<PAGE>
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
----------------
FORM 10-Q
(Mark One)
[X] Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the quarterly period ended October 31, 1999
OR
[_] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from to .
Commission File Number: 0-22369
BEA SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<CAPTION>
Delaware 77-0394711
<S> <C>
(State or other jurisdiction of incorporation (I. R. S. Employer Identification No. )
or organization)
</TABLE>
2315 North First Street
San Jose, California 95131
(Address of principal executive offices)
(408) 570-8000
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [_]
As of November 30, 1999, there were approximately 61,366,000 shares of the
Registrant's Common Stock outstanding and 17,824,000 shares of Registrant's
Class B Common Stock outstanding.
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BEA SYSTEMS, INC.
INDEX
<TABLE>
<CAPTION>
Page
No.
----
<C> <S> <C>
PART I. FINANCIAL INFORMATION
ITEM 1. Condensed Consolidated Financial Statements (Unaudited):
Condensed Consolidated Statements of Operations and
Comprehensive Loss
Three and Nine months ended October 31, 1999 and 1998.......... 2
Condensed Consolidated Balance Sheets
October 31, 1999 and January 31, 1999............ ........... . 3
Condensed Consolidated Statements of Cash Flows
Nine months ended October 31, 1999 and 1998.................... 4
Notes to Condensed Consolidated Financial Statements............ 5
ITEM 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations..................... .................... 8
ITEM 3. Quantitative and Qualitative Disclosures about Market Risk...... 26
PART II. OTHER INFORMATION
ITEM 6. Exhibits and Reports on Form 8-K................................ 28
Signatures................................................................ 29
</TABLE>
1
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM I. FINANCIAL STATEMENTS
BEA SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE LOSS
(in thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
Three months ended Nine months ended
October 31, October 31,
-------------------- ------------------
1999 1998 1999 1998
--------- --------- -------- --------
<S> <C> <C> <C> <C>
Revenues:
License fees........................ $ 77,912 $ 53,394 $198,715 $139,906
Services............................ 48,542 27,520 116,526 67,108
--------- -------- -------- --------
Total revenues.................... 126,454 80,914 315,241 207,014
Cost of revenues:
Cost of license fees................ 1,310 1,073 3,427 2,696
Cost of services.................... 27,382 16,085 65,764 41,076
Amortization of certain acquired
intangible assets.................. 6,925 7,878 21,027 16,286
--------- -------- -------- --------
Total cost of revenues............ 35,617 25,036 90,218 60,058
--------- -------- -------- --------
Gross profit.......................... 90,837 55,878 225,023 146,956
Operating expenses:
Sales and marketing................. 56,356 38,031 146,674 96,975
Research and development............ 16,754 11,083 42,598 32,060
General and administrative.......... 14,236 7,776 34,320 19,941
Acquisition-related charges......... - 3,453 - 42,244
--------- -------- -------- --------
Total operating expenses.......... 87,346 60,343 223,592 191,220
--------- -------- -------- --------
Income (loss) from operations......... 3,491 (4,465) 1,431 (44,264)
Interest income (expense) and other,
net.................................. 454 (252) (219) (177)
--------- -------- -------- --------
Income (loss) before provision for
income taxes......................... 3,945 (4,717) 1,212 (44,441)
Provision for income taxes............ 3,800 1,498 7,100 3,177
--------- -------- -------- --------
Net income (loss)..................... 145 (6,215) (5,888) (47,618)
Other comprehensive income (loss):
Foreign currency translation
adjustments........................ (226) (143) (351) (107)
Unrealized gain (loss) on available-
for-sale investments, net of income
taxes.............................. (68) 18 (184) (19)
--------- -------- -------- --------
Comprehensive loss.................... $ (149) $ (6,340) $ (6,423) $(47,744)
========= ======== ======== ========
Net income (loss) per share:
Basic............................... $ (0.00) $ (0.09) $ (0.08) $ (0.70)
========= ======== ======== ========
Diluted............................. $ (0.00) $ (0.09) $ (0.08) $ (0.70)
========= ======== ======== ========
Number of shares used in per share
calculations:
Basic............................... 77,820 70,660 76,730 68,792
========= ======== ======== ========
Diluted............................. 85,290 70,660 76,730 68,792
========= ======== ======== ========
</TABLE>
See accompanying notes.
2
<PAGE>
BEA SYSTEMS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
<TABLE>
<CAPTION>
October 31, 1999 January 31, 1999
---------------- ----------------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.................. $ 231,311 $ 232,556
Short-term investments..................... 46,190 3,895
Accounts receivable, net................... 116,079 77,068
Other current assets....................... 21,431 4,279
--------- ---------
Total current assets..................... 415,011 317,798
Computer equipment, furniture and leasehold
improvements, net........................... 25,329 17,185
Acquired intangible assets, net.............. 62,703 58,901
Other assets................................. 8,782 9,127
--------- ---------
Total assets............................. $ 511,825 $ 403,011
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Borrowing under lines of credit............ $ - $ 679
Accounts payable........................... 14,185 7,615
Accrued liabilities........................ 90,075 47,747
Accrued income taxes....................... 9,571 5,991
Deferred revenues.......................... 71,388 33,784
Current portion of notes payable and
capital lease obligations................. 29 43
--------- ---------
Total current liabilities................ 185,248 95,859
Notes payable and other long-term
obligations................................. 10,440 112
Convertible subordinated notes............... 250,000 250,000
Commitments and contingencies
Stockholders' equity:
Common stock............................... 79 77
Additional paid-in capital................. 258,067 243,097
Accumulated deficit........................ (189,004) (183,116)
Notes receivable from shareholders......... (544) (544)
Deferred compensation...................... (1,332) (1,880)
Accumulated other comprehensive loss....... (1,129) (594)
--------- ---------
Total stockholders' equity............... 66,137 57,040
--------- ---------
Total liabilities and stockholders'
equity.................................. $ 511,825 $ 403,011
========= =========
</TABLE>
See accompanying notes.
3
<PAGE>
BEA SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Nine months ended
October 31,
--------------------
1999 1998
--------- ---------
<S> <C> <C>
Operating activities:
Net loss............................................... $ (5,888) $ (47,618)
Adjustments to reconcile net loss to net cash provided
by operating activities:
Depreciation and amortization.......................... 5,273 3,021
Amortization of deferred compensation................ 548 2,675
Amortization of certain acquired intangible assets
and acquisition-related charges..................... 27,621 60,265
Amortization of debt issuance costs.................. 261 260
Changes in operating assets and liabilities.......... 31,734 8,189
Other................................................ (399) (483)
--------- ---------
Net cash provided by operating activities................ 59,150 26,309
--------- ---------
Investing activities:
Purchase of computer equipment, furniture and leasehold
improvements.......................................... (13,170) (9,104)
Payments for business combinations, net of cash
acquired.............................................. (19,524) (103,378)
Net maturities (purchases) of available-for-sale short-
term investments...................................... (42,479) 4,856
--------- ---------
Net cash used in investing activities.................... (75,173) (107,626)
--------- ---------
Financing activities:
Net borrowings under lines of credit................... (679) 303
Net payments on notes payable and capital lease
obligations........................................... (373) 200,426
Proceeds from issuance of common stock and preferred
stock, net............................................ 14,972 18,544
--------- ---------
Net cash provided by financing activities................ 13,920 219,273
--------- ---------
Net increase (decrease) in cash and cash equivalents..... (2,103) 137,956
Effect of exchange rate changes on cash.................. 858 (107)
Cash and cash equivalents at beginning of period......... 232,556 90,984
--------- ---------
Cash and cash equivalents at end of period............... $ 231,311 $ 228,833
========= =========
</TABLE>
See accompanying notes.
4
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BEA SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Basis of Presentation
The condensed consolidated financial statements included herein are unaudited
and reflect all adjustments (consisting only of normal recurring adjustments)
which are, in the opinion of management, necessary for a fair presentation of
the financial position, results of operations and cash flows for the interim
periods. These condensed consolidated financial statements should be read in
conjunction with the consolidated financial statements and notes thereto,
together with Management's Discussion and Analysis of Financial Condition and
Results of Operations contained in the BEA Systems, Inc. ("BEA" or the
"Company") Annual Report on Form 10-K for the fiscal year ended January 31,
1999. The results of operations for the three and nine months ended October 31,
1999 are not necessarily indicative of the results for the entire fiscal year
ending January 31, 2000.
The consolidated balance sheet at January 31, 1999 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.
Revenue recognition
The Company recognizes revenues in accordance with American Institute of
Certified Public Accountants Statement of Position 97-2, Software Revenue
Recognition, as amended. Revenue from software license agreements is recognized
when persuasive evidence of an agreement exists, delivery of the product has
occurred, no significant vendor obligations are remaining to be fulfilled, the
fee is fixed and determinable, and collectibility is probable.
Services revenue includes consulting services, post-contract customer support
and training. Software maintenance agreements provide technical support and the
right to unspecified upgrades on an if-and-when available basis. Consulting
revenue and the related cost of services are recognized on a time and materials
basis; however, revenues from certain fixed-price contracts are recognized on
the percentage of completion basis, which involves the use of estimates. Actual
results could differ from those estimates and, as a result, future gross margin
on such contracts may be more or less than planned. The amount of consulting
contracts recognized on a percentage of completion basis has not been material
to date. Post-contract customer support revenue is recognized ratably over the
term of the support period (generally one year) and training and other service
revenues are recognized as the related services are provided. The unrecognized
portion of amounts paid in advance for licenses and services is reported as
deferred revenues.
Recent acquisitions
The Company acquired Technology Resource Group ("TRG") on July 20, 1999 and
Avitek, Inc. ("Avitek") on August 5, 1999 using the purchase method of
accounting.
Note 2. Earnings Per Share
Basic net income (loss) per share is computed based on the weighted average
number of shares of the Company's common stock. Diluted net income (loss) per
share is computed based on the weighted average number of shares of the
Company's common stock and common equivalent shares (stock options, warrants,
convertible notes and preferred stock), if dilutive.
5
<PAGE>
The following is a reconciliation of the numerators and denominators of
diluted income (loss) per share computations (in thousands, except per share
data):
<TABLE>
<CAPTION>
Three months Nine months
ended ended
October 31, October 31,
---------------- -----------------
1999 1998 1999 1998
------- ------- ------- --------
<S> <C> <C> <C> <C>
Numerator:
Net income (loss)........................ $ 145 $(6,215) $(5,984) $(47,618)
======= ======= ======= ========
Denominator:
Denominator for basic net income (loss)
per
share-weighted average shares........... 78,555 72,130 77,649 70,446
Shares subject to repurchase.............. (735) (1,470) (919) (1,654)
------- ------- ------- --------
Denominator for basic net income (loss)
per
Share-weighted average shares, net...... 77,820 70,660 76,730 68,792
Dilutive potential common shares,
using treasury stock method............. 7,470 - - -
------- ------- ------- --------
Denominator for diluted net income (loss)
per share............................... 85,290 70,660 76,730 68,792
======= ======= ======= ========
Basic net income (loss) per share........ $ 0.00 $ (0.09) $ (0.08) $ (0.70)
======= ======= ======= ========
Diluted net income (loss) per share...... $ 0.00 $ (0.09) $ (0.08) $ (0.70)
======= ======= ======= ========
</TABLE>
The computations of diluted net income (loss) per share for the three and
nine months ended October 31, 1999 and 1998 exclude the impact of the
conversion of the 4% Convertible Subordinated Notes issued in June and July
1998 (see Note 3), which are convertible into 9,466,111 shares of common stock,
as such impact would be antidilutive for the periods presented. Additionally,
the computations of diluted net income (loss) per share for the three months
ended October 31, 1998 and the nine months ended October 31, 1999 and 1998
exclude the impact of options to purchase approximately 6.2 million, 6.0
million and 5.5 million shares, respectively as this would have an antidilutive
effect on EPS for the periods presented.
Note 3. Convertible Subordinated Debt Offering
In June and July, 1998, the Company completed the sale of $250 million of 4%
Convertible Subordinated Notes ("Notes") due June 15, 2005 in an offering to
Qualified Institutional Buyers. The Notes are subordinated to all existing and
future senior indebtedness of the Company, and the principal amount of the
Notes is convertible into common stock of the Company at a conversion rate of
37.87 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, for
cash plus accrued interest, if any, through the redemption date, subject to
certain events. Interest is payable semi-annually on June 15th and December
15th.
Note 4. Comprehensive Income (Loss)
The components of accumulated other comprehensive loss are as follows (in
thousands):
<TABLE>
<CAPTION>
October 31, January 31,
1999 1999
----------- -----------
<S> <C> <C>
Foreign currency translation adjustment............... $ (918) $(567)
Unrealized loss on available-for-sale investments, net
of tax............................................... (211) (27)
------- -----
Total accumulated other comprehensive loss............ $(1,129) $(594)
======= =====
</TABLE>
6
<PAGE>
Note 5. Industry and Geographic Segment Information
Through October 31, 1999, the Company has operated exclusively in one
operating segment. Information regarding the Company's operations by geographic
areas at October 31, 1999 and 1998 and for the three and nine months then ended
is as follows (in thousands):
<TABLE>
<CAPTION>
Three months ended Nine months ended
October 31, October 31,
------------------------------------
1999 1998 1999 1998
--------- ----------------- --------
<S> <C> <C> <C> <C>
Total revenues
United States............................. $ 75,130 $ 53,768 $187,229 $121,312
Europe, Middle East and Africa (EMEA)..... 33,117 22,209 94,262 69,931
Asia/Pacific.............................. 17,802 4,676 32,734 14,346
Other Non-United States................... 405 261 1,016 1,425
--------- -------- -------- --------
$ 126,454 $ 80,914 $315,241 $207,014
========= ======== ======== ========
<CAPTION>
1999 1998
-------- --------
<S> <C> <C> <C> <C>
Long-lived assets:
United States................................................ $ 92,465 $ 86,196
Europe, Middle East and Africa............................... 2,707 2,872
Asia/Pacific ................................................ 1,519 1,401
Other Non-United States...................................... 27 51
-------- --------
$ 96,718 $ 90,520
======== ========
</TABLE>
Within Asia/Pacific, Japan represented 11 percent and 7 percent of total
revenues for the three and nine months ended October 31, 1999. Revenue is
attributed to regions based on customer location.
Note 6. Subsequent Events
In November 1999, the Company's Board of Directors approved a two-for-one
split of the Company's common stock effected by a stock dividend applicable to
stockholders of record on November 19, 1999 and is payable on December 19,
1999. Share amounts and related information have not been restated to reflect
the stock split.
In November 1999, the Company purchased The Theory Center ("TTC") through the
issuance of 1,817,707 shares of common stock, valued at $64.75 per share, and
the exchange of TTC options to purchase 910,600 shares of BEA common stock. The
acquisition will be accounted for using the purchase method. While the Company
expects a significant portion of the purchase price to be allocated to
intangible assets, the valuation of the intangible assets and the allocation of
the purchase price have not been completed.
In December 1999, the Company intends to offer $300 million in convertible
subordinated notes, with an additional $100 million of notes to cover over-
allotments, if any, to qualified institutional investors, due 2006.
7
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion of the financial condition and results of
operations of BEA Systems, Inc. ("BEA" or the "Company") should be read in
conjunction with the Management's Discussion and Analysis of Financial
Condition and Results of Operations and the Consolidated Financial Statements
and the Notes thereto included in the Company's Annual Report on Form 10-K for
the year ended January 31, 1999. This quarterly report on Form 10-Q 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 using terminology such as "may," "will,"
"expects," "plans," "anticipates," "estimates," "potential," or "continue," or
the negative thereof or other comparable terminology regarding beliefs, plans,
expectations or intentions regarding the future. Forward-looking statements
include statements regarding growth in the market for our products market,
consolidation of companies serving the middleware market and opportunities for
BEA related thereto, future acquisitions or licensing transactions, the level
of service revenues as a percentage of total revenues and the impact thereby on
our operating results, the transition of our customer base to mission-critical
application based on CORBA, Java and EJB programming models, speeding
customers' deployment of systems based on our platform products, building sales
capacity and pursuing partnerships with other companies, future cost, and
expense and investment levels, (particularly cost of services), expected timing
and amount of amortization expenses related to acquisitions, the adequacy of
resources to meet future cash requirements, future hiring, evaluation and
resolution of the Year 2000 problem, and expenses, costs, liabilities and
material disruptions in the Company's business related to the Year 2000
problem. 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 in this Management's Discussion and Analysis of Financial
Condition and Results of Operations under the headings, "Overview," "Year 2000
Compliance" and "Factors That May Impact Future Operating Results." All
forward-looking statements and risk factors included in this document are made
as of the date hereof, based on information available to BEA as of the date
thereof, and BEA assumes no obligation to update any forward-looking statement
or risk factors.
