UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1999
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission File Number:
BE INCORPORATED
(Exact name of Registrant as specified in its charter)
Delaware 94-3123667
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
800 El Camino Real, Suite 400, Menlo Park, CA 94025 (Address of
principal executive offices, including zip code)
(650) 462-4100
(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 (1) No (2)
The number of shares of Common Stock outstanding as of November 10, 1999 was
34,399,204.
<PAGE>
BE INCORPORATED
FORM 10-Q
TABLE OF CONTENTS
PAGE
PART I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements:
Consolidated Balance Sheets at September 30, 1999
and December 31, 1998................................................3
Consolidated Statements of Operations for the three and nine
month periods ended September 30, 1999 and September 30, 1998........4
Consolidated Statements of Cash Flows for the nine month
periods ended September 30, 1999 and September 30, 1998..............5
Notes to Condensed Consolidated Financial Statements.................6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations............................................8
Item 3. Quantitative and Qualitative Disclosures About Market Risk..........21
PART II. OTHER INFORMATION
Item 1. Legal Proceedings...................................................21
Item 2. Changes in Securities and Use of Proceeds...........................21
Item 3. Defaults upon Senior Securities.....................................21
Item 4. Submission of Matters to a Vote of Security Holders.................22
Item 5. Other Information...................................................22
Item 6. Exhibits and Reports on Form 8-K....................................22
Signatures..........................................................23
Exhibit 27.1 - Financial Data Schedule
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
BE INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands)
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
--------- --------
(unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents .......................... $ 11,020 $ 3,394
Short-term investments ............................. 22,591 8,254
Accounts receivable ................................ 818 477
Prepaid and other current assets ................... 665 327
--------- --------
Total current assets ........................... 35,094 12,452
Property and equipment, net ........................... 625 403
Purchased web site technology, net of amortization .... 30 303
Other assets, net of accumulated amortization ......... 977 476
--------- --------
Total assets .................................. $ 36,726 $ 13,634
========= ========
LIABILITIES, MANDATORILY REDEEMABLE
CONVERTIBLE PREFERRED STOCK AND
STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable ................................... $ 1,121 $ 576
Accrued expenses ................................... 1,260 1,094
Technology license obligations, current portion .... 867 688
Deferred revenue ................................... 588 392
--------- --------
Total current liabilities ...................... 3,836 2,750
Technology license obligations, net of current portion 309 779
--------- --------
Total liabilities .............................. 4,145 3,529
--------- --------
Mandatorily redeemable convertible preferred stock .... -- 38,005
--------- --------
Stockholders' Equity (Deficit):
Common stock ....................................... 34 5
Additional paid-in capital ......................... 106,281 25,302
Deferred stock compensation ........................ (6,670) (4,490)
Accumulated deficit ................................ (67,064) (48,717)
--------- --------
Total stockholders' equity (deficit) ........... 32,581 (27,900)
--------- --------
Total liabilities, mandatorily redeemable
preferred stock and stockholders' deficit ... $ 36,726 $ 13,634
========= ========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
3
<PAGE>
BE INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------- --------------------
1999 1998 1999 1998
-------- ------- -------- --------
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
Net revenues ............................... $ 775 $ 226 $ 1,621 $ 892
Cost of revenues ........................... 372 99 696 1,862
-------- ------- -------- --------
Gross profit (loss) ........................ 403 127 925 (970)
Operating expenses:
Research and development ................ 2,005 1,270 5,675 4,296
Sales and marketing ..................... 2,179 887 6,520 2,770
General and administrative .............. 961 549 2,520 1,678
Amortization of deferred stock
compensation .......................... 1,596 1,097 4,974 2,712
-------- ------- -------- --------
Total operating expenses ............ 6,741 3,803 19,689 11,456
-------- ------- -------- --------
Loss from operations ....................... (6,338) (3,676) (18,764) (12,426)
Interest expense ........................... (32) (29) (106) (113)
Other income and expenses, net ............. 316 177 523 530
-------- ------- -------- --------
Net loss ................................... (6,054) (3,528) (18,347) (12,009)
-------- ------- -------- --------
Accretion of mandatorily redeemable
convertible preferred stock ............. $ (28) $ (97) $ (292) $ (260)
-------- ------- -------- --------
Net loss attributable to common
stockholders ............................ $ (6,082) $(3,625) $(18,639) $(12,269)
======== ======= ======== ========
Net loss per common share--basic and diluted $ (.22) $ (1.09) $ (1.56) $ (4.03)
======== ======= ======== ========
Shares used in per common share
calculation--basic and diluted .......... 27,853 3,340 11,921 3,042
======== ======= ======== ========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
4
<PAGE>
BE INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
1999 1998
-------- ---------
(unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net loss ............................................ $(18,347) $(12,009)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization ................... 721 642
Licensed technology used in
research and development ....................... -- 1,841
Amortization of discount on
technology license obligations ................. 93 98
Loss on disposal of fixed assets ................ 64 --
Compensation expense incurred on issuance
of stock ....................................... 505 --
Amortization of deferred stock compensation ..... 4,975 2,711
Changes in assets and liabilities
(in 1998, net of effects of acquisition):
Accounts receivable .......................... (341) (217)
Prepaid and other current assets ............. (460) (107)
Accounts payable ............................. 545 110
Accrued expenses ............................. (240) 115
Deferred revenue ............................. 196 8
-------- ---------
Net cash used in operating activities ...... (12,289) (6,808)
-------- ---------
Cash flow used in investing activities:
Acquisition of property and equipment ............... (504) (257)
Acquisition of licensed technology .................. (975) (1,373)
Purchases of short-term investments ................. (77,554) (21,257)
Sales of short-term investments ..................... 63,199 11,515
Acquisition of StarCode (net of cash acquired) ...... -- (562)
-------- ---------
Net cash used in investing activities ...... (15,834) (11,934)
-------- ---------
Cash flows provided by financing activities:
Proceeds from issuance of preferred stock, net ...... -- 19,404
Proceeds from option to purchase Series 2
preferred stock and common stock warrants ......... -- 1,322
Proceeds from issuance of common stock, net ......... 35,753 203
Repurchase of common stock .......................... (4) (4)
-------- ---------
Net cash provided by financing activities .. 35,749 20,925
-------- ---------
Net increase in cash and cash equivalents .............. 7,626 2,183
Cash and cash equivalents, beginning of period ......... 3,394 699
-------- ---------
Cash and cash equivalents, end of period ............... $ 11,020 $ 2,882
======== =========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
5
<PAGE>
BE INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. Organization and Business
Be Incorporated (the "Company") offers the Be Operating System ("BeOS"), an
operating system designed for digital media applications and Internet
appliances. The Company markets and sells BeOS directly to end users and
resellers and distributors. Prior to 1998, the Company was engaged
primarily in research and development, raising capital and development of
its markets and was in the development stage.
