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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934.
(Mark One)
[X]ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended January 31, 2000
OR
[_]TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
Commission file number: 0-22369
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BEA SYSTEMS, INC.
(Exact Name of Registrant as Specified in Its Charter)
Delaware 77-0394711
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
2315 North First Street
San Jose, California 95131
(Address of Principal Executive Offices, Zip Code)
(408) 570-8000
(Registrant's telephone number, including area code)
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Securities registered under Section 12(b) of the Act:
None
Securities registered under Section 12(g) of the Act:
Common Stock
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Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes [X] No [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [_]
The aggregate market value of the voting and non-voting common equity held
by non-affiliates of the registrant, computed by reference to the closing
price at which the common equity was sold on March 31, 2000, as reported on
the Nasdaq National Market, was approximately $10,794,968,000. Shares of
common equity held by each officer and director have been excluded in that
such persons may be deemed to be affiliates. This determination of affiliate
status does not reflect a determination that such persons are affiliates for
any other purposes.
As of March 31, 2000, there were approximately 371,585,000 shares of the
Registrant's common stock outstanding, as adjusted to reflect the Registrant's
two-for-one stock split effected on April 24, 2000.
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BEA SYSTEMS, INC.
FORM 10-K
For the Fiscal Year Ended January 31, 2000
INDEX
Page
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PART I.
Item 1. Business................................................................................ 1
Item 2. Properties.............................................................................. 7
Item 3. Legal Proceedings....................................................................... 7
Item 4. Submission of Matters to a Vote of Security Holders..................................... 8
PART II.
Item 5. Market for Registrant's Common Stock and Related Stockholder Matters.................... 8
Item 6. Selected Financial Data................................................................. 9
Item 7. Management's Discussion and Analysis of Financial Conditions and Results of Operations.. 10
Item 7A. Quantitative and Qualitative Disclosures about Market Risk.............................. 25
Item 8. Consolidated Financial Statements and Supplementary Data................................ 27
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.... 55
PART IV.
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K........................ 55
Signatures....................................................................................... 58
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PART I
FORWARD-LOOKING INFORMATION
This Annual Report on Form 10-K includes "forward-looking statements"
within the meaning of Section 27A of the Securities Act and Section 21E of the
Exchange Act. All statements in this Annual Report other than statements of
historical fact are "forward-looking statements" for purposes of these
provisions, including any statements of the plans and objectives for future
operations and any statement of assumptions underlying any of the foregoing.
Statements that include the use of terminology such as "may," "will,"
"expects," "plans," "anticipates," "estimates," "potential," or "continue," or
the negative thereof or other comparable terminology are forward-looking
statements. Forward-looking statements include (i) in Item 1, all text under
the heading "Business--Strategy" and statements regarding continued hiring in
direct sales, support and professional services, devoting substantial
resources to product development, and continuing to license and acquire
software technologies and businesses, and (ii) in Item 7, statements regarding
additional acquisitions, return on investment, investing in services
offerings, expected timing and amount of amortization expenses, investment in
sales channel expansion and marketing programs, and future hiring. These
forward-looking statements involve risks and uncertainties, and it is
important to note that BEA's actual results could differ materially from those
projected or assumed in such forward-looking statements. Among the factors
that could cause actual results to differ materially are the factors detailed
under the heading "Management's Discussion and Analysis of Financial Condition
and Results of Operations--Factors That May Impact Future Operating Results."
All forward-looking statements and risk factors included in this document are
made as of the date hereof, based on information available to BEA as of the
date hereof, and BEA assumes no obligation to update any forward-looking
statement or risk factor. You should consult the risk factors listed from time
to time in the Company's Reports on Forms 10-Q and 8-K.
ITEM 1. BUSINESS.
Overview
BEA Systems, Inc. ("BEA" or the "Company") is a leading provider of e-
commerce infrastructure software that helps companies of all sizes build e-
commerce systems that extend investments in existing computer systems and
provide the foundation for running a successful integrated e-business. BEA's
products are marketed and sold worldwide through a network of BEA sales
offices, as well as hardware vendors, independent software vendors ("ISVs")
and systems integrators ("SIs") that are BEA partners and distributors. The
Company's products have been adopted in a wide variety of industries,
including commercial and investment banking, securities trading,
telecommunications, airlines, retail, manufacturing, package delivery,
insurance and government, in many cases using the Internet as a system
component. BEA's products serve as a platform or integration tool for
applications such as billing, provisioning, customer service, electronic funds
transfers, ATM networks, securities trading, Web-based banking, Internet
sales, supply chain management, scheduling and logistics, and hotel, airline
and rental car reservations. Licenses for BEA products are typically priced on
a per-user, per-application basis, but BEA also offers licenses priced per
server and time-based enterprise licenses.
The Company's core business has been providing infrastructure for high-
volume transaction systems, such as telecommunications billing applications,
commercial bank ATM networks and account management systems, credit card
billing systems and securities trading account management systems. These
distributed systems must scale to process high transaction volumes and
accommodate large numbers of users. As the Internet and e-commerce continue to
develop, increasing transaction loads are being placed on Web-based systems,
such as retail and business-to-business e-commerce sites. In addition, systems
that historically had been strictly internal are now being extended to the
Internet, such as telecommunications, bank and credit card account
information.
BEA provides an e-commerce transaction platform that is designed to address
this demand and help companies quickly develop and integrate e-business
initiatives and reliably deliver a wider range of dynamic, personalized
services.
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Industry Background
Over the past decade, the information systems of many large organizations
have evolved from traditional mainframe-based systems to distributed computing
environments. This evolution has been driven by the benefits offered by
distributed computing, including lower incremental technology costs, faster
application development and deployment, increased flexibility, and improved
access to business information. Despite these benefits, large-scale mission-
critical applications that enable and support fundamental business processes,
such as airline reservations, credit card processing, and customer billing and
support systems, have largely remained in mainframe environments. For several
decades, the high levels of reliability, scalability, security, manageability
and control required for these complex, transaction-intensive systems have
been provided by application server functionality included in the mainframe
operating system. Mainframe environments, however, suffer from several
shortcomings, including inflexibility, lengthy development and maintenance
cycles, and limited, character-based user interfaces. Increasingly, these
shortcomings are forcing many organizations to seek solutions, such as those
offered by BEA, that will enable them to overcome the limitations of
distributed computing for mission-critical applications while providing the
robust computing infrastructure previously unavailable outside the mainframe
environment.
In addition, many businesses are using the World Wide Web as a node of
these infrastructures. Businesses use the Internet as a means of selling
products to consumers and distributors, buying components or whole products
from suppliers, opening new customer accounts, scheduling service
installation, providing account information and customer care, enabling
reservations, funds transfers, bill payments and securities trading, and
gathering information about customers and their buying habits. Many businesses
also use intranets for functions such as inventory control, decision support,
logistics, reservations, customer care and provisioning, and sometimes use
extranets to make similar information and applications available to their
suppliers or distributors. Achieving the full benefits of the Internet and e-
commerce requires fully integrating business-to-consumer or business-to-
business Web-based applications with existing enterprise applications, such as
shipping, inventory control, billing, payroll, and general ledger. In order to
fully integrate these internal applications with Web-based systems, the
internal applications must be electronically linked to each other and must be
built on a flexible, reliable, scalable, secure infrastructure that can
connect to the Web and support the demanding loads that result from heavy
Internet traffic.
An e-commerce transaction involves much more than simply the purchase of an
item over the Web. In order to perform a single e-business transaction, a
robust e-commerce system must process several distinct computer transactions.
A typical e-commerce request, whether a consumer purchase, a corporate
procurement of supplies, or an information search, generates a series of
interconnected computer transactions. These computer transactions may include
determining whether the ordered item is in stock, determining where the item
is located, scheduling the item for shipping, processing payment and recording
the transaction in the Company's financial records. In addition, many Web
sites now gather information about users as they navigate the site. This
information is stored, identified with the particular user, and compared with
past behavior of the same and other users in order to personalize online
interaction by recommending specific merchandise, offering personalized
pricing, and displaying targeted advertising, all based on the user's profile.
As e-commerce grows, an increasing number of e-business transactions generates
increasing numbers of computer transactions, driving the demand for more
scalable and reliable systems for managing them.
BEA provides a broad family of cross-platform software and services for
creating robust, reliable, personalized e-commerce sites, for robust, reliable
back-end systems that support e-commerce sites and distributed operations, and
for integrating these environments. BEA's products and services enable
mission-critical, distributed applications to work seamlessly in
client/server, Internet and legacy environments. Customers use BEA products as
a deployment platform for Web-based applications, as a deployment platform for
custom and packaged applications, and as a means for robust enterprise
application integration ("EAI") among mainframe, client/server and Web-based
applications. BEA also provides Enterprise Java Bean ("EJB") based
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components that perform common e-commerce functions, such as personalization,
shopping cart, order tracking, inventory, and pricing. These components can be
rapidly assembled into Web-based applications, and the application
functionality provided by these components can easily be augmented with
additional Java-based components developed by the end user, a systems
integrator, a packaged application vendor, or BEA's consulting group.
Customers also rely on BEA professional services offerings to develop system
architectures, application designs, components or custom applications, to
customize packaged applications and to integrate applications. Using BEA
platforms, application components and services, BEA customers have been able
to create robust e-commerce sites in a matter of weeks.
Strategy
Our strategy is to extend our current leadership position in distributed
transaction processing and Java-based Web application servers by penetrating
new customer accounts, particularly e-commerce sites, through any of our three
product lines or our professional services, and then to proliferate within
those customers, servicing higher usage volumes and selling additional
products. Key elements of our strategy include:
. Increasing our direct and indirect sales capacity by hiring more direct
sales representatives and by partnering with hardware vendors, systems
integrators and value-added resellers. At the end of fiscal 2000, BEA
had over 340 quota-bearing sales representatives, a 70 percent increase
over the end of fiscal 1999.
. Continuing to aggressively promote the embedding of our Web application
server products in Web applications being developed by ISVs. ISVs who
build on BEA application server products become resellers of those
products, tied to sales of the ISV's packaged applications, and BEA
typically receives a royalty on those sales.
. Generating repeat business from existing customers through servicing
increasing usage volumes and selling additional products or services.
BEA often generates repeat business as customers increase their system
capacity, expand into new territories or lines of business, or increase
the number of applications installed on BEA platforms.