Overview
BEA Systems, Inc. ("BEA" or the "Company") is a leading provider of mission-
critical e-commerce infrastructure solutions for the world's largest
enterprises. BEA's product line enables end-to-end, integrated solutions for
electronic commerce and business-critical systems. BEA products include: BEA
TUXEDO, the industry's market share leader for distributed transaction
management platforms; BEA WebLogic, a leading application server family
providing CORBA, Java and EJB solutions; BEA eLink, a solution for integrating
enterprise applications; BEA Commerce Foundation, library of reusable
components that enable rapid assembly of e-commerce applications. BEA also
provides a broad suite of consulting, education, and customer support offerings
to preserve and maximize technology investments in BEA products.
Potential Spending Freeze Related to Year 2000. Industry sources widely
predict that many large corporations will stop deploying new computer systems
in late 1999 and early 2000, in order to avoid disrupting their computer
systems before the year 2000. Large corporations represent the majority of
BEA's customer base, and a material portion of our license fees come from new
computer system deployments. BEA is monitoring our customer base, especially
customers expected to place orders in late 1999, to determine their plans and
has been informed by some customers that they intend to stop deploying new
computer systems in late 1999 and early 2000. However, BEA currently believes
that its business will not likely be materially affected by these delays. BEA
is also taking several steps to reduce our exposure to year 2000 deployment
delays, such as providing special incentives to our sales force during this
time and focusing on transactions that are not dependent on new deployments of
pending projects. However, if the year 2000 related delays in deployments are
8
<PAGE>
larger than we anticipate, start earlier or last longer than we anticipate, or
involve more of our targeted customers than we anticipate, our revenues in late
1999 or early 2000 could be materially
lower than expected. We also may experience reduced sales as customers reduce
their budgets for and personnel allocated to middleware and web application
software deployments due to increased expenditures and work on year 2000
compliance. See "Factors That May Impact Future Operating Results--Potential
Fluctuations in Quarterly Operating Results."
Acquisitions. Since its inception, BEA has acquired several companies and
product lines, and distribution rights to product lines. Through these
acquisitions, BEA has added additional product lines, additional functionality
to our existing products, additional direct distribution capacity and
additional service capacity. These acquisitions have resulted in significant
charges to BEA's operating results in the periods in which the acquisitions
were completed and have added intangible assets to BEA's balance sheet, the
value of which is being amortized and charged to BEA's operating results over
periods ranging from two to five years after completion of the acquisitions.
BEA's management views the market for our products as growing but that
companies serving that market are consolidating, and that this consolidation
presents an opportunity for BEA to further expand its product lines and
functionality, distribution capacity and services offerings and to add new,
related lines of business. BEA anticipates that it will make additional,
perhaps material, acquisitions in the future. The timing of any such
acquisition is impossible to predict and the charges associated with any such
acquisition could materially adversely affect BEA's results of operations
beginning in the periods in which any such acquisition is completed.
Investment in Distribution Channel. BEA is currently investing in building
our sales capacity by aggressively hiring sales and technical sales support
personnel, as well as aggressively pursuing partnerships with system platform
companies, packaged application software developers, systems integrators and
independent consultants, independent software tool vendors, and distributors.
These investments result in an immediate increase in expenses, especially in
sales and marketing, although the return on such investments, if any, is not
anticipated to occur until future periods.
BEA eSolutions and eLink. BEA is developing and marketing a set of solutions
for enterprise application integration and application development, especially
in the area of e-commerce. BEA's planned investment in this effort may affect
BEA's anticipated overall financial results, particularly service revenues as a
percentage of total revenues, cost of revenues as a percentage of total
revenues, and research and development expense as a percentage of total
revenues. In addition, investment in this project results in an immediate
increase in expenses, especially in research and development, although the
return on such investment, if any, is not anticipated to occur until future
periods. The expenses adversely affect BEA's operating results in the short
term and also in the long term if the anticipated benefits of such investment
do not materialize.
Change in Sales Cycles. Since mid-fiscal 1999, BEA has experienced changes in
sales cycles for our products. In September 1998, BEA completed its merger with
WebLogic, Inc. ("WebLogic"), whose products tend to have a shorter sales cycle
than BEA's enterprise application solutions. In contrast, during the second
half of fiscal 1999, an increasing number of BEA customers began negotiating
licenses to use BEA's enterprise application solutions products as an
architectural platform for several applications. These architectural
commitments are larger in scope and potential revenue than single project
transactions. In some cases, these architectural commitments have longer sales
cycles than BEA's typical transactions, both because of the customer's decision
cycle in adopting an architectural platform and because of heightened corporate
approval requirements for larger contracts. In some cases, architectural
commitment transactions have a shorter than usual sales cycle, in order for the
customer to proceed with development of the new applications. These contrasting
changes in the sales cycles and product mix may affect BEA's future quarterly
revenues, revenue mix and operating results.
9
<PAGE>
Increase in Service Revenues as a Percentage of Total Revenues. Service
revenues have increased as a percentage of total revenues, from 34 percent of
total revenues in the quarter ended October 31, 1998 to 38 percent in the
quarter ended October 31, 1999. Although gross margin on service revenues
increased from 42 percent to 44 percent of service revenues over the same
period, gross margin on service revenues is significantly lower than gross
margin on license revenues. BEA has made a strategic decision to increase
services, to as high as 40 percent of total revenues over the course of the
next several quarters. BEA believes that its customer base is in the process of
transitioning to mission-critical e-commerce applications based on CORBA, Java
and EJB programming models, but that customers typically do not have sufficient
numbers of programmers experienced in building large, reliable systems on these
programming models. BEA believes that by providing its customers with
additional services, especially in architecting, building and deploying CORBA,
Java and EJB systems and training customers' programmers to develop these
systems, BEA can speed customers' deployment of systems based on our CORBA,
Java and EJB platform products. The increase in service revenues as a
percentage of total revenues will have a negative impact on gross margins and
could have a negative impact on operating margins if the increase in service
revenues do no result in an increase in license revenues.
Results of Operations
Three and nine months ended October 31, 1999 and 1998
Revenues
BEA's revenues are derived from fees for software licenses, customer support,
education and consulting services. Total revenues increased by $45.5 million,
or 56 percent from the quarter ended October 31, 1998 to the quarter ended
October 31, 1999. Total revenues also increased $108.2 million or 52 percent
from the nine months ended October 31, 1998 to the nine months ended October
31, 1999. These increases reflect additional sales to existing customers, the
addition of new customer accounts and an increase in product and service
offerings.
License Revenues. License revenues increased 46 percent from the third
quarter of fiscal 1999 to the third quarter of fiscal 2000. For the nine months
ended October 31, 1999, license revenues increased $58.8 million or 42 percent
from the nine months ended October 31, 1998. The increases in license revenues
were mainly due to continued customer and market acceptance of the Company's
products, and expansion of the Company's direct sales force. License revenues
as a percentage of total revenues represented 62 percent and 66 percent of
total revenues in the third quarters of fiscal 2000 and 1999, respectively, and
63 percent and 68 percent of total revenues for the nine month periods ended
October 31, 1999 and 1998, respectively. The decreases in license revenues as a
percentage of total revenues were attributable to the percentage increases in
service revenues as a result of the Company's increased focus on its service
offerings.
Service Revenues. Service revenues increased 76 percent in the third quarter
of fiscal 2000 compared with the same quarter in fiscal 1999. For the nine
months ended October 31, 1999, service revenues increased $49.4 million or 74
percent from the same period of the prior fiscal year. Service revenues as a
percentage of total revenues represented 38 percent and 34 percent of total
revenues in the third quarter of fiscal 2000 and 1999, respectively, and 37
percent and 32 percent of total revenues for the nine months ended October 31,
1999 and 1998, respectively. These increases were primarily due to the increase
in application and component development projects, increased charges for
customer support resulting from increased license sales, an increase in
consulting services offered by the Company, and increased numbers of service
personnel and consultants.
International Revenues. International revenues accounted for 41 and 34
percent of total revenue for the third quarter of fiscal 2000 and 1999,
respectively. For the nine months ended October 31, 1999 and 1998,
international revenues were 41 percent of total revenues. The increase
10
<PAGE>
in absolute dollars was the result of expansion of the Company's international
sales force and an increase in sales to Japan and the rest of the Asia/Pacific
("APAC") region.
Revenues from the European, Middle East and Africa region ("EMEA") and APAC
region increased in the third quarter of fiscal 2000 to $33.1 million and $17.8
million, respectively, from $22.2 million and $4.7 million in the same quarter
of the prior fiscal year. For the nine months ended October 31, 1999, revenues
from the EMEA and APAC regions increased to $94.2 million and $32.7 million,
respectively, from $69.9 million and $15.4 million for the same period of the
prior fiscal year. Revenues from EMEA represented 26 percent of total revenues
in the third quarter of fiscal 2000, compared with 27 percent in the same
quarter of the prior fiscal year. Revenues from APAC represented 14 percent of
total revenues in the third quarter of fiscal 2000, compared with 6 percent in
the same quarter of the prior fiscal year. Within APAC, Japan represented 11
percent and 7 percent of total revenues for the three and nine months ended
October 31, 1999, respectively. The decrease as a percentage of total revenue
in EMEA was the direct result of the expansion of the Company's domestic sales
force and increased domestic revenue resulting from the acquisition of
WebLogic. The increase in APAC was primarily due to sales of licensed
technology in Japan.
Cost of Revenues
Total cost of revenues represented 28 and 31 percent of total revenues in the
quarters ended October 31, 1999 and 1998, respectively. For each nine month
period ended October 31, 1999 and 1998, total cost of revenues was 29 percent
of total revenues. Cost of revenues in the third quarter of fiscal 2000
increased in absolute dollars over the same quarter a year ago due to an
increase in associated revenues.
Cost of Licenses. Cost of licenses includes expenses related to the purchase
of disks and 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 represented approximately 2 percent of
license revenues for the third quarter of fiscal 2000 and 1999, and each of the
nine month periods ended October 31, 1999 and 1998.
Cost of Services. Cost of services consists primarily of salaries and
benefits for consulting, education and product support personnel. Cost of
services increased 70 percent in the third quarter of fiscal 2000 compared to
the same quarter of the prior fiscal year. For the nine months ended October
31, 1999, cost of services increased $24.7 million or 60 percent from the same
period of the prior fiscal year. These increases were the result of the
increase in application and component development projects, the expansion of
customer support centers in Europe and Asia, overall increased demand for the
Company's services, and increased professional services headcount. Cost of
services represented 56 percent and 58 percent of service revenues in the
quarters ended October 31, 1999 and 1998, respectively. For the nine months
ended October 31, 1999 and 1998, cost of services represented 56 percent and 61
percent of service revenues, respectively. Cost of services as a percentage of
service revenues decreased primarily as a result of nonrecurring fixed costs
associated with the fiscal 1999 expansion of support centers in Europe and
Asia. In the future, management expects the cost of services as a percentage of
services revenue to range between 55 percent and 65 percent, as the Company
continues to build its support and service organization.
Amortization of Acquired Intangible Assets. The amortization of acquired
intangible assets, consisting of developed technology, distribution rights,
trademarks and tradenames, totaled $6.9 million and $7.9 million for the third
quarter of fiscal years 2000 and 1999, respectively. For the nine months ended
October 31, 1999 and 1998, amortization of certain acquired intangible assets
totaled $21.0 million and $16.3 million, respectively. The decrease in the
third quarter of fiscal year 2000 in comparison to the same quarter of the
prior fiscal year was primarily due to assets becoming fully amortized as of
the quarter ended October 31, 1998. The increase for the nine months ended
October 31, 1999 was primarily due to intangible assets resulting from a number
of strategic
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acquisitions, particularly the fiscal 2000 acquisitions of Component Systems,
LLC ("Component Systems"), Avitek, Inc. ("Avitek") and Technology Resource
Group, Inc. ("TRG"). In the future, amortization expense associated with
intangible assets recorded through October 31, 1999 is expected to total $7.1
million for the fourth quarter of fiscal 2000, approximately $23.8 million,
$3.7 million, and $2 million for the fiscal years ending January 31, 2001, 2002
and thereafter, respectively.
Operating Expenses
Sales and Marketing. Sales and marketing expenses include salaries, benefits,
sales commissions, travel, and facility costs for the Company's sales and
marketing personnel. These expenses also include programs aimed at increasing
revenues, such as advertising, public relations, trade shows and user
conferences. Sales and marketing expenses increased 48 percent in the third
quarter of fiscal 2000 compared with the same quarter of the prior fiscal year.
For the nine months ended October 31, 1999, sales and marketing expenses
increased $49.7 million or 51 percent from the same period of the prior fiscal
year. These expenses represented 45 and 47 percent of total revenues for the
quarters ended October 31, 1999 and 1998, respectively, and 47 percent of total
revenues for each of the nine month periods ended October 31, 1999 and 1998.
The Company expects to continue to invest in sales channel expansion and
marketing programs to promote the Company's products. Accordingly, the Company
expects sales and marketing expenses to continue to increase in future periods
in absolute dollars.
Research and Development. Research and development expenses consist primarily
of salaries and benefits for software engineers, contract development fees,
costs of computer equipment used in software development and facilities
expenses. Total expenditures for research and development increased 51 percent
in the third quarter of fiscal 2000 compared with the same quarter in fiscal
1999. For the nine months ended October 31, 1999, research and development
expenses increased $10.5 million or 33 percent from the same period of the
prior fiscal year. Research and development expenses represented 13 percent and
14 percent of total revenues in the third quarter of fiscal 2000 and 1999,
respectively, and 14 percent and 15 percent of total revenues in the nine month
periods ended October 31, 1999 and 1998, respectively. The increase in research
and development spending in absolute dollars was attributed to an increase in
software development personnel and related expenses. The slight decrease in
research and development expenses as a percentage of total revenues was
primarily due to the substantial increase in license and service revenues. The
Company expects to continue to commit substantial resources to product
development and engineering in future periods. As a result, the Company expects
research and development expenses to continue to increase in absolute dollars
in future periods. Additionally, management intends to continue recruiting and
hiring experienced software development personnel and to consider the licensing
and acquisition of technologies complementary to the Company's business.
General and Administrative. General and administrative expenses include costs
for the Company's human resources, finance, information technology, facilities
and general management functions, as well as the amortization of goodwill
associated with various acquisitions. General and administrative expenses
increased 83 percent in the third quarter of fiscal 2000 compared with the same
quarter of fiscal 1999. For the nine months ended October 31, 1999, general and
administrative expenses increased $14.4 million or 72 percent from the same
period of the prior fiscal year. General and administrative expenses
represented 11 and 10 percent of total revenues for the quarters ended October
31, 1999 and 1998, respectively, as well as for the nine month periods ended
October 31, 1999 and 1998, respectively. The increases in general and
administrative expenses were attributed to the increase in goodwill
amortization, the expansion of the Company's support infrastructure, including
information systems and associated expenses necessary to manage the Company's
growth. Goodwill amortization totaled $4.0 million and approximately $1.0
million in the third quarter of fiscal 2000 and 1999, respectively. For the
nine months ended October 31, 1999 and 1998, goodwill amortization totaled $6.6
million and $1.7 million, respectively. Going forward,
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amortization of goodwill recorded prior to October 31, 1999 is expected to
total $3.5 million for the fourth quarter of fiscal 2000, approximately $15.2
million, $6.7 million for fiscal years ending January 31, 2001, 2002 and
thereafter, respectively.
Acquisition related charges. In the three and nine months ended October 31,
1998, acquisition related charges were related to direct acquisition expenses
and the write-off of in-process research and development costs associated with
the acquisition of Leader Group, Inc. ("Leader") and the TOP END product from
NCR.