2. Basis of Presentation
The condensed consolidated financial statements include the accounts of Be
Incorporated (the "Company" or "Be") and its wholly owned subsidiaries. All
significant intercompany balances and transactions have been eliminated.
The condensed consolidated financial statements have been prepared in
accordance with the rules and regulations of the Securities and Exchange
Commission ("SEC") applicable to interim financial information. Certain
information and footnote disclosures included in financial statements
prepared in accordance with generally accepted accounting principles have
been omitted in these interim statements pursuant to such SEC rules and
regulations. Management recommends that these interim financial statements
be read in conjunction with the audited financial statements of the Company
for the year ended December 31, 1998 and the notes thereto contained in the
Company's Registration Statement on Form S-1, Registration No. 333-77855,
in the form declared effective by the Securities and Exchange Commission on
July 20, 1999. Interim results are not necessarily indicative of the
results to be expected for the full year. The December 31, 1998 balance
sheet was derived from audited financial statements, but does not include
all disclosures required by Generally Accepted Accounting Standards.
In management's opinion, the condensed consolidated financial statements
include all adjustments necessary to present fairly the financial position
and results of operations for each interim period shown. Interim results
are not necessarily indicative of results to be expected for a full fiscal
year.
2. Recent Accounting Pronouncements
In December 1998, AcSEC released Statement of Position 98-9 or SOP 98-9,
Modification of SOP 97-2, "Software Revenue Recognition." SOP 98-9 amends
SOP 97-2 to require that an entity recognize revenue for multiple element
arrangements by means of the "residual method" when (1) there is no
vendor-specific objective evidence ("VSOE") of the fair values of all the
undelivered elements that are not accounted for by means of long-term
contract accounting, (2) VSOE of fair value does not exist for one or more
of the delivered elements, and (3) all revenue recognition criteria of SOP
97-2 (other than the requirement for VSOE of the fair value of each
delivered element) are satisfied. The provisions of SOP 98-9 that extend
the deferral of certain paragraphs of SOP 97-2 became effective December
15,1998. These paragraphs of SOP 97-2 and SOP 98-9 will be effective for
transactions that are entered into in fiscal years beginning after March
15,1999. Retroactive application is prohibited. The Company is currently
evaluating the impact of the requirements of SOP 98-9 and the effects, if
any, on its current revenue recognition policies.
6
<PAGE>
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, or SFAS 133, Accounting for
Derivative Instruments and Hedging Activities. SFAS 133 establishes new
standards of accounting and reporting for derivative instruments and
hedging activities. SFAS 133 requires that all derivatives be recognized at
fair value in the statement of financial position, and that the
corresponding gains or losses be reported either in the statement of
operations or as a component of comprehensive income, depending on the type
of hedging relationship that exists. SFAS 133 will be effective for fiscal
years beginning after June 15, 2000. The Company does not currently hold
derivative instruments or engage in hedging activities.
3. Net Loss Per Share
Basic net loss per common share is computed by dividing net loss available
to common stockholders by the weighted average number of vested common
shares outstanding for the period. Diluted net loss per common share is
computed giving effect to all dilutive potential common shares, including
options, warrants and preferred stock. Options, warrants and preferred
stock were not included in the computation of diluted net loss per common
share because the effect would be antidilutive. A reconciliation of the
numerator and denominator used in the calculation of basic and diluted net
loss per common share follows (in thousands, except per share data):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1999 1998 1999 1998
-------- -------- -------- --------
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
Historical net loss per common share, basic and diluted:
Net loss ............................................... $ (6,054) $ (3,528) $(18,347) $(12,009)
Accretion of mandatorily redeemable
convertible preferred stock .......................... (28) (97) (292) (260)
-------- -------- -------- --------
Numerator for net loss, basic and diluted .............. (6,082) (3,625) (18,639) (12,269)
Denominator for basic and diluted loss per common share:
Weighted average common shares
outstanding ........................................ 27,853 3,340 11,921 3,042
======== ======== ======== ========
Net loss per common share basic and diluted ............ $ (.22) $ (1.09) $ (1.56) $ (4.03)
======== ======== ======== ========
Antidilutive securities:
Options to purchase common stock ..................... 6,320 2,298 6,320 2,298
Common stock not yet vested .......................... 692 1,740 692 1,740
Preferred stock ...................................... -- 21,853 -- 21,853
Warrants ............................................. 2,870 2,862 2,870 2,862
-------- -------- -------- --------
9,882 28,753 9,882 28,753
======== ======== ======== ========
</TABLE>
7
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Forward Looking Statements
THIS REPORT CONTAINS FORWARD-LOOKING STATEMENTS THAT HAVE BEEN MADE PURSUANT TO
THE PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995. SUCH
FORWARD-LOOKING STATEMENTS ARE BASED ON CURRENT EXPECTATIONS, ESTIMATES AND
PROJECTIONS ABOUT THE COMPANY'S BUSINESS, MANAGEMENT'S BELIEFS AND ASSUMPTIONS
MADE BY MANAGEMENT. WORDS SUCH AS "ANTICIPATES," "EXPECTS," "INTENDS," "PLANS,"
