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, 2000
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission File Number: 000-26387
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, 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) Yes (2)
The number of shares of Common Stock outstanding as of October 31, 2000 was
36,149,544.
BE INCORPORATED
FORM 10-Q
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
Item 1. Condensed Financial Statements:
Consolidated Balance Sheets at September 30, 2000 and
December 31, 1999 ...............................................2
Consolidated Statements of Operations for the three and nine
month periods ended September 30, 2000 and September 30, 1999....3
Consolidated Statements of Cash Flows for the six month
periods ended September 30, 2000 and September 30, 1999..........4
Notes to Condensed Consolidated Financial Statements.............5
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations........................................9
Item 3. Quantitative and Qualitative Disclosures About Market Risk......28
PART II. OTHER INFORMATION
Item 1. Legal Proceedings...............................................29
Item 2. Changes in Securities and Use of Proceeds ......................29
Item 3. Defaults upon Senior Securities ................................29
Item 4. Submission of Matters to a Vote of Security Holders ............29
Item 5. Other Information ..............................................29
Item 6. Exhibits and Reports on Form 8-K ...............................29
Signatures .....................................................30
Exhibit 27.1 - Financial Data Schedule
1
<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,
2000 1999
--------- ---------
(unaudited) (audited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ......................... $ 9,982 $ 6,500
Short-term investments ............................ 8,039 22,629
Accounts receivable ............................... 30 167
Prepaid and other current assets .................. 819 730
Total current assets .......................... 18,870 30,026
--------- ---------
Property and equipment, net .......................... 419 562
Other assets, net of accumulated amortization ........ 1,127 1,722
Total assets ................................. $ 20,416 $ 32,310
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY .................
Current liabilities: .................................
Accounts payable .................................. $ 177 $ 860
Accrued expenses .................................. 1,151 1,550
Technology license obligations, current portion ... 310 777
Deferred revenue .................................. 80 99
Total current liabilities ..................... 1,718 3,286
--------- ---------
Technology license obligations, net of current portion 556 597
--------- ---------
Total liabilities ............................. 2,274 3,883
--------- ---------
Stockholders' Equity:
Common stock ...................................... 36 35
Additional paid-in capital ........................ 108,933 106,322
Accumulated other comprehensive gain/(loss) ....... 1 (17)
Deferred stock compensation ....................... (1,715) (4,690)
Accumulated deficit ............................... (89,113) (73,223)
Total stockholders' equity .................... 18,142 28,427
--------- ---------
Total liabilities and stockholders' equity ... $ 20,416 $ 32,310
========= =========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
2
<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,
2000 1999 2000 1999
-------- -------- -------- --------
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
Net revenues .................................................... $ 68 $ 775 $ 464 $ 1,621
Cost of revenues ................................................ 216 372 770 696
-------- -------- -------- --------
Gross profit (loss) ............................................. (148) 403 (306) 925
Operating expenses:
Research and development, excluding amortization of deferred . 2,088 2,005 6,079 5,675
stock compensation of $159, $454, $667 and $1,558
Sales and marketing, excluding amortization of deferred ...... 1,422 2,179 5,576 6,520
stock compensation of $121, $476, $547 and $1,375
General and administrative, excluding amortization of deferred 880 961 2,669 2,520
stock compensation of $227, $666, $983 and $2,041
Amortization of deferred stock compensation .................. 507 1,596 2,197 4,974
Total operating expenses ................................. 4,897 6,741 16,521 19,689
-------- -------- -------- --------
Loss from operations ............................................ (5,045) (6,338) (16,827) (18,764)
Interest expense ................................................ (58) (32) (121) (106)
Other income and expenses, net .................................. 332 316 1,058 523
-------- -------- -------- --------
Net loss ........................................................ (4,771) (6,054) (15,890) (18,347)
-------- -------- -------- --------
Accretion of mandatorily redeemable
convertible preferred stock .................................. $ -- $ (28) $ -- $ (292)
Net loss attributable to common
stockholders ................................................. $ (4,771) $ (6,082) $(15,890) $(18,639)
======== ======== ======== ========
Net loss per common share--basic and diluted .................... $ (.13) $ (.22) $ (.45) $ (1.56)
======== ======== ======== ========
Shares used in per common share
calculation--basic and diluted ............................... 35,722 27,853 35,406 11,921
======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
3
<PAGE>
BE INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
2000 1999
-------- --------
(unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net loss ............................................ $(15,890) $(18,347)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization ................... 905 721
Amortization of discount on
technology license obligations ................. 87 93
Compensation expense incurred on issuance
of stock ....................................... 34 506
Amortization of deferred stock compensation ..... 2,197 4,974
Changes in assets and liabilities
Accounts receivable .......................... 137 (341)
Prepaid and other current assets ............. (45) (460)
Other assets ................................. -- 64
Accounts payable ............................. (733) 545
Accrued expenses ............................. (519) (240)
Deferred revenue ............................. (19) 196
-------- --------
Net cash used in operating activities ...... (13,846) (12,289)
-------- --------
Cash flow provided (used in) by investing activities:
Acquisition of property and equipment ............... (121) (504)
Acquisition of licensed technology .................. (501) (975)
Purchases of short-term investments ................. (55,813) (77,554)
Sales of short-term investments ..................... 70,408 63,199
-------- --------
Net cash provided (used in)
by investing activities ............... 13,973 (15,834)
-------- --------
Cash flows provided by financing activities:
Proceeds from issuance of common stock:
pursuant to common stock options .................. 2,201 60
pursuant to common stock warrants ................. 455 --
under Employee Stock Purchase Plan ................ 702 --
in initial public offering, net ................... -- 35,693
Repurchase of common stock .......................... (3) (4)
-------- --------
Net cash provided by financing activities .. 3,355 35,749
-------- --------
Net increase in cash and cash equivalents .............. 3,482 7,626
-------- --------
Cash and cash equivalents, beginning of period ......... 6,500 3,394
-------- --------
Cash and cash equivalents, end of period ............... $ 9,982 $ 11,020
======== ========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
4
<PAGE>
BE INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. Organization and Business
Be Incorporated (the "Company" or "Be") was founded in 1990 and offers
software platforms designed for Internet appliances and digital media
applications. The Company's two software platforms are (i) BeIA, a turnkey
integrated software platform and development tools that enable the creation
of customized Internet appliances, and (ii) BeOS, the Company's desktop
operating system optimized for digital media applications. 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 the
Company 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, 1999 and the notes thereto contained in the
Company's Annual Report on Form 10-K. Interim results are not necessarily
indicative of the results to be expected for the full year. The December
31, 1999 balance sheet was derived from audited financial statements, but
does not include all disclosures required by Generally Accepted Accounting
Principles.