Interest Expense; Interest Income and Other, Net. Interest expense was $2.5
million and $3.3 million for the quarters ended October 31, 1999 and 1998,
respectively. Interest expense is the result of the issuance of the $250
million 4 percent Convertible Subordinated Notes ("Notes"). Interest income and
other was approximately $3.0 million in the third quarters of both fiscal 2000
and 1999.
Provision for Income Taxes. The Company has incurred income tax expense of
approximately $3.8 million and $1.5 million in the third quarters of fiscal
years 2000 and 1999, respectively. For the nine months ended October 31, 1999
and 1998, income tax expense totaled approximately $7.1 million and $3.2
million, respectively. The income tax expense consists primarily of domestic
minimum taxes, foreign withholding taxes and foreign income tax expense
incurred as a result of local country profits. The increase in income taxes in
the third quarter of fiscal 2000, relative to the same quarter of the prior
fiscal year was primarily due to an overall increase in foreign corporate
income taxes.
Under Statement of Financial Accounting Standards No.109 Accounting for
Income Taxes ("FAS 109"), deferred tax assets and liabilities are determined
based on the difference between financial reporting and tax bases of assets and
liabilities and are measured using the enacted tax rates and laws that will be
in effect when the differences are expected to reverse. FAS 109 provides for
the recognition of deferred tax assets if realization of such assets is more
likely than not. Based upon the available evidence, which includes BEA's
historical operating performance and the reported cumulative net losses from
prior years, the Company has provided a full valuation allowance against its
net deferred tax assets. The Company intends to evaluate the realizability of
the deferred tax assets on a quarterly basis.
Liquidity and Capital Resources
As of October 31, 1999, total cash, cash equivalents and short-term
investments totaled $277.5 million, up from $236.5 million at January 31, 1999.
The increase in cash, cash equivalents and short-term investments was primarily
due to cash generated from operations.
Cash generated from operating activities rose to $59.0 million for the nine
months ended October 31, 1999, compared with $26.3 million generated in the
same period of the prior fiscal year. The primary sources of cash generated
from operations were an increase in deferred revenue and net income adjusted
for non-cash transactions including depreciation and amortization.
Investing activities consumed $75.1 million in cash during the nine months
ended October 31, 1999, compared with $107.6 million in the same period of the
prior fiscal year. Cash used for investing activities in the first nine months
of fiscal 2000 was primarily due to purchases of short-term investments and
computer equipment, furniture and leasehold improvements. In the same period of
the prior fiscal year, the primary use of cash for investing activities was the
acquisition of the TOP END product.
The Company generated $13.9 million from financing activities in the nine
months ended October 31, 1999, compared with $219.3 million in the same period
of the prior fiscal year. The primary source of cash from financing activities
in the first nine months of fiscal 2000 was the issuance of common stock by BEA
and in the same period of the prior fiscal year the primary source of cash was
proceeds from the sale of the Notes (see Note 3).
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As of October 31, 1999, the Company's outstanding short and long-term debt
obligations were $260.5 million, up from $250.8 million at January 31, 1999. At
October 31, 1999, the Company's outstanding debt obligations consisted
principally of the $250 million Notes.
In addition to normal operating expenses, cash requirements are expected for
financing anticipated growth, payment of outstanding debt obligations and the
acquisition of companies, products and technologies and in-licensing of
products complementary to the Company's business. The Company believes that
existing cash, cash equivalents, short-term investments and cash generated from
operations, if any, will be sufficient to satisfy currently anticipated cash
requirements through October 31, 2000. However, the Company expects to make
additional acquisitions and may need to raise 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, at all,
or on terms favorable to the Company.
Year 2000 Compliance
BEA is aware of the issues associated with the programming code in existing
computer systems as the Year 2000 approaches. The "Year 2000 problem" is
pervasive and complex as virtually every computer operation will be affected in
some way by the rollover of the two-digit year value to 00. The issue is
whether computer systems will properly recognize date-sensitive information
when the year changes to 2000. Systems that do not properly recognize such
information could generate erroneous data or cause a system to fail.
State of Readiness
The Company has been evaluating the Year 2000 readiness of the most current
versions of BEA WebLogic Enterprise, BEA TUXEDO and its other software products
sold by the Company ("Products"). Internal information technology systems used
in our operations ("IT Systems") and our non-IT Systems, such as security
systems, building equipment, voice mail and other systems are also being
evaluated for Year 2000 readiness. The Company's evaluation primarily covers:
identification of all Products, IT Systems, and non-IT Systems; assessing
business and customer satisfaction risks associated with such systems, creating
action plans to address known risks, executing and monitoring action plans, and
contingency planning.
The Company has completed the evaluation of the following products and
believes the current versions of these products are Year 2000 compliant:
. BEA WebLogic Enterprise
. BEA WebLogic Express
. BEA WebLogic Server
. BEA TUXEDO
. BEA Manager
. BEA Builder
. BEA Jolt
. BEA ObjectBroker
. BEA ObjectBroker Desktop Connection
. BEA MQ Series Connection
. BEA Connect
. BEA TOP END
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. BEA TOP END LU6.2 IBM Connectivity
Some 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.
The Company has substantially tested BEA TOP END Security Services and
confirmed its Year 2000 compliance.
With respect to internal IT Systems and non-IT Systems, the Company has
initiated an assessment of our internal IT Systems including third-party
software and hardware technology and our non-IT Systems. To the extent that the
Company is not able to test the technology provided by third-party vendors, the
Company is seeking assurance from such vendors that their systems are Year 2000
compliant. The Company has been informed by substantially all of our material
business application software suppliers that their software is, or shortly will
be, Year 2000 compliant. The software from these suppliers, such as PeopleSoft,
Clarify and Microsoft, is used in the Company's financial, sales, customer
support and administrative operations. Further, the Company relies, both
domestically and internationally, upon various vendors, governmental agencies,
utility companies, telecommunications service companies, delivery service
companies and other service providers who are outside of the Company's control.
There is no assurance that such parties will not suffer a Year 2000 business
disruption, which could have a material adverse effect on the Company's
financial condition and results of operations.
Costs Associated with Year 2000 Issues
To date, the Company has not incurred any material costs in connection with
identifying or evaluating Year 2000 compliance issues. Most of its expenses
have related to the opportunity cost of time spent by employees of the Company
evaluating its software, the current versions of its products, and Year 2000
compliance matters. It is possible that the Company may experience additional
costs associated with assisting customers with upgrades, but such costs are not
expected by the management to be material.
Risks of Year 2000 Issues
Although we do not believe that we will incur any material costs or
experience material disruptions in its business associated with preparing its
internal systems for the Year 2000, there can be no assurances that the Company
will not experience serious unanticipated negative consequences and/or material
costs caused by undetected errors or defects in the technology used in its
internal systems. Internal systems are primarily composed of third-party
software and third-party hardware which contain embedded software and the
Company's own software products. Worst case scenarios would include: corruption
of data contained in the Company's internal information systems, hardware
failure, and the failure of services provided by government agencies and other
third parties (e.g., electricity, phone service, water transport, Internet
services, etc.). See "Factors That May Impact Future Operating Results-If our
products contain software defects, it could harm our revenues and expose us to
litigation".
Contingency Plans
The Company has not fully developed a comprehensive contingency plan to
address situations that may result from the Year 2000. If additional Year 2000
compliance issues are discovered, the Company will evaluate the need for
contingency plans relating to such issues.
Factors That May Impact Future Operating Results
BEA Systems, Inc. operates in a rapidly changing environment that involves
numerous risks and uncertainties. The following section lists some, but not
all, of these risks and uncertainties which may have a material adverse effect
on the Company's business, financial condition or results of operations.
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Significant unanticipated fluctuations in our quarterly revenues and operating
results may cause us not to meet securities analysts' or investors'
expectations and may result in a decline in our stock price.
Although we have had significant revenue growth in recent quarters, our
growth rates may not be sustainable. If our revenues, operating results,
earnings or future projections are below the levels expected by securities
analysts, our stock price is likely to decline. Our stock price is also subject
to the volatility generally associated with Internet, software and technology
stocks and may also be affected by broader market trends unrelated to our
performance.
We expect to experience significant fluctuations in our future quarterly
revenues and operating results as a result of many factors, including:
. difficulty predicting the size and timing of customer orders
. introduction or enhancement of our products or our competitors' products
. general economic conditions, which can affect our customers' capital
investment levels and the length of our sales cycle
. a widely-predicted freeze in deployment of new computer systems by large
corporations in late 1999 and first quarter of 2000, related to
remediation of the Year 2000 problem
. any slowdown in use of the Internet for commerce
. recent hiring may prove excessive if growth rates are not maintained
. the structure, timing and integration of acquisitions of businesses,
products and technologies, including The Theory Center
. the terms and timing of financing activities
. market acceptance of our products
. the lengthy sales cycle for our products
. technological changes in computer systems and environments
. whether we are able to develop, introduce and market new products on a
timely basis
. changes in our competitors' product offerings and pricing policies, and
customer order deferrals in anticipation of new products and product
enhancements from BEA or competitors
. whether we are able to expand our sales and marketing programs
. the mix of our products and services sold and mix of distribution
channels
. whether we are able to meet our customers' service requirements
. costs associated with acquisitions, including the acquisition of The
Theory Center
. the impact and duration of deteriorated economic and political
conditions in Asia
. loss of key personnel
. fluctuations in foreign currency exchange rates
. interpretations of the accounting pronouncements 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 trends or future performance.
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An increasing portion of our revenues is derived from large orders as
customers deploy our products throughout their organizations or choose to
standardize on our products for their system architecture. Increases in the
dollar 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
the substantial majority of our orders received in the last month of each
fiscal quarter. As a result, we may not learn of revenue shortfalls until late
in a fiscal quarter, after it is too late to adjust expenses for that quarter.
Additionally, our operating expenses are based in part on our expectations for
future revenues 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.
Our limited operating history and need to continue to integrate our
acquisitions makes it difficult to predict our future results
We were incorporated in January 1995 and therefore have a limited operating
history. We have generated revenues to date primarily from sales of BEA TUXEDO,
a software product to which we acquired worldwide distribution rights in
February 1996, and from fees for related software products and services. We
have also acquired a number of businesses, technologies and products, most
recently in November 1999 The Theory Center. Our limited operating history and
the need to integrate a number of separate and independent business operations
subject our business to numerous risks. At October 31, 1999, we had an
accumulated deficit of approximately $189 million. In addition, in connection
with certain acquisitions completed prior to October 31, 1999, we recorded
approximately $265 million as intangible assets. Under Generally Accepted
Accounting Principles, these intangible assets are required to be amortized in
future periods. Approximately $203 million of these assets have been amortized
as of October 31, 1999 and we expect to amortize the remaining approximately
$63 million in future periods through our fiscal year ending January 31, 2003.
We expect to amortize $11 million of such intangible assets over the remaining
quarter of the fiscal year ending January 31, 2000 and $39 million in the
fiscal year ending January 31, 2001. A substantial portion of the $100 million
purchase price for The Theory Center will be recorded as intangible assets and
amortized in the fiscal year ended January 31, 2001 and over future periods. If
we acquire additional businesses, products and technologies in the future, we
may report additional, potentially significant expenses. If future events cause
the impairment of any intangible assets acquired in our past or future
acquisitions, we may have to write off expenses sooner than we expect. Because
of our limited operating history and ongoing write-offs associated with our
prior acquisitions, 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.
The price of our common stock and our notes may fluctuate significantly
The market price for our common stock and, in turn, the market price of the
notes, may be affected by a number of factors, including developments in the
Internet or software industry, general market conditions and other factors,
including factors unrelated to our operating performance or our competitors'
operating performance. In addition, stock prices for BEA and many other
companies in the Internet, technology and emerging growth sectors have
experienced wide fluctuations including recent rapid rises in their stock
prices, that have often been unrelated to the operating performance of such
companies. Such factors and fluctuations, as well as general economic,
political and market conditions, such as recessions, may materially adversely
affect the market price of our common stock and, in turn, the market price of
the notes.
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If we cannot successfully integrate our past and future acquisitions, our
revenues may decline and expenses may increase
From our inception in January 1995, we have made several 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 Leader
Group, Inc. ("Leader Group") and a business unit of Penta Systems Technology,
Inc. ("Penta") in the quarter ended April 30, 1998, NCR's TOP END technology in
June 1998, the Entersoft Systems Corporation ("Entersoft") in July 1998,
WebLogic, Inc. ("WebLogic") in September 1998, Component Systems, LLC in May
1999, Technology Resource Group, Inc. ("TRG") in July 1999, Avitek, Inc.
("Avitek") in August 1999, and The Theory Center ("TTC") in November 1999. In
addition we and Warburg recently formed an independent company, which company
has entered into an agreement to purchase the Visual Cafe product line of
Symantec's Internet Tools Division. It is possible we may not achieve any of
the financial or strategic benefits of this transaction. While we intend to
make additional acquisitions in the future, there may not be suitable
companies, divisions or products available for acquisition. Our acquisitions
entail numerous risks, including the risk we will not successfully assimilate
the acquired operations and products, or retain key employees of the acquired
operations. There are also risks relating to the diversion of our management's
attention, and difficulties and uncertainties in our ability to maintain the
key business relationships the acquired entities have established. In addition,
if we undertake future acquisitions, we may issue dilutive securities, assume
or incur additional debt obligations, incur large one-time expenses, and
acquire intangible assets that would result in significant future amortization
expense. Any of these events could have a material adverse effect on our
business, operating results and financial condition.
Recently, the Financial Accounting Standards Board ("FASB") voted to
eliminate pooling of interests accounting for acquisitions and the ability to
write-off in-process research and development has been limited by recent
pronouncements. The effect of these changes would be to increase the portion of
the purchase price for any future acquisitions that must be charged to BEA's
cost of revenues and operating expenses in the periods following any such
acquisitions. As a consequence, our results of operations in periods following
any such acquisitions could be materially adversely affected. Although these
changes would not directly affect the purchase price for any of these
acquisitions, they would have the effect of increasing the reported expenses
associated with any of these acquisitions. To that extent, these changes may
make it more difficult for us to acquire other companies, product lines or
technologies.
Our revenues are derived primarily from two main product and services lines,
and a decline in demand or prices for either could substantially adversely
affect our operating results
We currently derive the majority of our license and service revenues from BEA
TUXEDO and BEA WebLogic and from related products and services. Although we
expect these products and services to continue to account for the majority of
our revenues in the immediate future, we believe that BEA WebLogic will become
an increasingly important revenue source. As a result, factors adversely
affecting the pricing of or demand for BEA TUXEDO and BEA WebLogic, 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.
The lengthy sales cycle for our products makes our revenues susceptible to
substantial fluctuations
Our customers typically use our products to implement large, sophisticated
applications that are critical to their business, and their purchases are often
part of their implementation of a distributed or Web-based computing
environment. Customers evaluating our software products face complex
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decisions regarding alternative approaches to the integration of enterprise
applications, competitive product offerings, rapidly changing software
technologies and limited internal resources due to other information systems
requirements. For these and other reasons, the sales cycle for our products is
lengthy and is subject to delays or cancellation over which we have little or
no control. We have experienced a significant increase in the number of million
and multi-million dollar license transactions. In some cases, this has resulted
in more extended customer evaluation and procurement processes, which in turn
have lengthened the overall sales cycle for our products. Moreover during the
second half of fiscal 1999, an increasing number of our customers began
negotiating licenses to use our enterprise application solutions as an
architectural platform for several applications. These architectural
commitments are larger in scope and potential revenue than single application
transactions. In some cases, these architectural commitments also have longer
sales cycles than our typical single application transactions, because of both
the customer's decision cycle in adopting an architectural platform and
heightened corporate approval requirements for larger contracts. We believe
general economic conditions that impact customers' capital investment decisions
also affect our sales cycles.
In addition, industry sources widely predict that many corporations will stop
deploying new computer systems in late 1999 and early 2000, in order to avoid
disrupting their computer systems before the Year 2000. We have been informed
by some of our customers that they intend to freeze deploying new computer
systems in late December 1999 and early 2000. Furthermore, some of our
customers may have accelerated their purchases and deployments of our products
in advance of these freezes. These factors could cause an unusual fluctuation
in our orders and if our customers stop deploying new computer systems, our
revenues could be materially reduced and our operating results could be
materially adversely affected, especially in the fourth quarter of calendar
year 1999 (our fiscal Year 2000) and the first quarter of calendar 2000. Any
significant change in customer buying decisions or sales cycles for our
products could have a material adverse effect on our business, results of
operations and financial condition.