"BELIEVES," "SEEKS," "ESTIMATES," "LIKELY, "VARIATIONS OF SUCH WORDS AND SIMILAR
EXPRESSIONS ARE INTENDED TO IDENTIFY SUCH FORWARD-LOOKING STATEMENTS. THESE
STATEMENTS ARE NOT GUARANTEES OF FUTURE PERFORMANCE AND ARE SUBJECT TO CERTAIN
RISKS, UNCERTAINTIES AND ASSUMPTIONS THAT ARE DIFFICULT TO PREDICT; THEREFORE,
ACTUAL RESULTS AND OUTCOMES MAY DIFFER MATERIALLY FROM WHAT IS EXPRESSED OR
FORECASTED IN ANY SUCH FORWARD-LOOKING STATEMENTS. SUCH RISKS AND UNCERTAINTIES
INCLUDE THOSE SET FORTH HEREIN BELOW UNDER "FACTORS AFFECTING OUR
BUSINESS,OPERATING RESULTS AND FINANCIAL CONDITION" AS WELL AS THOSE NOTED IN
OUR AMENDED REGISTRATION STATEMENT ON FORM S-1 (FILE NO. 333-77855) AND OUR
OTHER PUBLIC FILINGS WITH THE SECURITIES AND EXCHANGE COMMISSION. THE COMPANY
UNDERTAKES NO OBLIGATION TO UPDATE PUBLICLY ANY FORWARD- LOOKING STATEMENTS,
WHETHER AS A RESULT OF NEW INFORMATION, FUTURE EVENTS OR OTHERWISE.
Overview
Be was founded in 1990. We develop and sell BeOS, an operating system
designed for digital media applications and Internet appliances. Prior to 1997,
we had no revenues and our operations consisted primarily of research and
development. In December 1998, we shipped the first version of BeOS that was
targeted primarily to end users. Prior releases were targeted primarily to
software developers.
Our revenues are generated primarily from the following sources: sales of
BeOS to resellers and distributors, and direct sales of BeOS to end users
through our BeDepot.com Web site. We also generate revenue by collecting
commission from sales of third party software through our BeDepot.com Web site.
In the future, we also expect our revenues to be generated from royalties
received from OEMs bundling BeOS on their products. In an attempt to increase
the number of BeOS users and increase market acceptance of BeOS, we may choose
to forego immediate revenue potential by providing BeOS at little or no cost.
Our agreements with third party software vendors provide that we will sell
and, if desired by the customer, electronically distribute software that has
been written for BeOS. We do not carry inventory in connection with the third
party software sold through our Web site.
We defer revenues from sales to distributors and resellers. We also defer
an allocated portion of revenues attributable to free product upgrades. We
recognize revenues from sales to distributors and resellers when we have
evidence that our product has been sold to end users. For example, we typically
recognize revenue when we receive confirmation from the distributor or reseller
of sales to end users. Revenues deferred due to free product upgrades are
recognized as upgrades are shipped. As of September 30, 1999, we had $588,000 in
deferred revenues.
8
<PAGE>
Our cost of revenues consist primarily of the cost of packaging, software
duplication, documentation, translation and product fulfillment. We use a third
party fulfillment house to store, package and ship BeOS in retail channels. We
also include in the cost of revenues the amortized costs relating to the license
of third party technology used in the development of BeOS.
Our research and development expenses consist primarily of compensation and
related costs for research and development personnel. We also include in
research and development expenses the costs relating to licensing of
technologies and amortization of costs of software tools used in the development
of BeOS. Costs incurred in the research and development of new releases and
enhancements of BeOS are expensed as incurred. These costs include cost of
licensing technology that is incorporated into a product or an enhancement which
is still in preliminary development and technological feasibility has not been
established. Once the product is further developed and technological feasibility
has been established, development costs are capitalized until the product is
available for general release. To date, products and enhancements have generally
reached technological feasibility and have been released for sale at
substantially the same time. We expect that research and development expenses
will increase substantially in the future as we further develop and enhance BeOS
and develop new products including those intended for the Internet appliances
market.
Our sales and marketing expenses consist primarily of compensation and
related costs for sales and marketing personnel, marketing programs, public
relations, promotional materials, travel and related expenses for attending
trade shows. We also include costs relating to third party application
developers, including partial funding of their development costs and cost of
technical support provided to them in our sales and marketing expenses.
We expect our sales and marketing expenses to increase as we further
promote awareness of BeOS, expand our domestic and international distributor and
reseller channel and hire new personnel, establish new facilities and increase
distributor and reseller promotions. Sales and marketing expenses will also
increase as we further develop and expand our relationships with third party
application developers including providing developers technical support and
financial incentives by partially funding their development costs.
General and administrative expenses consist primarily of compensation and
related expenses for finance and accounting personnel, professional services and
related fees, occupancy costs and other expenses. General and administrative
expenses may increase in the future as we expand our existing facilities or
relocate to new facilities that better address any growth that we may
experience. We also expect general and administrative expenses to increase as we
hire additional personnel and incur costs related to the anticipated growth in
our business and cost of operating as a public company.
9
<PAGE>
We market and sell our products in the United States and internationally.