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.
The Company believes that existing cash and cash equivalents may not be
sufficient to meet the Company's operating and capital requirements at its
currently anticipated level of operations beyond the end of the second
quarter of 2001. Additional capital may be necessary in order to fund the
Company's operations at the currently anticipated levels beyond the second
quarter of 2001. While the Company is actively considering various funding
alternatives, the Company has not secured or entered into any arrangements
to obtain additional capital There can be no assurance that the Company
will be able to obtain additional funds, on acceptable terms or at all. If
the Company cannot raise additional capital to continue its present level
of operations, it will have to scale back its business and may not be able
to further develop or enhance its product offering, take advantage of
future opportunities or respond to competitive pressures, any of which
could have a material adverse effect on its business and results of
operations. The Company's liquidity may also be adversely affected in the
future by factors such as higher interest rates, inability to borrow
without collateral, availability of capital financing and continued
operating losses.
5
<PAGE>
3. Recent Accounting Pronouncements
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 is currently evaluating
the impact of the requirements of SFAS 133 and the effects, if any, on its
financial statements and does not expect any material impact from its
application. The Company does not currently hold derivative instruments or
engage in hedging activities.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101 (SAB 101), "Revenue Recognition in Financial
Statements." SAB 101 provides guidance for revenue recognition under
certain circumstances. The Company is currently evaluating the impact of
SAB 101 and has not yet determined whether its application will have a
material impact on its financial position or results of operation. The
accounting and disclosures prescribed by SAB 101 will be effective in the
fourth quarter of 2000.
In March 2000, the Financial Accounting Standards Board issued
Interpretation No.44 (FIN 44) "Accounting for Certain Transactions
involving Stock Compensation", an interpretation of APB Opinion No.25. FIN
44 clarifies the application of Opinion 25 for (a) the definition of an
employee for purposes of applying Opinion 25, (b) the criteria for
determining whether a plan qualifies as a noncompensatory plan, (c) the
accounting for an exchange of stock compensation awards in a business
combination. FIN 44 became effective on July 1, 2000, but certain
conclusions cover specific events that occur after either December 15,
1998, or January 12, 2000. The adoption of FIN 44 in July 2000 did not have
an impact on the Company's financial position and results of operations.
6
<PAGE>
4. 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 and warrants. Options and warrants 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
June 30, September 30,
2000 1999 2000 1999
-------- -------- -------- --------
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
Historical net loss per common share, basic and diluted:
Net loss ............................................... $ (4,771) $ (6,054) $(15,890) $(18,347)
Accretion of mandatorily redeemable
convertible preferred stock .......................... -- (28) -- (292)
-------- -------- -------- --------
Numerator for net loss, basic and diluted .............. (4,771) (6,082) (15,890) (18,639)
Denominator for basic and diluted loss per common share:
Weighted average common shares
outstanding ........................................ 35,722 27,853 35,406 11,921
======== ======== ======== ========
Net loss per common share basic and diluted ............ $ (.13) $ (.22) $ (.45) $ (1.56)
======== ======== ======== ========
Antidilutive securities:
Options to purchase common stock ..................... 1,197 6,320 5,210 6,320
Common stock not yet vested .......................... 332 692 332 692
Warrants ............................................. 2,130 2,870 2,130 2,870
-------- -------- -------- --------
3,659 9,882 7,672 9,882
======== ======== ======== ========
</TABLE>
7
<PAGE>
5. Comprehensive Income (loss)
---------------------------
Statement of Financial Accounting Standard No. 130 (SFAS 130), "Reporting
Comprehensive Income" establishes rules for the reporting and the display
of comprehensive income (loss) and its components. The following are the
components of comprehensive income (loss) (in thousands):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
2000 1999 2000 1999
-------- -------- -------- --------
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
Net loss ............................... $ (4,771) $ (6,054) $(15,890) $(18,347)
Unrealized gain on marketable securities 5 18
-------- -------- -------- --------
Comprehensive loss ..................... $ (4,766) $ (6,054) $(15,872) $(18,347)
======== ======== ======== ========
</TABLE>
The components of accumulated other income, net of related tax are as follows
(in thousands):
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
----- -----
(unaudited) (audited)
<S> <C> <C>
Unrealized gain (loss) on marketable securities.......$ 1 $(17)
----- -----
$ 1 $(17)
===== =====
</TABLE>
8
<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 BELOW UNDER "FACTORS AFFECTING OUR
BUSINESS,OPERATING RESULTS AND FINANCIAL CONDITION" AND ELSEWHERE IN THIS REPORT
AS WELL AS THOSE NOTED IN OUR ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED
DECEMBER 31, 1999 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 offer software platforms designed for Internet
appliances and digital media applications. Our two software platforms are (i)
BeIA, a turnkey integrated software platform and development tools that enable
the creation of customized Internet appliances, and (ii) BeOS, our desktop
operating system optimized for digital media applications.
Revenues. Prior to 1998, we had no revenues and our operations consisted
primarily of research and development. In December 1998, we shipped the first
version of BeOS, our desktop operating system that was targeted primarily to end
users. Prior releases of BeOS were targeted primarily to software developers. In
February of 2000, we announced the availability of BeIA, our software platform
intended for the Internet appliances market.
Our revenues to date have been primarily generated from the following
sources: sale of BeOS to resellers, distributors and publishers, and direct
sales of BeOS to end users through our former BeDepot.com Web site. We also
generated revenue by collecting commissions from sales of third party software
through such BeDepot.com Web site. In the first quarter of 2000, we shifted our
resources to focus primarily on the market for Internet appliances. We made a
version of BeOS available for personal use at no charge and a more fully
featured version is available through third party publishers. The personal
edition was released at the end of March and publishers began shipping the
commercial version in April. Since this shift in focus, revenues have been
primarily generated from royalties on sales by publishers. We have very little
or no influence over the marketing and promotional efforts of these third party
publishers. To date, we have not generated any significant revenues from sales
of BeOS through third party publishers and we may not generate any meaningful
revenues from sales of BeOS in the foreseeable future. We expect our future
revenues to be primarily generated through royalty payments and service fees
from developers and manufacturers of Internet appliances, and other device and
service providers incorporating BeIA into their products.
