not Year
2000 compliant. The Company has been encouraging such customers to upgrade to
current product versions. It is possible that the Company may experience
additional costs associated with assisting customers with these upgrades. In
addition, the current products may contain undetected errors or defects
associated with Year 2000 functions that may have a material adverse effect on
the Company's business, results of operations and financial condition. Year 2000
compliance issues are expected to result in a significant amount of litigation
against software vendors and the extent to which the Company may be affected is
uncertain.
The Company has been informed by substantially all of its business
application software suppliers that their software is Year 2000 compliant. The
software from these suppliers is used in the Company's financial, sales,
customer support and administrative operations. Accordingly, the Company expects
that the advent of the millennium will have no adverse effect on its business,
operating results and financial condition. However, there can be no assurances
that Year 2000 problems will not occur with respect to the Company's computer
systems. The Year 2000 problem may affect other entities with which the Company
transacts business and the Company cannot predict the effect of the Year 2000
problem on such entities.
Factors That May Impact Future Operating Results
BEA Systems, Inc. operates in a rapidly changing environment that involves
numerous risks and uncertainties. The following section lists some, but not all,
of these risks and uncertainties which may have a material adverse effect on the
Company's business, financial condition or results of operations.
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,
technologies and products. 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 business
with a limited operative history and the integration of a number of 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 revenue growth and has been profitable for each of the two
previous quarters ended January 31, 1998 and April 30, 1998, the Company has
incurred significant net losses including losses of approximately $21.0 million
and $87.7 million for the fiscal years ended January 31, 1998 and 1997,
respectively. At April 30, 1998, the Company had an accumulated deficit of
approximately $127.9 million. In addition, in connection with certain
acquisitions completed prior to April 30, 1998, the Company recorded
approximately $129.0 million as intangible assets, approximately $114.4 million
of which has already been amortized and approximately $14.6 million of which is
expected to be amortized in future periods through the Company's fiscal year
ending January 31, 2003. The amount of such acquired intangible assets to be
expensed to cost of revenues and general and administrative expense in future
periods, for intangible assets acquired prior to April 30, 1998 (excluding
amounts relating to the acquisition of TOP END enterprise middleware technology
and product family from NCR), is expected to be $10.1 million and $5.3 million
in the fiscal years ending January 31, 1999 and 2000, respectively. In June
1998, the Company completed the acquisition of the TOP END enterprise middleware
technology product family from NCR. This acquisition will result in significant
additional amortization of intangible assets and a significant one-time expense
for acquired in-process research and development. To the extent the Company
makes additional acquisitions of businesses, products and technologies in the
future, the Company may report additional, potentially significant, expenses
related thereto. To the extent future
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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 customer orders, introduction or enhancement of
products by the Company or its competitors, market acceptance of middleware
products, the lengthy sales cycle for the Company's products, technological
changes in computer systems and environments, the structure and timing of future
acquisitions of businesses, products and technologies, the impact and duration
of deteriorating economic and political conditions in Asia and related declines
in Asian currency values, general economic conditions which can affect
customers' capital investment levels, 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, 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, the terms and timing of financing
activities, loss of key personnel and fluctuations in other foreign currency
exchange rates and interpretations of the recently introduced statement of
position on software revenue recognition. 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.
A portion of the Company's revenues are derived from large orders as
customers deploy BEA products throughout their organizations. As the revenue
size of individual license transactions increases, the risk of fluctuation in
future quarterly results can also be expected to increase. Any inability of the
Company to generate large customer orders, or any delay or loss of such orders
in a particular quarter, will have a material adverse effect on the Company's
revenues and, more significantly on a percentage basis, its net income or loss
in that quarter. Moreover, the Company typically receives and fulfills a
majority of its orders within the quarter, with a substantial portion occurring
in the last month of a fiscal quarter. As a result, the Company may not learn of
revenue shortfalls until late in a fiscal quarter. Additionally, the Company's
operating expenses are based in part on its expectations for future revenue and
are relatively fixed in the short term. Any revenue shortfall below expectations
could have an immediate and significant adverse effect on the results of
operations.