International sales of products accounted for approximately 53% and 57% of total
revenues for the three month period ended September 30, 1999 and for the nine
month period ended September 30, 1999 respectively. We have a subsidiary located
in France to market and sell our products in Europe. In addition, we may in the
future open new offices in other countries to market and sell in those countries
and surrounding regions. The expansion of our existing international operations
and entry into additional international markets will require significant
management attention and financial resources and we cannot be certain that our
investments in establishing offices in other countries will produce desired
levels of revenues. While the majority of our international revenues are
presently denominated in US dollars, we expect an increasing portion of our
international revenues to be denominated in local currencies. We do not
currently engage in currency hedging activities. Although exposure to currency
fluctuations to date has been insignificant, future fluctuations in currency
exchange rates may adversely affect revenues from international sales.
From time to time in the past, we have granted stock options to employees,
consultants and non-employee directors and expect to continue to do so in the
future. As of September 30, 1999, we had recorded deferred compensation related
to these options in the total amount of $17.4 million representing the
difference between the deemed fair value of our common stock, as determined for
accounting purposes, and the exercise price of option at the date of grant.
Future amortization of expense arising out of options granted through September
30, 1999 is estimated to be $1.5 million for the remaining three months of 1999,
$3.4 million for the year ended 2000, $1.4 million for the year ended 2001,
$387,000 for the year ended 2002 and $10,000 for the year ended 2003. We
amortize the deferred compensation charge monthly over the vesting period of the
underlying option.
10
<PAGE>
Comparison of the Three Month Period ended September 30, 1999 to the Three Month
Period ended September 30, 1998
Net Revenues. Net revenues increased $549,000 to $775,000 for the three
month period ended September 30, 1999 from $226,000 for the three month period
ended September 30, 1998. This increase is primarily attributable to higher
shipments of BeOS as a result of the release of version R4.5 in June of 1999 and
of the development of a reseller distribution channel in 1999.
Cost of Revenues. Cost of revenues increased $273,000 to $372,000 for the
three month period ended September 30, 1999 from $99,000 for the three month
period ended September 30,1998. Gross margin decreased from 56% in 1998 to 52%
in 1999 due mainly to the development of the distribution channel where margins
are lower than direct sales which accounted for all the revenue in 1998.
Research and Development. Research and Development increased $735,000, or
58%, to $2.0 million for the three month period ended September 30, 1999 from
$1.3 million for the three month period ended September 30,1998. The increase
results primarily from increases of approximately $250,000 in personnel expenses
and of approximately $400,000 in costs of licensing third party technology.
Sales and Marketing. Sales and Marketing increased $1.3 million to $2.2
million for the three month period ended September 30, 1999 from $887,000 for
the three month period ended September 30,1998. This increase is primarily
attributable to the hiring of additional sales and marketing personnel and to
the launch of new marketing programs including those related to the release of
version 4.5 of BeOS in June of 1999.
General and Administrative. General and administrative expenses increased
$412,000, or 75%, to $961,000 for the three month period ended September 30,
1999 from $549,000 for the three month period ended September 30, 1998. This
increase was primarily attributable to the hiring of additional personnel, to
premiums related to insurance coverage obtained concurrently with the initial
public offering and to the expansion of leased facilities.
Amortization of Deferred Stock Compensation. Amortization of deferred stock
compensation increased $499,000, or 45%, to $1.6 million for the three month
period ended September 30, 1999, from $1.1 million for the three month period
ended September 30, 1998. These amounts represent the allocated portion of the
difference between the deemed fair value of our common stock and the exercise
price of stock options granted by us to employees, consultants and non-employee
directors.
Other Income (Expense), Net. Net other income increased $136,000, or 92%,
to $284,000 for the three month period ended September 30, 1999 from $148,000
for the three month period ended September 30, 1998. The increase is primarily
attributable to the increase in interest income due to the increased balances in
our investment portfolio following our initial public offering.
11
<PAGE>
Comparison of the Nine Month Period ended September 30, 1999 to the Nine Month
Period Ended September 30, 1998
Net Revenues. Net revenues increased $729,000, or 82%, to $1.6 million for
the nine month period ended September 30, 1999 from $892,000 for the nine month
period ended September 30, 1998. This increase is primarily attributable to
higher shipments of BeOS as a result of the release of version R4.5 in June of
1999 and of the development of a reseller distribution channel in 1999.
Cost of Revenues. Cost of revenues decreased $1.2 million or 63%, to
$696,000 for the nine month period ended September 30, 1999 from $1.9 million
for the nine month period ended September 30, 1998. The cost of revenues for the
nine month period ended September 30, 1998 includes a charge of $1.2 million
relating to technology which was used with BeOS, the cost of which was no longer
recoverable from forecasted revenues.
Research and Development. Research and Development increased $1.4 million,
or 32%, to $5.7 million for the nine month period ended September 30, 1999 from
$4.3 million for the nine month period ended September 30,1998. The net increase
is primarily attributable to an increase in personnel costs and in licensing
costs. Personnel expenses increased by approximately $940,000 and included a
one-time charge of approximately $145,000 related to the grant of immediately
vested stock options and the acceleration of vesting of stock options previously
issued to an employee.
Sales and Marketing. Sales and Marketing increased $3.8 million to $6.5
million for the nine month period ended September 30, 1999 from $2.8 million for
the nine month period ended September 30, 1998. This increase is primarily
attributable to the hiring of additional sales and marketing personnel and to
the costs relating to our third party developer programs including financial
incentives in the form of partial funding of developers' costs and technical
support provided to developers. Sales and marketing expenses also increased due
to the amortization of purchased technology related to the acquisition in the
second quarter 1998 of StarCode, a software development company. In 1999, sales
and marketing expenses increased due to the launch of new marketing programs
including those related to the release of version 4.5 of BeOS in September of
1999.
