<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
FORM 8-K/A
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 30, 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)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<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 WebLogic, Inc. in a transaction accounted for as a pooling of
interests:
ITEM 2. ACQUISITION OR DISPOSITION OF ASSETS.
On September 30, 1998, pursuant the terms of an Agreement and Plan of
Reorganization, dated as of September 24, 1998 between and among the
Registrant, WebLogic, Inc. (WebLogic) and the Charlotte Acquisition Corp.
(Charlotte) (the Agreement), the Registrant completed the merger of Charlotte,
a wholly-owned subsidiary of the Registrant, with and into WebLogic. The
transaction was accounted for using the pooling of interests method. As
consideration for the transaction, 0.612750 share of the Registrant's common
stock was issued for each outstanding share of WebLogic common stock, subject
to adjustment for cash paid in lieu of fractional shares. The Registrant will
issue 7,643,120 shares of common stock in exchange for the outstanding shares
of WebLogic common stock, subject to withholding of approximately 10 percent
of such shares in escrow in accordance with certain conditions in the
Agreement. Outstanding options to acquire shares of WebLogic common stock were
automatically converted into options to purchase the Registrant's common stock
at the same exchange ratio. The Registrant intends that the WebLogic business
will continue to be operated in its current manner. Certain of the assets of
WebLogic were used in the development and support of WebLogic's software
products, including its Web application server product, and the Registrant
intends to use such assets in substantially the same manner. The amount of
consideration paid was determined through arms-length negotiations between the
Registrant and WebLogic, which negotiations took into account the value of the
acquired intellectual property and workforce of WebLogic, among other factors.
There are no material relationships between WebLogic and the Registrant, or
any of its affiliates, any director or officer of the Registrant, or any
associate of any such director or office.
ITEM 5. OTHER EVENTS.
(A) SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS.
See Exhibit 99.1 and 99.2 for the supplemental consolidated financial
statements of BEA Systems, Inc.
(B) MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
See Exhibit 99.3 for Management's Discussion and Analysis of Financial
Condition and Results of Operations
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS.
(C) EXHIBITS.
The following exhibits are filed herewith:
<TABLE>
<C> <S>
Exhibit 2.1* Agreement and Plan of Reorganization dated as September 24, 1998
by and among BEA Systems, Inc. and Charlotte Acquisition Corp.
and WebLogic Inc.
Exhibit 23.1 Consent of Ernst & Young LLP, Independent Auditors
Exhibit 27.1 Financial Data Schedule
Exhibit 27.2 Financial Data Schedule
Exhibit 27.3 Financial Data Schedule
Exhibit 27.4 Financial Data Schedule
Exhibit 27.5 Financial Data Schedule
Exhibit 27.6 Financial Data Schedule
Exhibit 27.7 Financial Data Schedule
Exhibit 99.1 BEA Systems, Inc. Supplemental Consolidated Financial Statements
for the fiscal years ended January 31, 1998 and 1997
Exhibit 99.2 BEA Systems, Inc. Supplemental Condensed Consolidated Financial
Statements for the six months ended July 31, 1998 and 1997
Exhibit 99.3 Management's Discussion and Analysis of Financial Condition and
Results of Operations
Exhibit 99.4* Press Release dated October 2, 1998
</TABLE>
- --------
* previously filed
2
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this amended 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: October 29, 1998
3
<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 September 30, 1998, with respect to the
supplemental consolidated financial statements of BEA Systems, Inc. included
in this current report on Form 8-K/A.
/s/ Ernst & Young LLP
---------------------------------------
ERNST & YOUNG LLP
Palo Alto, California
October 22, 1998
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM JULY 31,
1998 FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FORM 10-Q.
</LEGEND>
<RESTATED>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JAN-31-1999
<PERIOD-START> FEB-01-1998
<PERIOD-END> JUL-31-1998
<CASH> 30,607
<SECURITIES> 215,354
<RECEIVABLES> 69,297
<ALLOWANCES> (3,053)
<INVENTORY> 0
<CURRENT-ASSETS> 317,469
<PP&E> 17,758
<DEPRECIATION> 5,845
<TOTAL-ASSETS> 414,165
<CURRENT-LIABILITIES> 104,556
<BONDS> 250,733
0
4
<COMMON> 70
<OTHER-SE> 58,802
<TOTAL-LIABILITY-AND-EQUITY> 414,165
<SALES> 86,512
<TOTAL-REVENUES> 126,100
<CGS> 1,623
<TOTAL-COSTS> 165,899
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (75)
<INCOME-PRETAX> (39,724)
<INCOME-TAX> 1,679
<INCOME-CONTINUING> (41,403)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (41,403)
<EPS-PRIMARY> (0.61)<F1><F2>
<EPS-DILUTED> (0.61)<F1>
<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,
1998 FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FORM 10-Q.
</LEGEND>
<RESTATED>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JAN-31-1999
<PERIOD-START> FEB-01-1998
<PERIOD-END> APR-30-1998
<CASH> 96,788
<SECURITIES> 9,718
<RECEIVABLES> 56,020
<ALLOWANCES> (2,438)
<INVENTORY> 0
<CURRENT-ASSETS> 164,820
<PP&E> 13,194
<DEPRECIATION> 4,694
<TOTAL-ASSETS> 193,316
<CURRENT-LIABILITIES> 97,927
<BONDS> 719
0
4
<COMMON> 69
<OTHER-SE> 94,597
<TOTAL-LIABILITY-AND-EQUITY> 193,316
<SALES> 40,619
<TOTAL-REVENUES> 58,529
<CGS> 781
<TOTAL-COSTS> 59,387
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (332)
<INCOME-PRETAX> (526)
<INCOME-TAX> 623
<INCOME-CONTINUING> (1,149)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,149)
<EPS-PRIMARY> (0.02)<F1><F2>
<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>
<RESTATED>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JAN-31-1998
<PERIOD-START> FEB-01-1997
<PERIOD-END> APR-30-1997
<CASH> 7,482
<SECURITIES> 0
<RECEIVABLES> 32,754
<ALLOWANCES> (1,303)
<INVENTORY> 0
<CURRENT-ASSETS> 47,171
<PP&E> 9,136
<DEPRECIATION> 1,880
<TOTAL-ASSETS> 75,587
<CURRENT-LIABILITIES> 68,628
<BONDS> 50,137
0
1
<COMMON> 59
<OTHER-SE> (43,238)
<TOTAL-LIABILITY-AND-EQUITY> 75,587
<SALES> 24,896
<TOTAL-REVENUES> 31,890
<CGS> 578
<TOTAL-COSTS> 49,547
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (2,477)
<INCOME-PRETAX> (20,134)
<INCOME-TAX> 572
<INCOME-CONTINUING> (20,706)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (20,706)
<EPS-PRIMARY> (0.99)<F1><F2>
<EPS-DILUTED> (0.99)<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>
<RESTATED>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JAN-31-1998
<PERIOD-START> FEB-01-1997
<PERIOD-END> JUL-31-1997
<CASH> 108,349
<SECURITIES> 0
<RECEIVABLES> 35,067
<ALLOWANCES> (1,296)
<INVENTORY> 0
<CURRENT-ASSETS> 146,229
<PP&E> 9,547
<DEPRECIATION> 2,362
<TOTAL-ASSETS> 173,702
<CURRENT-LIABILITIES> 64,724
<BONDS> 42,513
0
1
<COMMON> 66
<OTHER-SE> 66,398
<TOTAL-LIABILITY-AND-EQUITY> 173,702
<SALES> 51,548
<TOTAL-REVENUES> 68,199
<CGS> 1,168
<TOTAL-COSTS> 86,957
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 4,310
<INCOME-PRETAX> (23,068)
<INCOME-TAX> 1,172
<INCOME-CONTINUING> (24,240)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (24,240)
<EPS-PRIMARY> (0.62)<F1><F2>
<EPS-DILUTED> (0.62)<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 31,
1997 FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FORM 10-Q.
</LEGEND>
<RESTATED>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JAN-31-1998
<PERIOD-START> FEB-01-1997
<PERIOD-END> OCT-31-1997
<CASH> 93,025
<SECURITIES> 0
<RECEIVABLES> 40,723
<ALLOWANCES> (1,511)
<INVENTORY> 0
<CURRENT-ASSETS> 135,591
<PP&E> 10,766
<DEPRECIATION> 3,117
<TOTAL-ASSETS> 162,345
<CURRENT-LIABILITIES> 65,090
<BONDS> 20,873
0
1
<COMMON> 68
<OTHER-SE> 76,313
<TOTAL-LIABILITY-AND-EQUITY> 162,345
<SALES> 84,743
<TOTAL-REVENUES> 113,003
<CGS> 1,712
<TOTAL-COSTS> 130,680
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 4,230
<INCOME-PRETAX> (21,907)
<INCOME-TAX> 1,893
<INCOME-CONTINUING> (23,800)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (23,800)
<EPS-PRIMARY> (0.50)<F1><F2>
<EPS-DILUTED> (0.50)<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 JANUARY 31,
1998 FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FORM 10-K.
</LEGEND>
<RESTATED>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JAN-31-1998
<PERIOD-START> FEB-01-1997
<PERIOD-END> JAN-31-1998
<CASH> 90,984
<SECURITIES> 8,708
<RECEIVABLES> 49,955
<ALLOWANCES> (2,033)
<INVENTORY> 0
<CURRENT-ASSETS> 150,777
<PP&E> 12,280
<DEPRECIATION> 4,074
<TOTAL-ASSETS> 174,203
<CURRENT-LIABILITIES> 94,704
<BONDS> 766
0
1
<COMMON> 69
<OTHER-SE> 79,293
<TOTAL-LIABILITY-AND-EQUITY> 174,203
<SALES> 122,987
<TOTAL-REVENUES> 166,447
<CGS> 2,435
<TOTAL-COSTS> 182,190
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 4,325
<INCOME-PRETAX> (20,068)
<INCOME-TAX> 2,844
<INCOME-CONTINUING> (22,912)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (22,912)
<EPS-PRIMARY> (0.44)<F1><F2>
<EPS-DILUTED> (0.44)<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 JANUARY 31,