As is common in the software industry, the Company believes that its
fourth quarter orders are favorably impacted by a variety of factors including
year-end capital purchases by larger corporate customers and sales incentive
programs. This increase typically results in first quarter customer orders being
lower than orders received in the immediately preceding fourth quarter. The
Company anticipates that this seasonal impact is likely to increase as it
continues to focus on large corporate accounts.
Similarly, shortfalls in BEA's revenues and earnings from levels
expected by securities analysts could have an immediate and significant adverse
effect on the trading price of the Company's common stock. Moreover, the
Company's stock price is subject to the volatility generally associated with
software and technology stocks and may also be affected by broader market trends
unrelated to the Company's performance.
Past and Future Acquisitions
From its inception in January 1995, the Company has made a number of
strategic acquisitions. Integration of acquired companies, divisions and
products involves the assimilation of potentially conflicting operations and
products, which divert the attention of the Company's management team and
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may have a material adverse effect on the Company's operating results in future
quarters. In addition, in connection with certain of its acquisitions, the
Company is required to make certain future payments. Any failure to make such
payments or otherwise perform continuing obligations relative to these
acquisitions would result in the loss of certain of its rights in the acquired
businesses or products and would have a material adverse effect on the Company's
business, operating results and financial condition. Most recently, the Company
acquired Leader Group and a business unit of Penta Systems, Inc. in the quarter
ended April 30, 1998 and acquired the TOP END product line from NCR Corporation
in June 1998. The Company intends to make additional acquisitions in the future,
although there can be no assurance that suitable companies, divisions or
products will be available for acquisition. Such acquisitions entail numerous
risks, including an inability to successfully assimilate acquired operations and
products, an inability to retain key employees of the acquired operations,
diversion of management's attention, and difficulties and uncertainties in
transitioning the key business relationships from the acquired entity to the
Company. In addition, future acquisitions by the Company may result in the
issuance of dilutive securities, the assumption or incurrence of debt
obligations, large one-time expenses and the creation of intangible assets that
result in significant future amortization expense. These factors could have a
material adverse effect on the Company's business, operating results and
financial condition.
In June 1998, the Company completed an Asset Purchase Agreement with
NCR to purchase NCR's TOP END enterprise middleware technology product family
for approximately $93 million in cash. The acquisition is subject to a number of
risks that could adversely affect the Company's ability to achieve the
anticipated benefits of the acquisition. These risks may be exacerbated by the
fact that the TOP END operations and personnel are located in San Diego,
California, where the Company does not currently have any material operations.
The need to focus management's attention on establishing relationships with, and
procedures for communicating with, TOP END employees may reduce the ability of
the Company to successfully pursue other opportunities for a period of time. The
departure of key TOP END employees or significant numbers of other TOP END
employees could have a material adverse effect on the Company. The Company may
face difficulties in retaining TOP END customers, and customers' uncertainties
as to the Company's plans and abilities to support both the TOP END products and
BEA TUXEDO after the acquisition could adversely affect the Company's ability to
retain these customers, which could have a material adverse effect on the
Company. The acquisition will also result in a significant write-off related to
acquire in-process research and development projects and substantial ongoing
amortization expenses, which will have a negative impact on the Company's future
operating results.
Product Concentration
The Company currently derives the majority of its license and service
revenues from BEA TUXEDO and from related products and services. These products
and services are expected to continue to account for the 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, product
performance or technological change, could have a material adverse effect on the
Company's business and consolidated results of operations and financial
condition.