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 license transactions. Negotiation of mutually
acceptable terms and conditions can extend the sales cycle and, in certain
situations, may require us to defer recognition of revenue on the license. In
addition, while we do not expect the Statement of Position 97-2, Software
Revenues Recognition, ("SOP 97-2") and SOP 98-4 and SOP 98-9, which amend
certain provisions of SOP 97-2, to have a material impact on our revenues and
earnings, detailed implementation guidelines of the standard have not yet been
issued. Once issued, such detailed guidance could lead to unanticipated changes
in our current revenue recognition practices and such changes could have an
adverse impact on revenues and earnings.
If we do not effectively compete with new and existing competitors, our
revenues and operating margins will decline
The market for application server and integration software, and related
software components and services is highly competitive. Our competitors are
diverse and offer a variety of solutions directed at various segments of this
marketplace. These competitors include operating system vendors such as IBM,
Sun Microsystems and database vendors such as Oracle. Microsoft has released a
product that includes certain basic application server functionality and has
announced that it intends to include application server and integration
functionality in future versions of its operating systems, including Windows
2000. Oracle is the primary relational database vendor offering products that
are intended to serve as alternatives to our enterprise application server and
integration solutions. In addition, there are companies offering and developing
application server 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
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complementary software that supports these tools and performs basic application
server and integration functions. Last, internal development groups within
prospective customers' organizations may develop software and hardware systems
that may substitute for those 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 application server and integration software products, or similar products,
with their computer systems and database vendors that advocate client/server
networks driven by the database server. IBM and Sun Microsystems are the
primary hardware vendors who offer a line of application server and integration
solutions for its customers. IBM's sale of application server and integration
functionality along with its IBM proprietary hardware 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
application server and integration functionality with its proprietary hardware
and database systems. These inherent advantages allow IBM to bundle, at a
discounted price, application functionality with computer hardware and software
sales. Due to these factors, if we do not 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 our revenues and operating results will suffer.
Microsoft has announced that it intends to include certain application server
and integration functionality in future versions of its Windows 2000 operating
system. Microsoft has also introduced a product that includes certain basic
application server functionality. The bundling of competing functionality in
versions of Windows requires us to compete with Microsoft in the Windows
marketplace, where Microsoft has certain inherent advantages due to its
significantly greater financial, technical, marketing and other resources, its
greater name recognition, its substantial installed base and the integration of
its application server and integration functionality with Windows. We need to
differentiate our products from Microsoft's based on scalability,
functionality, interoperability with non-Microsoft platforms, performance and
reliability, and need to establish our products as more effective solutions to
customers' needs. We may not be able to successfully differentiate our products
from those offered by Microsoft, and Microsoft's entry into the application
server and integration market could materially adversely affect our business,
operating results and financial condition.
In addition, current and potential competitors may make strategic
acquisitions or establish cooperative relationships among themselves or with
third parties, thereby increasing the ability of their products to address the
needs of 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. We may not be able to compete
successfully against current and future competitors and any failure to do so
would have a material adverse effect upon our business, operating results and
financial condition.
If we fail to adequately protect our intellectual property rights, competitors
may use our technology and trademarks, which could weaken our competitive
position, reduce our revenues and increase our costs
Our success depends upon our proprietary technology. We rely on a combination
of patent, copyright, trademark and trade secret rights, confidentiality
procedures and licensing arrangements to
20
<PAGE>
establish and protect our proprietary rights. It is possible that other
companies could successfully challenge the validity or scope of our patents and
that our patents may not provide a competitive advantage to us.
As part of our confidentiality procedures, we generally enter into non-
disclosure agreements with our employees, distributors and corporate partners
and into license agreements with respect to our software, documentation and
other proprietary information. Despite these precautions, third parties could
copy or otherwise obtain and use our products or technology without
authorization, or develop similar technology independently. In particular, we
have, in the past, provided certain hardware OEMs with access to our source
code, and any unauthorized publication or proliferation of this source code
could materially adversely affect our business, operating results and financial
condition. It is difficult for us to police unauthorized use of our products,
and although we are unable to determine the extent to which piracy of our
software products exists, software piracy is a persistent problem. Effective
protection of intellectual property rights is unavailable or limited in certain
foreign countries. The protection of our proprietary rights may not be adequate
and our competitors could independently develop similar technology, duplicate
our products, and they could design around patents and other intellectual
property rights we hold.
Third parties could assert that our software products and services infringe
their intellectual property rights, which could expose us to increased costs
and litigation
It is possible that third parties could claim our current or future products
infringe their rights. 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. These type of claims might require us to enter into royalty or
license agreements. If required, we may not be able to obtain such royalty or
license agreements, or obtain them on terms acceptable to us, which could have
a material adverse effect upon our business, operating results and financial
condition.
Our international operations expose us to greater management, collections,
currency, intellectual property, regulatory and other risks
International revenues accounted for 41 and 34 percent of our consolidated
revenues for the quarters ended October 31, 1999 and 1998, 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. 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. We anticipate that weak Asian conditions may 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.
21
<PAGE>
If we are unable to manage our growth, our business will suffer
We have continued to experience a period of rapid and substantial growth that
has placed, and if such growth continues would continue to place, a strain on
the Company's administrative and operational infrastructure. We have increased
the number of our employees from 120 employees in three offices in the United
States at January 31, 1996 to over 1,800 employees in over 52 offices in
24 countries at November 30, 1999. 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. It
is possible we will not be able to successfully implement improvements to our
management information and control systems in an efficient or timely manner and
that, during the course of this implementation, we could discover deficiencies
in existing systems and controls. If we are unable to manage growth
effectively, our business, results of operations and financial condition will
be materially adversely affected.
If the market for application servers and integration software does not grow as
quickly as we expect, our revenues will be harmed
We sell our products and services in the application server and integration
markets. These markets are emerging and are characterized by continuing
technological developments, evolving industry standards and changing customer
requirements. Our success is dependent in large part on acceptance of our
products by large customers with substantial legacy mainframe systems,
customers establishing a presence on the Web for commerce, and developers of
web-based commerce applications. Our future financial performance will depend
in large part on continued growth in the number of companies extending their
mainframe-based, mission-critical applications to an enterprise-wide
distributed computing environment and to the Internet through the use of
application server and integration technology. There can be no assurance that
the markets for application server and integration technology and related
services will continue to grow. If these markets fail to grow or grow more
slowly than we currently anticipate, or if we experience increased competition
in these markets, our business, results of operations and financial condition
will be adversely affected.
Year 2000 issues could negatively affect our business
It is possible that our current products contain undetected errors or defects
associated with Year 2000 date functions that may result in material costs or
liabilities to us. Moreover, our software directly and indirectly interacts
with a large number of other hardware and software systems, each of which may
contain or introduce such undetected errors or defects. Some of our customers
are running product versions that are not Year 2000 compliant. We have been
encouraging our customers to migrate to current product versions. We are unable
to predict to what extent our business may be affected if our software or the
systems that operate in conjunction with our software experience a material
Year 2000 related failure. Any Year 2000 defect in our products or the software
and hardware systems with which our products operate, as well as any Year 2000
errors caused by older non-current products that were not upgraded by our
customers, could expose us to litigation that could have a material adverse
impact on us. The risks of such litigation may be particularly acute due to the
mission-critical applications for which our products are used. Some
commentators have stated that a significant amount of litigation will arise out
of Year 2000 compliance issues, and we are aware of a growing number of
lawsuits against other software vendors. Because of the unprecedented nature of
such litigation, it is uncertain whether or to what extent we may be affected
by it.
22
<PAGE>
We could also experience serious unanticipated negative consequences caused
by undetected Year 2000 defects in our internal systems, including third party
software and hardware products. Internal systems are primarily composed of
third-party software and third-party hardware which contain embedded software
and our own software products. For example we could experience a (i) corruption
of data contained in our internal information systems or a (ii) failure of
hardware, software, or other information technology systems, causing an
interruption or failure of normal business operations. Any such events could
have a material adverse impact on our operating results. In addition, we could
experience serious unanticipated negative consequences caused by the failure of
services or products provided by third parties that are critical to the
continued our day-to-day operation, such as electrical power,
telecommunications services, and shipping services (particularly outside of
countries such as the United States where Year 2000 remediation has progressed
the furthest), which consequences could have a material adverse effect on our
business operations.
In addition, a widely-predicted freeze in deployment of new computer systems
by large corporations at the end of calendar year 1999 related to remediation
of the Year 2000 problem could result in an unusual fluctuation of orders, with
a temporarily positive impact on orders received in mid and late 1999, followed
by an unusual decrease in orders in subsequent quarters.
If we lose key personnel or cannot hire enough qualified personnel, it will
adversely affect our ability to manage our business, develop new products and
increase revenue
We believe our future success will depend upon our ability to attract and
retain highly skilled personnel including our founders, Messrs. William T.
Coleman III, Alfred S. Chuang and other key members of management. Competition
for these types of employees is intense, and it is possible that we will not be
able to retain our key employees and that we will not be successful in
attracting, assimilating and retaining qualified candidates in the future. As
we seek to expand our global organization, the hiring of qualified sales,
technical and support personnel will be difficult due to the limited number of
qualified professionals. Failure to attract, assimilate and retain key
personnel would have a material adverse effect on our business, results of
operations and financial condition.
Our failure to maintain ongoing sales through distribution channels will result
in lower revenues
To date, we have sold our products principally through our direct sales
force, as well as through indirect sales channels, such as system platform
companies, packaged application software developers, systems integrators and
independent consultants, independent software tool vendors and distributors.
Our ability to achieve revenue growth in the future will depend in large part
on our success in expanding our direct sales force and in further establishing
and expanding relationships with distributors, ISVs, OEMs and systems
integrators. 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 additional ISVs to embed our Web application servers in their
products. It is possible that we will not be able to successfully expand our
direct sales force or other distribution channels, secure license agreements
with additional ISVs on commercially reasonable terms or at all, and otherwise
further develop our relationships with indirect distribution channels.
Moreover, even if we succeed in these endeavors, it still may not increase our
revenues. If we invest resources in these types of expansion and our 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. It is possible that these and other third
parties will not provide the level and quality of service required to
23
<PAGE>
meet the needs of our customers, that we will not be able to maintain an
effective, long term relationship with these third parties, and that these
third parties will not successfully meet the needs of our customers.
If we do not develop and enhance new and existing products to keep pace with
technological, market and industry changes, our revenues may decline
The market for our products is highly fragmented, competitive with
alternative computing architectures, and characterized by continuing
technological developments, evolving industry standards and changing customer
requirements. The introduction of products embodying new technologies, the
emergence of new industry standards or changes in customer requirements could
render our existing products obsolete and unmarketable. As a result, our
success depends upon our ability to 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. It is possible that our products will not adequately address the
changing needs of the marketplace and that we will not be successful in
developing and marketing enhancements to our existing products or products
incorporating new technology on a timely basis. Failure to develop and
introduce new products, or enhancements to existing products, in a timely
manner in response to changing market conditions or customer requirements, will
materially and adversely affect our business, results of operations and
financial condition.
If our products contain software defects, it could harm our revenues and expose
us to litigation
The software products we offer are internally complex and, despite extensive
testing and quality control, may contain errors or defects, especially when we
first introduce them. We may need to issue corrective releases of our software
products to fix these defects or errors. These defects and errors could also
cause damage to our reputation, loss of revenues, product returns or order
cancellations, or lack of market acceptance of our products. Accordingly, 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 and
support of our products entails the risk of such claims, which could be
substantial in light of customers' use of such products in mission-critical
applications. If a claimant brings a product liability claim against us, it
could have a material adverse effect on our business, results of operations and
financial condition.
Our products interoperate with many parts of complicated computer systems,
such as mainframes, servers, personal computers, application software,
databases, operating systems and data transformation software. Failure of
anyone of these parts due to the Year 2000 problem could cause all or large
parts of computer systems to fail. In such circumstances, it may be difficult
to determine which part failed, and it is likely that customers will bring a
lawsuit against several suppliers. Even if our software is not at fault, we
could suffer material expense and material diversion of management time in
defending any such lawsuits.
Warburg, Pincus Ventures, L.P. and our current management can control matters
requiring stockholder approval
As of November 30, 1999, our officers and directors and their affiliates, in
the aggregate, had voting control over approximately 44 percent of our voting
common stock. In particular, Warburg,
24
<PAGE>
Pincus Ventures, L.P. ("Warburg") had effective voting control over
approximately 38 percent of our voting common stock (assuming the conversion of
the non-voting Class B common stock owned by Warburg). As a result, these
stockholders would be able to control matters requiring majority stockholder
approval, including the election of directors and approval of significant
corporate transactions. The voting power of Warburg combined with our officers
and directors under certain circumstances could have the effect of delaying, or
preventing a change in control.
Recent accounting pronouncements could cause us to defer revenue
The American Institute of Certified Public Accountants has issued a series of
recent pronouncements which address revenue recognition in the software
industry, including SOP 97-2, SOP 98-4, and SOP 98-9. These pronouncements
principally focus on concepts versus specific implementation guidance. We
believe we are in compliance with these standards, but the software industry
and the accounting profession are currently discussing a wide range of
potential interpretations which may result in the issuance of more
pronouncements or interpretive guidance. As future guidance becomes available
or if the software industry broadly adopts certain practices which are
different from BEA's current revenue recognition practices which could have a
material diverse effect on our business practices, financial condition, or
results of operations.
We have not fully assessed our ability to comply with SOP 98-9 using current
business practices. However, we believe that SOP 98-9 may require significantly
more revenues to be deferred for certain types of transactions.
We have a high debt balance and large interest obligations
At October 31, 1999, we had approximately $260 million of long-term
indebtedness. As a result of this indebtedness, our principal and interest
payment obligations are substantial. The degree to which we are leveraged could
significantly harm our ability to obtain financing for working capital,
acquisitions or other purposes and could make us more vulnerable to industry
downturns and competitive pressures. Our ability to meet our debt service
obligations will be dependent upon our future performance, which will be
subject to financial, business and other factors affecting our operations, many
of which are beyond our control. In addition, our earnings are insufficient to
cover our fixed charges. See "Selected Consolidated Financial Data."
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 are unable to meet our
cash requirements out of cash flow from operations, there can be no assurance
that we will be able to obtain alternative financing. In the absence of such
financing, our ability to respond to changing business and economic conditions,
to make future acquisitions, to absorb adverse operating results or to fund
capital expenditures or increased working capital requirements would be
significantly reduced. If we do not generate sufficient increases in cash flow
from operations to repay the notes at maturity, we could attempt to refinance
the notes; however, no assurance can be given that such a refinancing would be
available on terms acceptable to us, if at all. Any failure by us to satisfy
our obligations with respect to the notes at maturity (with respect to payments
of principal) or prior thereto (with respect to payments of interest or
required repurchases) would constitute a default under the indenture and could
cause a default under agreements governing our other indebtedness.
25
<PAGE>
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Foreign Exchange
BEA's revenue originating outside the United States was 41 and 34 percent of
total revenues for the quarters ended October 31, 1999 and 1998, respectively.
For the three months ended October 31, 1999 international revenues from EMEA
and APAC represented 26 percent and 14 percent of total revenues. International
sales are generated mostly from the Company's foreign sales subsidiaries in the
local countries and are typically denominated in the local currency of each
country. These subsidiaries also incur most of their expenses in the local
currency. Accordingly, foreign subsidiaries use the local currency as their
functional currency.
The Company's international business is subject to risks typical of an
international business, including, but not limited to, differing economic
conditions, changes in political climate, differing tax structures, other
regulations and restrictions, and foreign exchange volatility. Accordingly, the
Company's future results could be materially adversely impacted by changes in
these or other factors.
The Company's exposure to foreign exchange rate fluctuations arise in part
from intercompany accounts in which certain costs of software development,
support and product marketing incurred in the United States are charged to the
Company's foreign subsidiaries. These intercompany accounts are typically
denominated in the functional currency of the foreign subsidiary in order to
centralize foreign exchange risk with the parent company in the United States.