1997 FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FORM 10-K.
</LEGEND>
<RESTATED>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JAN-31-1997
<PERIOD-START> FEB-01-1996
<PERIOD-END> JAN-31-1997
<CASH> 3,872
<SECURITIES> 0
<RECEIVABLES> 26,389
<ALLOWANCES> (1,098)
<INVENTORY> 0
<CURRENT-ASSETS> 32,336
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 59,276
<CURRENT-LIABILITIES> 64,382
<BONDS> 49,540
0
17
<COMMON> 15
<OTHER-SE> (75,458)
<TOTAL-LIABILITY-AND-EQUITY> 59,276
<SALES> 47,059
<TOTAL-REVENUES> 64,566
<CGS> 1,591
<TOTAL-COSTS> 144,884
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 6,716
<INCOME-PRETAX> (87,034)
<INCOME-TAX> 800
<INCOME-CONTINUING> (87,834)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (87,834)
<EPS-PRIMARY> (8.84)<F1><F2>
<EPS-DILUTED> (8.84)<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>
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........................ A-2
Supplemental Consolidated Balance Sheets as of January 31, 1998 and
1997.................................................................... A-3
Supplemental Consolidated Statements of Operations for the years ended
January 31, 1998 and 1997............................................... A-4
Supplemental Consolidated Statements of Stockholders' Equity (Deficit)
for the years ended
January 31, 1998 and 1997............................................... A-5
Supplemental Consolidated Statements of Cash Flows for the years ended
January 31, 1998 and 1997............................................... A-6
Notes to Supplemental Consolidated Financial Statements.................. A-7
</TABLE>
A-1
<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 WebLogic, 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 WebLogic, Inc. on
September 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
did not audit the financial statements of WebLogic, Inc., which financial
statements reflect losses from operations of approximately $1.9 million for
the year ended December 31, 1997 and $118,000 for the period from January 18,
1996 (date of inception) to December 31, 1996, respectively. Those statements
were audited by other auditors whose report (not presented herein) has been
furnished to us, and our opinion, insofar as it relates to data included for
WebLogic, Inc. is based solely on the report of the other auditors.
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 and the report of other
auditors provide a reasonable basis for our opinion.
In our opinion, based on our audits and the report of other auditors, 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 WebLogic, 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
September 30, 1998
A-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.............................. $ 90,984 $ 3,872
Short-term investments................................. 8,708 --
Accounts receivable, net of allowance for doubtful
accounts of $2,033 at January 31, 1998; $1,098 at
January 31, 1997...................................... 47,922 25,291
Other current assets................................... 3,163 3,173
--------- ---------
Total current assets.................................. 150,777 32,336
Computer equipment, furniture and leasehold improve-
ments, net............................................. 8,206 6,756
Acquired intangible assets, net......................... 12,315 17,226
Other assets............................................ 2,905 2,958
--------- ---------
Total assets.......................................... $ 174,203 $ 59,276
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Borrowings under lines of credit....................... $ 1,879 $ 9,050
Accounts payable....................................... 5,338 3,833
Accrued liabilities.................................... 26,012 14,254
Accrued income taxes................................... 2,741 321
Deferred revenues...................................... 14,963 8,744
Current portion of notes payable and capital lease ob-
ligations............................................. 43,141 28,180
--------- ---------
Total current liabilities............................. 94,074 64,382
Notes payable and capital lease obligations............. 766 49,540
Commitments.............................................
Series B redeemable convertible preferred stock--$0.001
par value, no shares authorized or outstanding at Janu-
ary 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,
5,613 shares and 20,245 shares authorized at January
31, 1998 and 1997; Series A, 245 shares and 20,245
shares designated, 245 shares and 17,411 issued and
outstanding, at January 31, 1998 and 1997,
respectively (liquidation preference $250); Series B,
368 shares designated, 357 shares issued and
outstanding at January 31, 1998, none in 1997
(liquidation preference $1,031)....................... 1 17
Common stock--$0.001 par value, 85,515 shares
authorized, 38,752 shares and 14,230 shares issued and
outstanding at January 31, 1998 and 1997,
respectively.......................................... 39 15
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............................. 211,556 32,694
Accumulated deficit.................................... (130,546) (106,837)
Notes receivable from stockholders..................... (544) (544)
Deferred compensation.................................. (601) (845)
Accumulated foreign currency translation adjustment.... (572) 74
--------- ---------
Total stockholders' equity (deficit).................. 79,363 (75,426)
--------- ---------
Total liabilities and stockholders' equity (deficit).. $ 174,203 $ 59,276
========= =========
</TABLE>
See accompanying notes
A-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............................................ $122,987 $ 47,059
Services................................................ 43,460 17,507
-------- --------
Total revenues........................................ 166,447 64,566
-------- --------
Cost of revenues:
Cost of license fees.................................... 2,435 1,591
Cost of services........................................ 27,261 9,695
Amortization of certain acquired intangible assets...... 11,336 8,696
-------- --------
Total cost of revenues................................ 41,032 19,982
-------- --------
Gross margin.............................................. 125,415 44,584
Operating expenses:
Sales and marketing..................................... 77,765 31,299
Research and development................................ 29,151 18,407
General and administrative.............................. 18,242 12,948
Acquisition related charges............................. 16,000 62,248
-------- --------
Total operating expenses.............................. 141,158 124,902
-------- --------
Loss from operations...................................... (15,743) (80,318)
Interest expense.......................................... (6,054) (6,727)
Interest income and other, net............................ 1,729 11
-------- --------
Loss before provision for income taxes.................... (20,068) (87,034)
Provision for income taxes................................ 2,844 800
-------- --------
Net loss.................................................. $(22,912) $(87,834)
======== ========
Basic and diluted net loss per share...................... $ (0.44) $ (8.84)
======== ========
Shares used in computing basic and diluted net loss per
share.................................................... 52,691 10,031
======== ========
</TABLE>
See accompanying notes
A-4
<PAGE>
BEA SYSTEMS, INC.
SUPPLEMENTAL CONSOLIDATED STATEMENTS 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........... -- -- 6,311 6 -- -- -- --
Issuance of
common stock.... -- -- -- -- 4,941 5 -- --
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, net of
amortization.... -- -- -- -- -- -- -- --
Foreign currency
translation
adjustment...... -- -- -- -- -- -- -- --
Distributions... -- -- -- -- -- -- -- --
Net loss........ -- -- -- -- -- -- -- --
------- ------- -------- ------- ------ ------ ------ ------
Balance at
January 31,
1997............ 19,848 20,780 17,411 17 14,230 15 -- --
Issuance of
common stock,
net of issuance
costs of
$3,062.......... -- -- -- -- 12,723 12 -- --
Common shares
issued under
stock option and
employee stock
purchase plans.. -- -- -- -- 1,812 2 -- --
Issuance of
Series B
preferred stock
net of issuance
costs of $10.... -- -- 357 1 -- -- -- --
Issuance and
exercise of
common stock
warrants........ -- -- -- -- 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..... -- -- -- -- -- -- -- --
Distributions... -- -- -- -- -- -- -- --
Net loss........ -- -- -- -- -- -- -- --
------- ------- -------- ------- ------ ------ ------ ------
Balance at
January 31,
1998............ -- $ -- 602 $ 1 38,752 $ 39 30,224 $ 30
======= ======= ======== ======= ====== ====== ====== ======
<CAPTION>
STOCKHOLDERS' EQUITY (DEFICIT)
-------------------------------------------------------------------------
ACCUMULATED
NOTES FOREIGN TOTAL
DDITIONAL 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........... 10,551 -- -- -- -- 10,557
Issuance of
common stock.... 568 -- -- -- -- 573
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, net of
amortization.... 973 -- -- (845) -- 128
Foreign currency
translation
adjustment...... -- -- -- 74 74
Distributions... -- (315) -- -- -- (315)
Net loss........ -- (87,834) -- -- -- (87,834)
---------- ----------- ------------ ------------ ----------- -------------
Balance at
January 31,
1997............ 32,694 (106,837) (544) (845) 74 (75,426)
Issuance of
common stock,
net of issuance
costs of
$3,062.......... 138,156 -- -- -- -- 138,168
Common shares
issued under
stock option and
employee stock
purchase plans.. 3,887 -- -- -- -- 3,889
Issuance of
Series B
preferred stock
net of issuance
costs of $10.... 989 -- -- -- -- 990
Issuance and
exercise of
common stock
warrants........ 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)
Distributions... -- (502) -- -- -- (502)
Net loss........ -- (22,912) -- -- -- (22,912)
---------- ----------- ------------ ------------ ----------- -------------
Balance at
January 31,
1998............ $211,556 $(130,546) $(544) $(601) $(572) $ 79,363
========== =========== ============ ============ =========== =============
</TABLE>
See accompanying notes
A-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.................................................. $(22,912) $(87,834)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:
Depreciation and amortization............................ 2,586 1,514
Amortization of deferred compensation.................... 244 128
Amortization of certain 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 busi-
ness combinations:
Accounts receivable..................................... (22,631) (14,390)
Other current assets.................................... 5,765 (2,039)
Other assets............................................ 53 (2,231)
Accounts payable........................................ 2,039 2,850
Accrued liabilities..................................... 2,842 3,589
Deferred revenues....................................... 6,219 6,425
-------- --------
Net cash provided by (used in) operating activities........ 2,359 (20,914)
-------- --------
Investing activities:
Purchases of computer equipment, furniture and leasehold
improvements............................................. (3,322) (4,745)
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...................... (14,955) (7,311)
-------- --------
Financing activities:
Net borrowings (payments) under lines of credit........... (7,171) 9,050
Proceeds from notes payable and capital lease obliga-
tions.................................................... 6,123 1,264
Payments on notes payable and capital lease obligations... (41,143) (7,540)
Proceeds from issuance of common and preferred stock,
net...................................................... 142,545 24,642
-------- --------
Net cash provided by financing activities.................. 100,354 27,416
-------- --------
Net increase (decrease) in cash and cash equivalents....... 87,758 (809)
Foreign currency translation adjustment.................... (646) 74
Cash and cash equivalents at beginning of year............. 3,872 4,607
-------- --------
Cash and cash equivalents at end of year................... $ 90,984 $ 3,872
======== ========
</TABLE>
See accompanying notes
A-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.