. Enhancing our technology leadership through research and development
efforts and through acquisition of complementary companies, products and
technologies, to strengthen our end-to-end e-commerce platform offering
and to offer increasing e-commerce application functionality. Through
BEA's research and development efforts or acquisitions, BEA has embraced
new standards, such as extensible markup language ("XML") and wireless
application protocol ("WAP"), and has added important features and
functionality to its product line. BEA products have won several key
industry awards and have received strong recommendations from key
industry analysts.
. Developing new services offerings that focus on accelerating delivery of
end-to-end e-commerce solutions based on robust transaction and
application platforms. BEA continues to enhance its services offerings
through acquisitions and aggressive hiring.
. Driving the continuing adoption of enterprise Java, object-based
solutions and e-commerce through development of products and
participation in standards-setting bodies. BEA believes that EJB,
object-based computing at the enterprise level, and electronic commerce
will be important drivers for boosting demand for BEA solutions. BEA is
participating in EJB standards setting groups, and is also providing the
most complete implementation of EJB available today.
Customers
The total number of licensees of BEA products and solutions is greater than
4,000 worldwide. BEA's target end-user customers are organizations with
sophisticated, high-end information systems with numerous, often
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geographically-dispersed, users and diverse, heterogeneous computing
environments. Typical customers are mainframe-reliant, have large-scale
client/server implementations that handle very high volumes of business
transactions, or have Web-based applications with large and unpredictable
usage volumes. No customer accounted for more than 10 percent of total
revenues in any of the fiscal years 2000, 1999 or 1998.
Sales and Marketing
BEA's sales strategy is to pursue opportunities worldwide within large
organizations and organizations that are establishing e-commerce businesses,
through its direct sales, professional services and technical support
organizations, complemented by indirect sales channels such as hardware OEMs,
ISVs and systems integrators. The Company currently intends to continue to add
to its direct sales, support and professional services organizations in major
worldwide markets.
Direct Sales Organization. BEA markets its software and services primarily
through its direct sales organization. As of January 31, 2000, BEA had over
1250 employees in consulting, training, sales, support and marketing,
including over 340 sales representatives, located in 70 offices in 29
countries. The Company typically uses a consultative, solution-oriented sales
model that entails the collaboration of technical and sales personnel to
formulate proposals to address specific customer requirements, often in
conjunction with hardware, software and services providers. Because the
Company's solutions are typically used as a platform or integration tool for
e-commerce initiatives or other applications that are critical to a customer's
business, the Company focuses its initial sales efforts on senior executives
and information technology department personnel who are responsible for such
initiatives and applications.
Targeting Developers. BEA also markets its software directly to system and
application developers. BEA makes trial developers copies of many of its
products available for free download over its Web site. Over 100,000 copies
were downloaded in fiscal 2000. In addition, BEA periodically provides
developer training and trial licenses through technical seminars in various
locations worldwide.
Strategic Relations. An important element of the Company's sales and
marketing strategy is to expand its relationships with third parties and
strategic partners to increase the market awareness, demand and acceptance of
BEA and its solutions. Partners have often generated and qualified sales
leads, made initial customer contacts, assessed needs and recommended use of
BEA solutions prior to BEA's introduction to the customer. A strategic partner
can provide customers with additional resources and expertise, especially in
vertical markets in which the partner has expertise, to help meet customers'
system definition and application development requirements. Types of strategic
alliances include:
System platform companies. BEA's partners often act as resellers of BEA
solutions, either under the BEA product name or integrated with the platform
vendor's own software products, or recommend BEA products to their customers
and prospects who are planning to implement high-end, mission-critical
applications and Web-based applications on their hardware platform.
Packaged application software developers. BEA licenses its software to
packaged application software vendors. These vendors embed BEA software as an
infrastructure for the applications they supply; giving these applications
increased distribution, scalability and portability across all platforms on
which the embedded BEA product runs. Customers can also easily integrate other
applications built using BEA solutions into these packaged applications.
Systems integrators and independent consultants. Systems integrators often
refer their customers to BEA, utilize BEA as a subcontractor in some
situations, and build custom solutions on BEA products. BEA also works
cooperatively with independent consulting organizations, often being referred
to prospective customers by professional services organizations with expertise
in high-end transactional applications.
Distributors. To supplement the efforts of its direct sales force, BEA uses
software distributors to sell its products in Europe, Asia, Latin America and,
to a lesser degree, North America. As of January 31, 2000, the Company was
represented by over 30 distributors.
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Professional Services. The Company believes that its professional services
organization plays a key role in facilitating initial license sales and
enabling customers to successfully architect, design, develop, deploy and
manage systems and applications. Fees for professional services are generally
charged on a time and materials basis and vary depending upon the nature and
extent of services to be performed.
Marketing. The Company's marketing efforts are directed at broadening the
demand for BEA products and solutions by increasing awareness of the benefits
of using the Company's products to build mission-critical distributed and Web-
based applications. Marketing efforts are also aimed at supporting the
Company's worldwide direct and indirect sales channels. Marketing personnel
engage in a variety of activities including conducting public relations and
product seminars, issuing newsletters, sending direct mailings, preparing
sales collateral and other marketing materials, coordinating the Company's
participation in industry trade shows, programs and forums, and establishing
and maintaining relationships with recognized industry analysts and press. The
Company's senior executives are frequent speakers at industry forums in many
of the major markets the Company serves.
Customer and Distributor Support
The Company believes that a high level of customer support is integral to
the successful marketing and sale of BEA solutions. Mission-critical
applications require rapid support response and problem resolution. The
Company's world-wide support and sales presence enhances its ability to
rapidly respond, and to handle support in local languages, which the Company
believes gives it an advantage over many of its competitors. The Company's
direct sales to customers include a basic level of support. Comprehensive 7x24
support contracts are also available, typically on an annual fee basis. In
addition, the Company offers introductory and advanced classes and training
programs at the Company's offices, customer sites and training centers
worldwide. Telephone hot line support is offered worldwide at either a
standard or around-the-clock level, depending on customer requirements. The
Company maintains product and technology experts on call at all times
worldwide and has support call centers located in San Jose, California; Paris,
France; Yokohama, Japan; Seoul, Korea and Brisbane, Australia.
Competition
The market for application server and integration software, and related
software components and services, is highly competitive. Our competitors are
diverse and offer a variety of solutions directed at various segments of this
marketplace. These competitors include operating system vendors such as IBM,
Sun Microsystems and database vendors such as Oracle. Microsoft has released
products that include certain application server functionality and has
announced that it intends to include application server and integration
functionality in future versions of its operating systems, including future
versions of Windows 2000. Oracle is the primary relational database vendor
offering products that are intended to serve as alternatives to our enterprise
application server and integration solutions. In addition, there are companies
offering and developing application server and integration software products
and related services that directly compete with products we offer. Further,
software development tool vendors typically emphasize the broad versatility of
their tool sets and, in some cases, offer complementary software that supports
these tools and performs basic application server and integration functions.
Last, internal development groups within prospective customers' organizations
may develop software and hardware systems that may substitute for those we
offer. A number of our competitors and potential competitors have longer
operating histories, significantly greater financial, technical, marketing and
other resources, greater name recognition and a larger installed base of
customers than us.
Our principal competitors currently include hardware vendors who bundle
their own application server and integration software products, or similar
products, with their computer systems and database vendors that advocate
client/server networks driven by the database server. IBM and Sun Microsystems
are the primary hardware vendors who offer a line of application server and
integration solutions for its customers. IBM's sale of application server and
integration functionality along with its IBM proprietary hardware systems
requires us to compete with IBM in its installed base, where IBM has certain
inherent advantages due to its significantly
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greater financial, technical, marketing and other resources, greater name
recognition and the integration of its enterprise application server and
integration functionality with its proprietary hardware and database systems.
These inherent advantages allow IBM to bundle, at a discounted price,
application functionality with computer hardware and software sales. Due to
these factors, if we do not differentiate our products based on functionality,
interoperability with non-IBM systems, performance and reliability, and
establish our products as more effective solutions to customers' needs our
revenues and operating results will suffer.
Microsoft has announced that it intends to include certain application
server and integration functionality in future versions of its Windows 2000
operating system. Microsoft has also introduced a product that includes
certain basic application server functionality. The bundling of competing
functionality in versions of Windows requires us to compete with Microsoft in
the Windows marketplace, where Microsoft has certain inherent advantages due
to its significantly greater financial, technical, marketing and other
resources, its greater name recognition, its substantial installed base and
the integration of its application server and integration functionality with
Windows. We need to differentiate our products from Microsoft's based on
scalability, functionality, interoperability with non-Microsoft platforms,
performance and reliability, and need to establish our products as more
effective solutions to customers' needs. We may not be able to successfully
differentiate our products from those offered by Microsoft, and Microsoft's
entry into the application server and integration market could materially
adversely affect our business, operating results and financial condition.
In addition, current and potential competitors may make strategic
acquisitions or establish cooperative relationships among themselves or with
third parties, thereby increasing the ability of their products to address the
needs of our current and prospective customers. Accordingly, it is possible
that new competitors or alliances among current and new competitors may emerge
and rapidly gain significant market share. Such competition could materially
adversely affect our ability to sell additional software licenses and
maintenance, consulting and support services on terms favorable to us.
Further, competitive pressures could require us to reduce the price of our
products and related services, which could materially adversely affect our
business, operating results and financial condition. We may not be able to
compete successfully against current and future competitors and any failure to
do so would have a material adverse effect upon our business, operating
results and financial condition. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Factors That May Impact Future
Operating Results--If we do not effectively compete with new and existing
competitors, our revenues and operating margins will decline."
Product Development
BEA's total research and development expenses were approximately $61.0
million, $42.6 million and $29.2 million in fiscal 2000, 1999 and 1998,
respectively. The Company believes that its success will depend largely upon
its ability to enhance existing products and develop or acquire new products
that meet the needs of the rapidly evolving application server and application
component marketplaces, and increasingly sophisticated and demanding
customers. The Company intends to continue to devote substantial resources to
expanding its product offerings, introducing new products and services, and
offering higher levels of integration among its products.
The Company has made substantial investments in technology acquisitions and
product development. BEA TUXEDO was originally developed by AT&T Bell Labs,
and had been revised by UNIX System Labs and Novell before BEA became the
developer of the product in February 1996. BEA WebLogic was acquired through
BEA's merger with WebLogic, Inc. in September 1998. Important additional
products and technologies were gained through other of the Company's
acquisitions. The Company intends to continue to consider the licensing and
acquisition of complementary software technologies and businesses where
appropriate. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations--Factors That May Impact Future Operating Results--
If we cannot successfully integrate our past and future acquisitions, our
revenues may decline and expenses may increase."