The Company is also exposed to foreign exchange rate fluctuations as the
financial results of foreign subsidiaries are translated into U.S. dollars in
consolidation. As exchange rates vary, these results, when translated, may vary
from expectations and adversely impact overall financial results.
The Company has a program to reduce the effect of foreign exchange
transaction gains and losses from recorded foreign currency-denominated assets
and liabilities. This program involves the use of forward foreign exchange
contracts in certain European and Asian currencies, principally those of
Western Europe, Sweden, Japan and Australia. A forward foreign exchange
contract obligates the Company to exchange predetermined amounts of specified
foreign currencies at specified exchange rates on specified dates or to make an
equivalent U.S. dollar payment equal to the value of such exchange. Each month
the Company marks to market open foreign exchange contracts based on the change
in the foreign exchange rates with any resulting gain or losses recorded
interest and other expenses.
The Company does not currently hedge anticipated foreign currency-denominated
revenues and expenses not yet incurred.
Interest Rates
The Company invests its cash in a variety of financial instruments,
consisting principally of investments in commercial paper, interest-bearing
demand deposit accounts with financial institutions, money market funds. These
investments are denominated in U.S. dollars. Cash balances in foreign
currencies overseas are operating balances and are only invested in short-term
time deposits of the local operating bank.
The Company accounts for its investment instruments in accordance with
Statement of Financial Accounting Standards No. 115, Accounting for Certain
Investments in Debt and Equity Securities, ("FAS 115"). All of the cash
equivalent, short term and long term investments are treated as "available-for-
sale" under FAS 115. Investments in both fixed rate and floating rate interest
earning instruments carry a degree of interest rate risk. Fixed rate securities
may have their market value adversely impacted due to a rise in interest rates,
while floating rate securities may produce less
26
<PAGE>
income than expected if interest rates fall. Due in part to these factors, the
Company's future investment income may fall short of expectations due to
changes in interest rates or the Company may suffer losses in principal if
forced to sell securities which have seen a decline in market value due to
changes in interest rates.
However, the Company reduces its interest rate risk by investing its cash in
instruments with short maturities. At October 31, 1999 the average maturity of
the Company's cash equivalents and investments was 24 days.
27
<PAGE>
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
The following exhibits are filed by attachment to this Form 10-Q:
<TABLE>
<CAPTION>
Exhibit Description
------- -----------
<S> <C>
10.1 Registrant's 1997 Employee Stock Purchase Plan, including forms of agreements
thereunder (1) *
10.2 Registrant's 1997 Stock Incentive Plan, including forms of agreements thereunder (1) *
27.1 Financial Data Schedule
</TABLE>
(1) Previously filed as an exhibit to Registrant's Annual Report on Form 10-K
for the year ended January 31, 1999 and incorporated herein by reference.
* Denotes a management contract or compensatory plan or arrangement.
(b) Reports on Form 8-K
No reports on Form 8-K were filed by the Company during the fiscal quarter
ended October 31, 1999.
28
<PAGE>
SIGNATURES
Pursuant to the requirement of the Security Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
BEA SYSTEMS, INC.
(Registrant)
/s/ Steve l. Brown
_____________________________________
Steve L. Brown
Executive Vice President and Chief
Financial Officer
(Principal Financial and Chief
Accounting Officer)
Dated: December 13, 1999
29
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER ITEM CAPTION
- ------- ----------------------------------------------------------------------------------------
<S> <C>
10.1 Registrant's 1997 Employee Stock Purchase Plan, including forms of agreements thereunder
10.2 Registrant's 1997 Stock Incentive Plan, including forms of agreements thereunder
27.1 Financial Data Schedule
</TABLE>
30
<PAGE>
EXHIBIT 10.1
BEA SYSTEMS, INC
1997 EMPLOYEE STOCK PURCHASE PLAN
---------------------------------
Adopted on March 19, 1997
Amended and Restated on September 16, 1997
Amended and Restated on May 13, 1998
Amended and Restated on May 12, 1999
The following constitute the provisions of the 1997 Employee Stock
Purchase Plan of BEA Systems, Inc.
1. Purpose. The purpose of the Plan is to provide employees of the
-------
Company and its Designated Parents or Subsidiaries with an opportunity to
purchase Common Stock of the Company through accumulated payroll deductions. It
is the intention of the Company to have the Plan qualify as an "Employee Stock
Purchase Plan" under Section 423 of the Code. The provisions of the Plan,
accordingly, shall be construed so as to extend and limit participation in a
manner consistent with the requirements of that section of the Code.
2. Definitions. As used herein, the following definitions shall
-----------
apply:
(a) "Accrual Period" means a period of approximately five and one-half
--------------
or six and one-half months, commencing on each December 16 and July 1 and
terminating on the next following June 30 or December 15, respectively;
provided, however, that the first Accrual Period shall commence on the Effective
Date and shall end on June 30, 1997.
(b) "Board" means the Board of Directors of the Company.
-----
(c) "Code" means the Internal Revenue Code of 1986, as amended.
----
(d) "Common Stock" means the common stock of the Company.
------------
(e) "Company" means BEA Systems, Inc. a Delaware corporation.
-------
(f) "Compensation" means an Employee's base salary, commissions,
------------
overtime, bonuses, annual awards, other incentive payments, from the Company or
one or more Designated Parents or Subsidiaries, including such amounts of
earnings as are deferred by the Employee (i) under a qualified cash or deferred
arrangement described in Section 401(k) of the Code, (ii) to a plan qualified
under Section 125 of the Code, or (iii) to any other qualified or non-qualified
plan intended to defer the receipt of compensation. Compensation does not
include reimbursements or other expense allowances, fringe benefits (cash or
noncash), moving expenses, and any other payments not specifically referenced in
the first sentence.
(g) "Corporate Transaction" means any of the following stockholder-
---------------------
approved transactions to which the Company is a party:
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<PAGE>
(1) a merger or consolidation in which the Company is not the
surviving entity, except for a transaction the principal purpose of
which is to change the state in which the Company is incorporated;
(2) the sale, transfer or other disposition of all or
substantially all of the assets of the Company (including the capital
stock of the Company's subsidiary corporations) in connection with
complete liquidation or dissolution of the Company; or
(3) any reverse merger in which the Company is the surviving
entity but in which securities possessing more than fifty percent
(50%) of the total combined voting power of the Company's outstanding
securities are transferred to a person or persons different from those
who held such securities immediately prior to such merger.
(h) "Designated Parents or Subsidiaries" means the Parents or
----------------------------------
Subsidiaries which have been designated by the Plan Administrator from time to
time as eligible to participate in the Plan.
(i) "Effective Date" means the effective date of the Registration
--------------
Statement relating to the Company's initial public offering of its Common Stock.
However, should any Designated Parent or Subsidiary become a participating
company in the Plan after such date, then such entity shall designate a separate
Effective Date with respect to its employee-participants.
(j) "Employee" means any individual, including an officer or
--------
director, who is an employee of the Company or a Designated Parent or Subsidiary
for purposes of Section 423 of the Code. For purposes of the Plan, the
employment relationship shall be treated as continuing intact while the
individual is on sick leave or other leave of absence approved by the
individual's employer. Where the period of leave exceeds ninety (90) days and
the individual's right to reemployment is not guaranteed either by statute or by
contract, the employment relationship will be deemed to have terminated on the
ninety-first (91st) day of such leave, for purposes of determining eligibility
to participate in the Plan.
(k) "Enrollment Date" means the first day of each Purchase Period.
---------------
(l) "Exchange Act" means the Securities Exchange Act of 1934, as
------------
amended.
(m) "Exercise Date" means the last day of each Accrual Period.
-------------
(n) "Fair Market Value" means, as of any date, the value of Common
-----------------
Stock determined as follows:
(1) Where there exists a public market for the Common Stock, the
Fair Market Value shall be (A) the closing price for a share of Common
Stock for the last market trading day prior to the time of the
determination (or, if no closing price was reported on that date, on
the last trading date on which a closing price
2
<PAGE>
was reported) on the stock exchange determined by the Plan
Administrator to be the primary market for the Common Stock or the
Nasdaq National Market, whichever is applicable or (B) if the Common
Stock is not traded on any such exchange or national market system,
the average of the closing bid and asked prices of a share of Common
Stock on the Nasdaq Small Cap Market for the day prior to the time of
the determination (or, if no such prices were reported on that date,
on the last date on which such prices were reported), in each case, as
reported in The Wall Street Journal or such other source as the Plan
Administrator deems reliable;
(2) In the absence of an established market of the type
described in (1), above, for the Common Stock, and subject to (3),
below, the Fair Market Value thereof shall be determined by the Plan
Administrator in good faith; or
(3) On the Effective Date, the Fair Market Value shall be the
price at which the Board, or if applicable, the Pricing Committee of
the Board, and the underwriters agree to offer Common Stock to the
public in the initial public offering of the Common Stock, net of
discounts and underwriting commissions.
(o) "Parent" means a "parent corporation," whether now or hereafter
------
existing, as defined in Section 424(e) of the Code.
(p) "Participant" means an Employee of the Company or Designated
-----------
Parent or Subsidiary who is actively participating in the Plan.
(q) "Plan" means this Employee Stock Purchase Plan.
----
(r) "Plan Administrator" means either the Board or a committee of
------------------
the Board that is responsible for the administration of the Plan.
(s) "Purchase Period" means a purchase period established pursuant
---------------
to Section 4 hereof.
(t) "Purchase Price" shall mean an amount equal to 85% of the Fair
--------------
Market Value of a share of Common Stock on the Enrollment Date or on the
Exercise Date, whichever is lower.
(u) "Reserves" means the number of shares of Common Stock covered by
--------
each option under the Plan which have not yet been exercised and the number of
shares of Common Stock which have been authorized for issuance under the
Plan but not yet placed under option.
(v) "Subsidiary" means a "subsidiary corporation," whether now or
----------
hereafter existing, as defined in Section 424(f) of the Code.
3
<PAGE>
3. Eligibility.
-----------
(a) General. Any individual who is an Employee on a given
-------
Enrollment Date shall be eligible to participate in the Plan for the Purchase
Period commencing with such Enrollment Date.
(b) Limitations on Grant and Accrual. Any provisions of the Plan
--------------------------------
to the contrary notwithstanding, no Employee shall be granted an option under
the Plan. (i) if, immediately after the grant, such Employee (taking into
account stock owned by any other person whose stock would be attributed to such
Employee pursuant to Section 424(d) of the Code) would own stock and/or hold
outstanding options to purchase stock possessing five percent (5%) or more of
the total combined voting power or value of all classes of stock of the Company
or of any Parent or Subsidiary, or (ii) which permits his/her rights to purchase
stock under all employee stock purchase plans of the Company and its Parents or
Subsidiaries to accrue at a rate which exceeds Twenty-Five Thousand Dollars
($25,000) worth of stock (determined at the Fair Market Value of the shares at
the time such option is granted) for each calendar year in which such option is
outstanding at any time. The determination of the accrual of the right to
purchase stock shall be made in accordance with Section 423(b)(8) of the Code
and the regulations thereunder.
(c) Other Limits on Eligibility. Notwithstanding Subsection (a),
---------------------------
above, the following Employees shall not be eligible to participate in the Plan
for any relevant Purchase Period: (i) Employees whose customary employment is 20
hours or less per week; (ii) Employees whose customary employment is for not
more than 5 months in any calendar year; and (iii) Employees who are subject to
rules or laws of a foreign jurisdiction that prohibit or make impractical the
participation of such Employees in the Plan.
4. Purchase Periods.
----------------
(a) The Plan shall be implemented through overlapping or consecutive
Purchase Periods until such time as (i) the maximum number of shares of Common
Stock available for issuance under the Plan shall have been purchased or (ii)
the Plan shall have been sooner terminated in accordance with Section 19 hereof.
The maximum duration of a Purchase Period shall be twenty-seven (27) months.
Initially, the Plan shall be implemented through overlapping Purchase Periods of
twenty-four (24) months' duration commencing each December 16 and July 1
following the Effective Date (except that the initial Purchase Period shall
commence on the Effective Date and shall end on June 30, 1999). The Plan
Administrator shall have the authority to change the length of any Purchase
Period and the length of Accrual Periods within any such Purchase Period
subsequent to the initial Purchase Period by announcement at least thirty (30)
days prior to the commencement of the Purchase Period and to determine whether
subsequent Purchase Periods shall be consecutive or overlapping.
(b) A Participant shall be granted a separate option for each
Purchase Period in which he/she participates. The option shall be granted on the
Enrollment Date and shall be automatically exercised in successive installments
on the Exercise Dates ending within the Purchase Period.
4
<PAGE>
(c) An Employee may participate in only one Purchase Period at a
time. Accordingly, except as provided in Section 4(d), an Employee who wishes to
join a new Purchase Period must withdraw from the current Purchase Period in
which he/she is participating and must also enroll in the new Purchase Period
prior to the Enrollment Date for that Purchase Period.
(d) If on the first day of any Accrual Period in a Purchase Period in
which a Participant is participating, the Fair Market Value of the Common Stock
is less than the Fair Market Value of the Common Stock on the Enrollment Date of
the Purchase Period (after taking into account any adjustment during the
Purchase Period pursuant to Section 18(a)), the Purchase Period shall be
terminated automatically and the Participant shall be enrolled automatically in
the new Purchase Period which has its first Accrual Period commencing on that
date, provided the Participant is eligible to participate in the Plan on that
date and has not elected to terminate participation in the Plan.
(e) Except as specifically provided herein, the acquisition of Common
Stock through participation in the Plan for any Purchase Period shall neither
limit nor require the acquisition of Common Stock by a Participant in any
subsequent Purchase Period.
5. Participation.
-------------
(a) An eligible Employee may become a Participant in the Plan by
completing a subscription agreement authorizing payroll deductions in the form
of Exhibit A to this Plan and filing it with the designated payroll office of
the Company at least ten (10) business days prior to the Enrollment Date for the
Purchase Period in which such participation will commence, unless a later time
for filing the subscription agreement is set by the Plan Administrator for all
eligible Employees with respect to a given Purchase Period.
(b) Payroll deductions for a Participant shall commence with the first
payroll period following the Enrollment Date and shall end on the last complete
payroll period during the Purchase Period, unless sooner terminated by the
Participant as provided in Section 10.
6. Payroll Deductions.
------------------
(a) At the time a Participant files his/her subscription agreement,
he/she shall elect to have payroll deductions made during the Purchase Period in
an amount not exceeding fifteen percent (15%) of the Compensation which he/she
receives during the Purchase Period.
(b) All payroll deductions made for a Participant shall be credited to
his/her account under the Plan and will be withheld in whole percentages only. A
Participant may not make any additional payments into such account.
(c) A Participant may discontinue his/her participation in the Plan as
provided in Section 10, or may increase or decrease the rate of his/her payroll
deductions during the Purchase Period by completing and filing with the Company
a new subscription agreement authorizing an increase or decrease in the payroll
deduction rate. Any decrease in the rate of a
5
<PAGE>
Participant's payroll deductions shall be effective with the first full payroll
period commencing ten (10) business days after the Company's receipt of the new
subscription agreement unless the Company elects to process a given change in
participation more quickly. Any increase in the rate of a Participant's payroll
deductions shall be effective with the first full payroll period of the next
Accrual Period following the Accrual Period in which the Company receives the
new subscription agreement if such agreement is filed within ten (10) business
days before the commencement of the next Accrual Period unless the Company
elects to process a given change in participation more quickly. A Participant's
subscription agreement shall remain in effect for successive Purchase Periods
unless terminated as provided in Section 10. The Plan Administrator shall be
authorized to limit the number of payroll deduction rate changes during any
Purchase Period.
(d) Notwithstanding the foregoing, to the extent necessary to comply
with Section 423(b)(8) of the Code and Section 3(b) herein, a Participant's
payroll deductions may be decreased to 0% at such time during any Accrual Period
which is scheduled to end during the current calendar year (the "Current Accrual
Period") that the aggregate of all payroll deductions which were previously used
to purchase stock under the Plan in a prior Accrual Period which ended during
that calendar year plus all payroll deductions accumulated with respect to the
Current Accrual Period equal $21,250. Payroll deductions shall recommence at the
rate provided in such Participant's subscription agreement at the beginning of
the first Accrual Period which is scheduled to end in the following calendar
year, unless terminated by the Participant as provided in Section 10.