9
<PAGE>
Since adopting and incorporating BeIA as a software platform solution
generally represents a significant product decision for developers and
manufacturers of Internet appliances and related systems and hardware, we expect
longer sales cycles as we collaborate with and educate customers and partners on
the use and benefits of BeIA. We expect our revenues in the future to be
dependent in large part upon the success of our customers' products using our
BeIA platform. We have little or no influence over the development and marketing
efforts of our customers. Our customers are generally under no minimum payment
obligations or minimum purchase requirements. Our customers and partners are
free to use software platforms developed by other companies in their Internet
appliance products and are under no obligation to develop or market products
based on our software platform. As a result, we have very limited ability to
evaluate the success of our partnership efforts and predict the realization or
timing of any revenues. Similarly, in the desktop market, we are highly
dependent on the marketing efforts and success of our third party publishers. We
have little or no influence over these publishers which makes it difficult to
predict the realization or timing of any revenues from BeOS.
It has been our policy to record revenues, in accordance with the
provisions of software revenue recognition rules, from sales to distributors and
resellers. We will apply such a policy in the future on sales of BeOS to
publishers and other partners and on royalty payments and other fees received
for licensing of BeIA to OEM's and other partners. 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, 2000, we had $80,000 in deferred revenues, related
to development work being performed for one of our customers.
Cost of Revenues. Prior to the shift in focus, our cost of revenues
consisted primarily of the cost of packaging, software duplication,
documentation, translation and product fulfillment. We also included in the cost
of revenues the amortized costs relating to the license of third party
technology used in the development of BeOS. In the future, we expect cost of
revenues to be mainly related to the licensing of third party technology.
Research and Development. 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 our software platforms. Costs incurred in the
research and development of new releases and enhancements are expensed as
incurred. These costs include the 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 our research and development expenses will continue to increase in
the future as we further develop and enhance our products and develop new
products for the Internet appliances market.
Sales and Marketing. 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 our development
partner program, such as the cost of technical support provided to partners in
our sales and marketing expenses.
10
<PAGE>
We expect our sales and marketing expenses to increase as we further
promote awareness of our software platform, work on establishing new
relationships with partners and hire new personnel. Sales and marketing expenses
will also increase as we further develop and expand our relationships with
existing and potential partners including expenses related to co-marketing
programs.
General and Administrative. 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.
We market and sell our products in the United States and internationally.
International sales of products accounted for approximately 30% and 21% of total
revenues for the three month period ended September 30, 2000 and for the nine
month period ended September 30, 2000 respectively. We have a subsidiary located
in France to market and sell our software platforms 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. 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.
Amortization of Deferred Stock Compensation. 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,
2000, we had recorded deferred compensation related to these options in the
total amount of $15.8 million, net of cancellations, representing the difference
between the deemed fair value of our common stock, as determined for accounting
purposes, and the exercise price of options at the date of grant. Of this
amount, $955,000 were amortized in 1996, $867,000 in 1997, $3.9 million in 1998,
$6.2 million in 1999 and $2.2 million in the nine month period ended September
30, 2000. Future amortization of expense arising out of options granted through
September 30, 2000 is estimated to be $417,000 in the remaining three months of
2000, $1.0 million in 2001, $280,000 in 2002 and $7,000 in 2003. We amortize the
deferred compensation charge monthly over the vesting period of the underlying
option.
Comparison of the Three Month Period ended September 30, 2000 to the Three Month
Period ended September 30, 1999
Net Revenues. Net revenues decreased $707,000 to $68,000, or 91%, for the
three month period ended September 30, 2000 from $775,000 for the three month
period ended September 30, 1999. This decrease is primarily attributable to
lower shipments of BeOS, which we believe resulted from making a version of BeOS
available for free download. During the quarter ended September 30, 2000,
revenues were mainly attributable to shipments of BeOS to third party
publishers. To date, all of our revenues have been derived from BeOS, with
future revenues to be dependent primarily on BeIA, our software platform for
Internet appliances.
11
<PAGE>
Cost of Revenues. Cost of revenues decreased $156,000 to $216,000, or 43%,
for the three month period ended September 30, 2000 from $372,000 for the three
month period ended September 30, 1999. Gross margin is negative this quarter as
a result of the continuing amortization of technology license agreements.
Research and Development. Research and Development expenses were relatively
constant at $2.1 million for the three month period ended September 30, 2000 as
compared with $2.0 million for the three month period ended September 30, 1999.
Increases in payroll expenses were due to added headcount and were partially
offset by lower outside consulting expenses.
Sales and Marketing. Sales and Marketing expenses decreased $757,000 to
$1.4 million, or 35%, for the three month period ended September 30, 2000 from
$2.2 million for the three month period ended September 30, 1999. This decrease
is primarily attributable to our decision to reallocate capital to focus on the
Internet appliances market, shifting our potential customer base from end users
to OEM's (original equipment manufacturers) and ODM's (original design
manufacturers). Additionally, the Web site technology purchased in 1998 is now
fully amortized.
General and Administrative. General and administrative expenses decreased
$81,000 to $880,000, or 8%, for the three month period ended September 30, 2000
from $961,000 for the three month period ended September 30, 1999. This reflects
a decrease in the allocation of facilities expenses partially offset by an
increase in personnel expenses, and expenses related to the activities of a
public company.
Amortization of Deferred Stock Compensation. Amortization of deferred stock
compensation decreased $1.1 million, or 68%, to $507,000 for the three month
period ended September 30, 2000, from $1.6 million for the three month period
ended September 30, 1999. The decrease is attributable to the cancellation of
options and to the amortization methodology. 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 expenses were relatively
constant at $274,000 for the three month period ended September 30, 2000 as
compared with $284,000 for the three month period ended September 30, 1999.
These amounts mainly represent the interest income generated by our investment
portfolio.
Comparison of the Nine Month Period ended September 30, 2000 to the Nine Month
Period Ended September 30, 1999
Net Revenues. Net revenues decreased $1.2 million to $464,000 for the nine
month period ended September 30, 2000 from $1.6 million for the nine month
period ended September 30, 1999. This decrease is primarily attributable to
lower shipments of BeOS, which we believe resulted from our announcement in
January 2000 to make a version of BeOS available for free download. During the
second and third quarter of 2000, revenues were primarily attributable to
shipments of BeOS to third party publishers, while in the first quarter they
were generated from revenue deferred in previous quarters. To date, all of our
revenues have been derived from BeOS, with future revenues to be dependent
primarily on BeIA, our software platform for Internet appliances.
