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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 April 30, 2000
OR
[_] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
Commission File Number: 0-22369
BEA SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
Delaware 77-0394711
(State or other jurisdiction of (I. R. S. Employer
incorporation or organization) Identification No.)
2315 North First Street
San Jose, California 95131
(Address of principal executive offices)
(408) 570-8000
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes [X] No [_]
As of May 31, 2000, there were approximately 374,701,000 shares of the
Registrant's Common Stock outstanding.
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BEA SYSTEMS, INC.
INDEX
<TABLE>
<CAPTION>
Page No.
--------
<C> <S> <C>
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements (Unaudited):
Condensed Consolidated Statements of Operations and
Comprehensive Loss
Three months ended April 30, 2000 and 1999............... 3
Condensed Consolidated Balance Sheets
April 30, 2000 and January 31, 2000...................... 4
Condensed Consolidated Statements of Cash Flows
Three months ended April 30, 2000 and 1999............... 5
Notes to Condensed Consolidated Financial Statements...... 6
ITEM 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations...................... 10
Quantitative and Qualitative Disclosure about Market
ITEM 3. Risks.................................................... 24
PART II. OTHER INFORMATION
ITEM 2. Changes in Securities and Use of Proceeds................. 24
ITEM 6. Exhibits and Reports on Form 8-K.......................... 24
Signatures.......................................................... 25
</TABLE>
2
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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
April 30,
--------------------
2000 1999
--------- ---------
<S> <C> <C>
Revenues:
License fees........................................... $ 85,239 $ 55,906
Services............................................... 68,443 29,669
--------- ---------
Total revenues....................................... 153,682 85,575
Cost of revenues:
Cost of license fees................................... 3,775 1,165
Cost of services....................................... 40,413 16,641
Amortization of certain acquired intangible assets..... 9,983 6,840
--------- ---------
Total cost of revenues............................... 54,171 24,646
--------- ---------
Gross profit............................................. 99,511 60,929
Operating expenses:
Sales and marketing.................................... 68,695 41,790
Research and development............................... 18,879 12,044
General and administrative............................. 10,864 8,118
Amortization of goodwill............................... 12,195 989
Acquisition-related charges............................ 2,200 -
--------- ---------
Total operating expenses............................. 112,833 62,941
--------- ---------
Loss from operations..................................... (13,322) (2,012)
Interest income (expense) and other, net................. 4,146 (388)
--------- ---------
Loss before provision for income taxes................... (9,176) (2,400)
Provision for income taxes............................... (3,207) (1,565)
--------- ---------
Net loss................................................. (12,383) (3,965)
Other comprehensive income (loss):
Foreign currency translation adjustments............... 142 (310)
Unrealized loss on available-for-sale investments, net
of income taxes....................................... (240) (22)
--------- ---------
Comprehensive loss....................................... $ (12,481) $ (4,297)
========= =========
Basic and diluted net loss per share..................... $ (0.03) $ (0.01)
========= =========
Shares used in computing basic and diluted net loss per
share................................................... 366,950 303,000
========= =========
</TABLE>
See accompanying notes.
3
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BEA SYSTEMS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
<TABLE>
<CAPTION>
April 30, January
2000 31, 2000
----------- ----------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............................ $ 775,882 $ 763,294
Restricted cash...................................... 1,905 1,631
Short-term investments............................... 1,354 38,135
Accounts receivable, net............................. 145,398 133,069
Other current assets................................. 42,050 35,248
---------- ----------
Total current assets............................... 966,589 971,377
Computer equipment, furniture and leasehold
improvements, net..................................... 33,891 27,978
Goodwill, net.......................................... 172,712 141,457
Acquired intangible assets, net........................ 57,863 61,600
Other long-term assets................................. 85,391 56,429
---------- ----------
Total assets....................................... $1,316,446 $1,258,841
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable..................................... $ 18,942 $ 14,848
Accrued liabilities.................................. 106,382 92,673
Accrued income taxes................................. 11,580 27,021
Deferred revenues.................................... 118,802 96,537
Current portion of notes payable, other long-term
obligations and capital lease obligations........... 2,083 4,454
---------- ----------
Total current liabilities.......................... 257,789 235,533
Notes payable and other long-term obligations.......... 18,083 6,005
Convertible subordinated notes......................... 564,464 572,484
Commitments and contingencies
Stockholders' equity:
Common stock......................................... 374 361
Additional paid-in capital........................... 693,703 650,128
Accumulated deficit.................................. (215,338) (202,951)
Notes receivable from shareholders................... (296) (296)
Deferred compensation................................ (956) (1,144)
Accumulated other comprehensive loss................. (1,377) (1,279)
---------- ----------
Total stockholders' equity......................... 476,110 444,819
---------- ----------
Total liabilities and stockholders' equity......... $1,316,446 $1,258,841
========== ==========
</TABLE>
See accompanying notes.