7. Grant of Option. On the Enrollment Date, each Participant
---------------
shall be granted an option to purchase (at the applicable Purchase Price) up to
a number of shares of the Common Stock determined by dividing fifteen percent
(15%) of such Participant's Compensation receivable during the Purchase Period
by the applicable Purchase Price; provided (i) that such option shall be subject
to the limitations set forth in Sections 3(b) and 12 hereof, and (ii) the
maximum number of shares of Common Stock a Participant shall be permitted to
purchase in any Accrual Period shall be three thousand (3,000) shares, subject
to adjustment as provided in Section 18 hereof. Exercise of the option shall
occur as provided in Section 8, unless the Participant has withdrawn pursuant to
Section 10, and the option, to the extent not exercised, shall expire on the
last day of the Purchase Period.
8. Exercise of Option. Unless a Participant withdraws from the Plan
------------------
as provided in Section 10, below, the Participant's option will be exercised
automatically on each Exercise Date by applying the accumulated payroll
deductions in the Participant's account to purchase the maximum number of full
shares subject to the option by dividing such Participant's payroll deductions
accumulated prior to such Exercise Date and retained in the Participant's
account as of the Exercise Date by the applicable Purchase Price. No fractional
shares will be purchased; any payroll deductions accumulated in a Participant's
account which are not sufficient to purchase a full share shall be carried over
to the next Accrual Period or Purchase Period, whichever applies, or returned to
the Participant, if the Participant withdraws from the Plan. Any amount
remaining in a Participant's account following the purchase of shares on the
Exercise Date which exceeds the cost of one full share of Common Stock on the
Exercise Date
6
<PAGE>
shall be returned to the Participant and shall not be carried over to the next
Purchase Period. During a Participant's lifetime, a Participant's option to
purchase shares hereunder is exercisable only by him/her.
9. Delivery. Upon receipt of a request from a Participant after each
--------
Exercise Date on which a purchase of shares occurs, the Company shall arrange
the delivery to such Participant, as promptly as practicable, of a certificate
representing the shares purchased upon exercise of his/her option.
10. Withdrawal; Termination of Employment.
-------------------------------------
(a) A Participant may withdraw all but not less than all the payroll
deductions credited to his/her account and not yet used to exercise his/her
option under the Plan at any time by giving written notice to the Company in the
form of Exhibit B to this Plan. All of the Participant's payroll deductions
credited to his/her account will be paid to such Participant as promptly as
practicable after receipt of notice of withdrawal, such Participant's option for
the Purchase Period will be automatically terminated, and no further payroll
deductions for the purchase of shares will be made during the Purchase Period.
If a Participant withdraws from a Purchase Period, payroll deductions will not
resume at the beginning of the succeeding Purchase Period unless the Participant
delivers to the Company a new subscription agreement.
(b) Upon a Participant's ceasing to be an Employee for any reason or
upon termination of a Participant's employment relationship (as described in
Section 2(j)), the payroll deductions credited to such Participant's account
during the Purchase Period but not yet used to exercise the option will be
returned to such Participant or, in the case of his/her death, to the person or
persons entitled thereto under Section 14, and such Participant's option will be
automatically terminated.
11. Interest. No interest shall accrue on the payroll deductions
--------
credited to a Participant's account under the Plan.
12. Stock.
-----
(a) Subject to adjustment upon changes in capitalization of the Company
as provided in Section 18, the maximum number of shares of Common Stock which
shall be made available for sale under the Plan shall be three million six
hundred sixty six thousand ninety two (3,666,092) shares, and annually,
commencing with the first business day of each fiscal year of the Company
beginning with February 1, 2000 and thereafter, such maximum number of shares
shall be increased by a number of shares of Common Stock equal to the lesser of
(i) six million (6,000,000) shares or (ii) six percent (6%) of the number of
shares of Common Stock outstanding as of the last day of the immediately
preceding fiscal year of the Company reduced by the number of shares of Common
Stock added to the Company's 1997 Stock Incentive Plan pursuant to the terms of
Section 3(a) of that plan. If on a given Exercise Date the number of shares with
respect to which options are to be exercised exceeds the number of shares then
available under the Plan, the Plan Administrator shall make a pro rata
allocation of the shares remaining
7
<PAGE>
available for purchase in as uniform a manner as shall be practicable and as it
shall determine to be equitable.
(b) A Participant will have no interest or voting right in shares
covered by his/her option until such shares are actually purchased on the
Participant's behalf in accordance with the applicable provisions of the Plan.
No adjustment shall be made for dividends, distributions or other rights for
which the record date is prior to the date of such purchase.
(c) Shares to be delivered to a Participant under the Plan will be
registered in the name of the Participant or in the name of the Participant and
his/her spouse.
13. Administration. The Plan shall be administered by the Board or a
--------------
committee of members of the Board appointed by the Board. The Board or its
committee shall have full and exclusive discretionary authority to construe,
interpret and apply the terms of the Plan, to determine eligibility and to
adjudicate all disputed claims filed under the Plan. Every finding, decision and
determination made by the Board or its committee shall, to the full extent
permitted by law, be final and binding upon all persons.
14. Designation of Beneficiary.
--------------------------
(a) Each Participant will file a written designation of a beneficiary
who is to receive any shares and cash, if any, from the Participant's account
under the Plan in the event of such Participant's death. If a Participant is
married and the designated beneficiary is not the spouse, spousal consent shall
be required for such designation to be effective.
(b) Such designation of beneficiary may be changed by the Participant
(and his/her spouse, if any) at any time by written notice. In the event of the
death of a Participant and in the absence of a beneficiary validly designated
under the Plan who is living at the time of such Participant's death, the
Company shall deliver such shares and/or cash to the executor or administrator
of the estate of the Participant, or if no such executor or administrator has
been appointed (to the knowledge of the Plan Administrator), the Plan
Administrator, in its discretion, may deliver such shares and/or cash to the
spouse or to any one or more dependents or relatives of the Participant, or if
no spouse, dependent or relative is known to the Plan Administrator, then to
such other person as the Plan Administrator may designate.
15. Transferability. Neither payroll deductions credited to a
---------------
Participant's account nor any rights with regard to the exercise of an option or
to receive shares under the Plan may be assigned, transferred, pledged or
otherwise disposed of in any way (other than by will, the laws of descent and
distribution or as provided in Section 14 hereof) by the Participant. Any such
attempt at assignment, transfer, pledge or other disposition shall be without
effect, except that the Plan Administrator may treat such act as an election to
withdraw funds from a Purchase Period in accordance with Section 10.
16. Use of Funds. All payroll deductions received or held by the
------------
Company under the Plan may be used by the Company for any corporate purpose, and
the Company shall not be obligated to segregate such payroll deductions.
8
<PAGE>
17. Reports. Individual accounts will be maintained for each
-------
Participant in the Plan. Statements of account will be given to Participants at
least annually, which statements will set forth the amounts of payroll
deductions, the Purchase Price, the number of shares purchased and the remaining
cash balance, if any.
18. Adjustments Upon Changes in Capitalization; Corporate Transactions.
------------------------------------------------------------------
(a) Adjustments Upon Changes in Capitalization. Subject to any
------------------------------------------
required action by the stockholders of the Company, the Reserves, the fixed
share limit on the annual increase in the number of shares of Common Stock
available for sale under the Plan, as well as the Purchase Price, shall be
proportionately adjusted for any increase or decrease in the number of issued
shares of Common Stock resulting from a stock split, reverse stock split, stock
dividend, combination or reclassification of the Common Stock, or any other
similar event resulting in an increase or decrease in the number of issued
shares of Common Stock. Such adjustment shall be made by the Plan Administrator,
whose determination in that respect shall be final, binding and conclusive.
Except as expressly provided herein, no issue by the Company of shares of stock
of any class, or securities convertible into shares of stock of any class, shall
affect, and no adjustment by reason thereof shall be made with respect to, the
number or price of shares of Common Stock subject to an option. The Plan
Administrator may, if it so determines in the exercise of its sole discretion,
make provision for adjusting the Reserves, as well as the price per share of
Common Stock covered by each outstanding option, in the event the Company
effects one or more reorganizations, recapitalizations, rights offerings or
other increases or reductions of shares of its outstanding Common Stock.
(b) Corporate Transactions. In the event of a proposed Corporate
----------------------
Transaction, each option under the Plan shall be assumed or an equivalent option
shall be substituted by such successor corporation or a parent or subsidiary of
such successor corporation, unless the Plan Administrator determines, in the
exercise of its sole discretion and in lieu of such assumption or substitution,
to shorten the Purchase Period then in progress by setting a new Exercise Date
(the "New Exercise Date"). If the Plan Administrator shortens the Purchase
Period then in progress in lieu of assumption or substitution in the event of a
Corporate Transaction, the Plan Administrator shall notify each Participant in
writing, at least ten (10) days prior to the New Exercise Date, that the
Exercise Date for his/her option has been changed to the New Exercise Date and
that his/her option will be exercised automatically on the New Exercise Date,
unless prior to such date he/she has withdrawn from the Purchase Period as
provided in Section 10. For purposes of this Subsection, an option granted under
the Plan shall be deemed to be assumed if, following the Corporate Transaction,
the option confers the right to purchase, for each share of Common Stock subject
to the option immediately prior to the Corporate Transaction, the consideration
(whether stock, cash or other securities or property) received in the Corporate
Transaction by holders of Common Stock for each share of Common Stock held on
the effective date of the Corporate Transaction (and if such holders were
offered a choice of consideration, the type of consideration chosen by the
holders of a majority of the outstanding shares of Common Stock); provided,
however, that if such consideration received in the Corporate Transaction was
not solely common stock of the successor corporation or its Parent, the Plan
Administrator may, with the consent of the successor corporation and the
Participant, provide for the consideration to
9
<PAGE>
be received upon exercise of the option to be solely common stock of the
successor corporation or its Parent equal in fair market value to the per share
consideration received by holders of Common Stock in the Corporate Transaction.
19. Amendment or Termination.
------------------------
(a) The Plan Administrator may at any time and for any reason
terminate or amend the Plan. Except as provided in Section 18, no such
termination can affect options previously granted, provided that a Purchase
Period may be terminated by the Plan Administrator on any Exercise Date if the
Plan Administrator determines that the termination of the Plan is in the best
interests of the Company and its stockholders. Except as provided in Section 18,
no amendment may make any change in any option theretofore granted which
adversely affects the rights of any Participant. To the extent necessary to
comply with Section 423 of the Code (or any successor rule or provision or any
other applicable law or regulation), the Company shall obtain stockholder
approval in such a manner and to such a degree as required.
(b) Without stockholder consent and without regard to whether any
Participant rights may be considered to have been "adversely affected," the Plan
Administrator shall be entitled to change the Purchase Periods, limit the
frequency and/or number of changes in the amount withheld during Purchase
Periods, establish the exchange ratio applicable to amounts withheld in a
currency other than U.S. dollars, establish additional terms, conditions, rules
or procedures to accommodate the rules or laws of applicable foreign
jurisdictions, permit payroll withholding in excess of the amount designated by
a Participant in order to adjust for delays or mistakes in the Company's
processing of properly completed withholding elections, establish reasonable
waiting and adjustment periods and/or accounting and crediting procedures to
ensure that amounts applied toward the purchase of Common Stock for each
Participant properly correspond with amounts withheld from the Participant's
Compensation, and establish such other limitations or procedures as the Plan
Administrator determines in its sole discretion advisable and which are
consistent with the Plan.
20. Notices. All notices or other communications by a Participant
-------
to the Company under or in connection with the Plan shall be deemed to have been
duly given when received in the form specified by the Plan Administrator at the
location, or by the person, designated by the Plan Administrator for the receipt
thereof.
21. Conditions Upon Issuance of Shares. Shares shall not be issued
----------------------------------
with respect to an option unless the exercise of such option and the issuance
and delivery of such shares pursuant thereto shall comply with all applicable
provisions of law, domestic or foreign, including, without limitation, the
Securities Act of 1933, as amended, the Exchange Act, the rules and regulations
promulgated thereunder, and the requirements of any stock exchange upon which
the shares may then be listed, and shall be further subject to the approval of
counsel for the Company with respect to such compliance. As a condition to the
exercise of an option, the Company may require the Participant to represent and
warrant at the time of any such exercise that the shares are being purchased
only for investment and without any present intention to sell or distribute such
shares if, in the opinion of counsel for the Company, such a representation is
10
<PAGE>
required by any of the aforementioned applicable provisions of law. In addition,
no options shall be exercised or shares issued hereunder before the Plan shall
have been approved by stockholders of the Company as provided in Section 23.
22. Term of Plan. The Plan shall become effective upon the earlier
------------
to occur of its adoption by the Board or its approval by the stockholders of the
Company. It shall continue in effect for a term of ten (10) years unless sooner
terminated under Section 19.
23. Approval of the Plan. The Plan became effective when adopted by
--------------------
the Board on March 19, 1997, and was approved by the Company's stockholders on
March 31, 1997. On September 16, 1997, the Board adopted and approved an
amendment and restatement of the Plan to modify the ending date of each semi-
annual Accrual Period commencing on July 1 from December 31 to December 15 and
to modify the commencement dates of each semi-annual Accrual Period and twenty-
four month Purchase Period commencing on January 1 from January 1 to December
16. On May 13, 1998, the Board adopted an amendment of the Plan to increase the
number of shares of Common Stock available for sale under the Plan and to adopt
a formula to provide for an annual automatic increase in the number of shares of
Common Stock available for sale under the Plan, which amendments were approved
by the Company's stockholders on June 25, 1998. Also on May 13, 1998, the Board
adopted an amendment and restatement of the Plan (a) to increase the maximum
rate of payroll withholding for the purchase of shares under the Plan from ten
percent (10%) of Compensation to fifteen percent (15%) of Compensation (such
amendment effective for Purchase Periods commencing on and after July 1, 1998)
and (b) to grant options under the Plan to each Participant at the maximum
fifteen percent (15%) of Compensation withholding rate (such amendment effective
for Purchase Periods commencing on and after July 1, 1998), and such amendments
were not subject to stockholder approval. On May 12, 1999, the Board adopted an
amendment and restatement of the Plan to reduce the number of shares of Common
Stock available for sale under the Plan and to adjust the formula that provides
an annual automatic increase in the number of shares of Common Stock available
for sale under the Plan, such amendments conditioned upon and not to take effect
until stockholder approval of such amendments is obtained.
24. No Employment Rights. The Plan does not, directly or indirectly,
--------------------
create any right for the benefit of any employee or class of employees to
purchase any shares under the Plan, or create in any employee or class of
employees any right with respect to continuation of employment by the Company or
a Designated Parent or Subsidiary, and it shall not be deemed to interfere in
any way with such employer's right to terminate, or otherwise modify, an
employee's employment at any time.
25. Effect of Plan. The provisions of the Plan shall, in accordance
--------------
with its terms, be binding upon, and inure to the benefit of, all successors of
each Participant, including, without limitation, such Participant's estate and
the executors, administrators or trustees thereof, heirs and legatees, and any
receiver, trustee in bankruptcy or representative of creditors of such
Participant.
11
<PAGE>
26. Applicable Law. The laws of the State of California (excluding
--------------
that body of law pertaining to its conflicts of law) will govern all matters
relating to this Plan except to the extent it is superseded by the laws of the
United States.
12
<PAGE>
EXHIBIT 10.2
BEA SYSTEMS, INC.
1997 STOCK INCENTIVE PLAN
Adopted on March 19, 1997
Amended and Restated on May 13, 1998
Amended and Restated on May 12, 1999
Amended and Restated on July 14, 1999
1. Purposes of the Plan. The purposes of this Stock Incentive Plan are to
--------------------
attract and retain the best available personnel for positions of substantial
responsibility, to provide additional incentive to Employees, Directors and
Consultants of the Company and its Parents and Subsidiaries and to promote the
success of the Company's business.
2. Definitions. As used herein, the following definitions shall apply:
-----------
(a) "Administrator" means the Board or any of the Committees appointed to
-------------
administer the Plan.
(b) "Affiliate" and "Associate" shall have the respective meanings
--------- ---------
ascribed to such terms in Rule 12b-2 promulgated under the Exchange
Act.