Cost of Revenues. Cost of revenues increased $74,000 to $770,000 for the
nine month period ended September 30, 2000 from $696,000 for the nine month
period ended September 30, 1999. Gross margin is negative for the nine month
period ended September 30, 2000 as a result of the continuing amortization of
technology license agreements.
12
<PAGE>
Research and Development. Research and Development increased $404,000, or
7%, to $6.1 million for the nine month period ended September 30, 2000 from $5.6
million for the nine month period ended September 30,1999. The increase results
primarily from an increase in personnel expenses following the hiring of
additional staff and in the allocation of facilities expenses.
Sales and Marketing. Sales and Marketing decreased $944,000, or 14%, to
$5.6 million for the nine month period ended September 30, 2000 from $6.5
million for the nine month period ended September 30,1999. This decrease is
primarily attributable to the impact of refocusing of marketing activities
initiated in the first quarter of 2000, net of an increase in personnel costs
following the hiring of additional sales and marketing personnel. The refocusing
of marketing activities resulted in a decrease in public relations activities
and other outside programs and a decrease in the costs relating to our third
party developer. Personnel expenses increased by $380,000, before the effect of
a one-time charge of $347,000 relating to the grant of immediately vested stock
options in 1999.
General and Administrative. General and administrative expenses increased
$149,000, or 6%, to $2.7 million for the nine month period ended September 30,
2000 from $2.5 million for the nine month period ended September 30, 1999. The
increase results primarily from increases in personnel expenses, premiums
related to insurance coverage obtained concurrently with the initial public
offering and expansion of leased facilities, net of a decrease in expenses
incurred in preparation of the initial public offering process in 1999.
Amortization of Deferred Stock Compensation. Amortization of deferred stock
compensation decreased $2.8 million, or 56%, to $2.2 million for the nine month
period ended September 30, 2000, from $5.0 million for the nine month period
ended September 30, 1999. The decrease is attributable to the cancellation of
options and to the amortization methodology. 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 $520,000 to
$937,000 for the nine month period ended September 30, 2000 from $417,000 for
the nine month period ended September 30, 1999. 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.
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 decreased approximately $11.1 million to
$18.0 million at September 30, 2000, from $29.1 million at December 31, 1999.
This decrease is primarily attributable to the amounts used to fund operations,
net of the proceeds of stock-option exercises.
Cash used in operating activities increased $1.6 million to $13.8 million
for the nine month period ended September 30, 2000 as compared to $12.2 million
for the nine month period ended September 30, 1999. This increase is primarily
attributable to the increase in the net loss, net of non-cash items, and to the
decrease in payables balances, during the nine month period ended September 30,
2000.
Cash provided by investing activities was approximately $14.0 million for
the nine month period ended September 30, 2000 as compared with cash used in
investing activities of $15.8 million for the nine month period ended September
30, 1999. This change is primarily attributable to net sales of short-term
investments in the nine month period ended September 30, 2000 and the net
purchases of short-term investments following our initial public offering in the
nine month period ended September 30, 2000 .
13
<PAGE>
Cash provided by financing activities for the nine month period ended
September 30, 2000 was approximately $3.4 million as compared with $35.8 million
in the nine month period ended September 30, 1999. This change is primarily
attributable to the proceeds of $35.7 million received from our initial public
offering in the third quarter of 1999.
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 the first quarter of 2000, we shifted our
resources to focus primarily on the market for Internet appliances. We made a
version of BeOS available for personal use at no charge and a more fully
featured version is available through third party publishers. The personal
edition was released at the end of March and publishers began shipping the
commercial version in April. Sales of BeOS have been our primary source of
revenue in the past. We have little or no influence over the marketing and
promotional efforts of third party publishers and their success, and we may not
generate any meaningful revenues from sale of BeOS in the future through these
publishers.
We expect our revenues and cash flow for the future periods to be
negatively impacted as a result of providing a version of BeOS for free. 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.
We believe that existing cash and cash equivalents may not be sufficient to
meet operating and capital requirements at our currently anticipated level of
operations beyond the end of the second quarter of 2001. Additional capital may
be necessary in order to fund our operations at currently anticipated levels
beyond the second quarter of 2001. While we are actively considering various
funding alternatives, we have not secured or entered into any arrangements to
obtain additional capital. There can be no assurance that we will be able to
obtain additional funds, on acceptable terms or at all. If we cannot raise
additional capital to continue our present level of operations, we will have to
scale back our business and may not be able to further develop or enhance our
product offering, take advantage of future opportunities or respond to
competitive pressures, any of which could have a material adverse effect on our
business and results of operations. Our liquidity may also be adversely affected
in the future by factors such as higher interest rates, inability to borrow
without collateral, availability of capital financing and continued operating
losses.
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
Annual Report on Form 10-K for the year ended December 31, 1999 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 $10.4 million in 1997,
$16.9 million in 1998, $24.5 million in 1999 and $15.9 million for the nine
month period ended September 30, 2000. As of September 30, 2000, we had an
accumulated deficit of approximately $89.1 million. We expect to incur
significant additional losses and continued negative cash flow from operations
in 2000 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. Sales of BeOS, our
desktop operating system, to resellers and distributors and direct sales to end
users have accounted for the primary source of our revenues to date. In the
first quarter of 2000, we shifted our resources to focus primarily on the market
for Internet appliances. We made a version of BeOS available for personal use at
no charge and a more fully featured version is available through third party
publishers. The personal edition was released at the end of March and publishers
began shipping the commercial version in April. As a result, we may not generate
any meaningful revenues from sales of BeOS in the foreseeable future. Our shift
to focus primarily on the market for Internet appliances may not result in any
increase in our revenues or any improvement in our operations or financial
condition and may not offset the loss of revenues from sales of BeOS. 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.
We will need to raise additional capital that may not be available to us.