The Company's software development activities are conducted in various
sites throughout the United States including San Jose and San Francisco,
California; Dallas, Texas; Maynard, Massachussetts; Liberty Corners,
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New Jersey; and Nashua, New Hampshire. As of January 31, 2000, the Company had
a research and software development staff of over 340 professionals. The
Company intends to continue to recruit and hire experienced software
developers. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations--Factors That May Impact Future Operating Results--
If the market for application servers, application integration and application
component software does not grow as quickly as we expect, our revenues will be
harmed."
Intellectual Property and Licenses
Our success depends upon our proprietary technology. We rely on a
combination of patent, copyright, trademark and trade secret rights,
confidentiality procedures and licensing arrangements to establish and protect
our proprietary rights. It is possible that other companies could successfully
challenge the validity or scope of our patents and that our patents may not
provide a competitive advantage to us.
As part of our confidentiality procedures, we generally enter into non-
disclosure agreements with our employees, distributors and corporate partners
and into license agreements with respect to our software, documentation and
other proprietary information. Despite these precautions, third parties could
copy or otherwise obtain and use our products or technology without
authorization, or develop similar technology independently. In particular, we
have, in the past, provided certain hardware OEMs with access to our source
code, and any unauthorized publication or proliferation of this source code
could materially adversely affect our business, operating results and
financial condition. It is difficult for us to police unauthorized use of our
products, and although we are unable to determine the extent to which piracy
of our software products exists, software piracy is a persistent problem.
Effective protection of intellectual property rights is unavailable or limited
in certain foreign countries. The protection of our proprietary rights may not
be adequate and our competitors could independently develop similar
technology, duplicate our products, or design around patents and other
intellectual property rights we hold. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Factors That May
Impact Future Operating Results--If we fail to adequately protect our
intellectual property rights, competitors may use our technology and
trademarks, which could weaken our competitive position, reduce our revenues
and increase our costs."
Employees
As of January 31, 2000, BEA had approximately 1,900 full-time employees,
including 340 in research and development, 1250 in consulting, training,
sales, support and marketing and 330 in administration. None of BEA's
employees is represented by a collective bargaining agreement, and BEA has
never experienced any work stoppage. BEA considers its relations with its
employees to be good.
ITEM 2. PROPERTIES.
BEA's executive offices and those related to product development, corporate
marketing and administrative functions, totaling approximately 224,000 square
feet, are located in San Jose, California under leases expiring in 2007. The
Company has signed agreements to sublease approximately 87,000 square feet.
The Company also leases office space in various locations throughout the
United States for sales, support and development personnel and BEA's foreign
subsidiaries lease space for their operations. The Company owns substantially
all of the equipment used in its facilities, except equipment held under
capitalized lease arrangements. The Company believes its existing facilities
will be adequate to meet its anticipated needs for the foreseeable future. See
Note 16 of Notes to Consolidated Financial Statements for information
regarding the Company's lease obligations.
ITEM 3. LEGAL PROCEEDINGS.
The Company is not currently party to any material legal proceedings. The
Company is subject to legal proceedings and claims that arise in the ordinary
course of its business. While management currently believes the amount of
ultimate liability, if any, with respect to these actions will not materially
affect the financial
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position, results of operations, or liquidity of the Company, the ultimate
outcome of any litigation is uncertain. Were an unfavorable outcome to occur,
the impact could be material to the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
On April 6, 2000, a special meeting of stockholders of BEA was held to
consider an amendment to the Company's Amended and Restated Certificate of
Incorporation to increase the number of shares of Common Stock and Class B
Common Stock, par value $0.001 per share, which the Company is authorized to
issue to 1,035,000,000 shares. The Company's Board of Directors had previously
authorized a two-for-one stock split, to be effected in April 2000 in the form
of a stock dividend, conditional upon stockholder approved of the amendment.
The number of votes cast for the amendment was 285,882,348. The number of
votes cast against or withheld for the amendment was 14,852,742. The number of
abstentions and broker non-votes for the amendment was 37,712. The amendment
was approved.
PART II
Note: On each of December 19, 1999 and April 24, 2000, the Company effected
two-for-one common stock splits in the form of stock dividends. All common
stock share information and per share amounts in this Annual Report on Form
10-K have been retroactively adjusted to reflect the effects of the stock
splits.
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS.
Since its initial public offering on April 11, 1997, the Company's common
stock has traded on the Nasdaq National Market under the symbol "BEAS."
According to the Company's transfer agent, the Company had approximately 716
stockholders of record as of March 31, 2000. Because many of such shares are
held by brokers and other institutions on behalf of stockholders, the Company
is unable to estimate the total number of stockholders represented by these
record holders.
The following table sets forth the high and low sales prices, as adjusted
to reflect the two-for-one stock splits on each of December 19, 1999 and April
24, 2000, reported on the Nasdaq National Market for BEA common stock for the
periods indicated:
Low High
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Fiscal year ended January 31, 2000:
Fourth Quarter.............................................. $11.46 $47.50
Third Quarter............................................... 5.25 11.60
Second Quarter.............................................. 3.67 8.03
First Quarter............................................... 3.33 4.63
Fiscal year ended January 31, 1999:
Fourth Quarter.............................................. $ 2.17 $ 6.63
Third Quarter............................................... 3.13 6.32
Second Quarter.............................................. 4.57 6.97
First Quarter............................................... 4.88 7.41
The Company has never declared or paid any cash dividends on its common
stock. The Company currently intends to invest cash generated from operations,
if any, to support the development of its business and does not anticipate
paying cash dividends for the foreseeable future. Payment of future dividends,
if any, will be at the discretion of the Company's Board of Directors after
taking into account various factors, including the Company's financial
condition, operating results and current and anticipated cash needs.
8
During fiscal 2000, the Company had the following issuances of equity
securities that were not either registered under the Securities Act of 1933,
as amended, (the "Securities Act") or exempt from registration under
Regulation S of the Securities Act:
On November 19, 1999, the Company acquired The Theory Center ("TTC")
through the issuance of 7,270,828 shares of BEA common stock and the exchange
of TTC options for options to purchase 3,642,400 shares of BEA common stock.
In issuing such securities, the Company relied upon Section 4(2) of the
Securities Act as transactions by an issuer not involving any public offering.
In connection with each such transaction, the purchasers represented their
intention to acquire the securities for investment only and not with a view
to, or for sale in connection with, any distribution thereof, and appropriate
legends were affixed to the securities issued in such transactions. The
purchasers had adequate access to information about the Company.
In December 1999, the Company issued $550 million principal amount of 4%
Convertible Subordinated Notes due December 15, 2006 ("2006 Notes"), which are
convertible, at the option of the debt holders, into approximately 15,873,000
shares of common stock. Such notes were sold to Qualified Institutional
Buyers, as that term is defined in Rule 144A under the Securities Act.
ITEM 6. SELECTED FINANCIAL DATA:
The following selected consolidated financial data should be read in
conjunction with the Consolidated Financial Statements and Notes thereto and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" appearing elsewhere in this Annual Report on Form 10-K.
As of or for the fiscal year ended January 31,
--------------------------------------------------
2000 1999(1) 1998(1) 1997(1) 1996
---------- -------- -------- -------- --------
(in thousands, except per share data)
Net revenues............ $ 464,410 $289,042 $166,447 $ 64,566 $ 5,133
Net loss................ (19,574) (51,582) (22,912) (87,834) (17,740)
Net loss per share,
basic and diluted...... (0.06) (0.18) (0.11) (2.21) (0.19)
Total assets............ 1,258,841 403,011 174,203 59,276 18,953
Long-term obligations... 578,489 250,112 766 49,540 4,287
Redeemable convertible
preferred stock........ - - - 83,120 24,448
- --------
(1) Restated to include the results of Leader Group, Inc. and WebLogic, Inc.,
which were acquired in pooling of interests transactions.
9
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
Overview
BEA Systems, Inc. ("BEA" or the "Company") is a leading provider of e-
commerce infrastructure software for e-commerce applications. BEA's products
and services enable scalable and reliable e-commerce applications to work
seamlessly in client/server, Internet, and legacy environments. BEA provides
transactional, messaging, and distributed object-based software, as well as an
industry-leading Java Web application server, for developing and deploying
these e-commerce applications and for connecting e-commerce applications to
legacy and mainframe applications. BEA also provides component-based
application solutions for delivering scalable and reliable e-commerce
applications. In addition to its broad software product line, BEA provides
complete solutions to its customers through its extensive alliance network,
and a full range of services, including consulting, training, and support.
BEA's revenues are derived from fees for software licenses, customer support,
education and consulting services.
Acquisitions. Since its inception, BEA has acquired several companies and
product lines, and distribution rights to product lines. Through these
acquisitions, BEA has added additional product lines, additional functionality
to its existing products, additional direct distribution capacity and
additional service capacity. These acquisitions have resulted in significant
charges to BEA's operating results in the periods in which the acquisitions
were completed and have added intangible assets to BEA's balance sheet, the
values of which are being amortized and charged to BEA's operating results
over periods ranging from eight to twenty quarters after completion of the
acquisitions. BEA's management views the e-commerce infrastructure software
market as growing but that companies serving that market are consolidating,
and that this consolidation presents an opportunity for BEA to further expand
its product lines and functionality, distribution capacity and service
offerings and to add new, related lines of business. BEA anticipates that it
will make additional, perhaps material, acquisitions in the future. The timing
of any such acquisitions is impossible to predict and the charges associated
with any such acquisitions could materially adversely affect BEA's results of
operations beginning in the periods in which any such acquisitions are
completed.
Investment in Distribution Channel. BEA has been and is currently investing
in building its sales capacity by aggressively hiring sales and technical
sales support personnel, as well as aggressively pursuing partnerships with
system platform companies, packaged application software developers, systems
integrators and independent consultants, independent software tool vendors,
and distributors. This investment results in an immediate increase in
expenses, especially in sales and marketing, although the return on such
investment, if any, is not anticipated to occur until future periods.
Product Development. In April 1999, BEA announced a project to develop and
market a set of solutions for enterprise application integration and
component-based application development, especially in the area of electronic
commerce. These efforts were significantly expanded with the acquisition of
The Theory Center, Inc. ("TTC") in November 1999, and the announcement of an
internal development project known as "Project E-Collaborate" in February
2000. BEA's planned investment in these efforts may affect BEA's anticipated
overall financial results, particularly services revenues as a percentage of
total revenues, cost of revenues as a percentage of total revenues, and
research and development expense as a percentage of total revenues, and may
create product transition concerns in BEA's customer base. In addition,
investment in these projects results in an immediate increase in expenses,
especially in research and development, although the return on such
investment, if any, is not anticipated to occur until future periods. These
expenses adversely affect BEA's operating results in the short-term and also
in the long-term if the anticipated benefits of such investment do not
materialize.