Lengthy Sales Cycle
The Company's products are typically used to integrate large,
sophisticated 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. Customers evaluating the Company's
software products face complex decisions regarding alternative approaches to the
integration of enterprise applications, competitive product offerings, rapidly
changing software technologies and limited internal resources due to other
information systems requirements. For these and other reasons, the sales cycle
for the Company's products is lengthy and is subject to delays or cancellation
over which the Company has little or no control. To the extent the revenue size
of license transactions increases, customer evaluations and procurement
processes are expected to lengthen the overall sales cycle. The Company believes
its sales cycles can be affected by general economic conditions which impact
customers' capital investment
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decisions. Any significant change in the Company's sales cycle could have a
material adverse effect on the Company's business, results of operations and
financial condition.
Although the Company has a standard license agreement which meets the
revenue recognition criteria under current generally accepted accounting
principles, the Company must often negotiate and revise terms and conditions of
this standard agreement, particularly in larger sales transactions. Negotiation
of mutually acceptable language can extend the sales cycle and in certain
situations, may require the Company to defer recognition of revenue on the sale.
In addition, while the recently issued Statement of Position (SOP) 97-2,
Software Revenue Recognition (as amended by SOP 98-4), is not expected to have a
material impact on the Company's revenues and earnings, detailed implementation
guidance of these standards has not yet been issued. Once issued, such guidance
could lead to unanticipated changes in the Company's current revenue recognition
practices and have an adverse impact on revenues and earnings. In the event that
implementation guidance is different, the Company believes that it can adapt its
current business practice to comply with this guidance; however, there can be no
assurances that this will be the case.
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 system and database vendors such as IBM and database
vendors such as Oracle, which offer their own middleware functionality for use
with their proprietary systems. Microsoft has released a product that includes
certain middleware functionality and has demonstrated and announced that it
intends to include this functionality in the future versions of its Windows NT
operating system. In addition, there are companies offering and developing
middleware and integration software products and related services that directly
compete with products offered by the Company. Further, 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. Last, 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 include hardware vendors
who bundle their own middleware software products with their computer systems
and database vendors that advocate client/server networks driven by the database
server. IBM is the primary hardware vendor who offers a line of middleware and
database solutions for its customers. The bundling of middleware functionality
in IBM proprietary hardware and database systems requires the Company to compete
with IBM in its installed base, where IBM has certain inherent advantages due to
its significantly greater financial, technical, marketing and other resources,
greater name recognition and the integration of its enterprise middleware
functionality with its proprietary hardware and database systems. The Company
needs to differentiate its products based on functionality, interoperability
with non-IBM systems, performance and reliability and establish its products as
more effective solutions to customers' needs. Oracle is the primary relational
database vendor offering products that are intended to serve as alternatives to
the Company's enterprise middleware solutions. There can be no assurance that
the Company will compete successfully with hardware, database, or other vendors,
or that the products offered by such vendors will not achieve greater market
acceptance than the Company's products.
Microsoft has demonstrated certain middleware functionality and
announced that it intends to include this functionality in future versions of
its Windows NT operating system. Microsoft has also introduced 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
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its middleware functionality with Windows NT. If Microsoft successfully
incorporates middleware software products 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 software
licenses and education, consulting and support services 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.
International Operations
International revenues accounted for 54 percent and 49 percent of
consolidated revenues in the quarter ended April 30, 1998 and the quarter ended
April 30, 1997, respectively. The Company sells its products and services
through a network of branches and subsidiaries located in 24 countries
worldwide. In addition, the Company also markets through distributors in Europe
and the Asia/Pacific region. Management believes that its success depends upon
continued expansion of its international operations. The Company's international
business is subject to a number of risks, including unexpected changes in
regulatory practices and tariffs, greater difficulties in staffing and managing
foreign operations, longer collection cycles, seasonality, potential changes in
tax laws, greater difficulty in protecting intellectual property and the impact
of fluctuating exchange rates between the US dollar and foreign currencies in
markets where BEA does business, in particular the French franc, the German
mark, the British pound, the Japanese yen, the Australian dollar and the Korean
won. The Company's international revenues may also be impacted by general
economic and political conditions in these foreign markets. Since the late
summer of 1997, a number of Pacific Rim countries have experienced economic,
banking and currency difficulties that have led to economic downturns in those
countries. Among other things, the decline in value of Asian currencies,
together with difficulties obtaining credit, has resulted in a decline in the
purchasing power of the Company's Asian customers, which in turn has resulted in
the delay of orders for the Company's products from certain Asian customers and
is likely to result in further delays and, possibly the cancellation, of such
orders. As a result of such delays, the Company's revenues from Asia for the
quarter ended April 30, 1998 comprised a lower percentage of total revenues than
the Company has historically experienced. The Company anticipates that its
financial results will continue to be adversely impacted by the weak Asian
economic conditions. The extent of the future impact of these conditions is
difficult to predict. There can be no assurances that these factors and other
factors will not have a material adverse effect on the Company's future
international revenues and consequently on the Company's business and
consolidated financial condition and results of operations.