(c) "Applicable Laws" means the legal requirements relating to the
---------------
administration of stock incentive plans, if any, under applicable
provisions of federal securities laws, state corporate and
securities laws, the Code, the rules of any applicable stock exchange
or national market system, and the rules of any foreign jurisdiction
applicable to Awards granted to residents therein.
(d) "Award" means the grant of an Option, SAR, Dividend Equivalent Right,
-----
Restricted Stock, Performance Unit, Performance Share, or other right
or benefit under the Plan.
(e) "Award Agreement" means the written agreement evidencing the grant of
---------------
an Award executed by the Company and the Grantee, including any
amendments thereto.
(f) "Board" means the Board of Directors of the Company.
-----
(g) "Change in Control" means a change in ownership or control of the
-----------------
Company effected through either of the following transactions:
(i) the direct or indirect acquisition by any person or related group
of persons (other than an acquisition from or by the Company or by a Company-
sponsored employee benefit plan or by a person that directly or indirectly
controls, is controlled by, or is under common control with, the Company) of
beneficial ownership (within the meaning of Rule 13d-3 of the Exchange Act) of
securities possessing more than fifty percent (50%) of the total combined voting
power of the Company's outstanding securities pursuant to a tender or exchange
offer made directly to the Company's stockholders which a majority of the
1
<PAGE>
Continuing Directors who are not Affiliates or Associates of the offeror do not
recommend such stockholders accept, or
(ii) a change in the composition of the Board over a period of
thirty-six (36) months or less such that a majority of the Board members
(rounded up to the next whole number) ceases, by reason of one or more
contested elections for Board membership, to be comprised of individuals who
are Continuing Directors.
(h) "Code" means the Internal Revenue Code of 1986, as amended.
----
(i) "Committee" means any committee appointed by the Board to administer
---------
the Plan.
(j) "Common Stock" means the common stock of the Company.
------------
(k) "Company" means BEA Systems, Inc., a Delaware corporation.
-------
(l) "Consultant" means any person who is engaged by the Company or any
----------
Parent or Subsidiary to render consulting or advisory services as an
independent contractor and is compensated for such services.
(m) "Continuing Directors" means members of the Board who either (i) have
--------------------
been Board members continuously for a period of at least thirty-six
(36) months or (ii) have been Board members for less than thirty-six
(36) months and were elected or nominated for election as Board
members by at least a majority of the Board members described in
clause (i) who were still in office at the time such election or
nomination was approved by the Board.
(n) "Continuous Status as an Employee, Director or Consultant" means that
--------------------------------------------------------
the provision of services to the Company, a Parent or Subsidiary in
any capacity of Employee, Director or Consultant, is not interrupted
or terminated. Continuous Status as an Employee, Director or
Consultant shall not be considered interrupted in the case of (i) any
approved leave of absence or (ii) transfers between locations of the
Company or among the Company, its Parent, any Subsidiary, or any
successor in any capacity of Employee, Director or Consultant. An
approved leave of absence shall include sick leave, military leave, or
any other authorized personal leave. For purposes of Incentive Stock
Options, no such leave may exceed ninety (90) days, unless
reemployment upon expiration of such leave is guaranteed by statute or
contract.
(o) "Corporate Transaction" means any of the following stockholder-
---------------------
approved transactions to which the Company is a party:
(i) a merger or consolidation in which the Company is not the
surviving entity, except for a transaction the principal purpose of which is to
change the state in which the Company is incorporated;
2
<PAGE>
(ii) the sale, transfer or other disposition of all or substantially
all of the assets of the Company (including the capital stock of the Company's
subsidiary corporations) in connection with the complete liquidation or
dissolution of the Company; or
(iii) any reverse merger in which the Company is the surviving entity
but in which securities possessing more than fifty percent (50%) of the total
combined voting power of the Company's outstanding securities are transferred to
a person or persons different from those who held such securities immediately
prior to such merger.
(p) "Covered Employee" means an Employee who is a "covered employee" under
----------------
Section 162(m)(3) of the Code.
(q) "Director" means a member of the Board.
--------
(r) "Dividend Equivalent Right" means a right entitling the Grantee to
-------------------------
compensation measured by dividends paid with respect to Common Stock.
(s) "Employee" means any person, including an Officer or Director, who is
--------
an employee of the Company or any Parent or Subsidiary of the Company
for purposes of Section 422 of the Code. The payment of a director's
fee by the Company shall not be sufficient to constitute "employment"
by the Company.
(t) "Exchange Act" means the Securities Exchange Act of 1934, as amended.
------------
(u) "Fair Market Value" means, as of any date, the value of Common Stock
-----------------
determined as follows:
(i) Where there exists a public market for the Common Stock, the Fair
Market Value shall be (A) the closing price for a Share for the last market
trading day prior to the time of the determination (or, if no closing price was
reported on that date, on the last trading date on which a closing price was
reported) on the stock exchange determined by the Administrator to be the
primary market for the Common Stock or the Nasdaq National Market, whichever is
applicable or (B) if the Common Stock is not traded on any such exchange or
national market system, the average of the closing bid and asked prices of a
Share on the Nasdaq Small Cap Market for the day prior to the time of the
determination (or, if no such prices were reported on that date, on the last
date on which such prices were reported), in each case, as reported in The Wall
Street Journal or such other source as the Administrator deems reliable; or
(ii) In the absence of an established market of the type described in
(i), above, for the Common Stock, the Fair Market Value thereof shall be
determined by the Administrator in good faith.
(v) "Grantee" means an Employee, Director or Consultant who receives an
-------
Award under the Plan.
3
<PAGE>
(w) "Immediate Family" means any child, stepchild, grandchild, parent,
----------------
stepparent, grandparent, spouse, former spouse, sibling, niece, nephew,
mother-in-law, father-in-law, son-in law, daughter-in-law, brother-in-
law, or sister-in-law, including adoptive relationships, any person
sharing the Grantee's household (other than a tenant or employee), a
trust in which these persons have more than fifty percent (50%) of the
beneficial interest, a foundation in which these persons (or the
Grantee) control the management of assets, and any other entity in
which these persons (or the Grantee) own more than fifty percent (50%)
of the voting interests.
(x) "Incentive Stock Option" means an Option intended to qualify as an
----------------------
incentive stock option within the meaning of Section 422 of the Code.
(y) "Non-Qualified Stock Option" means an Option not intended to qualify
--------------------------
as an Incentive Stock Option.
(z) "Officer" means a person who is an officer of the Company within the
-------
meaning of Section 16 of the Exchange Act and the rules and regulations
promulgated thereunder.
(aa) "Option" means a stock option granted pursuant to the Plan.
------
(bb) "Parent" means a "parent corporation," whether now or hereafter
------
existing, as defined in Section 424(e) of the Code.
(cc) "Performance - Based Compensation" means compensation qualifying as
--------------------------------
"performance-based compensation" under Section 162(m) of the Code.
(dd) "Performance Shares" means Shares or an award denominated in Shares
------------------
which may be earned in whole or in part upon attainment of performance
criteria established by the Administrator.
(ee) "Performance Units" means an award which may be earned in whole or in
-----------------
part upon attainment of performance criteria established by the
Administrator and which may be settled for cash, Shares or other
securities or a combination of cash, Shares or other securities as
established by the Administrator.
(ff) "Plan" means this 1997 Stock Incentive Plan.
----
(gg) "Restricted Stock" means Shares issued under the Plan to the Grantee
----------------
for such consideration, if any, and subject to such restrictions on
transfer, rights of first refusal, repurchase provisions, forfeiture
provisions, and other terms and conditions as established by the
Administrator.
(hh) "Rule 16b-3" means Rule 16b-3 promulgated under the Exchange Act or any
----------
successor thereto.
4
<PAGE>
(ii) "SAR" means a stock appreciation right entitling the Grantee to
---
Shares or cash compensation, as established by the Administrator,
measured by appreciation in the value of Common Stock.
(jj) "Share" means a share of the Common Stock.
-----
(kk) "Subsidiary" means a "subsidiary corporation," whether now or hereafter
----------
Shares or existing, as defined in Section 424(f) of the Code.
(ll) "Subsidiary Disposition" means the disposition by the Company of its
----------------------
equity holdings in any subsidiary corporation effected by a merger or
consolidation involving that subsidiary corporation, the sale of all or
substantially all of the assets of that subsidiary corporation or the
Company's sale or distribution of substantially all of the outstanding
capital stock of such subsidiary corporation.
3. Stock Subject to the Plan.
-------------------------
(a) Subject to the provisions of Section 10, below, the maximum aggregate
number of Shares which may be issued pursuant to Awards shall be twelve
million fifty two thousand one hundred eighty seven (12,052,187)
Shares, and annually, commencing with the first business day of each
fiscal year of the Company beginning with February 1, 2000 and
thereafter, such maximum aggregate number of Shares shall be increased
by a number of Shares equal to the lesser of (i) six million
(6,000,000) Shares, (ii) six percent (6%) of the number of Shares
outstanding as of the last day of the immediately preceding fiscal year
of the Company, or (iii) a lesser number of Shares determined by the
Administrator. The Shares to be issued pursuant to Awards may be
authorized, but unissued, or reacquired Common Stock.
(b) If an Award expires or becomes unexercisable without having been
exercised in full, or is surrendered pursuant to an Award exchange
program, or if any unissued Shares are retained by the Company upon
exercise of an Award in order to satisfy the exercise price for such
Award or any withholding taxes due with respect to such Award, such
unissued or retained Shares shall become available for future grant or
sale under the Plan (unless the Plan has terminated). Shares that
actually have been issued under the Plan pursuant to an Award shall not
be returned to the Plan and shall not become available for future
distribution under the Plan, except that if unvested Shares are
forfeited, or repurchased by the Company at their original purchase
price, such Shares shall become available for future grant under the
Plan.
4. Administration of the Plan.
--------------------------
(a) Plan Administrator.
------------------
(i) Administration with Respect to Directors and Officers. With
-----------------------------------------------------
respect to grants of Awards to Directors or Employees who are also Officers or
Directors of the Company, the Plan shall be administered by (A) the Board or (B)
a Committee designated by the Board, which Committee shall be constituted in
such a manner as to satisfy the Applicable Laws and to permit such grants and
related transactions under the Plan to be exempt from Section
5
<PAGE>
16(b) of the Exchange Act in accordance with Rule 16b-3. Once appointed, such
Committee shall continue to serve in its designated capacity until otherwise
directed by the Board.
(ii) Administration With Respect to Consultants and Other Employees.
--------------------------------------------------------------
With respect to grants of Awards to Employees or Consultants who are neither
Directors nor Officers of the Company, the Plan shall be administered by (A) the
Board or (B) a Committee designated by the Board, which Committee shall be
constituted in such a manner as to satisfy the Applicable Laws. Once appointed,
such Committee shall continue to serve in its designated capacity until
otherwise directed by the Board. The Board may authorize one or more Officers to
grant such Awards and may limit such authority as the Board determines from time
to time.
(iii) Administration With Respect to Covered Employees.
-----------------------------------------
Notwithstanding the foregoing, grants of Awards to any Covered Employee intended
to qualify as Performance-Based Compensation shall be made only by a Committee
(or subcommittee of a Committee) which is comprised solely of two or more
Directors eligible to serve on a committee making Awards qualifying as
Performance-Based Compensation. In the case of such Awards granted to Covered
Employees, references to the "Administrator" or to a "Committee" shall be deemed
to be references to such Committee or subcommittee.
(iv) Administration Errors. In the event an Award is granted in a
---------------------
manner inconsistent with the provisions of this subsection (a), such Award shall
be presumptively valid as of its grant date to the extent permitted by the
Applicable Laws.
(b) Powers of the Administrator. Subject to Applicable Laws and the
---------------------------
provisions of the Plan (including any other powers given to the
Administrator hereunder), and except as otherwise provided by the Board,
the Administrator shall have the authority, in its discretion:
(i) to select the Employees, Directors and Consultants to whom Awards
may be granted from time to time hereunder;
(ii) to determine whether and to what extent Awards are granted
hereunder;
(iii) to determine the number of Shares or the amount of other
consideration to be covered by each Award granted hereunder;
(iv) to approve forms of Award Agreement for use under the Plan;
(v) to determine the terms and conditions of any Award granted
hereunder;
(vi) to amend the terms of any outstanding Award granted under the Plan,
including a reduction in the exercise price (or base amount on which
appreciation is measured) of any Award to reflect a reduction in the Fair Market
Value of the Common Stock since the grant date of the Award, provided that any
amendment that would adversely affect the
6
<PAGE>
Grantee's rights under an outstanding Award shall not be made without the
Grantee's written consent;
(vii) to construe and interpret the terms of the Plan and Awards granted
pursuant to the Plan;
(viii) to establish additional terms, conditions, rules or procedures to
accommodate the rules or laws of applicable foreign jurisdictions and to afford
Grantees favorable treatment under such laws; provided, however, that no Award
shall be granted under any such additional terms, conditions, rules or
procedures with terms or conditions which are inconsistent with the provisions
of the Plan; and
(ix) to take such other action, not inconsistent with the terms of the
Plan, as the Administrator deems appropriate.
(c) Effect of Administrator's Decision. All decisions, determinations and
----------------------------------
interpretations of the Administrator shall be conclusive and binding on
all persons.
5. Eligibility. Awards other than Incentive Stock Options may be granted to
-----------
Employees, Directors and Consultants. Incentive Stock Options may be granted
only to Employees. An Employee, Director or Consultant who has been granted an
Award may, if otherwise eligible, be granted additional Awards. Awards may be
granted to such Employees, Directors or Consultants who are residing in foreign
jurisdictions as the Administrator may determine from time to time.
6. Terms and Conditions of Awards.
------------------------------
(a) Type of Awards. The Administrator is authorized under the Plan to
--------------
award any type of arrangement to an Employee, Director or Consultant
that is not inconsistent with the provisions of the Plan and that by
its terms involves or might involve the issuance of (i) Shares, (ii) an
Option, a SAR or similar right with an exercise or conversion privilege
at a fixed or variable price related to the Common Stock and/or the
passage of time, the occurrence of one or more events, or the
satisfaction of performance criteria or other conditions, or (iii) any
other security with the value derived from the value of the Common
Stock. Such awards include, without limitation, Options, SARs, sales or
bonuses of Restricted Stock, Dividend Equivalent Rights, Performance
Units or Performance Shares, and an Award may consist of one such
security or benefit, or two or more of them in any combination or
alternative.
(b) Designation of Award. Each Award shall be designated in the Award
--------------------
Agreement. In the case of an Option, the Option shall be designated as
either an Incentive Stock Option or a Non-Qualified Stock Option.
However, notwithstanding such designation, to the extent that the
aggregate Fair Market Value of Shares subject to Options designated as
Incentive Stock Opti ons which become exercisable for the first time by
a Grantee during any calendar year (under all plans of the Company or
any Parent or Subsidiary) exceeds $100,000, such excess Options, to the
extent of the Shares covered thereby in excess of the foregoing
limitation, shall be treated as Non-Qualified Stock Options. For this
purpose, Incentive Stock Options shall be
7
<PAGE>
taken into account in the order in which they were granted, and the
Fair Market Value of the Shares shall be determined as of the date the
Option with respect to such Shares is granted.
(c) Conditions of Award. Subject to the terms of the Plan, the
-------------------
Administrator shall determine the provisions, terms, and conditions of
each Award including, but not limited to, the Award vesting schedule,
repurchase provisions, rights of first refusal, forfeiture provisions,
form of payment (cash, Shares, or other consideration) upon settlement
of the Award, payment contingencies, and satisfaction of any
performance criteria. The performance criteria established by the
Administrator may be based on any one of, or combination of, increase
in share price, earnings per share, total stockholder return, return on
equity, return on assets, return on investment, net operating income,
cash flow, revenue, economic value added, personal management
objectives, or other measure of performance selected by the
Administrator. Partial achievement of the specified criteria may result
in a payment or vesting corresponding to the degree of achievement as
specified in the Award Agreement.
(d) Deferral of Award Payment. The Administrator may establish one or more
-------------------------
programs under the Plan to permit selected Grantees the opportunity to
elect to defer receipt of consideration upon exercise of an Award,
satisfaction of performance criteria, or other event that absent the
election would entitle the Grantee to payment or receipt of Shares or
other consideration under an Award. The Administrator may establish the
election procedures, the timing of such elections, the mechanisms for
payments of, and accrual of interest or other earnings, if any, on
amounts or Shares so deferred, and such other terms, conditions, rules
and procedures that the Administrator deems advisable for the
administration of any such deferral program.