Change in Sales Cycles. Since mid fiscal 1999, BEA has experienced changes
in sales cycles for its products. In September 1998, BEA completed its merger
with WebLogic, Inc. ("WebLogic"), whose products tend to have a shorter sales
cycle than BEA products at that time. Beginning in the second half of fiscal
1999, an increasing number of BEA customers began negotiating licenses to use
BEA products as an architectural
10
platform for several applications. These architectural commitments are larger
in scope and potential revenue than single project transactions. In some
cases, these architectural commitments have longer sales cycles than BEA's
typical transactions, both because of the customer's decision cycle in
adopting an architectural platform and because of heightened corporate
approval requirements for larger contracts. In some cases, architectural
commitment transactions have a shorter than usual sales cycle, in order for
the customer to proceed with development of the new applications. These
contrasting changes in the sales cycles and product mix may affect BEA's
future quarterly revenues, revenue mix and operating results.
Employer Payroll Taxes. The Company is subject to employer payroll taxes
when employees exercise stock options. These payroll taxes are assessed on the
stock option gain, which is the difference between the common stock price on
the date of exercise and the exercise price. The tax rate varies depending
upon the employees' taxing jurisdiction. Because we are unable to predict how
many stock options will be exercised, at what price and in which country, we
are unable to predict what, if any, expense will be recorded in a future
period.
Results of Operations
The following table sets forth BEA's revenues, cost of revenues, operating
expenses, interest expense and net loss as a percentage of total revenues for
the fiscal years ended January 31, 2000, 1999, and 1998.
Fiscal year ended
January 31,
---------------------
2000 1999 1998
----- ----- -----
Revenues:
License fees..................................... 63.1 % 66.9 % 73.9 %
Services......................................... 36.9 33.1 26.1
----- ----- -----
Total revenues................................. 100.0 100.0 100.0
Cost of revenues:
Cost of license fees(1).......................... 2.2 1.7 2.0
Cost of services(1).............................. 57.1 59.8 62.7
Amortization of certain acquired intangible
assets.......................................... 6.5 8.1 6.8
----- ----- -----
Total cost of revenues......................... 29.0 29.0 24.7
----- ----- -----
Gross margin....................................... 71.0 71.0 75.3
Operating expenses:
Sales and marketing.............................. 45.5 48.1 46.7
Research and development......................... 13.1 14.7 17.5
General and administrative....................... 8.2 8.6 10.7
Amortization of goodwill......................... 3.4 1.0 0.3
Acquisition related charges...................... 0.7 14.6 9.6
----- ----- -----
Income (loss) from operations...................... 0.1 (16.0) (9.5)
Interest income (expense) and other, net........... (1.3) (0.2) (2.6)
----- ----- -----
Loss before provision for income taxes............. (1.2) (16.2) (12.1)
----- ----- -----
Provision for income taxes......................... 3.0 1.6 1.7
----- ----- -----
Net loss........................................... (4.2)% (17.8)% (13.8)%
===== ===== =====
- --------
(1) Cost of license fees and cost of services are stated as a percentage of
license fees and services, respectively.
11
Revenues
BEA's revenues are derived from fees for software licenses, consulting and
education services and customer support. Total revenues increased $175.4
million or 60.7 percent from fiscal 1999 to fiscal 2000, and $122.6 million or
73.7 percent from fiscal 1998 to fiscal 1999. These increases reflect
additional sales to existing customers, addition of new customer accounts,
increases in product and service offerings, and a number of strategic
acquisitions.
License Revenues. License revenues increased 51.3 percent from fiscal 1999
to fiscal 2000 and increased 57.3 percent from fiscal 1998 to fiscal 1999.
These increases were mainly due to continued customer and market acceptance of
the Company's products, expansion of the Company's direct sales force, and
introduction of new products and new versions of existing products.
Service Revenues. Service revenues increased 79.6 percent from fiscal 1999
to fiscal 2000 and increased 119.8 percent from fiscal 1998 to fiscal 1999.
Service revenues as a percentage of total revenues increased from 33.1 percent
in fiscal 1999 to 36.9 percent in fiscal 2000 and increased from 26.1 percent
in fiscal 1998 to 33.1 percent in fiscal 1999. The increases were primarily
due to increased charges for customer support resulting from increased license
sales, an increase in the types of consulting services sold by the Company,
and increased number of service personnel and consultants as a result of the
Company's increased focus on service offerings. We expect to continue
investing in our services offerings, especially consulting services.
International Revenues. International revenues accounted for $187.7 million
or 40.4 percent of total revenues in fiscal 2000 compared with $115.7 million
or 40.0 percent of total revenues in fiscal 1999 and $70.3 million or 42.2
percent in fiscal 1998. The increases were the result of expansion of the
Company's international sales force and the acquisition of foreign
distributors.
During fiscal 2000 and 1999, Europe, Middle East and Africa ("EMEA")
experienced a 50.4 and 107.4 percent revenue growth, respectively. Increased
revenues from EMEA were due to increased demand for our products in Europe as
well as growth of our European sales force. Asia/Pacific ("APAC") experienced
a 125.9 percent revenue growth and a 15.2 percent decline in revenue in fiscal
2000 and 1999, respectively. Increased revenues from APAC in fiscal 2000 were
due to increased demand for our products in Asia as well as growth of our Asia
sales force. Decreased revenues from APAC in fiscal 1999 were due to the
weakening of the Asian economy, which began in late fiscal 1998.
Cost of Revenues
Total cost of revenues represented 29.0 percent of total revenues in fiscal
2000 and 1999, and 24.7 percent in fiscal 1998, respectively. The increase in
fiscal 1999 was due to the increase in cost of services, which carry a
substantially higher cost of revenues than software licenses. Amortization
charges included in cost of revenues also contributed to the increase in
fiscal 1999, due to the Company's acquisition of TOP END from NCR Corporation.
Cost of Licenses. Cost of licenses includes expenses related to the
purchase of compact discs, costs associated with transferring the Company's
software to electronic media, the printing of user manuals, packaging and
distribution costs as well as royalties paid to third parties. Cost of
licenses represented 2.2 percent, 1.7 percent and 2.0 percent of license
revenues in fiscal 2000, 1999 and 1998, respectively. The decrease in fiscal
1999 as a percentage of license revenue was due to increased use of electronic
delivery. The increase in fiscal 2000 as a percentage of license revenue was
due to increased royalties paid to third parties, primarily resulting from
license agreements signed in the third quarter. We expect cost of licenses to
increase as a percentage of license revenue in fiscal 2001 because these
license agreements will be in place for the full year.
Cost of Services. Cost of services consists primarily of salaries and
benefits for consulting, education and product support personnel. Cost of
services represented 57.1 percent, 59.8 percent and 62.7 percent of service
12
revenues in fiscal 2000, 1999 and 1998, respectively. Cost of services as a
percentage of service revenues decreased in fiscal 2000 and 1999 as a result
of spreading the fixed costs associated with the support centers over a larger
revenue base. If consulting revenues increase as a percentage of service
revenues, then cost of services could increase as a percentage of service
revenues in fiscal 2001.
Amortization of Certain Acquired Intangible Assets. The amortization of
certain acquired intangible assets, consisting of developed technology,
distribution rights, trademarks and tradenames, totaled $30.4 million,
$23.3 million and $11.3 million for fiscal 2000, 1999 and 1998, respectively.
The increase is primarily due to intangible assets resulting from a number of
strategic acquisitions, particularly the fiscal 2000 acquisition of TTC and
the fiscal 1999 acquisition of TOP END. In the future, amortization expense
associated with intangible assets recorded prior to January 31, 2000 is
expected to total $34.8 million, $13.9 million, $7.9 million, and $5.1 million
for the fiscal years ending January 31, 2001, 2002, 2003 and thereafter,
respectively.
Operating Expenses
Sales and Marketing. Sales and marketing expenses include salaries,
benefits, sales commissions, travel and facility costs for the Company's sales
and marketing personnel. These expenses also include programs aimed at
increasing revenues, such as advertising, public relations, trade shows and
user conferences. Sales and marketing expenses increased 52.2 percent in
fiscal 2000 compared with fiscal 1999 and increased 78.6 percent in fiscal
1999 compared with fiscal 1998. These increases were due to increased
commissions on the Company's increased revenue base, the expansion of the
Company's direct sales force and an increase in marketing personnel and
programs. Sales and marketing expenses decreased as a percentage of revenues
to 45.5 percent in fiscal 2000 from 48.1 percent in fiscal 1999 due to
spreading the increased sales and marketing expenses over a greater revenue
base. The Company expects to continue to invest in sales channel expansion and
marketing programs to promote the Company's products and brand. Accordingly,
the Company expects sales and marketing expenses to continue to increase in
future periods.
Research and Development. Research and development expenses consist
primarily of salaries and benefits for software engineers, contract
development fees, costs of computer equipment used in software development and
facilities expenses. Total expenditures for research and development increased
43.2 percent in fiscal 2000 compared with fiscal 1999 and increased 46.1
percent in fiscal 1999 compared with fiscal 1998. These increases were
attributed to an increase in software development personnel and related
expenses. The Company expects to continue to commit substantial resources to
product development and engineering in future periods. As a result, the
Company expects research and development expenses to continue to increase in
future periods. Additionally, management intends to continue recruiting and
hiring experienced software development personnel and to consider the
licensing and acquisition of technologies complementary to the Company's
business.
General and Administrative. General and administrative expenses include
costs for the Company's human resources, finance, legal, information
technology, facilities and general management functions. General and
administrative expenses increased 52.9 percent in fiscal 2000 compared with
fiscal 1999 and increased 52.8 percent in fiscal 1999 compared with fiscal
1998. The increases in general and administrative expenses were attributed to
the expansion of the Company's support infrastructure, including information
systems and associated expenses necessary to manage the Company's growth.
Amortization of Goodwill. Goodwill and amortization of goodwill increased
in fiscal 2000 due to various acquisitions completed in fiscal 1999 and fiscal
2000. In the future, amortization of goodwill recorded prior to February 1,
2000 is expected to total $46.5 million, $37.9 million, $31.1 million and
$25.9 million in fiscal 2001, 2002, 2003 and thereafter, respectively.