4
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BEA SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Three months ended
April 30,
--------------------
2000 1999
--------- ---------
<S> <C> <C>
Operating activities:
Net loss............................................... $ (12,383) $ (3,965)
Adjustments to reconcile net loss to net cash provided
by operating activities:
Depreciation and amortization........................ 2,333 1,865
Amortization of deferred compensation................ 188 188
Amortization of certain acquired intangible assets
and acquisition-related charges..................... 24,379 7,829
Amortization of debt issuance costs.................. 561 261
Debt conversion premium.............................. 236 -
Changes in operating assets and liabilities.......... 18,164 14,279
Other................................................ 967 (287)
--------- ---------
Net cash provided by operating activities................ 34,445 20,170
--------- ---------
Investing activities:
Purchase of computer equipment, furniture and leasehold
improvements.......................................... (7,618) (4,337)
Payments for business combinations, net of cash
acquired.............................................. (55,288) -
Net maturities of available-for-sale short-term
investments........................................... 36,791 141
--------- ---------
Net cash used in investing activities.................... (26,115) (4,196)
--------- ---------
Financing activities:
Net borrowings under lines of credit................... 1,882 -
Net payments on notes payable, other long-term
obligations and capital lease obligations............. (8,557) (83)
Debt conversion premium................................ (236) -
Proceeds from issuance of common stock and preferred
stock, net............................................ 12,487 788
--------- ---------
Net cash provided by financing activities................ 5,576 705
--------- ---------
Net increase in cash and cash equivalents................ 13,906 16,679
Effect of exchange rate changes on cash.................. (794) 365
Cash and cash equivalents at beginning of period......... 764,675 232,556
--------- ---------
Cash and cash equivalents at end of period............... $ 777,787 $ 249,600
========= =========
</TABLE>
See accompanying notes.
5
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BEA SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Basis of Presentation
The condensed consolidated financial statements included herein are
unaudited and reflect all adjustments (consisting only of normal recurring
adjustments) which are, in the opinion of management, necessary for a fair
presentation of the financial position, results of operations and cash flows
for the interim periods. These condensed consolidated financial statements
should be read in conjunction with the consolidated financial statements and
notes thereto, together with Management's Discussion and Analysis 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, 2000. The results of operations for the three months ended April 30, 2000
are not necessarily indicative of the results for the entire fiscal year
ending January 31, 2001.
The consolidated balance sheet at January 31, 2000 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 the 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 or 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
anticipated. 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 recorded as deferred revenues.
Recent acquisitions
On March 21, 2000, the Company purchased The Workflow Automation Corporation
("Workflow") with $4.9 million in cash and through the issuance of 470,718
shares of BEA common stock, valued at $49.41 per share. The acquisition was
accounted for using the purchase method. An independent valuation was
completed, in which the majority of the purchase price was allocated to
intangible assets.
On April 19, 2000, the Company completed its acquisition of the services
business of The Object People, Inc. ("TOP"). The purchase price was
approximately $20.5 million in cash. The acquisition was accounted for using
the purchase method with a significant portion of the purchase price allocated
to intangible assets.
Recent investments
During March 2000, the Company made an additional $5.0 million investment in
WebGain, Inc. In April 2000, WebGain, Inc. issued an $18.0 million 8%
Convertible Note to the Company, due April 2005. The Note is convertible, at
the option of the lender, at any time into Series A Preferred Stock.
Subsequent to these investments, the Company's ownership percentage remains at
48%. During the first quarter of fiscal 2001, the
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Company invested in several other privately held companies for a total of
approximately $7.0 million. These investments are accounted for under the cost
method, as ownership is less than 20 percent and the Company does not have
significant influence over operations.
Stock split
In April 2000, the Company's Board of Directors approved a two-for-one
common stock split effected as a stock dividend. Shareholders of record on
April 7, 2000 (the record date) received a dividend of one share for every
share held on that date. The shares were distributed on April 24, 2000. All
share information and per share amounts in the accompanying consolidated
financial statements and notes have been retroactively adjusted to reflect the
effect of the stock split.
Note 2. Supplemental Cash Flow Disclosures
In the first quarter of fiscal 2001, the holders converted approximately
$8.0 million of the 2005 Notes into common stock. The value of stock issued in
business acquisitions for the first quarter in fiscal 2001 was approximately
$23.2 million.
Note 3. Net Loss Per Share
The Company has adopted Statement of Financial Accounting Standard No. 128,
Earnings per Share ("FAS 128"). Under this standard, basic net income (loss)
per share is computed based on the weighted average number of shares of the
Company's common stock outstanding. 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.
The following is a reconciliation of the numerators and denominators of the
basic and diluted loss per share computations (in thousands, except per share
data):
<TABLE>
<CAPTION>
Three months ended April 30,
----------------------------
2000 1999
-------------- --------------
<S> <C> <C>
Numerator:
Net loss............................... $ (12,383) $ (3,965)
============== ==============
Denominator:
Weighted average shares................ 369,017 307,412
Weighted average shares subject to
repurchase............................ (2,067) (4,412)
-------------- --------------
Weighted average shares, net........... 366,950 303,000
============== ==============
Basic and diluted net loss per share... $ (0.03) $ (0.01)
============== ==============
</TABLE>
The computation of basic and diluted net loss per share for the three months
ended April 30, 2000 excludes the impact of options to purchase 49.9 million
shares of common stock, the conversion of the $550 million 4% Convertible
Subordinated Notes due December 15, 2006 ("2006 Notes") and the $250 million
4% Convertible Subordinated Notes due June 15, 2005 ("2005 Notes"), which are
convertible into 15.9 million and 2.2 million shares of common stock,
respectively, as such impact would be antidilutive for the period presented.