Management of Growth
The Company currently is continuing to experience a period of rapid and
substantial growth that has placed, and is expected to continue to place, a
strain on the Company's administrative and operational infrastructure. The
number of Company employees has increased from 120 employees in three offices in
the United States at January 31, 1996 to over 950 employees in 50 offices in 24
countries at April 30, 1998. The Company's ability to manage its staff and
growth effectively will require continued improvement in its
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operational, financial and management controls, reporting systems and
procedures. In this regard, the Company is currently updating its management
information systems to integrate financial and other reporting among the
Company's multiple domestic and foreign offices. In addition, the Company
intends to continue to increase its staff worldwide and to continue to improve
financial reporting and controls for the Company's global operations. There can
be no assurance that the Company will be able to successfully 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 be discovered. If management of the
Company is unable to manage growth effectively, the Company's business, results
of operations and financial condition will be materially adversely affected.
Dependence on Growth of Market for Middleware
The middleware market, in which the Company conducts its business, is
emerging and is characterized by continuing technological developments, evolving
industry standards and changing customer requirements. BEA's success is
dependent in large part on the Company's middleware software products' achieving
market acceptance by large customers with substantial legacy mainframe systems.
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, results of operations and
financial condition will be adversely affected.
Dependence on Key Personnel and Need to Hire Additional Personnel
The Company believes its future success will depend upon its ability to
attract and retain highly skilled personnel including the Company's founders,
Messrs. William T. Coleman III, Edward W. Scott, Jr., Alfred S. Chuang and key
members of management. 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 global organization, the hiring of
qualified sales, technical and support personnel will be difficult due to the
limited number of qualified professionals. Failure to attract, assimilate and
retain key personnel would have a material adverse effect on the Company's
business, results of operations and financial condition.
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.
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, ISVs and
OEMs. 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. 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, results of operations and financial condition
will be materially and adversely affected.
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The Company relies on informal relationships with a number of
consulting and systems integration firms to enhance its sales, support, service
and marketing efforts, particularly with respect to implementation and support
of its products as well as lead generation and assistance in the sale process.
The Company will need to expand its relationships with third parties in order to
support license revenue growth. Many such firms have similar, and often more
established, relationships with the Company's principal competitors. There can
be no assurance that these and other third parties will provide the level and
quality of service required to meet the needs of the Company's customers, that
the Company will be able to maintain an effective, long term relationship with
such third parties, or that such third parties will continue to meet the needs
of the Company's customers.
Rapid Technology 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. 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 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,
results of operations and financial condition.
Risk of Software Defects
The software products offered by the Company are internally complex
and, despite extensive testing and quality control, may contain errors or
defects, especially when first introduced. Such defects or errors could result
in corrective releases for the Company's software products, damage to the
Company's reputation, loss of revenue, product returns or order cancellations,
or lack of market acceptance of its products, any of which could have a material
and adverse effect on the Company's business, results of operations and
financial condition.
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 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
on the Company's business, results of operations 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 patent, copyright, trademark and trade secret
rights, confidentiality procedures and licensing arrangements to establish and
protect its proprietary rights. No assurance can be given that competitors will
not successfully challenge the validity or scope of the Company's patents or
that such patents will provide a competitive advantage to the Company.