Acquisition related charges. In connection with certain acquisitions, the
Company acquired and expensed the cost of a number of research projects and
products that were in process on the acquisition dates, in accordance with
generally accepted accounting principles. In fiscal 2000, acquisition related
charges were related to the write-off associated with the acquired in-process
research and development relating to the acquisition of TTC.
13
In fiscal 1999, acquisition related charges were primarily related to the
write-off associated with the acquired in-process research and development
relating to the acquisition of TOP END. In fiscal 1998, acquisition related
charges were related to the write-off associated with the acquired in-process
research and development relating to the acquisition of certain products from
Digital Equipment Corporation.
In November 1999, BEA completed its merger with TTC. This resulted in the
issuance of approximately 10.9 million shares of BEA common stock and stock
options valued at approximately $156.9 million. The transaction was accounted
for as a purchase with $3.0 million allocated to in-process technology, $124.5
million to goodwill and the remaining $29.4 million representing other
intangible assets and liabilities assumed. The intangibles are being amortized
on a straight-line basis over lives ranging from two to four years.
An independent valuation of the purchased assets was performed to assist
the Company in determining the fair value of each identifiable tangible and
intangible asset and in allocating the purchase price among the acquired
assets, including the portion of the purchase price attributed to acquired in-
process research and development projects. Standard valuation procedures and
techniques were utilized in determining the fair value of the acquired
core/developed and in-process technology.
Core technology and in-process technology were identified and valued
through analysis of TTC's and BEA's current development projects, their
respective stage of development, the time and resources needed to complete
them, their expected income-generating ability, their target markets and the
associated risks.
The cost approach, which includes an analysis of the cost of reproducing or
replacing the asset, was the methodology utilized in valuing component
technology tools and assembled workforce. The income approach, which includes
an analysis of the markets, cash flows and risks associated with achieving
such cash flows, was the methodology utilized in valuing in-process
technology, completed technology, patents and non-compete agreements. Each
developmental project was evaluated to determine if there were any alternative
future uses. This evaluation consisted of a specific review of each project,
including the overall objectives of the project, progress toward such
objectives, and uniqueness of the project. The net after-tax cash flows
representing the cash flows generated by the respective core and in-process
technologies were then discounted to present value. The discount was based
upon an analysis of the weighted average cost of capital for the industry.
Interest Expense; Interest Income and Other, Net. Interest expense was
$20.4 million in fiscal 2000, compared to $10.4 million and $6.1 million in
fiscal 1999 and 1998, respectively. The increase in fiscal 2000 was due to a
higher average amount of outstanding borrowings, primarily due to the issuance
of $550 million 4% Convertible Subordinated Notes due December 15, 2006 ("2006
Notes") in fiscal 2000 and premiums paid in connection with the conversion of
a majority of the $250 million 4% Convertible Subordinated Notes due June 15,
2005 ("2005 Notes") which were outstanding for substantially all of fiscal
2000 but were issued during fiscal 1999. The increase in fiscal 1999 was due
to a higher average amount of outstanding borrowings, primarily due to the
issuance of the 2005 Notes. Interest income and other, net was $14.4 million,
$9.9 million and $1.7 million in fiscal 2000, 1999 and 1998, respectively. The
increase in interest income in fiscal 2000 and 1999 was due to the investment
of higher average cash, cash equivalents and short-term investment balances,
generated primarily from the Company's debt and equity offerings.
The Company has a hedging program to minimize the effect of foreign
exchange transaction gains and losses from recorded foreign currency-
denominated assets and liabilities. This program involves the use of forward
foreign exchange contracts in certain European and Asian currencies. The
Company does not currently hedge anticipated foreign currency-denominated
revenues and expenses not yet incurred. Gains (losses) on foreign currency
transactions, which are included in interest income and other, net, were
$(287,000), $340,000 and $(600,000) in fiscal 2000, 1999 and 1998,
respectively.
The Company's international operations generally consist of sales and
support organizations that generate revenues and incur service costs and
marketing, general and administrative expenses in local currencies. Product
costs, research and development, and corporate marketing and administrative
expenses are primarily incurred in
14
U.S. dollars. Thus, a strengthening of local currencies against the U.S.
dollar has a positive influence on international revenues translated into
dollars and a negative effect on translated local costs and expenses. A
weakening of local currencies has a negative effect on translated
international revenues and a positive effect on translated local costs and
expenses. BEA's hedging program is intended to moderate the impact of exchange
rate changes on operating results and cash flow.
Provision for Income Taxes. Although the Company has experienced operating
losses to date, the Company has incurred income tax expense of approximately
$13.9 million, $4.9 million and $2.8 million for fiscal 2000, 1999 and 1998,
respectively. The income tax expense consists primarily of domestic minimum
taxes, foreign withholding taxes and foreign income tax expense incurred as a
result of local country profits. The increase in income taxes for fiscal 2000
relative to fiscal 1999 is primarily due to an overall increase in foreign
corporate income taxes and service revenues and an increase in domestic state
current taxes due to the book/tax differences in the amortization of acquired
intangibles and the timing of revenue recognition. The increase in income
taxes for fiscal 1999 relative to fiscal 1998 is primarily due to an overall
increase in foreign corporate income taxes.
Under Statement of Financial Accounting Standards No.109 Accounting for
Income Taxes ("FAS 109"), deferred tax assets and liabilities are determined
based on the difference between financial reporting and tax bases of assets
and liabilities and are measured using the enacted tax rates and laws that
will be in effect when the differences are expected to reverse. FAS 109
provides for the recognition of deferred tax assets if realization of such
assets is more likely than not. Based upon the available evidence, which
includes BEA's historical operating performance and the reported cumulative
net losses from prior years, the Company has provided a valuation allowance
against its net deferred tax assets to the extent they are dependent upon
future taxable income for realization. The Company intends to evaluate the
realizability of the deferred tax assets on a quarterly basis. A deferred tax
asset has been established in fiscal 2000 to the extent of refundable US
current federal income taxes payable. See Note 9 to the consolidated financial
statements.
Liquidity and Capital Resources
As of January 31, 2000, cash, cash equivalents and short-term investments
totaled $803.1 million, up from $236.5 million at January 31, 1999. The
increase in cash, cash equivalents and short-term investments was primarily
due to proceeds from the 2006 Notes and cash generated from operations.
Cash generated from operating activities rose to $95.2 million in fiscal
2000, compared with $27.4 million generated in fiscal 1999 and $2.4 million
generated in fiscal 1998.
Investing activities consumed $119.9 million in cash during fiscal 2000,
compared with $107.8 million and $15.0 million in fiscal 1999 and 1998,
respectively. Cash used for investing activities in fiscal 2000 was primarily
for a number of strategic acquisitions amounting to $66.0 million, capital
expenditures of $17.8 million and purchases of short-term investments of $38.0
million. Cash used for investing activities in fiscal 1999 was primarily for a
number of strategic acquisitions amounting to $99.4 million, capital
expenditures of $13.2 million and net sales of short-term investments of $4.8
million. Cash used for investing activities in fiscal 1998 was primarily for
short-term investment purchases of $8.7 million, capital expenditures of $3.3
million and $2.9 million for a number of strategic acquisitions.
The Company generated $554.2 million from financing activities in fiscal
2000, compared with $221.0 million and $100.4 million in fiscal 1999 and 1998,
respectively. The primary source of cash from financing activities in fiscal
2000 was the issuance of the $550 million 2006 Notes, net of $14.7 million
debt issuance costs. The primary source of cash from financing activities in
fiscal 1999 was the issuance of the $250 million 2005 Notes net of $5.3
million debt issuance costs. The main use of cash for financing activities in
fiscal 1999 was for the payment in full of the $38.7 million outstanding note
payable to Novell related to acquisition of distribution rights for Tuxedo.
The primary source of cash from financing activities in fiscal 1998 was from
the issuance of common and preferred stock, partially offset by payments on
the Company's outstanding notes payable and capital lease obligations.
15
As of January 31, 2000, the Company's outstanding short and long-term debt
obligations were $582.9 million, up from $250.8 million at January 31, 1999.
At January 31, 2000, the Company's outstanding debt obligations consisted
principally of the $572.5 million of convertible notes and $10.5 million of
other short-term and long-term debt. During fiscal 2000, approximately $227.5
million of the 2005 Notes were converted into common stock. As of March 31,
2000, approximately 8.0 million shares of the 2005 Notes were converted into
common stock. In addition, the Company is committed to a total of $84.1
million of lease payments under operating leases through 2007.
In addition to normal operating expenses, cash requirements are anticipated
for financing anticipated growth, payment of outstanding debt obligations and
the acquisition or licensing of products and technologies complementary to the
Company's business. The Company believes that its existing cash, cash
equivalents, short-term investments and cash generated from operations, if
any, will be sufficient to satisfy its currently anticipated cash requirements
through January 31, 2001. However, the Company expects to make additional
acquisitions and may need to raise additional capital through future debt or
equity financing to the extent necessary to fund any such acquisitions. There
can be no assurance that additional financing will be available, at all, or on
terms favorable to the Company.
Year 2000 Compliance
Impact of Year 2000
In prior years, the Company discussed the nature and progress of its plans
to become Year 2000 ready. In late fiscal 2000, the Company completed its
remediation and testing of systems. As a result of those planning and
implementation efforts, the Company experienced no significant disruptions in
mission-critical information technology and non-information technology systems
and believes those systems successfully responded to the Year 2000 date
change. The Company expensed approximately $1.1 million during fiscal 2000 in
connection with remediating its systems. The Company is not aware of any
material problems resulting from Year 2000 issues, either with its products,
its internal systems, or the products and services of third parties. The
Company will continue to monitor its mission-critical computer applications
and those of its suppliers and vendors throughout fiscal 2001 to ensure that
any latent Year 2000 matters that may arise are addressed promptly.
Effect of New Accounting Pronouncements
In December 1999, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial
Statements" ("SAB 101") and amended it in March 2000. BEA is required to adopt
the provisions of SAB 101 in its second fiscal quarter of 2000. The Company is
currently reviewing the provisions of SAB 101 and has not fully assessed the
impact of its adoption; however, the Company does not expect the adoption of
SAB 101 to have a material impact to its financial position.
In December 1998, the American Institute of Certified Public Accountants
("AICPA") issued Statement of Position ("SOP") 98-9, which amends certain
provisions of SOP 97-2 and extends the deferral of the application of certain
passages of SOP 97-2 provided by SOP 98-4 until the beginning of BEA's fiscal
year 2001. The Company is currently evaluating the impact of SOP 98-9 on its
financial statements and related disclosures.