The computation of basic and diluted net loss per share for the three months
ended April 30, 1999 excludes the impact of the conversion of the 2005 Notes
(See Note 3), which were convertible into approximately 9.5 million shares of
common stock, as well as approximately 4.5 million stock options, as such
impact would be antidilutive for the period presented.
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Note 4. Convertible Subordinated Debt Offering
In December 1999, the Company completed the sale of the 2006 Notes in an
offering to Qualified Institutional Buyers. The 2006 Notes are subordinated to
all existing and future senior indebtedness of the Company, and the principal
amount of the 2006 Notes is convertible at the option of the holder at any
time into common stock of the Company at a conversion rate of 28.86 shares per
$1,000 principal amount of 2006 Notes (equivalent to an approximate conversion
price of $34.65 per share). The 2006 Notes are redeemable at the option of the
Company in whole or in part at any time on or after December 20, 2002, in cash
plus accrued interest, if any, through the redemption date, subject to certain
events. Interest is payable semi-annually.
In June and July 1998, the Company completed the sale of the 2005 Notes in
an offering to Qualified Institutional Buyers. The 2005 Notes are subordinated
to all existing and future senior indebtedness of the Company, and the
principal amount of the 2005 Notes is convertible at the option of the holder
at any time into common stock of the Company at a conversion rate of 151.48
shares per $1,000 principal amount of 2005 Notes (equivalent to an approximate
conversion price of $6.60 per share). The 2005 Notes are redeemable at the
option of the Company in whole or in part at any time on or after June 5,
2001, in cash plus accrued interest, if any, through the redemption date,
subject to certain events. Interest is payable semi-annually. At the end of
the first quarter of fiscal 2001, approximately $235.5 million of the 2005
Notes had been converted to common stock, leaving approximately $14.5 million
as remaining principal. The Company incurred $236,000 of debt conversion
premium in the quarter ended April 30, 2000, which was charged to interest
expense.
Note 5. Comprehensive Loss
The components of accumulated comprehensive loss are as follows (in
thousands):
<TABLE>
<CAPTION>
April 30,
---------------
2000 1999
------- ------
<S> <C> <C>
Foreign currency translation adjustment................ $ (820) $ (877)
Unrealized loss on available-for-sale investments, net
of tax................................................ (557) (49)
------- ------
Total accumulated other comprehensive loss............. $(1,377) $ (926)
======= ======
</TABLE>
Note 6. Industry and Geographic Segment Information
Information regarding the Company's operations by geographic areas at April
30, 2000 and at January 31, 2000 and for the three months then ended is as
follows (in thousands):
<TABLE>
<CAPTION>
Three months ended April 30,
----------------------------
2000 1999
-------------- ---------------
<S> <C> <C>
Total revenues
United States.......................... $ 88,989 $ 50,839
Europe, Middle East and Africa (EMEA).. 48,321 28,251
Asia/Pacific (APAC).................... 15,396 6,345
Other Non-United States................ 976 140
-------------- --------------
$ 153,682 $ 85,575
============== ==============
<CAPTION>
April 30, January 31,
2000 2000
-------------- ---------------
Long-lived assets
<S> <C> <C>
United States.......................... $ 343,081 $ 264,865
Europe, Middle East and Africa (EMEA).. 4,010 3,610
Asia/Pacific (APAC).................... 1,889 1,724
Other Non-United States................ 877 17,265
-------------- --------------
$ 349,857 $ 287,464
============== ==============
</TABLE>
8
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The Company assigns revenues and assets to geographic areas based on the
location from which the invoice is generated.
The UK represented 15 percent of total revenues for the three months ended
April 30, 2000 and France represented 11 percent of total revenues for the
three months ended April 30, 1999.
Note 7. Commitments and Contingencies
Litigation
The Company is subject to legal proceedings and claims that arise in the
ordinary course of its business. While management currently believes the
amount of ultimate liability, if any, with respect to these actions will not
materially affect the financial position, results of operations, or liquidity
of the Company, the ultimate outcome of any litigation is uncertain, and the
impact of an unfavorable outcome could be material to the Company.
Employer Payroll Taxes
The Company is subject to employer payroll taxes when employees exercise
stock options. The payroll taxes are assessed on the stock option gain, which
is the difference between the common stock price on the date of exercise and
the exercise price. The tax rate varies depending upon the employees' taxing
jurisdiction. The timing and amount of employer payroll taxes is directly
related to the timing and number of options exercised by employees, the gain
thereon and the tax rate in the applicable jurisdiction. For the quarter ended
April 30, 2000, the Company recorded employer payroll taxes related to stock
option exercises of approximately $2.2 million. Because the Company is unable
to predict these employer payroll taxes, the Company is unable to predict
what, if any, expense will be recorded in a future period.