As described more fully in Note 18, BEA acquired WebLogic, Inc. (WebLogic)
on September 30, 1998. WebLogic, Inc. develops and markets pure-Java server
solutions for networked applications.
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. (Leader Group) in a merger transaction
accounted for as a pooling of interests (see Note 18). On September 30, 1998,
the Company acquired WebLogic, in a merger transaction also accounted for as a
pooling of interests (see Note 18). All financial information has been
restated to reflect the combined operations of the Company, Leader Group and
WebLogic.
Use of estimates
The preparation of the financial statements in accordance with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the consolidated financial
statements and the accompanying notes. Actual results could differ 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.
A-7
<PAGE>
BEA SYSTEMS, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Short-term investments consist principally of commercial paper and time
deposits with remaining maturities of one year or less. The Company determines
the appropriate classification of its short-term investments at the time of
purchase and re-evaluates such designations as of each balance sheet date. All
short-term investments in the Company's portfolio are classified as
"available-for-sale" and are stated at fair market value, with the unrealized
gains and losses reported in stockholders' equity (deficit) until disposition.
The amortized cost of debt securities is adjusted for amortization of premiums
and accretion of discounts to maturity. Such amortization is included in
interest income 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.
A-8
<PAGE>
BEA SYSTEMS, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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.
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
continuing right 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.
A-9
<PAGE>
BEA SYSTEMS, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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 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, and $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.
A-10
<PAGE>
BEA SYSTEMS, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Fair value of financial instruments
The carrying amounts and estimated fair values of the Company's financial
instruments were as follows (in thousands):
<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............. $90,984 $90,984 $3,872 $3,872
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)............................. 43,907 43,907 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, and 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.......................................... $ 5,809 $4,033
Furniture and equipment..................................... 2,409 1,653
Leasehold improvements...................................... 2,454 1,474
Furniture and equipment under capital leases................ 1,608 1,154
------- ------
12,280 8,314
Accumulated depreciation and amortization................... (4,074) (1,558)
------- ------
$ 8,206 $6,756
======= ======
</TABLE>
Accumulated amortization for furniture and equipment under capital leases
was approximately $432,000 and $154,000 at January 31, 1998 and 1997,
respectively.
A-11
<PAGE>
BEA SYSTEMS, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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>
A-12
<PAGE>
BEA SYSTEMS, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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.
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>
A-13
<PAGE>
BEA SYSTEMS, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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 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>
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.
A-14
<PAGE>
BEA SYSTEMS, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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..................... $14,925 $ 6,603
Accrued sales and value added tax........................... 3,425 3,547
Other accrued liabilities................................... 7,662 4,104
------- -------
$26,012 $14,254
======= =======
</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.
A-15
<PAGE>
BEA SYSTEMS, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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
Convertible subordinated notes, bearing interest at 7
percent per annum. The notes were convertible into
preferred stock in the event of a subsequent preferred
stock offering........................................ 680 --
Other notes payable.................................... 309 299
-------- --------
43,907 77,720
Less amounts due within one year....................... (43,141) (28,180)
-------- --------
Notes payable and capital lease obligations due after
one year.............................................. $ 766 $ 49,540
======== ========
</TABLE>
A-16
<PAGE>
BEA SYSTEMS, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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................................................. $42,706 $ 580
2000................................................. 105 601
2001................................................. -- 101
------- ------
$42,811 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.
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>
<S> <C>
Fiscal year ending January 31,
1999.............................................................. $ 7,102
2000.............................................................. 9,917
2001.............................................................. 8,839
2002.............................................................. 7,579
2003.............................................................. 7,676
Thereafter........................................................ 39,595
-------
Total minimum lease payments.................................... $80,708
=======
</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 $6.0 million and $3.4 million,
respectively.
A-17
<PAGE>
BEA SYSTEMS, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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................................................. $ 879 $ --
State................................................... 300 --
Foreign................................................. 1,665 800
--------- -------
Provision for income taxes............................ $ 2,844 $ 800
========= =======
</TABLE>
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.................... $ (6,822) $ (29,605)
Nondeductible amortization of acquired intangible as-
sets................................................. 2,720 11,842
Valuation allowance................................... 5,542 18,358
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.......................... $ 2,844 $ 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................................ $ 2,594 $ 3,275
Net operating loss carryforwards..................... 5,799 7,279
Computer equipment, furniture, leasehold improvements
and acquired intangible assets...................... 18,496 17,547
Other................................................ 950 --
-------- --------
Total deferred tax assets.............................. 27,839 28,101
Valuation allowance.................................... (27,839) (28,101)
-------- --------
Net deferred tax assets............................ $ -- $ --
======== ========
</TABLE>
A-18
<PAGE>
BEA SYSTEMS, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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 $262,000 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 $16.4 million and $1.1
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.
12. SERIES B REDEEMABLE CONVERTIBLE PREFERRED STOCK
At January 31, 1997, BEA had outstanding 19,847,800 shares of Series B
Redeemable Convertible Preferred Stock (Series B Redeemable Preferred Stock).
Holders of the Series B Redeemable 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 BEA Series A Convertible Preferred
Stock (BEA 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 Redeemable Preferred Stock.
Total accumulated dividends on the Series B Redeemable 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 Redeemable Preferred Stock and accumulated dividends
of $1.2 million were converted into 3,772,077 shares of common stock.
13. STOCKHOLDERS' EQUITY
Series A and B convertible preferred stock
At January 31, 1997, BEA had outstanding 17,166,000 shares of Series A
Preferred Stock. Each share of BEA 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 BEA
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 Redeemable Preferred Stock had been
declared and paid. No dividends were declared or paid by the Company on the
BEA Series A Preferred Stock.
At the time of the initial public offering in April 1997, all outstanding
shares of BEA Series A Preferred Stock were converted into 34,332,000 shares
of common stock.
A-19
<PAGE>
BEA SYSTEMS, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
At January 31, 1997, WebLogic had outstanding 245,000 shares of Series A
Preferred Stock and no Series B Preferred Stock. At January 31, 1998, WebLogic
had outstanding 245,000 shares of Series A Preferred Stock and 357,000 shares
Series B Preferred Stock. Each share of WebLogic Series A and B Preferred
Stock was convertible at any time at the option of shareholders into the
number of fully paid and nonassessable shares of common stock which results
from dividing the conversion price per share of the WebLogic Series A and B
Preferred Stock in effect at the time of conversion into the per share
conversion value of such series. Holders of WebLogic Series A and B Preferred
Stock were entitled to noncumulative annual dividends at the rate of $0.05 and
$0.1375 per share, respectively, when and if declared by the Board of
Directors. Dividends on WebLogic Series B Preferred Stock shall be payable
before payment of any dividends on the WebLogic Series A Preferred Stock. No
dividends were declared or paid by the Company on WebLogic Series A and B
Preferred Stock. Each share of WebLogic Series A and B Preferred Stock votes
equally with shares of common stock on an "if-converted" basis. WebLogic
Series A and B Preferred Stock have a liquidation preference of $0.625 and
$1.7188 per share, respectively, plus all declared but unpaid dividends.
WebLogic Series B has a liquidation preference to WebLogic Series A shares.
Upon liquidation, after payment of the full liquidation preference has been
made to the WebLogic Series A and B shareholders, the remaining assets of the
Company, if any, shall be distributed ratably among the common shareholders.
Upon the merger of BEA and WebLogic (see Note 18) all outstanding shares of
WebLogic Series A and B Preferred Stock were convertible into approximately
601,720 shares of common stock.
Common Stock
The Company has issued shares of its common stock to certain employees of
the Company, pursuant to which the Company has the right to repurchase shares
of common stock sold to employees at the original issuance price upon the
employee's termination. The repurchase option expires at 1/48 of the shares
every month, subject to acceleration upon the occurrence of certain events. As
of January 31, 1998, approximately 2,022,000 shares were subject to the
Company's right of repurchase.
Class B common stock
On March 19, 1997, BEA'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 January 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.
A-20
<PAGE>
BEA SYSTEMS, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Upon the merger of BEA and WebLogic, all of the WebLogic outstanding stock
options were converted into BEA stock options. All such options were
immediately exercisable on the date of grant and are subject to vesting,
however, certain options became fully vested upon the merger. The Company has
the right to repurchase unvested options, which right lapses ratably over the
option vesting period.
Information with respect to option activity under the Company's stock option
plans are summarized as follows:
<TABLE>
<CAPTION>
WEIGHTED AVERAGE
OPTIONS EXERCISE PRICE EXERCISE PRICE
OUTSTANDING PER SHARE PER SHARE
(SHARES IN THOUSANDS) ----------- -------------- ----------------
<S> <C> <C> <C>
Options outstanding at January
31, 1996...................... 2,244 $ 0.29 $0.29
Granted...................... 5,662 $0.01-$ 6.00 $1.15
Exercised.................... (404) $ 0.29 $0.29
Canceled..................... (527) $ 0.66 $0.66
------
Options outstanding at January
31, 1997...................... 6,975 $0.01-$ 6.00 $0.96
Granted...................... 6,059 $0.04-$24.13 $5.98
Exercised.................... (1,840) $0.04-$ 6.00 $0.35
Canceled..................... (1,176) $0.04-$20.00 $1.88
------
Options outstanding at January
31, 1998...................... 10,018 $0.04-$24.13 $4.00
======
Options exercisable at January
31, 1998...................... 3,510 $0.04-$ 6.74 $0.49
======
Options exercisable at January
31, 1997...................... 405 $ 0.29 $0.29
======
Options available for grant at
January 31, 1998.............. 3,219
======
</TABLE>
The weighted average grant date fair value of stock options was $4.08 and
$0.34 in fiscal years 1998 and 1997, respectively.