General and Administrative. General and administrative expenses increased
$842,000, or 50%, to $2.5 million for the nine month period ended September 30,
1999 from $1.7 million for the nine month period ended September 30, 1998. This
increase was primarily attributable to increases in professional services and
related fees, increased personnel and related costs, to premiums related to
insurance coverage obtained concurrently with the initial public offering and
expansion of leased facilities.
Amortization of Deferred Stock Compensation. Amortization of deferred stock
compensation increased $2.3 million, or 83%, to $5.0 million for the nine month
period ended September 30, 1999, from $2.7 million for the nine month period
ended September 30, 1998. These amounts represent the allocated portion of the
difference between the deemed fair value of our common stock and the exercise
price of stock options granted by us to employees, consultants and non-employee
directors.
Other Income (Expense), Net. Net other income remained stable at $417,000
for the nine month period ended September 30, 1999 as compared with the nine
month period ended September 30, 1998.
12
<PAGE>
Liquidity and Capital Resources
Since our inception, we have financed our operations primarily through the
sale of our equity securities and through borrowing arrangements. Cash and cash
equivalents and short-term investments increased approximately $22.0 million to
$33.6 million at September 30, 1999, from $11.6 million at December 31, 1998.
This increase is primarily attributable to the proceeds of our initial public
offering, net of amounts used to fund operations.
Cash used in operating activities increased $5.5 million to $12.3 million
for the nine month period ended September 30, 1999 as compared to $6.8 million
for the nine month period ended September 30, 1998. This increase is primarily
attributable to the increase in net loss during the nine month period ended
September 30, 1999.
Cash used in investing activities increased approximately $3.9 million to
$15.8 million for the nine month period ended September 30, 1999 as compared to
$11.9 million for the nine month period ended September 30, 1998. This increase
is primarily attributable to net purchases of short-term investments in the nine
month period ended September 30,1999 following our initial public offering. In
the nine month period ended 1998, we had purchased short term investments
following the sale of Series 2 convertible preferred stock.
Cash provided by financing activities for the nine month period ended
September 30, 1999 was approximately $35.7 million, which represents a $14.8
million increase in cash provided by financing activities from the nine month
period ended September 30, 1998 of $20.9 million. This increase is primarily
attributable to the net proceeds of $35.3 million received from our initial
public offering. The net proceeds from the sale of our Series 2 convertible
preferred stock in the nine month period ended September 30,1998 amounted to
approximately $20.7 million.
We require substantial working capital to fund our operations. We expect to
continue to experience losses from operations and negative cash flows for at
least the next twelve month period. In July 1999, we completed the initial
public offering of our common stock and raised approximately $32.2 million in
net cash proceeds. We raised an additional $3.1 million in net proceeds in
August 1999 upon the underwriters' exercise of their over-allotment option. The
proceeds of the initial public offering are and will be used for working capital
and general corporate purposes, including any expansion of our sales and
marketing efforts, increases in research and development activities, and
licensing and acquisition of new technologies. Since inception, we have
experienced losses and negative cash flow from operations and expect to continue
to experience significant negative cash flow in the foreseeable future. In
addition, in the future, we may need to raise additional capital and we cannot
be certain that we will be able to obtain additional financing on favorable
terms, if at all. If we cannot raise additional capital on acceptable terms, if
and when needed, we may not be able to further develop or enhance BeOS, take
advantage of future opportunities or respond to competitive pressures or
unanticipated requirements, any of which could have a material adverse effect on
our business and results of operations.
13
<PAGE>
Year 2000 Issue
The "Year 2000 Issue" is typically the result of limitations of certain
software written using two digits rather than four digits to define the
applicable year. If software with date-sensitive functions are not Year 2000
compliant, they may recognize a date using "00" as the year 1900 rather than the
year 2000.
Risks
We believe that our principle product, BeOS, has been designed to avoid the
Year 2000 Issue. However, if for any reason, BeOS is not Year 2000 compliant, we
could face unexpected expenses redesigning BeOS, which could harm our business
and reputation and delay any market acceptance for BeOS.
In addition, our operating system operates in complex network environments
and directly and indirectly interacts with a number of other hardware and
software systems and applications. These hardware system and software
applications may contain errors or defects associated with the Year 2000 Issue.
We are presently unable to predict to what extent our business may be affected
if hardware systems or software applications and tools that operate in
conjunction with our operating system experience the Year 2000 Issue. Known or
unknown errors or defects that affect the operation of BeOS, when used in
conjunction with other hardware or software, could result in delay or loss of
revenues, damage to our reputation and possible litigation, any of which could
materially adversely affect our business and results of operations.
We also depend on the Internet and more specifically on our BeDepot.com
Website for release and distribution of BeOS and related support tools and
applications. The Internet is a medium which is susceptible to the Year 2000
Issues. The Year 2000 Issue could result in a system failure or miscalculations
causing significant disruption of our Web site operations, including, among
other things, interruptions in the distribution of BeOS and related support
tools and applications over the Internet. This could also include disruption in
the distribution of third party software applications over our electronic
commerce Web site. It is possible that this disruption will continue for an
extended period of time. Any disruption in our Web site operations or our
electronic commerce site could result in loss of revenues and could harm our
reputation and business.
Readiness
We have completed our internal review of our information systems including
software programs used in our accounting and financial reporting functions and
of our material non-information technology systems. Based on our review and
information gathered from third party vendors, we do not believe that there are
any significant Year 2000 Issues relating to our information systems. Our costs
incurred to date with respect to Year 2000 have not been significant. Although,
we believe reasonable steps have been taken, we cannot be certain that all
internal Year 2000 risks have been addressed or that our suppliers or other
third parties with whom we conduct business have successfully addressed such
risks. If not addressed, such risks could have a material adverse effect on our
business.