We believe that existing cash and cash equivalents may not be sufficient to meet
operating and capital requirements at our currently anticipated level of
operations beyond the end of the second quarter of 2001. Additional capital may
be necessary in order to fund our operations at currently anticipated levels
beyond the second quarter of 2001. While we are actively considering various
funding alternatives, we have not secured or entered into any arrangements to
obtain additional capital. There can be no assurance that we will be able to
obtain additional funds, on acceptable terms or at all. If we cannot raise
additional capital to continue our present level of operations, we will have to
scale back our business and may not be able to further develop or enhance our
product offering, take advantage of future opportunities or respond to
competitive pressures, any of which could have a material adverse effect on our
business and results of operations. Our liquidity may also be adversely affected
in the future by factors such as higher interest rates, inability to borrow
without collateral, availability of capital financing and continued operating
losses. If additional capital is raised through the issuance of equity
securities, our stockholders' percentage ownership of the common stock will be
reduced and our stockholders may experience dilution in net book value per
share, or the new equity securities may have rights, preferences or privileges
senior to those of our stockholders. Any debt financing, if available, may
involve covenants limiting or restricting our operations or future
opportunities.
15
<PAGE>
We have recently shifted our resources to focus primarily on a new and
undeveloped market.
In the first quarter of 2000, we shifted our resources to focus primarily
on the market for Internet appliances and the further development and marketing
of BeIA, our software platform intended for Internet appliances. We may be
unsuccessful in our attempt to focus primarily on this market and face
significant challenges often encountered with companies undergoing a strategic
reorganization, which include:
o inability to effectively shift existing product development and
engineering, sales and marketing and management resources to focus on the
market for Internet appliances;
o management distraction and loss of key personnel as we focus on this market
and shift resources towards the development and marketing of our software
platform for Internet appliances market;
o inadequacy of our existing resources to understand the needs and
requirements of developers and manufacturers of Internet appliances;
o inability to train existing personnel or hire and train new qualified
personnel to address the market for Internet appliances; and
o failure to adapt to new and evolving trends in Internet appliances.
We may not successfully meet any or all of these challenges. Our failure to
meet one or more of these challenges could materially adversely affect our
business and prospects. In addition, our business and prospects are highly
dependent on the development and market acceptance of Internet appliances and
our ability to successfully market BeIA as a viable software platform 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 BeIA as a software platform for Internet appliances is dependent upon
developing and maintaining relationships with industry-leading computer and
consumer electronics companies, system and hardware manufacturers, and Internet
service and content providers. Our failure to establish relationships with
companies that offer Internet appliances and establish BeIA in this market would
have a material adverse effect on our business and prospects.
We face intense competition from companies with significantly greater financial,
marketing, and technical resources.
There is already intense competition to develop and market operating
systems. This competition exists in the market for desktop operating systems, as
well as operating systems and software platforms intended for the Internet
appliances market. Companies such as Microsoft Corporation, Apple Computer,
Inc., QNX Software Systems Ltd., Palm, Inc., vendors of UNIX-based operating
systems such as Linux, and vendors of embedded operating systems, have operating
systems that are being used or may be used for Internet appliances. We also face
competition from vendors of embedded browsers and manufacturers of set-top boxes
and terminals. Many of these companies have an established market presence,
relationships with OEMs and consumer electronic manufacturers such as those
developing and marketing Internet appliances, and have significantly greater
financial, marketing and technical resources than we do. As a result, we may
have difficulty attracting manufacturers and developers to create devices and
software that will use our software platform. These more established companies,
together with a large number of smaller companies who offer software platforms
that may be used for Internet appliances, may capture a larger portion of the
market than we do. We also expect to face increased competition from new
entrants offering software platforms intended for use on Internet appliances.
16
<PAGE>
We expect our competitors to continue to improve and enhance their current
products and to introduce new products and software platforms, especially those
intended for the Internet appliances market. Successful product introductions
and product improvements by our competitors could reduce or eliminate any
perceived advantages in our software platform over these competitors and could
reduce market acceptance for our software platform and make it obsolete. To be
competitive, we must continue to invest significant resources in research and
development, sales and marketing, and continue to enhance and improve our
software platform. We may have insufficient resources to make these investments
and may be unable to make the advances necessary to be competitive. Our failure
to compete successfully against current or future competitors would have a
material adverse effect on our business and prospects.
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 depends in large part on our ability to establish and maintain
strategic relationships with industry-leading computer and consumer electronic
companies, hardware and systems manufacturers, and Internet service and content
providers. In the Internet appliance market, we have agreements with Compaq
Computer Corporation and Qubit Technology, and collaboration arrangements with
National Semiconductor, Inc., First International Computer, Inc. (FIC), Arima
Computer Corporation (Arima) and DT Research, Inc. 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 our
software platform. We may be unable to enter into new agreements with additional
partners on terms favorable to us or at all. The market for Internet appliances
is new and subject to rapid technological change. We may be unable to
successfully meet the requirements of existing or future strategic partners. As
a result, we may be unable to maintain strategic relationships with developers
and manufacturers of Internet appliances and Internet service and content
providers. If we are unable to develop or maintain relationships with strategic
partners and customers, we will have difficulty selling and gaining market
acceptance for our products and our business and results of operations will be
materially adversely affected.
Agreements with strategic partners may not result in any increase in our
revenues or improvement in our operations or financial conditions.
Existing agreements with OEM customers, for example, those with Compaq and
Qubit, and arrangements with our other strategic partners including National
Semiconductor, FIC and Arima, generally do not contain any minimum purchase
commitments or minimum payment obligations. Similarly, new agreements with
additional OEM customer and arrangements with new strategic partners, may not
contain any minimum purchase commitments or minimum payment obligations.
Agreements with existing and new OEM customers may be limited to a pilot or test
program. These partners are free to use software platforms developed by other
companies in their Internet appliance products and are under no obligation to
develop or market products based on our software platform. In addition, our
arrangements with existing and new strategic partners may not result in the
marketing or shipment of any commercial products based on our platform or may
include only a limited number of demonstration models. As a result, existing
arrangements and new arrangements, if any, with strategic partners may not
result in any actual sales, any increase in our revenues, or any improvement in
our operations or financial condition.
17
<PAGE>
We are dependent upon the success of the products and services offered by our
partners and customers in the Internet appliances market.
We expect to market BeIA primarily to developers and manufacturers of
Internet appliances and providers of services to access information and
entertainment over Internet. Our intent is that that these manufacturers and
service providers will incorporate our software platform into their products and
services. Our BeIA customers may include computer and consumer electronic
companies, manufacturers of the hardware and systems used in Internet
appliances, and Internet service and content providers. As a result, our success
is dependent in large part on factors which are outside our control which
include, the performance of our customers and the market acceptance of our
customers' products and services based on our software platform. We have little
or no ability to influence the development and marketing efforts of our
customers and our customers may fail to dedicate adequate resources necessary to
successfully develop and market products based on our software platform.