The following table summarizes information about stock options outstanding
at January 31, 1998:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE REMAINING
NUMBER CONTRACTUAL LIFE WEIGHTED AVERAGE
OF SHARES (IN YEARS) EXERCISE PRICE
(SHARES IN THOUSANDS) --------- ----------------- ----------------
<S> <C> <C> <C>
Range of per share exercise
prices:
$ 0.04-$ 0.17............... 745 9.16 $ 0.13
$ 0.29...................... 4,174 8.18 $ 0.29
$ 0.46...................... 1,024 9.59 $ 0.46
$ 1.00-$ 6.74............... 2,414 8.98 $ 5.02
$ 9.25-$16.00............... 910 9.65 $13.45
$17.31-$24.13............... 751 9.68 $18.80
------
10,018
======
</TABLE>
A-21
<PAGE>
BEA SYSTEMS, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The following table summarizes information about outstanding and exercisable
stock options at January 31, 1998:
<TABLE>
<CAPTION>
NUMBER WEIGHTED AVERAGE
OF SHARES EXERCISE PRICE
(SHARES IN THOUSANDS) --------- ----------------
<S> <C> <C>
Range of per share exercise prices:
$0.04-$0.17..................................... 745 $0.13
$0.29........................................... 1,390 $0.29
$0.46........................................... 1,024 $0.46
$1.00-$6.74..................................... 351 $4.35
-----
3,510
=====
</TABLE>
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 OPTIONS EMPLOYEE STOCK 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>
A-22
<PAGE>
BEA SYSTEMS, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The Black-Scholes option pricing model was developed for use in estimating
the fair value of traded options that have no vesting restrictions and are
fully transferable. In addition, option valuation models require the input of
highly subjective assumptions, including the expected volatility of the stock
price. Because the Company's stock based awards have characteristics
significantly different from those of traded options and because changes in
the subjective input assumptions can materially affect the fair value
estimates, in the opinion of management, the existing models do not
necessarily provide a reliable single measure of the fair value of its stock
based awards.
For purposes of pro forma disclosures, the estimated fair value of the above
stock-based awards is amortized to expense over the awards' vesting period.
The Company's pro forma information follows (in thousands, except per share
amount):
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
JANUARY 31,
------------------
1998 1997
-------- --------
<S> <C> <C>
Pro forma net loss...................................... $(25,713) $(88,859)
Pro forma basic and diluted net loss per share.......... $ (0.49) $ (8.86)
</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 of $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.
Warrants
As of January 31, 1998 the Company issued to a bank warrants to purchase
11,152 shares of WebLogic Series B preferred stock at a stated price of $1.05
per share and 1,423 shares of common stock at a price of $0.98 per share. All
warrants were exercisable and outstanding at January 31, 1998.
A-23
<PAGE>
BEA SYSTEMS, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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............................................. $(22,912) $(87,834)
Effect of Series B redeemable convertible Preferred
stock dividends..................................... (268) (880)
-------- --------
Net loss available to common stockholders............ $(23,180) $(88,714)
======== ========
Denominator:
Weighted average shares.............................. 52,691 10,031
======== ========
Basic and diluted net loss per share................. $ (0.44) $ (8.84)
======== ========
</TABLE>
The computation of diluted net loss per share for the fiscal year ended
January 31, 1998 excludes the impact of 5.9 million stock options and 602,000
shares of convertible preferred stock, as such impact would be antidilutive
for the periods presented.
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>
<S> <C>
Numerator:
Net loss........................................................ $(87,834)
========
Denominator:
Weighted average shares......................................... 10,031
Dilutive effect of conversion of preferred stock................ 29,964
--------
39,995
========
Pro forma net loss per share...................................... $ (2.20)
========
</TABLE>
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.
A-24
<PAGE>
BEA SYSTEMS, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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........................................ $ 126,142 $ 51,220
Europe............................................... 45,229 18,761
Asia/Pacific and other............................... 25,048 3,494
Consolidating eliminations........................... (29,972) (8,909)
--------- --------
$ 166,447 $ 64,566
========= ========
Income (loss) from operations:
United States........................................ $ (17,107) $(78,670)
Europe............................................... 1,120 120
Asia/Pacific and other............................... 244 (1,768)
--------- --------
$(15,743) $(80,318)
========= ========
Identifiable assets (at end of year):
United States........................................ $ 127,849 $ 38,721
Europe............................................... 29,046 16,241
Asia/Pacific and other............................... 17,308 4,314
--------- --------
$ 174,203 $ 59,276
========= ========
</TABLE>
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
A-25
<PAGE>
BEA SYSTEMS, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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 ACQUISITIONS OF LEADER GROUP AND WEBLOGIC
On April 30, 1998, the Company issued 560,704 shares of its common stock to
acquire Leader Group, Inc., a Denver-based private company specializing in
consulting solutions for the development, deployment and delivery of mission-
critical distributed object applications, in a transaction accounted for as a
pooling of interests. The Company's 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.
On September 30, 1998, the Company issued 7,643,120 shares of its common
stock to acquire WebLogic, Inc., a San Francisco-based software company, in a
transaction accounted for as a pooling of interests. Prior to pooling with
BEA, WebLogic's fiscal year followed the calendar year. Accordingly, the
Company's supplemental consolidated financial statements for the fiscal years
ended January 31, 1998 and 1997 include the financial position of WebLogic as
of December 31, 1997 and 1996, and its statement of operations, stockholders
equity and cash flows for the year ended December 31, 1997 and the period from
January 18, 1996 (date of inception) to December 31, 1996, respectively.
WebLogic's total revenues and net loss for the month ended January 31, 1998
were approximately $246,000 and ($457,000), respectively.
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
WebLogic, Inc.......................................... 4,349 226
-------- --------
Combined............................................. $166,447 $ 64,566
======== ========
Net income (loss):
BEA Systems, Inc....................................... $(21,995) $(88,665)
Leader Group, Inc...................................... 1,003 949
WebLogic, Inc.......................................... (1,920) (118)
-------- --------
Combined............................................. $(22,912) $(87,834)
======== ========
</TABLE>
As required by generally accepted accounting principles, the effect of
transactions between the Company, Leader Group and WebLogic prior to the
combinations have been eliminated. There were no significant conforming
accounting adjustments.
A-26
<PAGE>
BEA SYSTEMS, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
19. SUBSEQUENT EVENTS (UNAUDITED)
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.
A-27
<PAGE>
EXHIBIT 99.2
BEA SYSTEMS, INC.
INDEX TO SUPPLEMENTAL CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
FINANCIAL STATEMENTS
Supplemental Condensed Consolidated Statements of Operations for the six
months ended July 31, 1998 and 1997..................................... B-2
Supplemental Condensed Consolidated Balance Sheets as of July 31, 1998
and January 31, 1998.................................................... B-3
Supplemental Condensed Consolidated Statements of Cash Flows for the six
months ended July 31, 1998 and 1997..................................... B-4
Notes to Supplemental Condensed Consolidated Financial Statements........ B-5
</TABLE>
B-1
<PAGE>
BEA SYSTEMS, INC.
SUPPLEMENTAL CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JULY 31,
------------------
1998 1997
-------- --------
<S> <C> <C>
Revenues:
License fees............................................ $ 86,512 $ 51,548
Services................................................ 39,588 16,651
-------- --------
Total revenues........................................ 126,100 68,199
-------- --------
Cost of revenues:
Cost of license fees.................................... 1,623 1,168
Cost of services........................................ 24,991 10,710
Amortization of certain acquired intangible assets...... 8,408 5,414
-------- --------
Total cost of revenues................................ 35,022 17,292
-------- --------
Gross margin.............................................. 91,078 50,907
Operating expenses:
Sales and marketing..................................... 58,944 33,566
Research and development................................ 20,977 11,940
General and administrative.............................. 12,165 8,159
Acquisition-related charges............................. 38,791 16,000
-------- --------
Total operating expenses.............................. 130,877 69,665
-------- --------
Loss from operations...................................... (39,799) (18,758)
Interest and other, net................................... 75 (4,310)
-------- --------
Loss before provision for income taxes.................... (39,724) (23,068)
Provision for income taxes................................ 1,679 1,172
-------- --------
Net loss.................................................. $(41,403) $(24,240)
======== ========
Basic and diluted net loss per share...................... $ (0.61) $ (0.62)
======== ========
Shares used in computing basic and diluted net loss per
share.................................................... 67,858 39,265
======== ========
</TABLE>
See accompanying notes
B-2
<PAGE>
BEA SYSTEMS, INC.
SUPPLEMENTAL CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
JULY 31, JANUARY 31,
1998 1998
--------- -----------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.............................. $ 30,607 $ 90,984
Short-term investments................................. 215,354 8,708
Accounts receivable, net............................... 66,244 47,922
Other current assets................................... 5,264 3,163
--------- ---------
Total current assets.................................. 317,469 150,777
Computer equipment, furniture and leasehold improve-
ments, net............................................. 11,913 8,206
Acquired intangible assets, net......................... 75,504 12,315
Other assets............................................ 9,279 2,905
--------- ---------
Total assets.......................................... $ 414,165 $ 174,203
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Borrowing under lines of credit........................ $ 2,173 $ 1,879
Accounts payable....................................... 8,903 5,338
Accrued liabilities.................................... 39,895 26,012
Accrued income taxes................................... 3,815 2,741
Deferred revenues...................................... 19,973 14,963
Current portion of notes payable and capital lease ob-
ligations............................................. 29,797 43,141
--------- ---------
Total current liabilities............................. 104,556 94,074
Notes payable and capital lease obligations............. 733 766
Convertible subordinated notes.......................... 250,000 --
Stockholders' equity:
Preferred stock........................................ 4 1
Common stock........................................... 70 69
Additional paid-in capital............................. 237,500 211,556
Accumulated deficit.................................... (173,017) (130,546)
Notes receivable from shareholders..................... (544) (544)
Deferred compensation.................................. (4,601) (601)
Accumulated other comprehensive loss................... (536) (572)
--------- ---------
Total stockholders' equity............................ 58,876 79,363
--------- ---------
Total liabilities and stockholders' equity............ $ 414,165 $ 174,203
========= =========
</TABLE>
See accompanying notes
B-3
<PAGE>
BEA SYSTEMS, INC.