Contingency Plans
We have substantially completed the development of a contingency plan to
address situations that may result if we are faced with situations not addressed
by our Year 2000 review of our critical operations. Although, we will continue
to enhance our contingency plan during the last quarter of 1999, there can be no
assurance that our contingency plan will adequately address all Year 2000
issues. Our failure to develop and implement, if necessary, an appropriate
contingency plan could materially adversely affect our business and results of
operations.
14
<PAGE>
FACTORS AFFECTING OUR BUSINESS, OPERATING RESULTS AND FINANCIAL CONDITION
The following is a discussion of certain risks, uncertainties and other
factors that currently impact or may impact Be's business, operating results
and/or financial condition. Anyone making an investment decision with respect to
Be's Common Stock or other securities of the Company is cautioned to carefully
consider these factors, along with the "Risk Factors" discussed in the Company's
Amended Registration Statement on Form S-1 (File No. 333-77855) and our other
public filings with the Securities and Exchange Commission.
We have incurred significant net losses and we may never achieve profitability.
We incurred significant net losses of approximately $7.8 million in 1996,
$10.4 million in 1997, $16.9 million in 1998 and $18.3 million for the nine
period ended September 30, 1999. As of September 30, 1999, we had an accumulated
deficit of approximately $67.1 million. We expect to incur significant
additional losses and continued negative cash flow from operations in 1999 and
beyond and we may never become profitable.
We expect to continue to incur significant sales and marketing, research
and development and general and administrative expenses. We will need to
generate significant revenues to achieve profitability and positive operating
cash flows. Even if we do achieve profitability and positive operating cash
flow, we may not be able to sustain or increase profitability or positive
operating cash flow on a quarterly or annual basis.
The market for Internet appliances may not evolve and we may not be able to
compete effectively in this market.
Our business and prospects depend on the development and market acceptance
of Internet appliances and our ability to successfully market BeOS as a viable
operating system for Internet appliances. The market for Internet appliances is
new, unproven and subject to rapid technological change. This market may never
develop or may develop at a slower rate than we anticipate. In addition, our
success in marketing BeOS as a platform for Internet appliances is dependent
upon developing and maintaining relationships with industry-leading computer and
consumer electronics manufacturers, Internet service providers and content
creators. There is already intense competition to offer non-PC devices that
provide access to the Internet and enable digital media content on the Internet.
Companies such as Microsoft Corporation, Oracle Corporation, Apple Computer,
Inc. and Spyglass, Inc. have operating systems that are being used or may be
used for Internet appliances. These companies have an established market
presence, relationships with computer and consumer electronic manufacturers who
will develop and market Internet appliances, and have significantly greater
financial, marketing and technical resources than we do. These companies,
together with a large number of smaller companies who offer operating systems
that may be used for Internet appliances, may capture a larger portion of the
market than we do. Our failure to establish relationships with other companies
that offer Internet appliances and establish BeOS in this market would have a
material adverse effect on our business and prospects.
15
<PAGE>
We have only one product that may never gain broad market acceptance.
BeOS is our only product and we will derive all of our revenue for the
foreseeable future from sales of BeOS. To date, BeOS has been used primarily by
a limited number of enthusiasts and application developers. Our business and
prospects are highly dependent on the broader market acceptance of BeOS as a
viable platform for a wide variety of applications and devices enabling digital
media and Internet-based applications. The ability of BeOS to gain broad support
from developers, enthusiasts and OEMs is unproven. BeOS may never gain broad
market acceptance among consumers and OEMs. At present, a large base of
commercially available software developed for use on BeOS does not exist.
Consumers and OEMs may not perceive any significant advantages over traditional
operating systems such as Microsoft Windows, Apple's Mac OS or the UNIX-based
operating systems. In addition, we may be unable to demonstrate the commercial
viability and cost-effective nature of BeOS. We may also be unsuccessful at
marketing BeOS as the operating system of choice among professional users,
consumers or applications developers. As a result, potential customers may not
purchase BeOS and OEMs may not elect to incorporate BeOS in their products. If
BeOS is not accepted or adopted by an increasing number of developers and OEMs,
our business and prospects will be materially adversely affected.
Traditional or new operating systems could evolve to more effectively
address the digital media requirements of users and OEMs. For example,
enhancements and features could be added to Microsoft's Windows operating system
and Apple's Mac OS which could significantly decrease the differences between
BeOS and these operating systems. As a result, any technical or marketing
advantage we may have had in the market for operating systems could be lost and
the demand and acceptance of BeOS would diminish.
We face intense competition from companies with significantly greater financial,
marketing, and technical resources
The market for computer operating systems is intensely competitive. This
market is dominated by one company, Microsoft Corporation, which has
significantly greater brand recognition, market presence and financial,
marketing and distribution resources than we do. Other companies that offer
competing operating systems include Apple Computer, Inc., IBM, Oracle
Corporation, Sony Corporation and a number of companies that offer versions of
the UNIX operating system, including SGI, the Hewlett-Packard Company and Sun
Microsystems. In addition, we face competition from a number of smaller
companies developing and marketing UNIX-based operating systems such as Linux.
Many of our current and potential competitors have longer operating histories, a
larger customer base, a greater number of applications, greater brand
recognition, and greater financial, technical, marketing and distribution
resources than we do. As a result, we may have difficulty increasing the number
of BeOS users and attracting OEMs and third party developers to create devices
and software that will use BeOS.
Our success depends on our ability to establish and maintain strategic
relationships, and the loss of any of our strategic relationships could harm our
business and have an adverse impact on our revenue.
Our success in increasing the number of BeOS users, particularly in the
Internet appliance market, depends in large part on our ability to establish and
maintain strategic relationships with industry-leading computer and consumer
electronic manufacturers and Internet service and content providers. We have
entered into agreements with four OEMs and a number of resellers and
distribution partners. We cannot be certain that we will be able to reach
agreements with additional partners on a timely basis or at all, or that these
partners will devote adequate resources to promote BeOS. We may be unable to
enter into new agreements with additional partners on terms favorable to us or
at all. If we are unable to develop or maintain relationships with OEMs, we will
have difficulty selling and gaining market acceptance for BeOS and our business
and results of operations will be materially adversely affected.