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As part of its confidentiality procedures, the Company generally enters
into non-disclosure agreements with its employees, distributors and corporate
partners and into license agreements with respect to its software, documentation
and other proprietary information. Despite these precautions, 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 does not believe 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 with respect to
current or future products. 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.
Control by Management and Current Stockholders
As of April 30, 1998, the Company's officers and directors and their
affiliates, in the aggregate, had voting control over approximately 62 percent
of the Company's voting common stock. In particular, Warburg, Pincus Ventures,
L.P. ("Warburg") had voting control over approximately 49 percent of the
Company's voting common stock and beneficially owned approximately 64 percent of
the Company's common stock (which includes the non-voting Class B common stock
owned by Warburg). As a result, these stockholders will be able to control all
matters requiring stockholder approval, including the election of directors and
approval of significant corporate transactions. The voting power of Warburg and
the Company's officers and directors under certain circumstances could have the
effect of delaying or preventing a change in control of the Company.
Significant Leverage; Debt Service
In connection with the sale of 4% Convertible Subordinated Notes, the
Company incurred $250 million indebtedness. As a result of this indebtedness,
the Company's principal and interest payment obligations will increase
substantially. The degree to which the Company will be leveraged could
materially and adversely affect the Company's ability to obtain financing for
working capital, acquisitions or other purposes and could make it more
vulnerable to industry downturns and competitive pressures. The Company's
ability to meet its debt service obligations will be dependent upon the
Company's future performance, which will be subject to financial, business and
other factors affecting the operations of the Company, many of which are beyond
its control.
The Company will require substantial amounts of cash to fund scheduled
payments of interests on the Notes, payment of the principal amount of the
Notes, payment of principal and interest on the Company's other indebtedness,
future capital expenditures and any increased working capital requirements. If
the Company is unable to meet its cash requirements out of cash flow from
operations, there can be no assurance that it will be able to obtain alternative
financing. In the absence of such financing, the Company's ability to respond to
changing business and economic conditions, to make future acquisitions, to
absorb adverse operating results or to fund capital expenditures or increased
working capital
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requirements may be adversely affected. If the Company does not generate
sufficient increases in cash flow from operations to repay the Notes at
maturity, it could attempt to refinance the Notes; however, no assurance can be
given that such a refinancing would be available on terms acceptable to the
Company, if at all. Any failure by the Company to satisfy its obligations with
respect to the Notes at maturity (with respect to payments of principal) or
prior thereto (with respect to payments of interest or required repurchases)
would constitute a default under the Indenture and could cause a default under
agreements governing other indebtedness, if any, of the Company.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISKS.
Foreign Currency Forward Contracts
The Company has a program to minimize the effect of foreign exchange
transaction gains and losses from recorded foreign currency-denominated assets
and liabilities. This program involves the use of forward foreign exchange
contracts in certain European and Asian countries, principally U.K., France,
Germany, Finland, Sweden, Switzerland, Japan and Australia. A forward foreign
exchange contract obligates the Company to exchange predetermined amounts of
specified foreign currencies at specified exchange rates on specified dates or
to make an equivalent U.S. dollar payment equal to the value of such exchange.
Each month the Company marks to market the foreign exchange contracts based on
the change in the foreign exchange rates with any resulting gain or losses
recorded in the interest and other expense.
The Company does not currently hedge anticipated foreign
currency-denominated revenues and expenses not yet incurred.
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PART II. OTHER INFORMATION
ITEM 5. OTHER INFORMATION.