In June 1998, the Financial Accounting Standards Board released Statement
of Financial Accounting Standards No. 133, Accounting for Derivative
Instruments and Hedging Activities ("FAS 133"), FAS 133 establishes the
accounting and reporting standards for derivative instruments, including
certain derivative instruments embedded in other contracts (collectively
referred to as derivatives) and for hedging activities. It requires that an
entity recognize all derivatives as either assets or liabilities in the
statement of financial position and measure those instruments at fair value.
In July 1999, FAS No. 137, "Accounting for Derivative Instruments and Hedging
Activities--Deferral of the Effective Data of FASB Statement 133" ("FAS 137")
was issued. FAS
16
137 deferred the effective date of FAS 133 until the first fiscal quarter of
fiscal years beginning after June 15, 2000. The Company expects to adopt FAS
133 effective February 1, 2001. The Company does not expect the adoption of
FAS 133 to have a material impact to its financial position on results of
operations.
Factors That May Impact Future Operating Results
This Annual Report on Form 10-K includes "forward-looking statements"
within the meaning of Section 27A of the Securities Act and Section 21E of the
Exchange Act. All statements in this Annual Report other than statements of
historical fact are "forward-looking statements" for purposes of these
provisions, including any statements of the plans and objectives for future
operations and any statement of assumptions underlying any of the foregoing.
Statements that include the use of terminology such as "may," "will,"
"expects," "plans," "anticipates," "estimates," "potential," or "continue," or
the negative thereof or other comparable terminology are forward-looking
statements. Forward-looking statements include (i) in Item 1, all text under
the heading "Business-Strategy" and statements regarding continued hiring in
direct sales, support and professional services, devoting substantial
resources to product development, and continuing to license and acquire
software technologies and businesses, and (ii) in Item 7, statements regarding
additional acquisitions, return on investment, investing in service offerings,
expected timing and amount of amortization expenses, investment in sales
channel expansion and marketing programs, and future hiring. These forward-
looking statements involve risks and uncertainties, and it is important to
note that BEA's actual results could differ materially from those projected or
assumed in these forward-looking statements. Among the factors that could
cause actual results to differ materially are the risks and uncertainties
described in the risk factors below. All forward-looking statements and risk
factors included in this document are made as of the date hereof, based on
information available to BEA as of the date hereof, and BEA assumes no
obligation to update any forward-looking statement or risk factor. You should
consult the risk factors listed from time to time in the Company's Reports on
Forms 10-Q and 8-K.
Significant unanticipated fluctuations in our actual or anticipated quarterly
revenues and operating results may cause us not to meet securities analysts'
or investors' expectations and may result in a decline in our stock price.
Although we have had significant revenue growth in recent quarters, our
growth rates may not be sustainable. If our revenues, operating results,
earnings or future projections are below the levels expected by investors or
securities analysts, our stock price is likely to decline. Our stock price is
also subject to the volatility generally associated with Internet, software
and technology stocks and may also be affected by broader market trends
unrelated to our performance.
We expect to experience significant fluctuations in our future quarterly
revenues and operating results as a result of many factors, including:
. difficulty predicting the size and timing of customer orders
. introduction or enhancement of our products or our competitors' products
. the mix of our products and services sold and mix of distribution
channels
. general economic conditions, which can affect our customers' capital
investment levels and the length of our sales cycle
. changes in our competitors' product offerings and pricing policies, and
customer order deferrals in anticipation of new products and product
enhancements from BEA or competitors
. whether we are able to develop, introduce and market new products on a
timely basis
. any slowdown in use of the Internet for commerce
. recent hiring may prove excessive if growth rates are not maintained
. the structure, timing and integration of acquisitions of businesses,
products and technologies, including The Theory Center
. the terms and timing of financing activities
. market acceptance of our products
17
. the lengthy sales cycle for our products
. technological changes in computer systems and environments
. whether we are able to successfully expand our sales and marketing
programs
. whether we are able to meet our customers' service requirements
. costs associated with acquisitions, including the acquisition of The
Theory Center
. the impact and duration of deteriorated economic and political
conditions in Asia
. loss of key personnel
. fluctuations in foreign currency exchange rates
. interpretations of the accounting pronouncements on software revenue
recognition.
As a result of all of these factors, we believe that quarterly revenues and
operating results are difficult to forecast and period-to-period comparisons
of our results of operations are not necessarily meaningful and should not be
relied upon as indications of trends or future performance.
An increasing portion of our revenues has been derived from large orders,
as customers deployed our products throughout their organizations or chose to
standardize on our products for their system architecture. Increases in the
dollar size of individual license transactions have also increased the risk of
fluctuation in future quarterly results. If we cannot generate large customer
orders, or customers delay or cancel such orders in a particular quarter, it
will have a material adverse effect on our revenues and, more significantly on
a percentage basis, our net income or loss in that quarter. Moreover, we
typically receive and fulfill a majority of our orders within the quarter,
with the substantial majority of our orders received in the last month of each
fiscal quarter. As a result, we may not learn of revenue shortfalls until late
in a fiscal quarter, after it is too late to adjust expenses for that quarter.
Additionally, our operating expenses are based in part on our expectations for
future revenues and are difficult to adjust in the short term. Any revenue
shortfall below our expectations could have an immediate and significant
adverse effect on our results of operations. Further, we are subject to
employer payroll taxes when our employees exercise their stock options. The
employer payroll taxes are assessed on each employee's gain, which is the
difference between the price of our common stock on the date of exercise and
the exercise price. During a particular period, these payroll taxes could be
material. These employer payroll taxes would be recorded as an expense and are
assessed at tax rates that varies depending upon the employee's taxing
jurisdiction in the period such options are exercised based on actual gains
realized by employees. However, because we are unable to predict how many
stock options will be exercised, at what price and in which country during any
particular period, we cannot predict, the amount, if any, of employer payroll
expense will be recorded in a future period or the impact on our future
financial results.
Although we use a standard license agreement, which meets the revenue
recognition criteria under current generally accepted accounting principles,
we must often negotiate and revise terms and conditions of this standard
agreement, particularly in larger license transactions. Negotiation of
mutually acceptable terms and conditions can extend the sales cycle and, in
certain situations, may require us to defer recognition of revenue on the
license. In addition, while we believe that we are in compliance with
Statement of Position 97-2, Software Revenues Recognition, ("SOP 97-2") and
SOP 98-4 and SOP 98-9, which amend certain provisions of SOP 97-2, the
American Institute of Certified Public Accountants has only issued some
implementation guidelines for these standards and the accounting profession is
still discussing a wide range of potential interpretations. These
implementation guidelines, once finalized, could lead to unanticipated changes
in our current revenue accounting practices that could cause us to recognize
lower revenue and profits.
18
Our limited operating history and need to continue to integrate our
acquisitions makes it difficult to predict our future results
We were incorporated in January 1995 and therefore have a limited operating
history. We have generated revenues to date primarily from sales of BEA
TUXEDO, a software product to which we acquired worldwide distribution rights
in February 1996, and from BEA WebLogic, a software product which we acquired
in September 1998, and fees for software products and services related to
TUXEDO and WebLogic. We have also acquired a number of businesses,
technologies and products, most recently The Theory Center, which was acquired
in November 1999 and The Workflow Automation Corporation, which was acquired
in March 2000. Our limited operating history and the need to integrate a
number of separate and independent business operations subject our business to
numerous risks. At January 31, 2000, we had an accumulated deficit of
approximately $203.0 million. In addition, in connection with certain
acquisitions completed prior to January 31, 2000, we recorded approximately
$424.5 million as intangible assets and goodwill. Under Generally Accepted
Accounting Principles, intangible assets and goodwill are required to be
amortized in future periods. Approximately $221.4 million of these assets have
been amortized as of January 31, 2000 and we expect to amortize the remaining
approximately $203.1 million in future periods through our fiscal year ending
January 31, 2005. We expect to amortize $81.3 million of such intangible
assets and goodwill in the fiscal year ending January 31, 2001. A substantial
portion of the $156.9 million purchase price for The Theory Center has been
recorded as intangible assets and goodwill and amortized in the fiscal year
ended January 31, 2000 and will be amortized over future periods. If we
acquire additional businesses, products and technologies in the future, we may
report additional, potentially significant expenses. If future events cause
the impairment of any intangible assets acquired in our past or future
acquisitions, we may have to expense such assets sooner than we expect.
Because of our limited operating history and ongoing expenses associated with
our prior acquisitions, there can be no assurance that we will be profitable
in any future period and recent operating results should not be considered
indicative of future financial performance.
Our revenues are derived primarily from two main product and services lines,
and a decline in demand or prices for either could substantially adversely
affect our operating results
We currently derive the majority of our license and service revenues from
BEA TUXEDO and BEA WebLogic and from related products and services. Although
we expect these products and services to continue to account for the majority
of our revenues in the immediate future, we believe that BEA WebLogic will
become an increasingly important revenue source. As a result, factors
adversely affecting the pricing of or demand for BEA TUXEDO and BEA WebLogic,
such as competition, product performance or technological change, could have a
material adverse effect on our business and consolidated results of operations
and financial condition.
The price of our common stock may fluctuate significantly
The market price for our common stock may be affected by a number of
factors, including developments in the Internet, software or technology
industry, general market conditions and other factors, including factors
unrelated to our operating performance or our competitors' operating
performance. In addition, stock prices for BEA and many other companies in the
Internet, technology and emerging growth sectors have experienced wide
fluctuations including recent rapid rises and declines in their stock prices,
that have often been unrelated to the operating performance of such companies.
Such factors and fluctuations, as well as general economic, political and
market conditions, such as recessions, may materially adversely affect the
market price of our common stock.