16
<PAGE>
Our success depends upon availability of third party applications that operate
on BeOS.
Demand and market acceptance for BeOS will significantly depend upon the
availability of an increasing number of third party applications that operate on
the BeOS platform. These applications include video and audio editing programs,
3D games, creative audio and video content development and manipulation, and
personal productivity applications.
We intend to encourage the development of an increasing number of
applications that operate on BeOS by attracting third party developers to the
BeOS platform and by maintaining our existing developer relationships through
marketing, technical support and financial incentives for third party
developers. However, third party developers are generally under no obligation to
develop applications based on the BeOS platform. A developer's decision to write
applications for BeOS is based in part on the perception and analysis of the
relative technical, financial and other benefits of developing applications for
the BeOS platform versus writing applications for more popular operating systems
such as Microsoft's Windows or Apple's Mac OS. If we fail to attract a
sufficient number of application developers who develop and market successful
applications on BeOS, the demand for BeOS and our business will suffer.
Moreover, any delay or unsuccessful release of third party applications could
have a material adverse effect on our business and results of operations.
We may not be able to respond to the rapid technological change in the markets
in which we compete.
The markets in which we participate or seek to participate are subject to:
. rapid technological change
. frequent product upgrades and enhancements;
. changing customer requirements for new products and features; and
. multiple, competing and evolving industry standards.
The introduction of operating systems that contain new technologies and the
emergence of new industry standards could render BeOS less desirable or
obsolete. In particular, we expect that changes in the Internet-based technology
and digital media enabling technology will require us to rapidly evolve and
adapt our products to be competitive. As a result, the life cycle of each
release of BeOS is difficult to estimate. To be competitive, we will need to
develop and release new products and operating system upgrades that respond to
technological changes or evolving industry standards on a timely and
cost-effective basis. We cannot be certain that we will successfully develop and
market these types of products and operating system upgrades or that our
products will achieve market acceptance. If we fail to produce technologically
competitive products in a cost-effective manner and on a timely basis, our
business and results of operations could suffer materially.
17
<PAGE>
Our revenues and operating results are subject to significant fluctuations and
our stock price may fall if we fail to meet the expectations of the public
market.
Our revenues and operating results will likely vary significantly from
period to period due to a number of factors, many of which are outside our
control, including :
. demand for and acceptance of our operating system;
. deferral of customer orders in anticipation of new products, product
enhancements or upgrades by us or by our competitors;
. the timing and availability of key applications developed by third parties
to be used in BeOS;
. delays and defects in BeOS;
. ability to attract and retain key strategic partners, including OEMs and
third party application developers;
. new product releases and product enhancements by us and our competitors;
. changes in our pricing policies or the pricing policies of our competitors;
. the mix of sales channels through which our products and services are sold;
. the mix of domestic and international sales;
. risks inherent in international operations, including foreign currency
fluctuations;
. potential acquisitions and integration of technology or businesses;
. changes in accounting standards, including standards relating to revenue
recognition, business combinations and stock-based compensation; and .
impact of any Year 2000 issues.
Based on these factors, we may fail to meet the expectations of the public
market in any given period and our stock price would likely be materially
adversely affected.
We are highly dependent on third party development tools.
We are highly dependent on development tools provided by a limited number
of third party vendors. Development tools are software applications that assist
programmers in the development of applications. Together with our application
developers, we primarily rely upon software development tools provided by Cygnus
Solutions and Perforce Software. If Cygnus or Perforce fail to support or
maintain these development tools, we will either have to devote resources to
maintain and support the tools ourselves or transition to another vendor. Any
maintenance or support of the tools by us or the transition could be costly,
time consuming, could delay our product release and upgrade schedule, and could
delay the development and availability of third party applications used on BeOS.
Failure to procure the needed software development tools or any delay in the
availability of third party applications could negatively impact our ability and
the ability of third party application developers to release and support BeOS
and the applications that run on it. These factors could negatively and
materially affect the acceptance and demand for BeOS, our business and
prospects.
In our effort to increase market acceptance for BeOS, we may forego near-term
revenue by providing BeOS at little or no cost to potential users.
In an attempt to increase the number of users and market acceptance of
BeOS, we may choose to forego immediate revenue potential by providing BeOS at
little or no cost. Users, therefore, may be unwilling to pay for any upgrades or
new releases of BeOS. Our decision to forego near-term revenue in expectation of
increasing the number of BeOS users may not yield market acceptance and future
revenues. In addition, we may reduce prices in response to competitive factors
or to pursue new market opportunities.
18
<PAGE>
We expect continued erosion in the average selling prices of our products.
We have experienced erosion in the average selling prices of our products
due to a number of factors, including:
. competitive pricing pressures;
. rapid technological changes; and
. sales discounts.
We anticipate that the average selling prices of our products will
fluctuate and decrease in the future in response to these factors. We also
anticipate that the average selling price of our products will decrease as we
market BeOS to Internet appliances and other low-cost device manufacturers.
Therefore, to maintain or increase our gross margins, we must develop and
introduce new products and product enhancements on a timely basis. We must also
continually reduce our product costs. In addition, our average selling prices
fluctuate based on changes in the percentage of revenues derived from the
different sales channels used to sell our products. For example, the retail
price for sales of BeOS is generally higher than the wholesale price used for
sales to resellers, distributors and OEMs. As our average selling prices
decline, we must increase our unit sales volume to maintain or increase our
revenue. If our average selling prices decline more rapidly than our costs, our
gross margins will decline, which could seriously harm our business and results
of operations.