SUPPLEMENTAL CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JULY 31,
------------------
1998 1997
-------- --------
<S> <C> <C>
Operating activities:
Net loss.................................................. $(41,403) $(24,240)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:
Depreciation ............................................ 1,720 1,091
Amortization of deferred compensation.................... 458 122
Amortization of acquired intangible assets and certain
acquisition-related charges............................. 47,847 21,554
Amortization of debt issuance costs...................... 139 --
Changes in operating assets and liabilities, net of busi-
ness combinations....................................... (5,276) (3,170)
Other.................................................... (144) 255
-------- --------
Net cash provided by (used in) operating activities........ 3,341 (4,388)
-------- --------
Investing activities:
Purchase of computer equipment, furniture and leasehold
improvements............................................. (5,188) (746)
Payments for business combinations, net of cash acquired.. (98,358) (1,519)
Net sales of available-for-sale short-term investments.... (206,646) --
-------- --------
Net cash used in investing activities...................... (310,192) (2,265)
-------- --------
Financing activities:
Net borrowings (payments) under lines of credit........... 263 (9,050)
Net borrowings (payments) on notes payable and capital
lease obligations........................................ 230,138 (19,609)
Proceeds from issuance of common and preferred stock,
net...................................................... 16,006 140,052
-------- --------
Net cash provided by financing activities.................. 246,407 111,393
-------- --------
Net increase (decrease) in cash and cash equivalents....... (60,444) 104,740
Cumulative foreign currency translation adjustment......... 67 (263)
Cash and cash equivalents at beginning of period........... 90,984 3,872
-------- --------
Cash and cash equivalents at end of period................. $ 30,607 $108,349
======== ========
</TABLE>
See accompanying notes
B-4
<PAGE>
NOTES TO SUPPLEMENTAL CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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 the BEA Systems, Inc. (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
this current report on Form 8-K/A as amended, reflecting the merger with
WebLogic, Inc. (WebLogic). The results of operations for the six months ended
July 31, 1998 and 1997 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 5, on September 30, 1998, the Company acquired all of
the outstanding shares of WebLogic 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 WebLogic for
the periods presented.
The results of operations for the separate companies and the combined
amounts presented in the consolidated financial statements follow (in
thousands):
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JULY 31,
------------------
1998 1997
-------- --------
<S> <C> <C>
Total revenues:
BEA Systems, Inc....................................... $122,927 $ 67,153
WebLogic, Inc.......................................... 3,173 1,046
-------- --------
Combined............................................. 126,100 68,199
======== ========
Net income (loss):
BEA Systems, Inc....................................... $(36,130) $(22,887)
WebLogic, Inc.......................................... (5,273) (1,353)
-------- --------
Combined............................................. $(41,403) $(24,240)
======== ========
</TABLE>
B-5
<PAGE>
BEA SYSTEMS, INC.
NOTES TO SUPPLEMENTAL CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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>
SIX MONTHS ENDED
JULY 31,
------------------
1998 1997
-------- --------
<S> <C> <C>
Numerator:
Net loss............................................. $(41,403) $(24,240)
Effect of Series B redeemable convertible preferred
stock dividends..................................... -- (268)
-------- --------
Net loss available to common stockholders for basic
loss per share...................................... $(41,403) $(24,508)
======== ========
Denominator:
Weighted average shares.............................. 67,858 39,265
======== ========
Basic and diluted net loss per share................. $ (0.61) $ (0.62)
======== ========
</TABLE>
The computation of diluted net loss per share for the six months ended July
31, 1998 excludes the impact of the conversion of the 4% Convertible
Subordinated Notes issued in June and July 1998 (See Note 3), which are
convertible into 9.5 million shares of common stock, as well as 5.5 million
stock options and 4.2 million shares of convertible preferred stock, as such
impact would be antidilutive for the periods presented.
3. CONVERTIBLE SUBORDINATED DEBT OFFERING
On June 12, 1998, the Company completed the sale of $200 million of 4%
Convertible Subordinated Notes (the Notes) due June 15, 2005 in an offering to
qualified institutional investors. The Company granted the initial purchasers
a 30-day option to purchase an additional $50 million of the Notes to cover
overallotments, which was exercised in full in a transaction completed on July
7, 1998. 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 rate of 37.8698 shares per $1,000 principal amount of
Notes (equivalent to an approximate conversion price of $26.41 per share). The
Notes are redeemable at the option of the Company in whole or in part at any
time on or after June 5, 2001, in cash plus accrued interest through the
redemption date, if any, subject to certain events.
4. COMPREHENSIVE INCOME
Effective February 1, 1998, the Company adopted Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income", (FAS 130). FAS
130 establishes new rules for the reporting of comprehensive income and its
components and requires foreign currency translation adjustments 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.
B-6
<PAGE>
BEA SYSTEMS, INC.
NOTES TO SUPPLEMENTAL CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The components of comprehensive income, net of tax, are as follows (in
thousands):
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JULY 31,
------------------
1998 1997
-------- --------
<S> <C> <C>
Net loss............................................... $(41,403) $(24,240)
Foreign currency translation adjustment................ 25 (184)
Change in unrealized gain (loss) on available-for-sale
investments........................................... (37) --
-------- --------
Comprehensive loss..................................... $(41,415) $(24,424)
======== ========
</TABLE>
5. ACQUISITIONS
On June 16, 1998, the Company completed an Asset Purchase Agreement with NCR
Corporation (NCR) under which the Company purchased the TOP END enterprise
middleware technology and product family for approximately $92.4 million in
cash. The Company has accounted for the acquisition as a purchase of assets.
In connection with the purchase, the Company recorded a charge of $38.3
million relating to acquired in-process research and development in its second
quarter ended July 31, 1998. The remaining purchase price was primarily
allocated to intangible assets.
In July 1998, the Company acquired Entersoft Systems Corporation, an
independent distributor of TOP END products. The purchase price of the
transaction was approximately $2.7 million in cash. The Company has accounted
for the acquisition using the purchase method, with the purchase price being
allocated primarily to intangible assets.
On September 30, 1998, the Company issued 7,643,120 shares of its common
stock to acquire WebLogic, Inc. (WebLogic), a San Francisco-based software
company, in a transaction accounted for as a pooling of interests. The
Company's supplemental condensed consolidated financial statements for the six
months ended July 31, 1998 and 1997 include the financial position of WebLogic
as of July 31, 1998 and 1997, and its statement of operations, and cash flows
for the six months ended July 31, 1998 and 1997, respectively.
6. SUBSEQUENT EVENT
In August 1998, the Company paid the remaining $27.7 million outstanding
debt due to Novell, Inc. in connection with the acquisition of TUXEDO,
securing the perpetual rights to the BEA TUXEDO product.
B-7
<PAGE>
EXHIBIT 99.3
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 the
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 supplemental consolidated financial statements and notes thereto,
contained in this Form 8-K/A, reflecting the merger with WebLogic, Inc. 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."
On September 30, 1998, the Company issued 7,643,120 shares of its common
stock to acquire WebLogic, Inc., (WebLogic) a San Francisco-based software
company, in a transaction accounted for as a pooling of interests. All
financial information for dates and periods prior to the merger with WebLogic
have been recast to reflect the combined operations of the Company and
WebLogic.
RESULTS OF OPERATIONS
SIX MONTHS ENDED JULY 31, 1998 AND 1997, AND YEARS ENDED JANUARY 31, 1998 AND
1997
Revenues
The Company's revenues are derived from fees for software licenses and
customer support, education and consulting services. The Company's
consolidated revenues for the six months ended July 31, 1998 were $126.1
million, which represented an 85 percent increase from $68.2 million in the
same period of the prior fiscal year. Consolidated revenues also increased 158
percent to $166.4 million for the year ended January 31, 1998, compared to
$64.6 million for the year ended January 31, 1997.
License revenues for the six months ended July 31, 1998 were $86.5 million,
an increase of 68 percent from $51.5 million in the same period of the prior
fiscal year. License revenues increased 161 percent to $123.0 million for the
year ended January 31, 1998 as compared to $47.1 million for the year ended
January 31, 1997. The increases were mainly due to continued customer
acceptance of and increase in market awareness for the Company's middleware
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 76 percent of total revenues for
the six months ended July 31, 1998 and 1997, respectively, and 74 percent and
73 percent of total revenues for the years ended January 31, 1998 and 1997,
respectively. The decrease in license revenue as a percentage of total
revenues for the six months ended July 31, 1998 was due primarily to the
substantial increase in service revenues as a result of the Company's
increased focus on its service offerings.
Service revenues for the six months ended July 31, 1998 were $39.6 million,
an increase of 138 percent from $16.7 million in the same period of the prior
fiscal year. Service revenues represented 31 percent and 24 percent of total
revenues for the six months ended July 31, 1998 and 1997, respectively. For
the year ended January 31, 1998, service revenues were $43.5 million, an
increase of 148 percent from $17.5 million in the same period of the prior
fiscal year. Service revenues represented 26 percent and 27 percent of total
revenues for the years ended January 31, 1998 and 1997, respectively. The
increases in service revenues was due in large part
C-1
<PAGE>
to an increase in the number of service related product offerings as well as
an increase in the number of service and support employees and consultants.
International revenues accounted for 46 percent and 45 percent for the six
months ended July 31, 1998 and 1997, respectively. For the years ended January
31, 1998 and 1997, international revenues were 42 percent and 34 percent of
total revenue. The Company experienced revenue growth in the Americas and
Europe, with the European region experiencing particularly strong performance.
Revenues from the Asia/Pacific region for the six month period ended July 31,
1998 comprised a lower percentage of total revenues than posted in the same
period of the prior fiscal year as a result of economic, banking and currency
difficulties in that region which has resulted in the delay of orders for the
Company's products from Asian customers and is likely to result in further
delays and cancellations, of such orders. The Company anticipates that its
financial results will continue to be adversely impacted by weak Asian
economic conditions.
For the six month and fiscal year periods, the Company continued to derive
the majority of its license revenues from BEA TUXEDO and products that work in
conjunction with BEA TUXEDO. Additionally, service revenues 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.