If we cannot successfully integrate our past and future acquisitions, our
revenues may decline and expenses may increase
From our inception in January 1995, we have made several strategic
acquisitions. Integration of acquired companies, divisions and products
involves the assimilation of potentially conflicting operations and products,
which divert the attention of our management team and may have a material
adverse effect on our operating results in future quarters. We acquired Leader
Group, Inc. ("Leader Group") and a business unit of Penta
19
Systems Technology, Inc. ("Penta") in the quarter ended April 30, 1998, NCR's
TOP END technology in June 1998, the Entersoft Systems Corporation
("Entersoft") in July 1998, WebLogic, Inc. ("WebLogic") in September 1998,
Component Systems, LLC in May 1999, Technology Resource Group, Inc. ("TRG") in
July 1999, Avitek, Inc. ("Avitek") in August 1999, and The Theory Center
("TTC") in November 1999. It is possible we may not achieve any of the
intended financial or strategic benefits of these transactions. While we
intend to make additional acquisitions in the future, there may not be
suitable companies, divisions or products available for acquisition. Our
acquisitions entail numerous risks, including the risk we will not
successfully assimilate the acquired operations and products, or retain key
employees of the acquired operations. There are also risks relating to the
diversion of our management's attention, and difficulties and uncertainties in
our ability to maintain the key business relationships the acquired entities
have established. In addition, if we undertake future acquisitions, we may
issue dilutive securities, assume or incur additional debt obligations, incur
large one-time expenses, and acquire intangible assets that would result in
significant future amortization expense. Any of these events could have a
material adverse effect on our business, operating results and financial
condition.
Recently, the Financial Accounting Standards Board ("FASB") voted to
eliminate pooling of interests accounting for acquisitions and the ability to
write-off in-process research and development has been limited by recent
pronouncements. The effect of these changes would be to increase the portion
of the purchase price for any future acquisitions that must be charged to
BEA's cost of revenues and operating expenses in the periods following any
such acquisitions. As a consequence, our results of operations in periods
following any such acquisitions could be materially adversely affected.
Although these changes would not directly affect the purchase price for any of
these acquisitions, they would have the effect of increasing the reported
expenses associated with any of these acquisitions. To that extent, these
changes may make it more difficult for us to acquire other companies, product
lines or technologies.
The lengthy sales cycle for our products makes our revenues susceptible to
substantial fluctuations
Our customers typically use our products to implement large, sophisticated
applications that are critical to their business, and their purchases are
often part of their implementation of a distributed or Web-based computing
environment. Customers evaluating our software products face complex decisions
regarding alternative approaches to the integration of enterprise
applications, competitive product offerings, rapidly changing software
technologies and limited internal resources due to other information systems
requirements. For these and other reasons, the sales cycle for our products is
lengthy and is subject to delays or cancellation over which we have little or
no control. We have experienced a significant increase in the number of
million and multi-million dollar license transactions. In some cases, this has
resulted in more extended customer evaluation and procurement processes, which
in turn have lengthened the overall sales cycle for our products. Moreover
during the second half of fiscal 1999, an increasing number of our customers
began negotiating licenses to use our enterprise application solutions as an
architectural platform for several applications. These architectural
commitments are larger in scope and potential revenue than single application
transactions. In some cases, these architectural commitments also have longer
sales cycles than our typical single application transactions, because of both
the customer's decision cycle in adopting an architectural platform and
heightened corporate approval requirements for larger contracts. We believe
general economic conditions that impact customers' capital investment
decisions also affect our sales cycles.
In addition, industry sources widely predicted that many corporations would
stop deploying new computer systems in late 1999 and early 2000, in order to
avoid disrupting their computer systems before the Year 2000. We have been
informed by some of our customers that they intended to freeze deploying new
computer systems in late December 1999 and early 2000. Furthermore, some of
our customers may have accelerated their purchases and deployments of our
products in advance of these freezes. These factors could cause an unusual
fluctuation in our orders, and our revenues could be materially reduced and
our operating results could be materially adversely affected, especially in
the first quarter of calendar 2000. Any significant change in customer buying
decisions or sales cycles for our products could have a material adverse
effect on our business, results of operations and financial condition.
20
If we do not effectively compete with new and existing competitors, our
revenues and operating margins will decline
The market for application server and integration software, and related
software components and services, is highly competitive. Our competitors are
diverse and offer a variety of solutions directed at various segments of this
marketplace. These competitors include operating system vendors such as IBM,
Sun Microsystems and database vendors such as Oracle. Microsoft has released
products that include certain application server functionality and has
announced that it intends to include application server and integration
functionality in future versions of its operating systems, including future
versions of Windows 2000. Oracle is the primary relational database vendor
offering products that are intended to serve as alternatives to our enterprise
application server and integration solutions. In addition, there are companies
offering and developing application server and integration software products
and related services that directly compete with products we offer. Further,
software development tool vendors typically emphasize the broad versatility of
their tool sets and, in some cases, offer complementary software that supports
these tools and performs basic application server and integration functions.
Last, internal development groups within prospective customers' organizations
may develop software and hardware systems that may substitute for those we
offer. A number of our competitors and potential competitors have longer
operating histories, significantly greater financial, technical, marketing and
other resources, greater name recognition and a larger installed base of
customers than us.
Our principal competitors currently include hardware vendors who bundle
their own application server and integration software products, or similar
products, with their computer systems and database vendors that advocate
client/server networks driven by the database server. IBM and Sun Microsystems
are the primary hardware vendors who offer a line of application server and
integration solutions for its customers. IBM's sale of application server and
integration functionality along with its IBM proprietary hardware systems
requires us to compete with IBM in its installed base, where IBM has certain
inherent advantages due to its significantly greater financial, technical,
marketing and other resources, greater name recognition and the integration of
its enterprise application server and integration functionality with its
proprietary hardware and database systems. These inherent advantages allow IBM
to bundle, at a discounted price, application functionality with computer
hardware and software sales. Due to these factors, if we do not differentiate
our products based on functionality, interoperability with non-IBM systems,
performance and reliability, and establish our products as more effective
solutions to customers' needs our revenues and operating results will suffer.
Microsoft has announced that it intends to include certain application
server and integration functionality in future versions of its Windows 2000
operating system. Microsoft has also introduced a product that includes
certain basic application server functionality. The bundling of competing
functionality in versions of Windows requires us to compete with Microsoft in
the Windows marketplace, where Microsoft has certain inherent advantages due
to its significantly greater financial, technical, marketing and other
resources, its greater name recognition, its substantial installed base and
the integration of its application server and integration functionality with
Windows. We need to differentiate our products from Microsoft's based on
scalability, functionality, interoperability with non-Microsoft platforms,
performance and reliability, and need to establish our products as more
effective solutions to customers' needs. We may not be able to successfully
differentiate our products from those offered by Microsoft, and Microsoft's
entry into the application server and integration market could materially
adversely affect our business, operating results and financial condition.
In addition, current and potential competitors may make strategic
acquisitions or establish cooperative relationships among themselves or with
third parties, thereby increasing the ability of their products to address the
needs of our current and prospective customers. Accordingly, it is possible
that new competitors or alliances among current and new competitors may emerge
and rapidly gain significant market share. Such competition could materially
adversely affect our ability to sell additional software licenses and
maintenance, consulting and support services on terms favorable to us.
Further, competitive pressures could require us to reduce the price of our
products and related services, which could materially adversely affect our
business, operating results and financial condition. We may not be able to
compete successfully against current and future competitors and any failure to
do so would have a material adverse effect upon our business, operating
results and financial condition.
21
If we fail to adequately protect our intellectual property rights,
competitors may use our technology and trademarks, which could weaken our
competitive position, reduce our revenues and increase our costs
Our success depends upon our proprietary technology. We rely on a
combination of patent, copyright, trademark and trade secret rights,
confidentiality procedures and licensing arrangements to establish and protect
our proprietary rights. It is possible that other companies could successfully
challenge the validity or scope of our patents and that our patents may not
provide a competitive advantage to us.
As part of our confidentiality procedures, we generally enter into non-
disclosure agreements with our employees, distributors and corporate partners
and into license agreements with respect to our software, documentation and
other proprietary information. Despite these precautions, third parties could
copy or otherwise obtain and use our products or technology without
authorization, or develop similar technology independently. In particular, we
have, in the past, provided certain hardware OEMs with access to our source
code, and any unauthorized publication or proliferation of this source code
could materially adversely affect our business, operating results and
financial condition. It is difficult for us to police unauthorized use of our
products, and although we are unable to determine the extent to which piracy
of our software products exists, software piracy is a persistent problem.
Effective protection of intellectual property rights is unavailable or limited
in certain foreign countries. The protection of our proprietary rights may not
be adequate and our competitors could independently develop similar
technology, duplicate our products, or design around patents and other
intellectual property rights we hold.
Third parties could assert that our software products and services infringe
their intellectual property rights, which could expose us to increased costs
and litigation
It is possible that third parties could claim our current or future
products infringe their rights. Any such claims, with or without merit, could
cause costly litigation that could absorb significant management time, which
could materially adversely effect our business, operating results and
financial condition. These types of claims might require us to enter into
royalty or license agreements. If required, we may not be able to obtain such
royalty or license agreements, or obtain them on terms acceptable to us, which
could have a material adverse effect upon our business, operating results and
financial condition.
Our international operations expose us to greater management, collections,
currency, intellectual property, regulatory and other risks
International revenues accounted for 40.4 percent, 40.0 percent and 42.2
percent of our consolidated revenues for the fiscal years ended January 31,
2000, 1999 and 1998, respectively. We sell our products and services through a
network of branches and subsidiaries located in 29 countries worldwide. In
addition, we also market through distributors. We believe that our success
depends upon continued expansion of our international operations. Our
international business is subject to a number of risks, including unexpected
changes in regulatory practices and tariffs, greater difficulties in staffing
and managing foreign operations, longer collection cycles, seasonality,
potential changes in tax laws, greater difficulty in protecting intellectual
property and the impact of fluctuating exchange rates between the US dollar
and foreign currencies in markets where we do business.
General economic and political conditions in these foreign markets may also
impact our international revenues. Since the late summer of 1997, a number of
Pacific Rim countries have experienced economic, banking and currency
difficulties that have led to economic downturns in those countries. Among
other things, the decline in value of Asian currencies, together with
difficulties obtaining credit, has resulted in a decline in the purchasing
power of our Asian customers, which in turn has resulted in the delay of
orders for our products from certain Asian customers and is likely to result
in further delays and, possibly the cancellation, of such orders. We
anticipate that weak Asian economic conditions may continue to adversely
impact our financial results. It is difficult for us to predict the extent of
the future impact of these conditions. There can be no assurances that these
factors and other factors will not have a material adverse effect on our
future international revenues and consequently on our business and
consolidated financial condition and results of operations.