The demand for our software platform is dependent on our ability to support key
industry standards and access to enabling technologies.
The demand and acceptance of our product is dependent upon our ability to
support a wide range of industry standards such as those used for streaming
media and Internet browsing and access to key enabling technologies. These key
technologies include a Web browser under license from Opera Software A/S. If we
were to lose our rights to this Web browser or any other key technology
incorporated into our products, we may be required to devote significant time
and resources to replace such browser or other key technologies. This could in
turn be costly, result in the unavailability or delay the release of our
products, and would materially adversely affect our business and operating
results. We also license other enabling technologies for inclusion in our
product, such as third party compression and decompression algorithms known as
"codecs." We may be unable to license these enabling technologies at favorable
terms, or at all, which may result in lower demand for our products.
We expect long sales cycles associated with our software platform intended for
the Internet appliances market and our stock price could decline if sales are
delayed or cancelled.
We believe that the adoption of BeIA as the software platform represents a
significant product decision for the developers and manufacturers of Internet
appliances and we expect long sales cycles as we collaborate and educate
customers and partners on the use and benefits of our software platform. We
similarly expect that customers and partners will spend a significant amount of
time performing internal reviews and testing our software platform before
accepting and adopting our product. Any failure to gain acceptance for our
software platform and any delays in sales of our product could cause our
quarterly operating results to vary significantly from projected results, which
could cause our stock price to decline.
18
<PAGE>
Our products may never gain broad market acceptance.
We have two principle products, BeIA, our software platform intended for
the Internet appliances market and BeOS, our operating system intended for the
desktop market. BeOS has been our primary source of revenues in the past and it
has been used primarily by a limited number of enthusiasts and application
developers. Our business and prospects are dependent on the broader market
acceptance of our products, especially the acceptance of BeIA as a viable
software platform for a broad range of Internet appliances and devices enabling
Internet-based and digital media applications. In an effort to increase the
market acceptance of our software platform, a version of BeOS has been made
available for personal use for no charge. Despite these efforts, we may not
experience any significant increase in the number of BeOS users or a broader
market acceptance of our software platform and developers may decide not to
adopt or develop products based on our software platform.
We may be unsuccessful at marketing BeIA as the software platform of choice
for Internet appliances, and developers and manufacturers of Internet appliances
and Internet service and content providers may not elect to incorporate BeIA in
their products and services. Potential customers may not perceive any
significant advantages over other operating systems such as Microsoft Windows
CE, QNX, the UNIX-based operating systems, Linux, or embedded browsers and
operating systems. In addition, we may be unable to demonstrate the commercial
viability and cost-effective nature of our products. If our products, especially
our software platform intended for the Internet appliances, are not accepted or
adopted by an increasing number of developers and manufacturers, our business
and prospects will be materially adversely affected.
In addition, traditional operating systems could evolve and new operating
systems could emerge to more effectively address the needs of the manufacturers
and developers of Internet appliances and 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 our products and these operating
systems. As a result, any technical or marketing advantage we may have in the
market for operating systems could be lost and the demand and acceptance of our
products would diminish.
We are dependent upon third party publishers for the marketing and sale of the
commercial version of BeOS and we have little or no control over the efforts and
operation of these publishers.
In March of 2000, a version of BeOS was made available for personal use at
no charge. In April of 2000, we also made the commercial version of BeOS
available through third party publishers. Our success in the desktop market is
highly dependent on these publishers' ability to sell and market BeOS and
incorporate it as part of successful product offerings. We have little or no
ability to influence the marketing and promotional efforts of these publishers
and these companies may fail to dedicate adequate resources necessary to
successfully market and promote the commercial version of BeOS.
19
<PAGE>
We have limited experience marketing and selling our products, which makes it
difficult to evaluate our business.
We were founded in 1990 and shipped our first commercial product in
December 1998. Prior to 1998, our business was primarily focused on research and
product development activities. To date, we have not generated any significant
revenues from sales of our products and this makes it difficult to evaluate our
business and prospects. In January 2000, we announced a shift in our resources
to focus primarily on the Internet appliances market, a new and unproven market
and a market in which we have little experience competing. Your evaluation of
our business and prospects must be made in light of the risks and uncertainties
frequently encountered by companies in an early stage of development and
offering products in a market featuring intense competition from companies with
substantially greater financial and marketing resources. Risks faced in this
regard include:
o our inability to manage or adapt to new and evolving trends in Internet
appliances and digital media; o our inability to market our product as a
viable software platform, especially to leading developers and
manufacturers of Internet appliances;
o our failure to gain any sustainable level of market share or to compete
with operating systems and software platforms offered by others; and
o costs and delays in releasing new versions and product upgrades.
We may not successfully meet any of these challenges. Our failure to meet
one or more of these challenges could materially adversely affect our business
and prospects. It is also difficult to predict the size and future growth rate,
if any, of the market for our software platform. We have limited experience upon
which to determine or predict trends that may emerge and adversely affect our
business or prospects. The market for our software platform may not develop or
may develop more slowly than we anticipate, and may never become economically
sustainable.
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:
o rapid technological change;
o frequent product upgrades and enhancements;
o changing customer requirements for new products and features; and
o multiple, competing and evolving industry standards.
The introduction of software platforms that contain new technologies and
the emergence of new industry standards could render our products 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 our products is difficult to estimate. To be competitive, we
will need to develop and release new products and software platform 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 software platform 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.
20
<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, some of which are under our
control, such as product enhancements by us, and many of which are outside our
control, such as new product releases and product enhancements by our
competitors. Customer orders may be deferred in anticipation of new product
releases, product enhancements or upgrades by us or by our competitors. In
addition, changes in the pricing policies or marketing efforts of our competitor
and our response to these changes, which could include price reductions or
increased marketing efforts by us, may cause significant fluctuations in our
revenues and operating results. 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 may be unable to adjust expenses in a timely manner to compensate for revenue
shortfalls.
Our expense levels are fixed and based, in part, on our expectations of
future sales. We may be unable to adjust spending in a timely manner to
compensate for any sales shortfall. A significant portion of our expenses
include minimum payments for licensed technology under licensing agreements,
payment obligations under non-cancellable lease arrangements, rent and other
payments that are fixed and do not vary with revenues. We plan to increase our
operating expenses to:
o expand our sales and marketing efforts;
o fund greater levels of product development and engineering;
o expand and increase the number of our relationships with strategic
partners; and
o broaden our customer support capabilities.