On June 12, 1998, the Company completed the sale of $200 million of its 4%
Convertible Subordinated Notes (the "Notes") due June 15, 2005 in an offering to
qualified institutional investors. On July 7, 1998, initial purchasers exercised
an option to purchase an additional $50 million to cover over-allotments. The
Notes are subordinated to all existing and future senior indebtedness of the
Company and are convertible into common stock of the Company at a conversion
price of approximately $26.41 per share. The Company has agreed to file a shelf
registration statement with respect to the Notes and the common stock issuable
upon conversion thereof within 90 days after the date of original issuance of
the Notes. The Notes are redeemable at the option of the Company in whole or in
part at any time on or after June 20, 2001, in cash plus accrued interest
through the redemption date, if any, subject to certain events.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
The following exhibits are filed by attachment to this Form 10-Q:
Exhibit Description
------- -----------
27.1 Financial Data Schedule
27.2 Financial Data Schedule
27.3 Financial Data Schedule
27.4 Financial Data Schedule
99.1 Press release dated June 9, 1998
(b) Reports on Form 8-K
No reports on Form 8-K were filed by the Company during the fiscal quarter
ended April 30, 1998.
Signatures
Pursuant to the requirement of the Securities Exchange Act of 1934, the
registrant has duly caused this amended report to be signed on its behalf by the
undersigned thereunto duly authorized.
Dated: September 9, 1998
BEA SYSTEMS, INC.
(Registrant)
/s/ STEVE L. BROWN
------------------
Steve L. Brown
Executive Vice President, Secretary and
Chief Financial Officer
(Principal Financial and Chief Accounting Officer)
23
<PAGE>
INDEX TO EXHIBITS
Exhibit Description
------- -----------
27.1 Financial Data Schedule
27.2 Financial Data Schedule
27.3 Financial Data Schedule
27.4 Financial Data Schedule
99.1 Press release dated June 9, 1998
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THIS FORM
10-Q AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JAN-31-1999
<PERIOD-END> APR-30-1998
<CASH> 92,521
<SECURITIES> 4,759
<RECEIVABLES> 54,830
<ALLOWANCES> 2,389
<INVENTORY> 0
<CURRENT-ASSETS> 154,090
<PP&E> 12,660
<DEPRECIATION> 4,524
<TOTAL-ASSETS> 182,222
<CURRENT-LIABILITIES> 96,289
<BONDS> 0
0
0
<COMMON> 66
<OTHER-SE> 85,272
<TOTAL-LIABILITY-AND-EQUITY> 182,222
<SALES> 39,741
<TOTAL-REVENUES> 57,450
<CGS> 775
<TOTAL-COSTS> 55,469
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 467
<INTEREST-EXPENSE> 214
<INCOME-PRETAX> 2,195
<INCOME-TAX> 623
<INCOME-CONTINUING> 1,572
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,572
<EPS-PRIMARY> (0.02)<F1>
<EPS-DILUTED> (0.02)<F2>
<FN>
<F1>For purposes of this exhibit, primary means basic.
<F2>Amounts have been restated to comply with the provisions of Statement of
Financial Accounting Standards No. 128, "Earnings per Share."
</FN>
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM APRIL 30,
1997 FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FORM 10-Q.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JAN-31-1998
<PERIOD-END> APR-30-1997
<CASH> 7,093
<SECURITIES> 0
<RECEIVABLES> 32,415
<ALLOWANCES> 1,298
<INVENTORY> 0
<CURRENT-ASSETS> 46,301
<PP&E> 8,853
<DEPRECIATION> 1,865
<TOTAL-ASSETS> 74,449
<CURRENT-LIABILITIES> 68,024
<BONDS> 50,012
0
0
<COMMON> 56
<OTHER-SE> (43,643)
<TOTAL-LIABILITY-AND-EQUITY> 74,449
<SALES> 24,478
<TOTAL-REVENUES> 31,446
<CGS> 578
<TOTAL-COSTS> 48,466
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 165
<INTEREST-EXPENSE> (2,477)
<INCOME-PRETAX> (19,497)
<INCOME-TAX> 572
<INCOME-CONTINUING> (20,069)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (20,069)
<EPS-PRIMARY> (0.97)<F1>
<EPS-DILUTED> (0.97)<F2>
<FN>
<F1>For purposes of this exhibit, primary means basic.
<F2>Amounts have been restated to comply with the provisions of Statement of
Financial Accounting Standards No. 128, "Earnings per Share."