9
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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, 2000. 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 additional acquisitions,
seasonality, return on investment, statements regarding increase in service
revenues as a percentage in total revenues, planned investment in product
development, investing in services offerings, increase in cost of licenses,
devoting substantial resources to product development, continued hiring,
continuing to make additional acquisitions. These forward-looking statements
involve risks and uncertainties and actual results could differ materially
from those discussed in the forward-looking statements. These risks and
uncertainties include, but are not limited to, those described under the
headings "Year 2000 Compliance," "Effect of New Accounting Pronouncements" 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 e-
commerce infrastructure software that helps companies of all sizes build e-
commerce systems that extend investments in existing computer systems and
provide the foundation for running a successful integrated e-business. BEA's
products are marketed and sold worldwide through a network of BEA sales
offices, as well as hardware vendors, independent software vendors ("ISVs")
and systems integrators ("SIs") that are BEA partners and distributors. The
Company's products have been adopted in a wide variety of industries,
including commercial and investment banking, securities trading,
telecommunications, airlines, retail, manufacturing, package delivery,
insurance and government, in many cases using the Internet as a system
component. BEA's products serve as a platform or integration tool for
applications such as billing, provisioning, customer service, electronic funds
transfers, ATM networks, securities trading, Web-based banking, Internet
sales, supply chain management, scheduling and logistics, and hotel, airline
and rental car reservations. Licenses for BEA products are typically priced on
a per-user, per-application basis, but BEA also offers licenses priced per
server and time-based enterprise licenses.
The Company's core business has been providing infrastructure for high-
volume transaction systems, such as telecommunications billing applications,
commercial bank ATM networks and account management systems, credit card
billing systems and securities trading account management systems. These
distributed systems must scale to process high transaction volumes and
accommodate large numbers of users. As the Internet and e-commerce continue to
develop, increasing transaction loads are being placed on Web-based systems,
such as retail and business-to-business e-commerce sites. In addition, systems
that historically had been strictly internal are now being extended to the
Internet, such as telecommunications, bank and credit card account
information.
BEA provides an e-commerce transaction platform that is designed to address
this demand and help companies quickly develop and integrate e-business
initiatives and reliably deliver a wider range of dynamic, personalized
services.
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 its 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
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acquisitions were completed and have added intangible assets to BEA's balance
sheet, the values of which are 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 middleware markets for its products
as growing, but that companies serving those markets are consolidating. 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.
Seasonality. As is common in the software industry, we believe that our
fourth quarter orders are favorably impacted by a variety of factors including
year-end capital purchases by larger corporate customers and the commission
structure for our sales force. This increase typically results in first
quarter customer orders being lower than orders received in the immediately
preceding fourth quarter. BEA anticipates that this seasonal impact is likely
to continue.
Investment in Distribution Channel. BEA is currently investing in building
its sales and consulting capacity by aggressively hiring sales, technical
sales support and consulting personnel, as well as aggressively pursuing
relationships with system platform companies, packaged application software
developers, systems integrators and independent consultants, independent
software vendors, and distributors. This investment results 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.
Increase in Service Revenues as a Percentage of Total Revenues. Service
revenues have increased as a percentage of total revenues. BEA believes that
its customer base is in the process of transitioning to mission-critical
applications based on CORBA, Java and EJB programming models, but that
customers typically do not have sufficient numbers of system architects and
programmers experienced in building large, reliable systems on these
programming models. BEA anticipates that by providing its customers with
additional services, especially in architecting, building and deploying CORBA,
Java and EJB systems and training system architects and customers' programmers
to develop these systems, BEA can help facilitate 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 not result in an increase in license revenues.
Product Development. In Fiscal 2001, BEA continues to invest in product
development, particularly BEA WebLogic Collaborate (formerly known as "Project
e-Collaborate"), BEA WebLogic Commerce-Server and BEA WebLogic Personalization
Server. BEA WebLogic Collaborate is business-to-business integration software
that provides an open, scalable and dynamic way to rapidly create and manage
multi-party trading exchanges. BEA WebLogic Commerce-Server and BEA WebLogic
Personalization Server enable companies to quickly deliver highly personalized
e-commerce applications. BEA's planned investment in these efforts may affect
BEA's anticipated overall financial results, particularly cost of revenues as
a percentage of total revenues, research and development expense as a
percentage of total revenues and may create product transition concerns in
BEA's customer base. In addition, investment in these projects 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. These 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.
Results of Operations
Revenues
BEA's revenues are derived from fees for software licenses, customer
support, education and consulting services. Total revenues increased by $68.1
million or 79.6 percent from the quarter ended April 30, 1999 to the
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quarter ended April 30, 2000. The increase reflects rapid adoption of our
solutions for e-commerce systems resulting in additional sales to existing
customers and to new customer accounts and increases in demand for consulting
services.