Any delay in generating revenue could cause significant variations in our
operating results from quarter to quarter and could result in substantial
operating losses. If we fail to generate sufficient sales or if our sales are
below expectations, operating results are likely to be materially adversely
affected.
21
<PAGE>
In our effort to increase market acceptance for our products, we may forego
near-term revenue by providing our products at little or no cost to potential
customers.
In an attempt to increase the market acceptance of our software platform,
we have made a version of BeOS available to end users for free. In the future,
we may decide to continue to forego immediate revenue potential by providing
other versions of BeOS at little or no cost. We may also forego near-term
revenue potential in the Internet appliances market by providing BeIA to
developers and manufacturers at little to no cost. Customers, whether end-users
or the developers or manufacturers of Internet appliances, may be unwilling to
pay for any upgrades or enhanced versions of our products. Our decision to
forego near-term revenue in expectation of increasing the users and adopters of
our software platform may not yield any increase or sustainable market
acceptance for our products and may not result in any future revenues. In
addition, we may reduce prices in response to competitive factors or to pursue
new market opportunities.
Our future success depends in part on our ability to continue to attract,
identify, hire and retain key personnel and qualified employees.
Our success depends to a significant degree upon the continued
contributions of our executive management team, including our co-founders
Jean-Louis Gassee, our Chief Executive Officer and Steve Sakoman, our Chief
Operating Officer, and other senior level financial, technical, marketing and
sales personnel. The loss of these or other members of our senior management
team could have a material adverse effect on our business and results of
operations.
As of September 30, 2000, we had 107 employees. We anticipate that the
number of employees may increase during the next 12 months as we increase our
research and development activities and sales and marketing efforts. Our success
depends upon our ability to attract and retain additional highly qualified
senior management and technical, sales and marketing personnel to support
growing operations. The process of locating and hiring personnel with the
combination of skills and attributes required to carry out our strategy is
time-consuming and costly.
In addition, there is intense competition for qualified personnel in the
software platform and development industry. Competition is especially intense in
the San Francisco Bay Area, where our corporate headquarters is located. Our
anticipated growth and the high costs involved in doing business in the San
Francisco Bay Area is expected to place demands on our resources and will likely
require the addition of new management and personnel and the development of
additional expertise by existing management and personnel. The loss of key
personnel or our inability to attract additional qualified personnel to
supplement or, if necessary, to replace existing personnel, could have a
material adverse effect on our business and results of operations.
Our success is dependent on the continued growth and improvement of the Internet
and adoption of Internet appliances.
Our future success depends on the continued growth of and reliance by
consumers and businesses on the Internet, particularly in the Internet appliance
market. Use and growth of the Internet will depend in significant part on
continued rapid growth in the number of households and commercial, educational
and government institutions with access to the Internet. The use and growth of
the Internet will also depend on the number and quality of products and services
designed for use on the Internet. Because use of the Internet as a source of
information, products and services is a relatively recent phenomenon, it is
difficult to predict whether the number of users drawn to the Internet will
continue to increase and whether any significant market for commercial use of
the Internet will continue to develop and expand. Either Internet use patterns
may decline as the novelty of the medium recedes or the quality of products and
services offered online may not support continued or increased use.
The rapid rise in the number of Internet users and the growth of electronic
commerce and applications for the Internet has placed increasing strains on the
Internet's communications and transmission infrastructure. This could lead to
significant deterioration in transmission speeds and the reliability of the
Internet as a commercial medium and could reduce the use of the Internet by
businesses and individuals. The Internet may not be able to support the demands
placed upon it by this continued growth. Any failure of the Internet to support
growth due to inadequate infrastructure or for any other reason would seriously
limit its development as a viable source of commercial and interactive content
and services. This could impair the development and acceptance of Internet
appliances which could in turn materially adversely affect our business and
prospects.
22
<PAGE>
We may be unable to expand our sales and support organization to increase sales
and market awareness for our products.
We must expand our sales and marketing efforts aimed at computer and
consumer electronic companies, systems and hardware manufacturers, and Internet
service and content providers. Without this increase we may be unable to
increase sales and market acceptance of our software platform. This would
require a sophisticated sales force and the commitment of significant financial
resources on our part. Competition for qualified sales personnel is intense,
especially those with an understanding of emerging Internet-based technologies
and markets. We may not be able to hire the type and number of sales personnel
that we require on a timely basis or at all.
We will need to increase our staff to support new customers and the
expanding needs of existing customers. Hiring customer service and support
personnel is very competitive in our industry due to the limited number of
people available with the necessary technical skills and understanding of
operating systems and Internet-based applications. If we cannot hire adequate
numbers of qualified sales, marketing and customer service personnel, our
business could suffer materially.
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 especially those intended for the
Internet appliance market, and implement effective planning and operating
processes. To manage any anticipated growth we must:
o establish and manage multiple relationships with OEMs, Internet service and
content providers and other third parties;
o continue to implement and improve our operational, financial and management
information systems; and
o 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.
23
<PAGE>
We expect continued erosion in the average selling prices of our products.
We anticipate that the average selling prices of our products will
fluctuate and decrease in the future in response to a number of factors,
including:
o competitive pricing pressures;
o rapid technological changes; and
o sales discounts.
We also anticipate that the average selling price of our products will
decrease as we market our products to Internet appliance developers and
manufacturers. Therefore, to maintain or increase our gross margins, we must
develop and introduce new products and product enhancements on a timely basis.
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.
Our success depends upon availability of third party applications that operate
on our software platform.
Demand and market acceptance for our products will depend upon the
availability of an increasing number of third party applications that operate on
our software platform. These applications include video and audio editing, 3D
games, creative audio and video content development and manipulation, and
personal productivity applications.
In part to encourage the development of an increasing number of
applications that operate on our software platform and to increase market
acceptance for our products, we have made a version of BeOS available for
personal use at no charge. However, providing a version of BeOS to end-users for
free may not result in any significant increase in the number of BeOS users and
third party developers, which are generally under no obligation to develop
applications based on our software platform, may not increase their development
of applications that run on our products. A developer's decision to write
applications for our software platform is based in part on the perception and
analysis of the relative technical, financial and other benefits of developing
applications for our platform versus writing applications for more popular
operating systems such as Microsoft's Windows, Apple's Mac OS, Palm OS, or
Linux. If we fail to attract a sufficient number of application developers who
develop and market successful applications on our software platform, the demand
for our products 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.