Cost of Revenues
Consolidated cost of revenues increased 103 percent for the six months ended
July 31, 1998 to $35.0 million as compared to $17.3 million for the same
period in the prior fiscal year. As a percent of total revenue, total cost of
revenues increased from 25 percent in the six months ended July 31, 1997 to 28
percent in the six months ended July 31, 1998. This increase in cost of
revenues as a percentage of total revenue for the six months ended July 31,
1998 was primarily the result of an increase in services as a percentage of
total revenue. Traditionally, services carry a substantially higher cost of
revenues than software license sales. Consolidated cost of revenues for the
year ended January 31, 1998 was $41.0 million as compared to $20.0 million for
the year ended January 31, 1997, an increase of a 105 percent. As a percent of
total revenues, total cost of revenues decreased from 31 percent for the year
ended January 31, 1997 to 25 percent for the year ended January 31, 1998. The
decrease in cost of revenues as a percentage of total revenue for the year
ended January 31, 1998 was primarily the result of significant revenue growth.
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 $1.6 million and $1.2 million for the six months ended July
31, 1998 and 1997, respectively. Cost of licenses totaled $2.4 million and
$1.6 million for the years ended January 31, 1998 and 1997, respectively. For
both the six months and fiscal year periods presented, cost of licenses
represented approximately 2 percent of license revenues.
Cost of services, which consists primarily of salaries and benefits for the
Company's consulting and product support personnel, was $25.0 million and
$10.7 million for the six months ended July 31, 1998 and 1997, respectively,
representing 63 percent and 64 percent of total service revenues for each
period. Cost of services were $27.3 million and $9.7 million for the years
ended January 31, 1998 and 1997, respectively, representing 63 percent and 55
percent of total service revenues for each period. The increase in cost of
services was due primarily to additional consulting, education and support
personnel in response to the increased demand for the Company's service
products. Additionally, customer support costs increased due to the expansion
of customer support centers in Europe and Asia and increased 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
revenues 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 totaled $8.4 million and
$5.4 million for the six months ended July 31, 1998 and 1997, respectively and
$11.3 million and $8.7 million for the years ended January 31,
C-2
<PAGE>
1998 and 1997. As a percentage of total revenues, amortization expense was 7
percent and 8 percent for the six month periods ended July 31, 1998, and July
31, 1997. For the years ended January 31, 1998 and 1997, amortization expense
was 7 percent and 13 percent, respectively. While decreasing as a percentage
of total revenue, the increase in absolute dollars is primarily due to
intangible assets resulting from a number of strategic acquisitions. In the
future, amortization expense associated with intangible assets acquired
through July 31, 1998 is expected to total approximately $6.8 million and $6.2
million for the remaining third and fourth quarter of fiscal year 1999, and
approximately $26.9 million for the fiscal year ending January 31, 2000 and
thereafter approximately $23.2 million in aggregate through the fiscal year
ending January 31, 2004.
Operating Expenses
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 $58.9 million and $33.6 million for the six months ended July 31, 1998
and 1997, respectively, representing 47 percent and 49 percent of total
revenues for each period. Sales and marketing expenses were $77.8 million and
$31.3 million for the years ended January 31, 1998 and 1997, respectively,
representing 47 percent and 48 percent of total revenues for 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
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 relatively
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 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 six months ended
July 31, 1998 and 1997, research and development expenses were $21.0 million
and $11.9 million, respectively, representing 17 percent and 18 percent of
total revenues for each period. For the years ended January 31, 1998 and 1997,
research and development expenses were $29.2 million and $18.4 million,
respectively, representing 18 percent and 28 percent of total revenues for
each period. While decreasing as a percentage of total revenues, research and
development spending increased in absolute dollars due 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 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 $12.2 million and $8.2 million for
the six months ended July 31, 1998 and 1997, respectively, representing 10
percent and 12 percent of total revenues for each period. General and
administrative expenses were $18.2 million and $12.9 million for the years
ended January 31, 1998 and 1997, respectively, representing 11 percent and 20
percent of total revenues for each period. While decreasing as a percentage of
total revenues, 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
$803,000 and $83,000 for the six months ended July 31, 1998 and 1997,
respectively. For fiscal years ended January 31, 1998 and 1997, goodwill
amortization totaled $500,000 and $200,000, respectively. In the future,
amortization of goodwill acquired prior to July 31, 1998 is expected to total
$989,000 for each of the remaining quarters in fiscal year 1999, approximately
$4.0 million for the fiscal year ending January 31, 2000 and thereafter
approximately
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$4.9 million in aggregate through the fiscal year ending January 31, 2003. The
Company anticipates that general and administrative expenses will increase in
absolute dollars while decreasing slightly as a percentage of total revenues,
although there can be no assurances that total revenues will increase to
achieve such percentage.
Acquisition-related charges for the six months ended July 31, 1998 included
a $38.8 million write-off of acquired in-process research and development
expenses associated with the acquisition of TOP END from NCR. For the six
months ended July 31, 1997 and the year ended January 31, 1998, 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 ("Digital"). For the
year ended January 31, 1997, acquisition-related charges included a $62.2
million write-off of in-process research and development related to
technologies acquired from Novell.
Interest and Other
Interest expense was approximately $2.5 million for the six months ended
July 31, 1998 and $1.8 million for the same period of the prior fiscal year.
Interest income was $2.5 million for the six months ended July 31, 1998 and
was not material in the prior fiscal year. The increase in interest expense
was due to a higher average amount of outstanding borrowings in the second
quarter of fiscal year 1999 compared to the prior year, primarily due to the
issuance of $250 million of its 4% Convertible Subordinated Notes (the Notes).
Interest income increased due to a higher average cash, cash equivalents and
short-term investment balances, generated primarily from proceeds of the
convertible note offering.
Provision for Income Taxes
The Company recorded an income tax provision of $1.7 million and $1.2
million in the six months ended July 31, 1998 and 1997, respectively, as
compared to an income tax provision of $2.8 million and $800,000 for the years
ended January 31, 1998 and 1997, respectively. The Company's income tax
provision for the six months ended July 31, 1998, was higher than the
comparable period for the prior fiscal year, primarily due to taxable earnings
after giving consideration to federal and state net operating loss and tax
carryovers, foreign withholding tax and foreign income tax expense as a result
of local country profits.
LIQUIDITY AND CAPITAL RESOURCES
At July 31, 1998, cash, cash equivalents and short-term investments totaled
$246 million as compared to $99.7 million at January 31, 1998, an increase of
$146.3 million. The increase in cash, cash equivalents and short-term
investments was primarily due to proceeds from the Notes offset by cash used
in acquisitions, principally TOP END from NCR. Additionally, while the Company
generated approximately $3.3 million of cash from operations for the six
months ended July 31, 1998, cash was used to repay portions of the Company's
outstanding notes payable and capital lease obligations. Working capital
totaled $212.9 million at July 31, 1998, as compared to $56.7 million at
January 31, 1998.
At July 31, 1998, the Company's outstanding short and long-term debt
obligations were $282.7 million, up from $45.8 million at January 31, 1998. At
July 31, 1998, the Company's outstanding debt obligations consisted
principally of the $250 million Notes and $27.7 million ($38.7 million at
January 31, 1998) due to Novell, Inc. in connection with the acquisition of
TUXEDO. In August 1998, the Company paid in full the debt obligation due
Novell.
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 through July 31, 1999. However, the Company intends to make
additional acquisitions and may need to raise
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additional capital through future debt or equity financing to the extent
necessary to fund any such acquisitions. There can be no assurance that
additional financing will be available, if at all, or on terms favorable to
the Company.
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 does
not anticipate that the advent of the millennium will not have a material
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.
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RISK FACTORS
Investors should carefully consider the following risk factors in evaluating
an investment in the Common Stock offered hereby. This Prospectus includes
"forward-looking statements" within the meaning of Section 27A of the
Securities Act and Section 21E of the Exchange Act. All statements in this
prospectus other than statements of historical fact are "forward-looking
statements" for purposes of these provisions, including any projections of
earnings, revenues or other financial items, any statements of the plans and
objectives of management for future operations, any statements concerning
proposed new products or services, any statements regarding future economic
conditions or performance, and any statement of assumptions underlying any of
the foregoing. In some cases, forward-looking statements contain words an be
identified by the use of terminology such as "may," "will," "expects," "plans,"
"anticipates," "estimates," "potential," or "continue," or the negative thereof
or other comparable terminology. BEA's actual results could differ materially
from these projected or assumed in these forward-looking statements because of
risks and uncertainties, including risks and uncertainties described in the
risk factors below and elsewhere in this Prospectus. BEA assumes no obligation
to update any such forward-looking statement or reason why actual results might
differ.
LIMITED OPERATING HISTORY; INTEGRATION OF ACQUISITIONS; NO ASSURANCE OF
PROFITABILITY
BEA was incorporated in January 1995 and therefore has a limited operating
history. We have generated revenues to date primarily from sales of BEA TUXEDO,
a product to which we acquired worldwide rights in February 1996, and from fees
for related services. We have also acquired a number of businesses,
technologies and products, most recently WebLogic, Inc. (WebLogic). Our limited
operating history and the difficulties of integrating a number of separate and
independent business operations subject our business to numerous risks. At July
31, 1998, we had an accumulated deficit of approximately $173 million. In
addition, in connection with certain acquisitions completed prior to July 31,
1998, we recorded approximately $234.2 million as intangible assets,
approximately $158.7 million of which has been amortized and approximately
$75.5 million of which we expect to amortize in future periods through our
fiscal year ending January 31, 2004. We expect to expense to cost of revenues
and general and administrative expenses $26.0 million of such intangible assets
in the fiscal year ending January 31, 1999 and $30.8 million in the fiscal year
ended January 31, 2000. If we acquire additional businesses, products and
technologies in the future, we may report additional, potentially significant,
expenses related thereto. If future events cause the impairment of any
capitalized intangible assets, we may have to amortize expenses sooner than we
expect. For the foregoing reasons, there can be no assurance that we will be
profitable in any future period and recent operating results should not be
considered indicative of future financial performance.