License Revenues. License revenues increased 52.5 percent from the first
quarter of fiscal 2000 to the first quarter of fiscal 2001. The increase in
license revenues was mainly due to rapid adoption of our products for e-
commerce systems and expansion of the Company's direct sales force and
introduction of new products and new versions of existing products. License
revenues as a percentage of total revenues represented 55.5 percent and 65.3
percent of total revenues in the first quarters of fiscal 2001 and 2000,
respectively. The percentage decrease was attributable to the significant
increase in service revenues as a result of increased demand for the Company's
consulting services.
Service Revenues. Service revenues increased 130.7 percent in the first
quarter of fiscal 2001 compared with the same quarter in fiscal 2000. Service
revenues as a percentage of total revenues increased to 44.5 percent in the
first quarter of fiscal 2001 from 34.7 percent in the first quarter of fiscal
2000. The increase was primarily due to increased revenues from consulting
resulting from an increased customer base, an increase in the types of
consulting services sold by the Company, and increased number of service
personnel and consultants as a result of the Company's increased focus on
service offerings. We expect to continue investing in our services offerings,
especially consulting services.
International Revenues. International revenues accounted for $64.7 million
or 42.1 percent of total revenue in the quarter ended April 30, 2000 compared
with $34.7 million or 40.6 percent in the same quarter of the prior fiscal
year.
Revenues from the European, Middle East and Africa region ("EMEA") and
Asia/Pacific region ("APAC") increased in the first quarters of fiscal 2001
and 2000 to $48.3 million and $15.4 million, respectively, from $28.3 million
and $6.3 million in the same quarter of the prior fiscal year. Revenues from
EMEA represented 31.5 percent of total revenues in the first quarter of fiscal
2001, compared with 33.0 percent in the same quarter of the prior fiscal year.
Revenues from APAC represented 10.0 percent of total revenues in the first
quarter of fiscal 2001, compared with 7.4 percent in the same quarter of the
prior fiscal year.
Cost of Revenues
Total cost of revenues represented 35.2 percent and 28.8 percent of total
revenues in the quarters ended April 30, 2000 and 1999, respectively. The
increase was primarily due to the increase in service revenues as a percentage
of total revenues. Service revenues carry a substantially higher cost of
revenues than software licenses. Amortization charges included in cost of
revenues also contributed to the increase.
Cost of Licenses. Cost of licenses includes expenses related to the purchase
of compact discs, costs associated with transferring the Company's software to
electronic media, the printing of user manuals, packaging and distribution
costs as well as royalties paid to third parties. Cost of licenses represented
4.4 percent and 2.1 percent of license revenues in the first quarters of
fiscal 2001 and 2000, respectively. The increase in the first quarter of
fiscal 2001 as a percentage of license revenue was due to increased royalties
paid to third parties, primarily resulting from license and reseller
agreements signed in the third quarter of fiscal 2000. We expect cost of
licenses to increase as a percentage of license revenue in fiscal 2001 because
these license agreements will be in place for the full year.
Cost of Services. Cost of services consists primarily of salaries and
benefits for consulting, education and product support personnel. Cost of
services increased 142.9 percent in the first quarter of fiscal 2001 compared
to the same quarter of the prior fiscal year. This increase was the result of
overall increased demand for the Company's consulting services, increased
professional services headcount and the expansion of customer support centers
in Europe and Asia. Cost of services represented 59.0 percent and 56.1 percent
of service revenues in the quarters ended April 30, 2000 and 1999,
respectively. Cost of services as a percentage of service revenues increased
as a result of increased consulting costs attributable to increased consulting
revenues.
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Amortization of Certain Acquired Intangible Assets. The amortization of
certain acquired intangible assets, consisting of developed technology,
distribution rights, trademarks and tradenames, totaled $10.0 million and $6.8
million for the first quarters of fiscal 2001 and 2000, respectively. The
increase was primarily due to intangible assets resulting from a number of
strategic acquisitions, particularly the fiscal 2000 acquisition of The Theory
Center, Inc. ("TTC"). In the future, amortization expense associated with
these intangible assets recorded prior to April 30, 2000 is expected to total
$10.2 million, $9.8 million and $6.9 million for the second, third and fourth
quarters of fiscal 2001, respectively, and approximately $15.9 million, $9.1
million, and $5.9 million for the fiscal years ending January 31, 2002, 2003
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 64.4 percent in the
first quarter of fiscal 2001 compared with the same quarter of the prior
fiscal year. The increase was due to increased commissions on the Company's
increased revenue base, the expansion of the Company's direct sales force and
an increase in marketing personnel and programs. Sales and marketing expenses
decreased as a percentage of revenues to 44.7 percent in fiscal 2001 from 48.8
percent in fiscal 2000 due to the allocation of the increased sales and
marketing expenses over a larger revenue base. The Company expects to continue
to invest in sales channel expansion and marketing programs to promote the
Company's products and brand. Accordingly, the Company expects sales and
marketing expenses to continue to increase in future periods.