22
If we are unable to manage our growth, our business will suffer
We have continued to experience a period of rapid and substantial growth
that has placed, and if such growth continues would continue to place, a
strain on the Company's administrative and operational infrastructure. We have
increased the number of our employees from 120 employees in three offices in
the United States at January 31, 1996 to over 1,900 employees in over 70
offices in 29 countries at January 31, 2000. Our ability to manage our staff
and growth effectively requires us to continue to improve our operational,
financial and management controls, reporting systems and procedures. In this
regard, we are currently updating our management information systems to
integrate financial and other reporting among our multiple domestic and
foreign offices. In addition, we intend to continue to increase our staff
worldwide and to continue to improve the financial reporting and controls for
our global operations. It is possible we will not be able to successfully
implement improvements to our management information and control systems in an
efficient or timely manner and that, during the course of this implementation,
we could discover deficiencies in existing systems and controls. If we are
unable to manage growth effectively, our business, results of operations and
financial condition will be materially adversely affected.
If the market for application servers, application integration and
application component software does not grow as quickly as we expect, our
revenues will be harmed
We sell our products and services in the application server, application
integration and application component markets. These markets are emerging and
are characterized by continuing technological developments, evolving industry
standards and changing customer requirements. Our success is dependent in
large part on acceptance of our products by large customers with substantial
legacy mainframe systems, customers establishing a presence on the Web for
commerce, and developers of web-based commerce applications. Our future
financial performance will depend in large part on continued growth in the
number of companies extending their mainframe-based, mission-critical
applications to an enterprise-wide distributed computing environment and to
the Internet through the use of application server and integration technology.
There can be no assurance that the markets for application server and
integration technology and related services will continue to grow. If these
markets fail to grow or grow more slowly than we currently anticipate, or if
we experience increased competition in these markets, our business, results of
operations and financial condition will be adversely affected.
If we lose key personnel or cannot hire enough qualified personnel, it will
adversely affect our ability to manage our business, develop new products and
increase revenue
We believe our future success will depend upon our ability to attract and
retain highly skilled personnel including our founders, Messrs. William T.
Coleman III and Alfred S. Chuang, and other key members of management.
Competition for these types of employees is intense, and it is possible that
we will not be able to retain our key employees and that we will not be
successful in attracting, assimilating and retaining qualified candidates in
the future. As we seek to expand our global organization, the hiring of
qualified sales, technical and support personnel will be difficult due to the
limited number of qualified professionals. Failure to attract, assimilate and
retain key personnel would have a material adverse effect on our business,
results of operations and financial condition.
Our failure to maintain ongoing sales through distribution channels will
result in lower revenues
To date, we have sold our products principally through our direct sales
force, as well as through indirect sales channels, such as computer hardware
companies, packaged application software developers (ISVs), systems
integrators and independent consultants, independent software tool vendors and
distributors. Our ability to achieve revenue growth in the future will depend
in large part on our success in expanding our direct sales force and in
further establishing and expanding relationships with distributors, ISVs, OEMs
and systems integrators. In particular, a significant part of our strategy is
to embed our technology in products our ISV customers offer. We intend to seek
distribution arrangements with additional ISVs to embed our Web application
servers in their
23
products. It is possible that we will not be able to successfully expand our
direct sales force or other distribution channels, secure license agreements
with additional ISVs on commercially reasonable terms or at all, and otherwise
further develop our relationships with indirect distribution channels.
Moreover, even if we succeed in these endeavors, it still may not increase our
revenues. If we invest resources in these types of expansion and our revenues
do not correspondingly increase, our business, results of operations and
financial condition will be materially and adversely affected.
We rely on informal relationships with a number of consulting and systems
integration firms to enhance our sales, support, service and marketing
efforts, particularly with respect to implementation and support of our
products as well as lead generation and assistance in the sales process. We
will need to expand our relationships with third parties in order to support
license revenue growth. Many such firms have similar, and often more
established, relationships with our principal competitors. It is possible that
these and other third parties will not provide the level and quality of
service required to meet the needs of our customers, that we will not be able
to maintain an effective, long term relationship with these third parties, and
that these third parties will not successfully meet the needs of our
customers.
If we do not develop and enhance new and existing products to keep pace with
technological, market and industry changes, our revenues may decline
The market for our products is highly fragmented, competitive with
alternative computing architectures, and characterized by continuing
technological developments, evolving industry standards and changing customer
requirements. The introduction of products embodying new technologies, the
emergence of new industry standards or changes in customer requirements could
render our existing products obsolete and unmarketable. As a result, our
success depends upon our ability to enhance existing products, respond to
changing customer requirements and develop and introduce in a timely manner
new products that keep pace with technological developments and emerging
industry standards. It is possible that our products will not adequately
address the changing needs of the marketplace and that we will not be
successful in developing and marketing enhancements to our existing products
or products incorporating new technology on a timely basis. Failure to develop
and introduce new products, or enhancements to existing products, in a timely
manner in response to changing market conditions or customer requirements,
will materially and adversely affect our business, results of operations and
financial condition.
If our products contain software defects, it could harm our revenues and
expose us to litigation
The software products we offer are internally complex and, despite
extensive testing and quality control, may contain errors or defects,
especially when we first introduce them. We may need to issue corrective
releases of our software products to fix any defects or errors. Any defects or
errors could also cause damage to our reputation, loss of revenues, product
returns or order cancellations, or lack of market acceptance of our products.
Accordingly, any defects or errors could have a material and adverse effect on
our business, results of operations and financial condition.
Our license agreements with our customers typically contain provisions
designed to limit our exposure to potential product liability claims. It is
possible, however, that the limitation of liability provisions contained in
our license agreements may not be effective as a result of existing or future
federal, state or local laws or ordinances or unfavorable judicial decisions.
Although we have not experienced any product liability claims to date, sale
and support of our products entails the risk of such claims, which could be
substantial in light of customers' use of such products in mission-critical
applications. If a claimant brings a product liability claim against us, it
could have a material adverse effect on our business, results of operations
and financial condition.
Our products interoperate with many parts of complicated computer systems,
such as mainframes, servers, personal computers, application software,
databases, operating systems and data transformation software. Failure of any
one of these parts could cause all or large parts of computer systems to fail.
In such circumstances, it may be difficult to determine which part failed, and
it is likely that customers will bring a lawsuit against several
24
suppliers. Even if our software is not at fault, we could suffer material
expense and material diversion of management time in defending any such
lawsuits.
We have a high debt balance and large interest obligations
At January 31, 2000, we had approximately $572.5 million of long-term
indebtedness in the form of convertible notes. As a result of this
indebtedness, we have substantial principal and interest payment obligations.
The degree to which we are leveraged could significantly harm our ability to
obtain financing for working capital, acquisitions or other purposes and could
make us more vulnerable to industry downturns and competitive pressures. Our
ability to meet our debt service obligations will be dependent upon our future
performance, which will be subject to financial, business and other factors
affecting our operations, many of which are beyond our control. In addition,
our earnings are insufficient to cover our fixed charges.
We will require substantial amounts of cash to fund scheduled payments of
interest on the notes, payment of the principal amount of the notes, payment
of principal and interest on our other indebtedness, future capital
expenditures and any increased working capital requirements. If we are unable
to meet our cash requirements out of cash flow from operations, there can be
no assurance that we will be able to obtain alternative financing. In the
absence of such financing, our ability to respond to changing business and
economic conditions, to make future acquisitions, to absorb adverse operating
results or to fund capital expenditures or increased working capital
requirements would be significantly reduced. If we do not generate sufficient
cash flow from operations to repay the notes at maturity, we could attempt to
refinance the notes; however, no assurance can be given that such a
refinancing would be available on terms acceptable to us, if at all. Any
failure by us to satisfy our obligations with respect to the notes at maturity
(with respect to payments of principal) or prior thereto (with respect to
payments of interest or required repurchases) would constitute a default under
the indenture and could cause a default under agreements governing our other
indebtedness.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Foreign Exchange
BEA's revenue originating outside the United States was 40.4 percent, 40.0
percent and 42.2 percent of total revenues in fiscal 2000, 1999 and 1998,
respectively. International revenues from each geographic sub-region were less
than 10 percent of total revenues. International sales are made mostly from
the Company's foreign sales subsidiaries in the local countries and are
typically denominated in the local currency of each country. These
subsidiaries also incur most of their expenses in the local currency.
Accordingly, foreign subsidiaries use the local currency as their functional
currency.
The Company's international business is subject to risks typical of an
international business, including, but not limited to, differing economic
conditions, changes in political climate, differing tax structures, other
regulations and restrictions, and foreign exchange volatility. Accordingly,
the Company's future results could be materially adversely impacted by changes
in these or other factors.
The Company's exposure to foreign exchange rate fluctuations arise in part
from intercompany accounts in which certain costs of software development,
support and product marketing incurred in the United States are charged to the
Company's foreign subsidiaries. These intercompany accounts are typically
denominated in the functional currency of the foreign subsidiary in order to
centralize foreign exchange risk with the parent company in the United States.
The Company is also exposed to foreign exchange rate fluctuations as the
financial results of foreign subsidiaries are translated into U.S. dollars in
consolidation. As exchange rates vary, these results, when translated, may
vary from expectations and adversely impact overall financial results.
The Company has a program to reduce the effect of foreign exchange
transaction gains and losses from recorded foreign currency-denominated assets
and liabilities. This program involves the use of forward foreign exchange
contacts in certain European and Asian currencies, principally the U.K.,
France, Germany, Finland,
25
Sweden, Japan and Australia. A forward foreign exchange contract obligates the
Company to exchange predetermined amounts of specified foreign currencies at
specified exchange rates on specified dates or to make an equivalent U.S.
dollar payment equal to the value of such exchange. Each month the Company
marks to market the foreign exchange contracts based on the change in the
foreign exchange rates with any resulting gain or losses recorded in the
interest income and other, net line item.
The Company does not currently hedge anticipated foreign currency-
denominated revenues and expenses not yet incurred.
Interest Rates
The Company invests its cash in a variety of financial instruments,
consisting principally of investments in commercial paper, interest-bearing
demand deposit accounts with financial institutions, money market funds and
highly liquid debt securities of corporations, municipalities and the U.S.
Government. These investments are denominated in U.S. dollars. Cash balances
in foreign currencies overseas are operating balances and are only invested in
short-term time deposits of the local operating bank.
The Company accounts for its investment instruments in accordance with
Statement of Financial Accounting Standards No. 115, Accounting for Certain
Investments in Debt and Equity Securities, ("FAS 115"). All of the cash
equivalents, short-term and long-term investments are treated as "available-
for-sale" under FAS 115. Investments in both fixed rate and floating rate
interest earning instruments carry a degree of interest rate risk. Fixed rate
securities may have their market value adversely impacted due to a rise in
interest rates, while floating rate securities may produce less income than
expected if interest rates fall. Due in part to these factors, the Company's
future investment income may fall short of expectations due to changes in