(e) Award Exchange Programs. The Administrator may establish one or more
-----------------------
programs under the Plan to permit selected Grantees to exchange an
Award under the Plan for one or more other types of Awards under the
Plan on such terms and conditions as established by the Administrator
from time to time.
(f) Early Exercise. The Award may, but need not, include a provision
--------------
whereby the Grantee may elect at any time while an Employee, Director,
or Consultant to exercise any part or all of the Award prior to full
vesting of the Award. Any unvested Shares received pursuant to such
exercise may be subject to a repurchase right in favor of the Company
or to any other restriction the Administrator determines to be
appropriate.
(g) Term of Award. The term of each Award shall be the term stated in the
-------------
Award Agreement, provided, however, that the term of an Incentive Stock
Option shall be no more than ten (10) years from the date of grant
thereof. However, in the case of an Incentive Stock Option granted to a
Grantee who, at the time the Option is granted, owns stock representing
more than ten percent (10%) of the voting power of all classes of stock
of the Company or any Parent or Subsidiary, the term of the Incentive
Stock Option shall be five (5) years from the date of grant thereof or
such shorter term as may be provided in the Award Agreement.
8
<PAGE>
(h) Transferability of Awards. Incentive Stock Options may not be sold,
-------------------------
pledged, assigned, hypothecated, transferred, or disposed of in any
manner other than by will or by the laws of descent or distribution and
may be exercised, during the lifetime of the Grantee, only by the
Grantee; provided, however, that Grantee may designate a beneficiary of
the Grantee's Incentive Stock Option in the event of the Grantee's
death on a beneficiary designation form approved by the Administrator.
Other Awards may be transferred by gift or through a domestic relations
order to members of the Grantee's Immediate Family to the extent
provided in the Award Agreement or in the manner and to the extent
determined by the Administrator.
(i) Time of Granting Awards. The date of grant of an Award shall for all
-----------------------
purposes be the date on which the Administrator makes the determination
to grant such Award, or such other date as is determined by the
Administrator. Notice of the grant determination shall be given to each
Employee, Director or Consultant to whom an Award is so granted within
a reasonable time after the date of such grant.
(j) Individual Option and SAR Limit. The maximum number of Shares with
-------------------------------
respect to which Options and SARs may be granted to any Employee in any
fiscal year of the Company shall be one million (1,000,000) Shares. The
foregoing limitation shall be adjusted proportionately in connection
with any change in the Company's capitalization pursuant to Section 10,
below. To the extent required by Section 162(m) of the Code or the
regulations thereunder, in applying the foregoing limitation with
respect to an Employee, if any Option or SAR is canceled, the canceled
Option or SAR shall continue to count against the maximum number of
Shares with respect to which Options and SARs may be granted to the
Employee. For this purpose, the repricing of an Option (or in the case
of a SAR, the base amount on which the stock appreciation is calculated
is reduced to reflect a reduction in the Fair Market Value of the
Common Stock) shall be treated as the cancellation of the existing
Option or SAR and the grant of a new Option or SAR.
7. Award Exercise or Purchase Price, Consideration, Taxes and Reload Options.
-------------------------------------------------------------------------
(a) Exercise or Purchase Price. The exercise or purchase price, if any,
--------------------------
for an Award shall be as follows:
(i) In the case of an Incentive Stock Option:
(A) granted to an Employee who, at the time of the grant of such
Incentive Stock Option owns stock representing more than ten percent (10%) of
the voting power of all classes of stock of the Company or any Parent or
Subsidiary, the per Share exercise price shall be not less than one hundred ten
percent (110%) of the Fair Market Value per Share on the date of grant.
(B) granted to any Employee other than an Employee described in
the preceding paragraph, the per Share exercise price shall be not less than one
hundred percent (100%) of the Fair Market Value per Share on the date of grant.
9
<PAGE>
(ii) In the case of Awards intended to qualify as Performance-Based
Compensation, the exercise or purchase price, if any, shall be not less than one
hundred percent (100%) of the Fair Market Value per Share on the date of grant.
(iii) In the case of other Awards, such price as is determined by the
Administrator.
(b) Consideration. Subject to Applicable Laws, the consideration to be
--- -------------
paid for the Shares to be issued upon exercise or purchase of an Award
including the method of payment, shall be determined by the
Administrator (and, in the case of an Incentive Stock Option, shall be
determined at the time of grant). In addition to any other types of
consideration the Administrator may determine, the Administrator is
authorized to accept as consideration for Shares issued under the Plan
the following:
(i) cash;
(ii) check;
(iii) delivery of Grantee's promissory note with such recourse,
interest, security, and redemption provisions as the Administrator determines as
appropriate;
(iv) surrender of Shares or delivery of a properly executed form of
attestation of ownership of Shares as the Administrator may require (including
withholding of Shares otherwise deliverable upon exercise of the Award) which
have a Fair Market Value on the date of surrender or attestation equal to the
aggregate exercise price of the Shares as to which said Award shall be exercised
(but only to the extent that such exercise of the Award would not result in an
accounting compensation charge with respect to the Shares used to pay the
exercise price unless otherwise determined by the Administrator);
(v) delivery of a properly executed exercise notice together with such
other documentation as the Administrator and the broker, if applicable, shall
require to effect an exercise of the Award and delivery to the Company of the
sale or loan proceeds required to pay the exercise price; or
(vi) any combination of the foregoing methods of payment.
(c) Taxes. No Shares shall be delivered under the Plan to any Grantee or
-----
other person until such Grantee or other person has made arrangements
acceptable to the Administrator for the satisfaction of any foreign,
federal, state, or local income and employment tax withholding
obligations, including, without limitation, obligations incident to the
receipt of Shares or the disqualifying disposition of Shares received
on exercise of an Incentive Stock Option. Upon exercise of an Award,
the Company shall withhold or collect from Grantee an amount sufficient
to satisfy such tax obligations.
(d) Reload Options. In the event the exercise price or tax withholding of
--------------
an Option is satisfied by the Company or the Grantee's employer
withholding Shares otherwise
10
<PAGE>
deliverable to the Grantee, the Administrator may issue the Grantee an
additional Option, with terms identical to the Award Agreement under
which the Option was exercised, but at an exercise price as determined
by the Administrator in accordance with the Plan.
8. Exercise of Award.
-----------------
(a) Procedure for Exercise; Rights as a Stockholder.
(i) Any Award granted hereunder shall be exercisable at such times and
under such conditions as determined by the Administrator under the terms of the
Plan and specified in the Award Agreement.
(ii) An Award shall be deemed to be exercised when written notice of
such exercise has been given to the Company in accordance with the terms of the
Award by the person entitled to exercise the Award and full payment for the
Shares with respect to which the Award is exercised has been received by the
Company. Until the issuance (as evidenced by the appropriate entry on the books
of the Company or of a duly authorized transfer agent of the Company) of the
stock certificate evidencing such Shares, no right to vote or receive dividends
or any other rights as a stockholder shall exist with respect to Shares subject
to an Award, notwithstanding the exercise of an Option or other Award. The
Company shall issue (or cause to be issued) such stock certificate promptly upon
exercise of the Award. No adjustment will be made for a dividend or other right
for which the record date is prior to the date the stock certificate is issued,
except as provided in the Award Agreement or Section 10, below.
(b) Exercise of Award Following Termination of Employment, Director or
------------------------------------------------------------------
Consulting Relationship.
-----------------------
(i) An Award may not be exercised after the termination date of such
Award set forth in the Award Agreement and may be exercised following the
termination of a Grantee's Continuous Status as an Employee, Director or
Consultant only to the extent provided in the Award Agreement.
(ii) Where the Award Agreement permits a Grantee to exercise an Award
following the termination of the Grantee's Continuous Status as an Employee,
Director or Consultant for a specified period, the Award shall terminate to the
extent not exercised on the last day of the specified period or the last day of
the original term of the Award, whichever occurs first.
(iii) Any Award designated as an Incentive Stock Option to the extent
not exercised within the time permitted by law for the exercise of Incentive
Stock Options following the termination of a Grantee's Continuous Status as an
Employee, Director or Consultant shall convert automatically to a Non-Qualified
Stock Option and thereafter shall be exercisable as such to the extent
exercisable by its terms for the period specified in the Award Agreement.
11
<PAGE>
(c) Buyout Provisions. The Administrator may at any time offer to buy out
-----------------
for a payment in cash or Shares, an Award previously granted, based on
such terms and conditions as the Administrator shall establish and
communicate to the Grantee at the time that such offer is made.
9. Conditions Upon Issuance of Shares.
----------------------------------
(a) Shares shall not be issued pursuant to the exercise of an Award unless
the exercise of such Award and the issuance and delivery of such Shares
pursuant thereto shall comply with all Applicable Laws, and shall be
further subject to the approval of counsel for the Company with respect
to such compliance.
(b) As a condition to the exercise of an Award, the Company may require the
person exercising such Award to represent and warrant at the time of
any such exercise that the Shares are being purchased only for
investment and without any present intention to sell or distribute such
Shares if, in the opinion of counsel for the Company, such a
representation is required by any Applicable Laws.
10. Adjustments Upon Changes in Capitalization. Subject to any required action
------------------------------------------
by the stockholders of the Company, the number of Shares covered by each
outstanding Award, the maximum number of Shares with respect to which Options
and SARs may be granted to any Employee in any fiscal year of the Company, and
the number of Shares which have been authorized for issuance under the Plan but
as to which no Awards have yet been granted or which have been returned to the
Plan (including the fixed Share limit on the annual increase in the number of
Shares available for issuance under the Plan), as well as the price per share of
Common Stock covered by each such outstanding Award, shall be proportionately
adjusted for any increase or decrease in the number of issued shares of Common
Stock resulting from a stock split, reverse stock split, stock dividend,
combination or reclassification of the Common Stock, or any other similar event
resulting in an increase or decrease in the number of issued shares of Common
Stock. Except as expressly provided herein, no issuance by the Company of
shares of stock of any class, or securities convertible into shares of stock of
any class, shall affect, and no adjustment by reason hereof shall be made with
respect to, the number or price of Shares subject to an Award.
11. Corporate Transactions/Changes in Control/Subsidiary Dispositions. Except
-----------------------------------------------------------------
as may be provided in an Award Agreement:
(a) Effective upon the consummation of a Corporate Transaction, all
outstanding Awards under the Plan shall terminate unless assumed by
the successor company or its Parent. For the purposes of this
subsection, the Award shall be considered assumed if, following the
Corporate Transaction, the Award confers, for each Share subject to
the Award immediately prior to the Corporate Transaction, (i) the
consideration (whether stock, cash, or other securities or property)
received in the Corporate Transaction by holders of Common Stock for
each Share subject to the Award held on the effective date of the
Corporate Transaction (and if holders were offered a choice of
consideration, the type of consideration chosen by the holders of a
majority of the outstanding Shares), or (ii) the right to purchase
such consideration in the
12
<PAGE>
case of an Option or similar Award; provided, however, that if such
consideration received in the Corporate Transaction was not solely
common stock of the successor corporation or its Parent, the
Administrator may, with the consent of the successor corporation,
provide for the consideration to be received upon the exercise or
exchange of the Award for each Share subject to the Award to be solely
common stock of the successor corporation or its Parent equal in fair
market value to the per share consideration received by holders of
Common Stock in the Corporate Transaction.
(b) In the event of a Change in Control (other than a Change in Control
which also is a Corporate Transaction), each Award which is at the
time outstanding under the Plan shall remain exercisable until the
expiration or sooner termination of the applicable Award term.
(c) In the event of a Subsidiary Disposition, each Award with respect to
those Grantees who are at the time engaged primarily in Continuous
Status as an Employee or Consultant with the subsidiary corporation
involved in such Subsidiary Disposition which is at the time
outstanding under the Plan shall remain so exercisable until the
expiration or sooner termination of the Award term.
12. Term of Plan. The Plan shall become effective upon the earlier to occur of
------------
its adoption by the Board or its approval by the stockholders of the Company.
It shall continue in effect for a term of ten (10) years unless sooner
terminated.
13. Amendment, Suspension or Termination of the Plan.
------------------------------------------------
(a) The Board may at any time amend, suspend or terminate the Plan. To the
extent necessary to comply with Applicable Laws, the Company shall
obtain stockholder approval of any Plan amendment in such a manner and
to such a degree as required.
(b) No Award may be granted during any suspension of the Plan or after
termination of the Plan.
(c) Any amendment, suspension or termination of the Plan shall not affect
Awards already granted, and such Awards shall remain in full force and
effect as if the Plan had not been amended, suspended or terminated,
unless mutually agreed otherwise between the Grantee and the
Administrator, which agreement must be in writing and signed by the
Grantee and the Company.
14. Reservation of Shares.
---------------------
(a) The Company, during the term of the Plan, will at all times reserve and
keep available such number of Shares as shall be sufficient to satisfy
the requirements of the Plan.
(b) The inability of the Company to obtain authority from any regulatory
body having jurisdiction, which authority is deemed by the Company's
counsel to be necessary to the lawful issuance and sale of any Shares
hereunder, shall relieve the Company of any liability in
13
<PAGE>
respect of the failure to issue or sell such Shares as to which such
requisite authority shall not have been obtained.
15. No Effect on Terms of Employment. The Plan shall not confer upon any
--------------------------------
Grantee any right with respect to continuation of employment or consulting
relationship with the Company, nor shall it interfere in any way with his or her
right or the Company's right to terminate his or her employment or consulting
relationship at any time, with or without cause.
16. Stockholder Approval. The Plan became effective when adopted by the Board
--------------------
on March 19, 1997, and was approved by the Company's stockholders on March 31,
1997. On May 13, 1998, the Board adopted and approved an amendment and
restatement of the Plan (a) to include Incentive Stock Options within the class
of Awards subject to the formula for determining the maximum aggregate number of
Shares that may be issued pursuant to Awards under the Plan, (b) to place a cap
on the annual increase in such maximum aggregate number of Shares determined
under the formula, (c) to permit the grant of Incentive Stock Options with
respect to the two million two hundred sixty nine thousand six hundred fifty
eight (2,269,658) Shares that became available for issuance under the Plan
pursuant to the formula on January 2, 1998 and (d) to adopt a limit on the
maximum number of Shares with respect to which Options and SARs may be granted
to any Employee in any fiscal year of the Company and certain other
administrative provisions to comply with the performance-based compensation
exception to the deduction limit of Section 162(m) of the Code, which amendments
were approved by the stockholders of the Company on June 25, 1998. On May 12,
1999, the Board adopted an amendment and restatement of the Plan to increase the
number of Shares available for issuance under the Plan and to adjust the formula
that provides an annual automatic increase in the number of Shares of Common
Stock available for issuance under the Plan, such amendments conditioned upon
and not to take effect until stockholder approval of the amendments is obtained.
On July 14, 1999, the Board adopted an amendment and restatement of the Plan to
allow Awards to be transferred to the extent provided in the Award Agreement or
as determined by the Administrator.
14
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THIS FORM
10-Q AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JAN-31-2000
<PERIOD-START> FEB-01-1999
<PERIOD-END> OCT-31-1999
<CASH> 231,311
<SECURITIES> 46,190
<RECEIVABLES> 121,166
<ALLOWANCES> 5,087
<INVENTORY> 0
<CURRENT-ASSETS> 415,011
<PP&E> 39,106
<DEPRECIATION> 13,777
<TOTAL-ASSETS> 511,825
<CURRENT-LIABILITIES> 185,248
<BONDS> 250,000
0
0
<COMMON> 79
<OTHER-SE> 66,058
<TOTAL-LIABILITY-AND-EQUITY> 511,825
<SALES> 198,715
<TOTAL-REVENUES> 315,241
<CGS> 3,427
<TOTAL-COSTS> 313,810
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 8,346
<INCOME-PRETAX> 1,212
<INCOME-TAX> 7,100
<INCOME-CONTINUING> (5,888)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (5,888)
<EPS-BASIC> (.08)
<EPS-DILUTED> (.08)
</TABLE>