We face risks relating to our product returns and price reduction policies.
We provide most of our distributors and resellers with product return
rights for stock balancing or limited product evaluation. Stock balancing rights
permit distributors to return products to us for credit, subject to some
limitations. We may experience significant returns in the future and our
reserves may be inadequate to cover such returns. We also provide most of our
distributors and resellers with price protection rights. Price protection rights
require that we grant retroactive price adjustments for inventories of our
products held by distributors or resellers if we lower our prices for these
products. Product returns or price protection rights could have a material
adverse effect on business and results of operations.
We are dependent on the licensing of enabling technologies from third parties.
The demand and acceptance of our product is also dependent upon our ability
to license key enabling technologies. We license from third parties compression
and decompression algorithms known as "codecs" and communications protocols that
facilitate the movement of rich media data and large files and enables the
connection of consumer products such as digital camcorders or set-top boxes
directly to a personal computer. We may be unable to license these enabling
technologies at favorable terms or at all which may result in lower demand for
BeOS.
19
<PAGE>
We may be unable to manage any growth that we may experience.
To succeed in the implementation of our business strategy, we must rapidly
execute our sales and marketing strategy, further develop and enhance our
products and product support capabilities, and implement effective planning and
operating processes. To manage any anticipated growth we must:
. establish and manage multiple relationships with OEMs, Internet service and
content providers and other third parties;
. continue to implement and improve our operational, financial and management
information systems; and
. hire, train and retain additional qualified personnel.
Our systems, procedures and controls may not be adequate to support our
operations, and our management may not be able to perform the tasks required to
capitalize on market opportunities for our products and services. If we fail to
manage our growth effectively, our business could suffer materially.
Product defects may harm our business and reputation.
Computer operating systems, including BeOS, and related software products
frequently contain errors or bugs. We have detected and may continue to detect
errors and product defects in connection with new releases and upgrades of our
operating system and related products. Despite our internal testing and testing
by current and potential customers, errors may be discovered after BeOS or
related software and tools are installed and used by customers. These errors
could result in reduced or lost revenue, delay in market acceptance, diversion
of development resources, damage to our reputation, or increased service and
warranty costs, any of which could materially adversely affect our business and
results of operations.
Our products must successfully integrate with products from other vendors,
such as third party software applications and computer hardware. As a result,
when problems occur in a personal computer or any other device or network using
our products, it may be difficult to identify the source of the problem. The
occurrence of hardware and software errors, whether caused by our products or
another vendor's products, may result in reduced or loss of market acceptance of
our products, and any necessary product revisions may force us to incur
significant expenses. The occurrence of these problems could materially
adversely affect our business and results of operations.
20
<PAGE>
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
We considered the provision of Financial Reporting Release No. 48
"Disclosure of Accounting Policies for Derivative Financial Instruments and
Derivative Commodity Instruments, and Disclosure of Quantitative and Qualitative
Information about Market Risk Inherent in Derivative Financial Instruments,
Other Financial Instruments and Derivative Commodity Instruments." We had no
holdings of derivative financial or commodity instruments at September 30, 1999.
However, we are exposed to financial market risks, including changes in foreign
currency exchange rates and interest rates. Much of our revenue and capital
spending is transacted in U.S. dollars. However, the expenses and capital
spending of our French subsidiary are transacted in French francs. Results of
operations from our French subsidiary are not material to the results of our
operations, therefore, we believe that foreign currency exchange rates should
not materially adversely affect our overall financial position, results of
operations or cash flows. We believe that the fair value of our investment
portfolio or related income would not be significantly impacted by increases or
decreases in interest rates due mainly to the short-term nature of our
investment portfolio. However, a sharp increase in interest rates could have a
material adverse effect on the fair value of our investment portfolio.
Conversely, sharp declines in interest rates could seriously harm interest
earnings of our investment portfolio.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Sales of Registered Securities and Use of Proceeds
None.
Sales of Unregistered Securities
None.
ITEM 3. DEFAULT UPON SENIOR SECURITIES
None.
21
<PAGE>
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
3.1* Amended and Restated Certificate of Incorporation
3.2* Bylaws
27.1 Financial Data Schedule (EDGAR version only)
* Filed with the Company's Registration Statement on Form S-1, Registration No.
333-77855, declared effective by the Securities and Exchange Commission on July
20, 1999, incorporated herein by reference.
(b) Reports on Form 8-K
None
22
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
BE INCORPORATED
By: /s/ JEAN-LOUIS F. GASSEE Date : November 12, 1999
Jean-Louis F. Gassee
President, Chief Executive Officer and Director
By: /s/ WESLEY S. SAIA Date : November 12, 1999
Wesley S. Saia
Vice President and Chief Financial Officer
23
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Company's Financial Statements for the nine month period ending September 30,
1999 included in the Company's Form 10-Q filed November 12, 1999 and is
qualified in its entirety by reference to such statements.
</LEGEND>
<CIK> 0000895921
<NAME> BE INCORPORATED
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 11,020
<SECURITIES> 22,591
<RECEIVABLES> 818
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 35,094
<PP&E> 1,346
<DEPRECIATION> (721)
<TOTAL-ASSETS> 36,726
<CURRENT-LIABILITIES> 3,836
<BONDS> 0
0
0
<COMMON> 34
<OTHER-SE> 32,547
<TOTAL-LIABILITY-AND-EQUITY> 36,726
<SALES> 1,621
<TOTAL-REVENUES> 1,621
<CGS> 696
<TOTAL-COSTS> 696
<OTHER-EXPENSES> 19,689
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (106)
<INCOME-PRETAX> (18,347)
<INCOME-TAX> 0
<INCOME-CONTINUING> (18,347)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (18,347)
<EPS-BASIC> (1.56)
<EPS-DILUTED> (1.56)
</TABLE>