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
56.8 percent in the first quarter of fiscal 2001 compared with the same
quarter in fiscal 2000. Research and development expenses represented 12.3
percent and 14.1 percent of total revenues in the first quarters of fiscal
2001 and 2000, respectively. The decrease in research and development expenses
as a percentage of total revenues was primarily due to the allocation of the
increased research and development expenses over a larger revenue base. 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 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, legal, information
technology, facilities and general management functions. General and
administrative expenses increased 33.8 percent in the first quarter of fiscal
2001 compared with the same quarter of fiscal 2000. General and administrative
expenses represented 7.1 percent and 9.5 percent of total revenues for the
quarters ended April 30, 2000 and 1999, respectively. The increase in general
and administrative spending was attributed to the expansion of the Company's
support infrastructure, including information systems and associated expenses
necessary to manage the Company's growth. The decrease in general and
administrative expenses as a percentage of total revenues was primarily due to
the allocation of the increased general and administrative expenses over a
larger revenue base.
Amortization of Goodwill. Amortization of goodwill increased in the first
quarter of fiscal 2001, compared to the first quarter of fiscal 2000, due to
goodwill resulting from various acquisitions completed in fiscal 2000 and the
first quarter of fiscal 2001. In the future, amortization of goodwill recorded
prior to April 30, 2000 is expected to total $13.1 million, $13.0 million and
$13.0 million for the second, third and fourth quarters of fiscal 2001,
respectively, and approximately $43.6 million, $36.9 million, and $31.7
million for the fiscal years ending January 31, 2002, 2003 and thereafter,
respectively.
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Acquisition related charges. In connection with The Workflow Automatic
Corporation ("Workflow") acquisition, the Company acquired and expensed the
cost of a number of research projects and products that were in process on the
acquisition dates, in accordance with generally accepted accounting
principles. In the first quarter of fiscal 2001, acquisition related charges
were related to the write-off associated with the acquired in-process research
and development of approximately $2.2 million relating to this acquisition.
Interest Expense; Interest Income and Other, Net. Interest expense was $6.0
million in the first quarter of fiscal 2001, compared with $2.5 million in the
same quarter of the prior fiscal year. The increase was due to a higher
average amount of outstanding borrowings, primarily due to the issuance of
$550 million 4% Convertible Subordinated Notes due December 15, 2006 ("2006
Notes") in fiscal 2000. Interest income and other, net was $10.1 million and
$2.1 million in fiscal 2001 and 2000, respectively. The increase in interest
income was due to the investment of higher average cash, cash equivalents and
short-term investment balances, generated primarily from the Company's debt
and equity offerings.
Provision for Income Taxes. Although the Company has experienced operating
losses to date, the Company has incurred income tax expense of approximately
$3.2 million and $1.6 million in the first quarter of fiscal years 2001 and
2000, 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 first quarter of fiscal 2001, relative to the same quarter of the prior
fiscal year is primarily due to an overall increase in foreign corporate
income taxes and service revenues and an increase in domestic state current
taxes due to book/tax difference in the amortization of acquired intangibles
and the timing of revenue recognition.
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 valuation allowance
against its net deferred tax assets to the extent they are dependent upon
future taxable income for realization. The Company intends to evaluate the
realizability of the deferred tax assets on a quarterly basis.
Liquidity and Capital Resources
As of April 30, 2000, cash, cash equivalents and short-term investments
totaled $779.1 million, down from $803.1 million at January 31, 2000. The
decrease in cash, cash equivalents and short-term investments was primarily
due to cash used in the acquisition of the services business of The Object
People, Inc. ("TOP") and the Company's strategic equity investments in
privately-held companies offset primarily by $34.4 million cash generated from
operations.
Cash generated from operating activities rose to $34.4 million in the first
quarter of fiscal 2001, compared with $20.2 million generated in the same
quarter of fiscal 2000.
Investing activities consumed $26.1 million in cash during the first quarter
of fiscal 2001, compared with $4.2 million in the same quarter of the prior
fiscal year. Cash used for investing activities in the first quarter of fiscal
2001 was primarily for a strategic acquisition and equity investments in
privately-held companies amounting to an aggregate of $55.3 million and
capital expenditures of $7.6 million, net of maturities of short-term
investments of $36.8 million. In the same quarter of the prior fiscal year the
primary use of cash for investing activities was due to purchases of computer
equipment, furniture and leasehold improvements.
The Company generated $5.6 million from financing activities in the first
quarter of fiscal 2001, compared with $705,000 in the same quarter of fiscal
2000. The primary source of cash from financing activities in both the first
quarters of fiscal 2001 and 2000 was the issuance of common stock by BEA
pursuant to stock option exercises.
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As of April 30, 2000, the Company's outstanding short and long-term debt
obligations were $584.6 million, up from $582.9 million at January 31, 2000.