</FN>
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM JULY 31,
1997 FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FORM 10-Q.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JAN-31-1998
<PERIOD-END> JUL-31-1997
<CASH> 108,021
<SECURITIES> 0
<RECEIVABLES> 34,670
<ALLOWANCES> 1,276
<INVENTORY> 0
<CURRENT-ASSETS> 145,398
<PP&E> 9,179
<DEPRECIATION> 2,329
<TOTAL-ASSETS> 172,536
<CURRENT-LIABILITIES> 63,418
<BONDS> 42,401
0
0
<COMMON> 63
<OTHER-SE> 66,654
<TOTAL-LIABILITY-AND-EQUITY> 172,536
<SALES> 50,590
<TOTAL-REVENUES> 67,153
<CGS> 1,168
<TOTAL-COSTS> 84,562
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 258
<INTEREST-EXPENSE> 4,306
<INCOME-PRETAX> (21,715)
<INCOME-TAX> 1,172
<INCOME-CONTINUING> (22,887)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (22,887)
<EPS-PRIMARY> (0.59)<F1>
<EPS-DILUTED> (0.59)<F2>
<FN>
<F1>For purposes of this exhibit, primary means basic.
<F2>Amounts have been restated to comply with the provisions of Statement of
Financial Accounting Standards No. 128, "Earnings per Share."
</FN>
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM OCTOBER 30,
1997 FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FORM 10-Q.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JAN-31-1998
<PERIOD-END> OCT-31-1997
<CASH> 91,704
<SECURITIES> 0
<RECEIVABLES> 40,102
<ALLOWANCES> 1,476
<INVENTORY> 0
<CURRENT-ASSETS> 133,553
<PP&E> 10,357
<DEPRECIATION> 3,062
<TOTAL-ASSETS> 159,953
<CURRENT-LIABILITIES> 63,102
<BONDS> 20,788
0
0
<COMMON> 65
<OTHER-SE> 75,998
<TOTAL-LIABILITY-AND-EQUITY> 159,953
<SALES> 80,175
<TOTAL-REVENUES> 109,254
<CGS> 1,712
<TOTAL-COSTS> 126,133
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 408
<INTEREST-EXPENSE> 4,201
<INCOME-PRETAX> (21,080)
<INCOME-TAX> 1,893
<INCOME-CONTINUING> (22,973)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (22,973)
<EPS-PRIMARY> (0.49)<F1>
<EPS-DILUTED> (0.49)<F2>
<FN>
<F1>For purposes of this exhibit, primary means basic.
<F2>Amounts have been restated to comply with the provisions of Statement of
Financial Accounting Standards No. 128, "Earnings per Share."
</FN>
</TABLE>
<PAGE>
PRESS RELEASE DATED JUNE 9, 1998
BEA PRICES $200 MILLION PRIVATE OFFERINGS OF 4%
CONVERTIBLE SUBORDINATED NOTES
SUNNYVALE, Calif., June 9, 1998 - BEA Systems, Inc. (Nasdaq: BEAS) announced
today that it has sold $200 million of its 4 percent convertible subordinated
notes due 2005 in an offering to qualified institutional investors. The
offering is expected to close on June 12, 1998.
The Company has granted the initial purchasers a 30-day option to purchase an
additional $50 million of notes to cover over-allotments, if any. The notes
will be convertible into common stock of the Company at a conversion price of
approximately $26.41 per share.
The net proceeds of the offering will be added to working capital and used for
general corporate purposes. The Company may also use a portion of the net
proceeds to fund acquisitions of complimentary businesses, products, or
technologies.
This announcement is neither an offer to sell nor a solicitation to buy any of
these securities.
The securities will not be registered under the Securities Act of 1933, as
amended (the "Securities Act"), or any state securities laws, and unless so
registered, may not be offered or sold in the United States except pursuant to
an exemption from, or in a transaction not subject to, the registration
requirements of the Securities Act and applicable state securities laws.