The recent issuance by the SEC of an accounting bulletin related to revenue
recognition, SAB 101, may have a material impact on our financial performance.
In December 1999, the SEC issued Staff Accounting Bulletin No. 101. Revenue
Recognition in Financial Statements, referred to as SAB 101. SAB 101 summarizes
the SEC staff's views in applying generally accounting principles to revenue
recognition in financial statements. We are currently in the process of
evaluating SAB 101 and what effect it may have on our financial statements.
Accordingly, we have not determined whether SAB 101 will have a material impact
on our financial position or results of operations. In the event that the
implementation of SAB 101 requires us to report a change in accounting
principles related to our revenue recognition policy, we would be required to
report such change no later than the quarter ending December 31, 2000. In
addition to other uncertain risks related to SAB 101, it is possible that SAB
101 will result in increased fluctuations in our quarterly operating results and
increase the likelihood that we may fail to meet expectations of securities
analysts for any period.
24
<PAGE>
We are dependent on third party development tools.
We are 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. Cygnus Solutions was recently acquired by Red
Hat Software, one of our competitors. If we lose access to these development
tools or 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 our products. 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 our software
platform and the applications that run on it. These factors could negatively and
materially affect the acceptance and demand for our products, our business and
prospects.
Product defects may harm our business and reputation.
Computer operating systems, such as our 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 our products 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 an Internet appliance, 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 the reduction 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.
25
<PAGE>
Our success depends on our ability to protect and enforce our proprietary
rights.
Our success depends significantly on our ability to protect our proprietary
rights to technologies used in our products. We rely primarily on a combination
of copyright, trademark and trade secret laws, as well as confidentiality
procedures and contractual provisions to protect our proprietary rights. To
date, we have no patents and existing copyright laws afford only limited
protection for our software. A substantial portion of our sales are derived from
the licensing of products under "shrink wrap" license agreements that are not
signed by licensees and, therefore, may be unenforceable under the laws of
certain jurisdictions. Despite any measures taken to protect our proprietary
rights, attempts may be made to copy aspects of our software platform or to
obtain and use information that we regard as proprietary which could harm our
business. In addition, the laws of some foreign countries do not protect our
intellectual property to the same extent as U.S. laws. Finally, our competitors
may independently develop similar technologies. The loss or misappropriation of
any material trademark, trade name, trade secret or copyright could have a
material adverse effect on our business and results of operations.
The software industry is characterized by the existence of a large number
of patents and frequent litigation based on allegations of patent infringement.
As the number of entrants into our market increases, the possibility of an
infringement claim against us grows. For example, we may be inadvertently
infringing on a patent. In addition, because patent applications can take many
years to issue, there may be a patent application now pending of which we are
unaware upon which will be infringing when it issues in the future. Although we
do not believe that our products infringes on the rights of third parties, third
parties may still assert infringement claims against us in the future and this
could result in costly litigation and distraction of management. To address such
patent infringement claims, we may have to enter into royalty or licensing
agreements. Licenses may not be available on reasonable terms or at all which
could have a material adverse effect on our business and results of operations.
Our stock price is highly volatile.
The trading price of our common stock has fluctuated significantly and has
ranged from $2.281 to $39.563 over the past 15 months since our initial public
offering in July 1999. In addition, many factors could cause the market price of
our common stock to fluctuate substantially, including:
o announcement by us or our competitors of significant strategic
partnerships, joint ventures, significant contracts, or acquisitions, or
rumors to that effect;
o announcement by us of loss of significant strategic partnerships, joint
ventures, significant contracts or acquisitions;
o news and announcements relating to the ongoing antitrust actions involving
Microsoft;
o announcements by us or our competitors concerning software errors or delays
in product releases;
o availability of key software applications developed for our products or our
competitor's products; and
o changes in financial estimates by securities analysts.
Specifically, certain market segments such as the computer software
industry have experienced dramatic price and volume fluctuations from time to
time. These fluctuations may or may not be based upon any business or operating
results. Our common stock may experience similar or even more dramatic price and
volume fluctuations which may continue indefinitely.
26
<PAGE>
In the past, securities class action litigation has often been brought
against a company following periods of volatility in the market price of its
stock. We may in the future be the target of similar litigation. Securities
litigation could result in substantial costs and diversion of management
attention and resources, all of which could materially harm our business and
results of operation.
Our Amended and Restated Certificate of Incorporation, bylaws, Delaware law and
change of control agreement with some of our key employees contain provisions
that could discourage a third party from acquiring us and consequently decrease
the market value of our common stock.
Our Amended and Restated Certificate of Incorporation grants our board of
directors the authority to issue up to 2,000,000 shares of preferred stock and
to determine the price, rights, preferences, privileges and restrictions,
including voting rights of these shares without any further vote or action by
the stockholders. Since the preferred stock could be issued with voting,
liquidation, dividend and other rights superior to those of the common stock,
the rights of the holders of common stock will be subject to, and may be
adversely affected by, the rights of the holders of any preferred stock that may
be issued. The issuance of preferred stock could have the effect of making it
more difficult for a third party to acquire a majority of our outstanding voting
stock which could decrease the market value of our stock. Further, provisions in
our Amended and Restated Certificate of Incorporation and bylaws and of Delaware
law could have the effect of delaying or preventing a third party from acquiring
us, even if a change in control would be in the best interest of our
stockholders. These provisions include the inability of stockholders to act by
written consent without a meeting and procedures required for director
nomination and stockholder proposal.
We have entered into a Change of Control Agreement with each of our
officers and some of our other key employees. These agreements provide that,
among other things, if an employee is terminated without cause or otherwise
resigns for good reason during the period starting nine months prior to the date
of a change of control and ending eighteen months following our change of
control, then the employee shall be entitled to a severance payment, and the
acceleration and immediate exercisability of all unvested options. These
provisions may discourage a third party from acquiring us.
27
<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, 2000.
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.
28
<PAGE>
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.
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
29
<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 13, 2000
Jean-Louis F. Gassee
President, Chief Executive Officer and Director
By: /s/ P.C. BERNDT Date : November 13, 2000
P.C. Berndt
Chief Financial Officer
30
<PAGE>