At April 30, 2000, the Company's outstanding debt obligations consisted
principally of the $564.5 million of convertible notes and $20.1 million of
other short-term and long-term debt. At January 31, 2000, the Company's
outstanding debt obligations consisted principally of $572.5 million of
convertible notes and $10.5 million of other short-term and long-term debt.
In addition to normal operating expenses, cash requirements are anticipated
for financing anticipated growth, payment of outstanding debt obligations and
the acquisition or licensing of products and technologies complementary to the
Company's business. The Company believes that its existing cash, cash
equivalents, short-term investments and cash generated from operations, if
any, will be sufficient to satisfy its currently anticipated cash requirements
through April 30, 2001. 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
Impact of Year 2000
In prior years, the Company discussed the nature and progress of its plans
to become Year 2000 ready. In late fiscal 2000, the Company completed its
remediation and testing of systems. As a result of those planning and
implementation efforts, the Company experienced no significant disruptions in
mission critical information technology and non-information technology systems
and believes those systems successfully responded to the Year 2000 date
change. The Company is not aware of any material problems resulting from Year
2000 issues, either with its products, its internal systems, or the products
and services of third parties. The Company will continue to monitor its
mission critical computer applications and those of its suppliers and vendors
throughout fiscal 2001.
Effect of New Accounting Pronouncements
In December 1999, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial
Statements" ("SAB 101") and amended it in March 2000. BEA is required to adopt
the provisions of SAB 101 in its second fiscal quarter of 2001. The Company is
currently reviewing the provisions of SAB 101 and has not fully assessed the
impact of its adoption; however, the Company does not currently expect that
the adoption of SAB 101 will have a material impact to its financial position
or results of operations.
In June 1998, the Financial Accounting Standards Board released Statement of
Financial Accounting Standards No. 133, Accounting for Derivative Instruments
and Hedging Activities ("FAS 133"). FAS 133 establishes the accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts (collectively referred to as
derivatives) and for hedging activities. It requires that an entity recognize
all derivatives as either assets or liabilities in the statement of financial
position and measure those instruments at fair value. In July 1999, FAS No.
137, "Accounting for Derivative Instruments and Hedging Activities--Deferral
of the Effective Data of FASB Statement 133" ("FAS 137") was issued. FAS 137
deferred the effective date of FAS 133 until the first fiscal quarter of
fiscal years beginning after June 15, 2000. The Company expects to adopt FAS
133 effective February 1, 2001. The Company does not currently expect that the
adoption of FAS 133 will have a material impact to its financial position or
results of operations.
In March 2000, the Financial Accounting Standards Board issued FASB
Interpretation No. 44, Accounting for Certain Transactions Involving Stock
Compensation--an Interpretation of APB Opinion No. 25, ("FIN 44"). FIN 44
clarifies the application of APB Opinion No. 25 and, among other issues
clarifies the following: the definition of an employee for purposes of
applying APB Opinion No. 25; the criteria for determining whether a plan
qualifies as a noncompensatory plan; the accounting consequence of various
modifications to the terms of
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the previously fixed stock options or awards; and the accounting for an
exchange of stock compensation awards in a business combination. FIN 44 is
effective July 1, 2000, but certain conclusions in FIN 44 cover specific
events that occurred after either December 15, 1998 or January 12, 2000. The
Company does not expect the application of FIN 44 to have a material impact on
the Company's financial position or results of operations.
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.
Significant unanticipated fluctuations in our actual or anticipated quarterly
revenues and operating results may cause us not to meet securities analysts'
or investors' expectations and may result in a decline in or 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 investors or
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
. the mix of our products and services sold and mix of distribution
channels
. general economic conditions, which can affect our customers' capital
investment levels and the length of our sales cycle
. 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 develop, introduce and market new products on a
timely basis 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 Workflow Automation Corporation
and the services business of The Object People, Inc.
. 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 successfully expand our sales and marketing
programs
. whether we are able to meet our customers' service requirements
. costs associated with acquisitions, including the acquisitions of The
Workflow Automation Corporation and the services business of The Object
People, Inc.
. loss of key personnel
. fluctuations in foreign currency exchange rates
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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.
A significant portion of our revenues has been derived from large orders, as
customers deployed our products throughout their organizations or chose to
standardize on our products for their system architecture. Increases in the
dollar size of individual license transactions have also increased 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
may 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 difficult to adjust in the short term. Any revenue
shortfall below our expectations could have an immediate and significant
adverse effect on our results of operations.
We are subject to employer payroll taxes when our employees exercise their
stock options. The employer payroll taxes are assessed on each employee's
gain, which is the difference between the price of our common stock on the
date of exercise and the exercise price. During a particular period, these
payroll taxes could be material. These employer payroll taxes would be
recorded as an expense and are assessed at tax rates that varies depending
upon the employee's taxing jurisdiction in the period such options are
exercised based on actual gains realized by employees. However, because we are
unable to predict how many stock options will be exercised, at what price and
in which country during any particular period, we cannot predict, the amount,
if any, of employer payroll expense will be recorded in a future period or the
impact on our future financial results.