POTENTIAL FLUCTUATIONS IN QUARTERLY OPERATING RESULTS
We expects that we will experience significant fluctuations in our future
quarterly operating results as a result of many factors, including, among
others:
. the size and timing of customer orders, introduction or enhancement of
our products or our competitors' products
. market acceptance of middleware products
. the lengthy sales cycle for our products
. technological changes in computer systems and environments
. structure and timing of future acquisitions of businesses, products and
technologies, including the acquisition of the TOP END enterprise
middleware technology and product family from NCR and the WebLogic
application server technology
. the impact and duration of deteriorating economic and political
conditions in Asia and related declines in Asian currency values
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. general economic conditions which can affect our customers' capital
investment levels
. our ability to develop, introduce and market new products on a timely
basis
. changes in our or our competitors' pricing policies, customer order
deferrals in anticipation of future new products and product enhancements
. our success in expanding our sales and marketing programs
. the mix of our products and services sold, mix of distribution channels
. our ability to meet the service requirements of our customers
. costs associated with acquisitions, including the acquisition of the TOP
END enterprise middleware technology and product family from NCR and the
WebLogic acquisition
. the terms and timing of financing activities
. loss of key personnel and fluctuations in other foreign currency exchange
rates
. interpretations of the recently introduced statement of position on
software revenue recognition.
As a result of all of these factors, we believe that quarterly revenues and
operating results are difficult to forecast and period-to-period comparisons of
our results of operations are not necessarily meaningful and should not be
relied upon as indications of future performance.
Our revenues are derived from large orders as customers deploy our products
throughout their organizations. Increases in the revenue size of individual
license transactions also increase the risk of fluctuation in future quarterly
results. If we cannot generate large customer orders, or customers delay or
cancel such orders in a particular quarter, it will have a material adverse
effect on our revenues and, more significantly on a percentage basis, our net
income or loss in that quarter. Moreover, we typically receive and fulfill a
majority of our orders within the quarter, with a substantial portion occurring
in the last month of a fiscal quarter. As a result, we may not learn of revenue
shortfalls until late in a fiscal quarter. Additionally, our operating expenses
are based in part on our expectations for future revenue and are relatively
fixed in the short term. Any revenue shortfall below our expectations could
have an immediate and significant adverse effect on our results of operations.
As is common in the software industry, we believe that a variety of factors
cause our fourth quarter orders to be favorably impacted, 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. We
anticipates that this seasonal impact is likely to increase as we continue to
focus on large corporate accounts.
Similarly, shortfalls in our revenues and earnings from levels expected by
securities analysts could have an immediate and significant adverse effect on
the trading price of our Common Stock. Moreover, our 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 our performance may also
affect our stock price.
RISKS ASSOCIATED WITH PAST AND FUTURE ACQUISITIONS
From our inception in January 1995, we have made a number of strategic
acquisitions. Integration of acquired companies, divisions and products
involves the assimilation of potentially conflicting operations and products,
which divert the attention of our management team and may have a material
adverse effect on our operating results in future quarters. We acquired
WebLogic, Inc. in September 1998 (discussed below), Leader Group and Penta in
the quarter ended April 30, 1998, the Entersoft Systems Corporation in July
1998, and TOP END (discussed below) in June 1998. We intend 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 the risk we will not successfully
assimilate the acquired operations
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and products, and retain key employees of the acquired operations. There are
also risks relating to the diversion of our management's attention and
difficulties and uncertainties in our ability to maintaining the key business
relationships the acquired entities have established. In addition, if we
undertake future acquisitions, we may issue dilutive securities, assume or
incur additional debt obligations and large one-time expenses, and acquire
intangible assets that would result in significant future amortization expense.
Any of these events could have a material adverse effect on our business,
operating results and financial condition.
The recently completed WebLogic merger is subject to a number of risks that
could adversely affect our ability to achieve the anticipated benefits of this
transaction. These risks include the risk that we will not be able to
successfully integrate our products and business with WebLogic's and risks
relating to the diversion of the attention of the Company's management team,
particularly Alfred Chung, the Company's Chief Technical Officer, who will
oversee WebLogic's operations. There are also risks relating to competition
from other web application server providers, particularly those recently
acquired by companies with significantly greater resources than ours. The need
to focus our management's attention on establishing relationships with, and
procedures for communicating with, WebLogic employees may reduce our ability to
successfully pursue other opportunities for a period of time. Any departure of
key WebLogic employees or significant numbers of other WebLogic employees could
have a material adverse effect on our operations. We may face difficulties in
retaining WebLogic customers.
The recently-completed TOP END acquisition is also subject to a number of
risks that could adversely affect our ability to achieve benefits we anticipate
from the TOP END acquisition. The location of the TOP END operations and
personnel in San Diego, California, where we did not previously have any
material operations exacerbates the risks of this acquisition. The need to
focus management's attention on establishing relationships with, and procedures
for communicating with, TOP END employees may reduce our ability to
successfully pursue other opportunities for a period of time. Any departure of
key TOP END employees or significant numbers of other TOP END employees could
have a material adverse effect on our operations. We may face difficulties in
retaining TOP END customers, and customers' uncertainties as to our plans and
abilities to support both the TOP END products and BEA TUXEDO could adversely
affect our ability to retain these customers, which could have a material
adverse effect on our operations. We wrote off $38.3 in our quarter ended July
31, 1998 for acquired in-process research and development related to the TOP
END acquisition, and we will incur substantial ongoing amortization expenses,
which will have a negative impact on our future operating results. See "Recent
Events."
PRODUCT CONCENTRATION
We currently derive the majority of our license and service revenues from BEA
TUXEDO and from related products and services we expect these products and
services to continue to account for the majority of our 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 our business and
consolidated results of operations and financial condition.
LENGTHY SALES CYCLE
Our customers typically use our products to integrate large, sophisticated
applications that are critical to their business, and their purchases are often
part of their implementation of a distributed computing environment. Customers
evaluating our software products face complex decisions regarding alternative
approaches to the integration of enterprise applications, competitive product
offerings, rapidly changing software technologies and limited internal
resources due to other information systems requirements. For these and other
reasons, the sales cycle for our products is lengthy and is subject to delays
or cancellation over which we have little or no control. To the extent the
revenue size of our license transactions increases, we expect customer
evaluations and procurement processes to lengthen and thus extend the overall
sales cycle. We believe general economic conditions which impact customers'
capital investment decisions also affect our sales cycles. Any significant
change in our sales cycle could have a material adverse effect on our business,
results of operations and financial condition.
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Although we use a standard license agreement which meets the revenue
recognition criteria under current generally accepted accounting principles,
we must often negotiate and revise terms and conditions of this standard
agreement, particularly in larger sales transactions. Negotiation of mutually
acceptable language can extend the sales cycle and in certain situations, may
require us to defer recognition of revenue on the sale. In addition, while we
do not expect the recently issued Statement of Position (SOP) 97-2, Software
Revenue Recognition (as amended by SOP 98-4), to have a material impact on our
revenues and earnings, detailed implementation guidance of these standards has
not yet been issued. Once issued, such guidance could require us to make
unanticipated changes in our current revenue recognition practices and such
changes could have an adverse impact on revenues and earnings.
COMPETITION
The market for middleware software and related services is highly
competitive. Our 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 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 we offer. Further, 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 we offer. A number
of our competitors and potential competitors have longer operating histories,
significantly greater financial, technical, marketing and other resources,
greater name recognition and a larger installed base of customers than us.
Our principal competitors currently include hardware vendors who bundle
their own 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 us to compete with
IBM in its installed base, where IBM has certain inherent advantages due to
its significantly greater financial, technical, marketing and other resources,
greater name recognition and the integration of its enterprise middleware
functionality with its proprietary hardware and database systems. We need to
differentiate our products based on functionality, interoperability with non-
IBM systems, performance and reliability and establish our products as more
effective solutions to customers' needs. Oracle is the primary relational
database vendor offering products that are intended to serve as alternatives
to our enterprise middleware solutions.
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 us to compete with Microsoft in the
Windows NT marketplace, where Microsoft will have certain inherent advantages
due to its significantly greater financial, technical, marketing and other
resources, greater name recognition, its substantial installed base and the
integration of its middleware functionality with Windows NT. If Microsoft
successfully incorporates middleware software products into Windows NT or
separately offers middleware applications, we will need to differentiate our
products based on functionality, interoperability with non-Microsoft
platforms, performance and reliability and establish our products as more
effective solutions to customers' needs. There can be no assurance that we
will be able to successfully differentiate our products from those offered by
Microsoft, or that Microsoft's entry into the middleware market will not
materially adversely affect our business, operating results and financial
condition.
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In addition, current and potential competitors may make strategic
acquisitions or establish cooperative relationships among themselves or with
third parties, thereby increasing the ability of their products to address the
needs of our current and prospective customers. Accordingly, it is possible
that new competitors or alliances among current and new competitors may emerge
and rapidly gain significant market share. Such competition could materially
adversely affect our ability to sell additional software licenses and
maintenance, consulting and support services on terms favorable to us. Further,
competitive pressures could require us to reduce the price of our products and
related services, which could materially adversely affect our business,
operating results and financial condition. There can be no assurance that we
will be able to compete successfully against current and future competitors and
the failure to do so would have a material adverse effect upon our business,
operating results and financial condition.
INTERNATIONAL OPERATIONS
International revenues accounted for 46 percent and 45 percent of our
consolidated revenues for the six months ended July 31, 1998 and 1997,
respectively. We sell our products and services through a network of branches
and subsidiaries located in 24 countries worldwide. In addition, we also market
through distributors in Europe and the Asia/Pacific region. We believe that our
success depends upon continued expansion of our international operations. Our
international business is subject to a number of risks, including unexpected
changes in regulatory practices and tariffs, greater difficulties in staffing
and managing foreign operations, longer collection cycles, seasonality,
potential changes in tax laws, greater difficulty in protecting intellectual
property and the impact of fluctuating exchange rates between the US dollar and
foreign currencies in markets where BEA does business, in particular the French
franc, the German mark, the British pound, the Japanese yen, the Australian
dollar and the Korean won. General economic and political conditions in these
foreign markets may also impact our international revenues. Since the late
summer of 1997, a number of Pacific Rim countries have experienced economic,
banking and currency difficulties that have led to economic downturns in those
countries. Among other things, the decline in value of Asian currencies,
together with difficulties obtaining credit, has resulted in a decline in the
purchasing power of our Asian customers, which in turn has resulted in the
delay of orders for our products from certain Asian customers and is likely to
result in further delays and, possibly the cancellation, of such orders. As a
result of such delays, our revenues from Asia for the six months ended July 31,
1998 comprised a lower percentage of total revenues than we have historically
experienced. We anticipate that weak Asian conditions will continue to
adversely impact our financial results. It is difficult for us to predict the
extent of the future impact of these conditions. There can be no assurances
that these factors and other factors will not have a material adverse effect on
our future international revenues and consequently on our business and
consolidated financial condition and results of operations.