As is common in the software industry, we believe that our fourth quarter
orders are favorably impacted by a variety of factors including year-end
capital purchases by larger corporate customers and the commission structure
for our sales force. This increase typically results in first quarter customer
orders being lower than orders received in the immediately preceding fourth
quarter. BEA anticipates that this seasonal impact is likely to continue.
Although we use a standard license agreement, which meets the revenue
recognition criteria under 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 believe that we are in compliance with 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, the American Institute
of Certified Public Accountants continues to issue some implementation
guidelines for these standards and the accounting profession continues to
discuss a wide range of potential interpretations. Additional implementation
guidelines could lead to unanticipated changes in our current revenue
accounting practices that could cause us to recognize lower revenue and
profits.
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 BEA WebLogic, a software product which we acquired
in September 1998, and fees for software products and services related to
TUXEDO and WebLogic. We have also acquired a number of businesses,
technologies and products, most recently The Workflow Automation Corporation
("Workflow"), which was acquired in March 2000 and the services business of
The Object People, Inc. ("TOP"), which was acquired in April 2000. Our limited
operating history and the need to integrate a number of separate and
independent business operations subject our business to numerous risks. At
April 30,
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2000, we had an accumulated deficit of approximately $215.3 million. In
addition, in connection with certain acquisitions completed prior to April 30,
2000, we recorded approximately $474.2 million as intangible assets and
goodwill. Under Generally Accepted Accounting Principles, intangible assets
and goodwill are required to be amortized in future periods. Approximately
$243.6 million of these assets have been amortized as of April 30, 2000 and we
expect to amortize the remaining amount of approximately $230.6 million in
future periods through our fiscal year ending January 31, 2005. We expect to
amortize $65.9 million of such intangible assets and goodwill over the
remaining quarters of fiscal 2001. 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 expense
such assets sooner than we expect. Because of our limited operating history
and ongoing expenses 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.
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 price of our common stock may fluctuate significantly
The market price for our common stock may be affected by a number of
factors, including developments in the Internet, software or technology
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 and declines 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.
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, The Theory Center in November 1999, Workflow in
March 2000 and TOP in April 2000. It is possible we may not achieve any of the
intended financial or strategic benefits of these transactions. 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
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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.
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 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 predicted that many corporations would
stop deploying new computer systems in late 1999 and early 2000, in order to
avoid disrupting their computer systems before the Year 2000. Conversely, some
of our customers may have accelerated their purchases and deployments of our
products in advance of the year 2000.These factors could cause an unusual
fluctuation in our orders, and our revenues could be materially reduced and
our operating results could be materially adversely affected. 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.
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
products that include certain application server functionality and has
announced that it intends to include application server and integration
functionality in future versions of its operating systems, including future
versions of Windows 2000. Oracle recently announced plans to introduce a new
version of its application server product in the summer of 2000. 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 tool sets and, in some cases, offer complementary
software that supports these tools and
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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 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.
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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, or 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 including their patent 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 types 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 41.1 percent and 40.6 percent of our
consolidated revenues for the three months ended April 30, 2000 and 1999,
respectively. We sell our products and services through a network of branches
and subsidiaries located in 29 countries worldwide. In addition, we also
market through distributors. 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 we do business.
General economic and political conditions in these foreign markets may also
impact our international revenues. 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.
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 2,100 employees in over 70
offices in 29 countries at April 30, 2000. 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.
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If the market for application servers, application integration and
application component software does not grow as quickly as we expect, our
revenues will be harmed
We sell our products and services in the application server, application
integration and application component 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.
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 and 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 computer hardware
companies, packaged application software developers (ISVs), 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 sales 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 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.
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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 any defects or errors. Any defects or 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, any
defects or 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 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.
We have a high debt balance and large interest obligations
At April 30, 2000, we had approximately $564.5 million of long-term
indebtedness in the form of convertible notes. As a result of this
indebtedness, we have substantial principal and interest payment obligations.
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.
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
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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 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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISKS
For financial market risks related to changes in interest rates and foreign
currency exchange rates, refer to Part II: Item 7a, "Quantitative and
Qualitative Disclosure About Market Risks," in the Company's Annual Report on
Form 10-K for the year ended January 31, 2000.
PART II. OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
In connection with the acquisition of The Workflow Automation Corporation
("Workflow"), effective March 21, 2000, the Company exchanged approximately
$4.9 million cash and issued 470,718 shares of its Common Stock, valued at
$49.41 per share, to the former shareholders of Workflow at a conversion ratio
of 2263.04 shares of BEA Common Stock for each share of Workflow stock. The
shares were issued in reliance on Section 4(2) of the Securities Act of 1933,
as amended, and were registered for resale on a form S-3 (File No. 333-34956)
registration statement declared effective May 30, 2000.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
27 Financial Data Schedule
(b) Reports on Form 8-K:
None
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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/ William M. Klein
-------------------------------
William M. Klein
Chief Financial Officer and
Executive Vice President--
Administration
(Duly Authorized Officer and
Principal Financial Officer or Chief
Accounting Officer)
Dated: June 14, 2000
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