MANAGEMENT OF GROWTH
We are continuing to experience a period of rapid and substantial growth that
has placed, and if such growth continues would continue to place, a strain on
the Company's administrative and operational infrastructure. We have increased
the number of our employees from 120 employees in three offices in the United
States at January 31, 1996 to approximately 1,200 employees in 51 offices in 24
countries at July 31, 1998. Our ability to manage our staff and growth
effectively requires us to continue to improve our operational, financial and
management controls, reporting systems and procedures. In this regard, we are
currently updating our management information systems to integrate financial
and other reporting among our multiple domestic and foreign offices. In
addition, we intend to continue to increase our staff worldwide and to continue
to improve the financial reporting and controls for our global operations.
There can be no assurance that we will be able to successfully implement
improvements to our management information and control systems in an efficient
or timely manner or that, during the course of this implementation, we will not
discover deficiencies in existing systems and controls. If we are unable to
manage growth effectively, our business, results of operations and financial
condition will be materially adversely affected.
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DEPENDENCE ON GROWTH OF MARKET FOR MIDDLEWARE
We sell our products and services in the middleware market. This market is
emerging and is characterized by continuing technological developments,
evolving industry standards and changing customer requirements. Our success is
dependent in large part on large customers with substantial legacy mainframe
systems accepting our middleware software products. Our future financial
performance will depend in large part on continued growth in the number of
companies extending their mainframe-based, mission-critical applications to an
enterprise-wide distributed computing environment 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 we currently anticipate, or if we experience
increased competition in this market, our business, results of operations and
financial condition will be adversely affected.
DEPENDENCE ON KEY PERSONNEL AND NEED TO HIRE ADDITIONAL PERSONNEL
We believe our future success will depend upon our 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 these types of employees is intense, and there
can be no assurance that we will be able to retain our key employees or that we
will be successful in attracting, assimilating and retaining them in the
future. As we seek to expand our global organization, the hiring of qualified
sales, technical and support personnel will be difficult due to the limited
number of qualified professionals. Failure to attract, assimilate and retain
key personnel would have a material adverse effect on our business, results of
operations and financial condition.
EXPANDING DISTRIBUTION CHANNELS AND RELIANCE ON THIRD PARTIES
To date, we have sold our products principally through our direct sales
force, as well as through indirect sales channels, such as ISVs, hardware OEMs,
systems integrators, independent consultants and distributors. Our ability to
achieve significant revenue growth in the future will depend in large part on
our success in expanding our direct sales force and in further establishing and
maintaining relationships with distributors, ISVs and OEMs. In particular, a
significant part of our strategy is to embed our technology in products our ISV
customers offer. We intend to seek distribution arrangements with other ISVs to
embed our middleware technology in their products and expect that these
arrangements will account for a significant portion of our revenues in future
periods. There can be no assurance that we will be able to successfully expand
our direct sales force or other distribution channels, secure license
agreements with additional ISVs on commercially reasonable terms or at all, or
otherwise further develop our relationships with distributors and ISVs. There
also can be no assurance that any such expansion or additional license
agreements would increase our revenues. Although we believe that our
investments in the expansion of our direct sales force and in the establishment
of other distribution channels through third parties ultimately will improve
our operating results, to the extent that such investments are made and
revenues do not correspondingly increase, our business, results of operations
and financial condition will be materially and adversely affected.
We rely on informal relationships with a number of consulting and systems
integration firms to enhance our sales, support, service and marketing efforts,
particularly with respect to implementation and support of our products as well
as lead generation and assistance in the sale process. We will need to expand
our relationships with third parties in order to support license revenue
growth. Many such firms have similar, and often more established, relationships
with our principal competitors. 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 our customers, that we will be able to maintain an effective, long
term relationship with these third parties, or that these third parties will
continue to meet the needs of our customers.
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RAPID TECHNOLOGY CHANGE; DEPENDENCE ON NEW PRODUCTS AND PRODUCT ENHANCEMENTS
The market for our 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 our existing products obsolete and unmarketable. As a result, our
success depends upon our ability to enhance existing products, respond to
changing customer requirements and develop and introduce in a timely manner new
products that keep pace with technological developments and emerging industry
standards. There can be no assurance that our products will adequately address
the changing needs of the marketplace or that we will be successful in
developing and marketing enhancements to our existing products or products
incorporating new technology on a timely basis. Failure to develop and
introduce new products, or enhancements to existing products, in a timely
manner in response to changing market conditions or customer requirements, will
materially and adversely affect the Company's business, results of operations
and financial condition.
RISK OF SOFTWARE DEFECTS
The software products we offer are internally complex and, despite extensive
testing and quality control, may contain errors or defects, especially when we
first introduced them. We may need to issue corrective releases of our software
products to fix these defects or errors. These defects and errors could also
cause damage to our reputation, loss of revenue, product returns or order
cancellations, or lack of market acceptance of our products. Accordingly, these
defects and errors could have a material and adverse effect on our business,
results of operations and financial condition.
Our license agreements with our customers typically contain provisions
designed to limit our exposure to potential product liability claims. It is
possible, however, that the limitation of liability provisions contained in our
license agreements may not be effective as a result of existing or future
federal, state or local laws or ordinances or unfavorable judicial decisions.
Although we have not experienced any product liability claims to date, sale in
and supporting of our products entails the risk of such claims, which could be
substantial in light of the use of such products in mission-critical
applications. If a claimant successfully brings a product liability claim
against us, it could have a material adverse effect on our business, results of
operations and financial condition.
DEPENDENCE ON PROPRIETARY TECHNOLOGY; RISK OF INFRINGEMENT
Our success depends upon our proprietary technology. We rely on a combination
of patent, copyright, trademark and trade secret rights, confidentiality
procedures and licensing arrangements to establish and protect our proprietary
rights. No assurance can be given that competitors will not successfully
challenge the validity or scope of our patents or that such patents will
provide a competitive advantage to us.
As part of our confidentiality procedures, we generally enter into non-
disclosure agreements with our employees, distributors and corporate partners
and into license agreements with respect to our software, documentation and
other proprietary information. Despite these precautions, third parties could
copy or otherwise obtain and use our products or technology without
authorization, or to develop similar technology independently. In particular,
we have, in the past, provided certain hardware OEMs with access to our source
code and any unauthorized publication or proliferation of this source code
could materially adversely affect our business, operating results and financial
condition. It is difficult for us to police unauthorized use of our products,
and although we are unable to determine the extent to which piracy of our
software products exists, software piracy is a persistent problem. Effective
protection of intellectual property rights is unavailable or limited in certain
foreign countries. There can be no assurance that the protection of our
proprietary rights will be adequate or that our competitors will not
independently develop similar technology, duplicate our products or design
around any patents or other intellectual property rights we hold.
We do not believe that any of our products infringe the proprietary rights of
third parties. There can be no assurance, however, that third parties will not
claim the Company's current or future products infringe their
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rights. Any such claims, with or without merit, could cause costly litigation
that could absorb significant management time, which could materially
adversely effect our business, operating results and financial condition. Such
claims might require us to enter into royalty or license agreements. If
required, the Company may not be able to obtain such royalty or license
agreements, or obtain them on terms acceptable to us, which could have a
material adverse effect upon the Company's business, operating results and
financial condition.
CONTROL BY MANAGEMENT AND CURRENT STOCKHOLDERS
As of July 31, 1998, BEA's officers and directors and their affiliates, in
the aggregate, had voting control over approximately 62 percent of BEA's
voting Common Stock. In particular, Warburg, Pincus Ventures, L.P. (Warburg)
had voting control over approximately 49 percent of BEA's voting Common Stock
and beneficially owned approximately 63 percent of BEA'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 combined with BEA's
officers and directors under certain circumstances could have the effect of
delaying or preventing a change in control of BEA.
SIGNIFICANT LEVERAGE; DEBT SERVICE
In connection with the sale of 4% Convertible Subordinated Notes (Notes), we
incurred $250 million in long-term indebtedness. Our principal and interest
payment obligations increase substantially because of this indebtedness. The
degree to which we are leveraged could materially and adversely affect our
ability to obtain financing for working capital, acquisitions or other
purposes and could make us more vulnerable to industry downturns and
competitive pressures. Our ability to meet our debt service obligations will
be dependent upon our future performance, which will be subject to financial,
business and other factors affecting our operations, many of which are beyond
our control.
We will require substantial amounts of cash to fund scheduled payments of
interest on the Notes, payment of the principal amount of the Notes, payment
of principal and interest on our other indebtedness, future capital
expenditures and any increased working capital requirements. If we cannot meet
our cash requirements out of cash flow from operations, there can be no
assurance that we will be able to obtain alternative financing. If we cannot
obtain such financing, our ability to respond to changing business and
economic conditions, to make future acquisitions, to absorb adverse operating
results or to fund capital expenditures or increased working capital
requirements may be adversely affected. If we do not generate sufficient
increases in cash flow from operations to repay the Notes at maturity, we
could attempt to refinance the Notes; however, such a refinancing may not be
available on terms acceptable to us, if at all. Any failure by us to satisfy
our obligations with respect to the Notes at maturity (with respect to
payments of principal) or prior thereto (with respect to payments of interest
or required repurchases) would constitute a default under the indenture
entered into in connection with the issuance of the Note and could cause a
default under agreements governing other indebtedness, if any, of BEA.
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