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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, 2001
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 30, 2001, as reported on
the Nasdaq National Market, was approximately $10,245,747,000. 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 30, 2001, there were approximately 392,420,640 shares of the
Registrant's common stock outstanding.
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DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for the Registrant's 2001 Annual Meeting of
Stockholders to be held July 11, 2001 are incorporated by reference in Part
III of this Form 10-K Report.
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BEA SYSTEMS, INC.
FORM 10-K
For the Fiscal Year Ended January 31, 2001
INDEX
Page
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PART I
Item 1. Business...................................................... 1
Item 2. Properties.................................................... 8
Item 3. Legal Proceedings............................................. 8
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.... 27
Item 8. Consolidated Financial Statements and Supplementary Data...... 30
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure..................................... 61
PART IV
Item 10. Directors and Executive Officers of the Registrant............ 61
Item 11. Executive Compensation........................................ 61
Item 12. Security Ownership of Certain Beneficial Owners and
Management................................................... 61
Item 13. Certain Relationships and Related Transactions................ 61
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form
8-K.......................................................... 61
Signatures.............................................................. 64
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 of 1933 (the
"Securities Act") and Section 21E (this "Annual Report") of the Securities and
Exchange Act of 1934 (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," statements regarding continued hiring in direct sales, support and
services, indirect distribution channels, devoting substantial resources to
product development, continuing to license and acquire software technologies
and businesses, and continuing to recruit and hire experienced software
developers, (ii) in Item 2, the statement regarding the adequacy of the
Company's existing facilities to meet anticipated needs, (iii) in Item 3, the
statement regarding the non-materiality of the liability of claims arising in
the ordinary course of business, (iv) in Item 5, the statement regarding
payment of cash dividends in the future, (v) in Item 7, statements regarding
seasonal impacts, additional acquisitions, return on investment, investing in
services offerings, improvement of total gross margins, expected timing and
amount of amortization expenses, investment in sales channel expansion and
marketing programs, commitment of substantial resources to product development
and engineering, increase in general and administrative expenses, expansion of
operations, sufficiency of cash to meet cash requirements, continuation of
certain products accounting for the majority of revenues, distribution
arrangements, 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 e-business
infrastructure software company. BEA's customers use BEA products as a
deployment platform for Internet-based applications, including custom-built
and packaged applications, and as a means for robust enterprise application
integration among mainframe, client/server and Internet-based applications. In
addition, BEA provides Enterprise Java Bean ("EJB")-based components which
perform functions such as personalization, shopping cart, order tracking,
inventory and pricing that are used in developing custom applications.
The Company's products have been adopted in a wide variety of industries,
including commercial and investment banking, securities trading, insurance,
telecommunications, services, airlines, package delivery, software, retail,
manufacturing, government, healthcare, communications and utilities. The BEA
WebLogic E-Business Platform(TM) provides infrastructure for building an
integrated e-business, allowing customers to integrate private client/server
networks, the Internet, intranets, extranets, and mainframe and legacy systems
as system components. 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-central processing unit basis, but BEA also offers licenses priced on a
per-user basis.
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BEA's products are marketed and sold worldwide through a network of BEA
sales offices, the Company's Web site at www.bea.com, as well as distributors
and alliances with hardware vendors, independent software vendors ("ISVs"),
application service providers ("ASPs") and systems integrators ("SIs").
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.
Products
BEA provides a broad family of cross-platform software and services.
BEA E-Commerce Server Products. BEA's application servers are software
programs that function as the platform for applications that run in Internet
or client/server environments, much like the operating system is the
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platform for applications that run on personal computers. In its role as an
application platform, BEA's application server products perform a wide variety
of services for applications, such as balancing loads among the hardware in
the system, detecting and accommodating hardware unavailability (either
through crashes or planned maintenance), brokering transactions within e-
business systems between the Web-based user, the application and the database.
By delegating a substantial portion of processing logic from the application
to the application server, application servers create a standardized
transaction processing environment which leads to extremely high levels of
scalability, enhanced performance, increased availability and improved
reliability.
BEA E-Commerce Application Component Products. BEA's commerce servers help
enable adaptable e-commerce applications that personalize customer
interactions. With out-of-the-box commerce and personalization functionality,
BEA customers can quickly build e-commerce sites that capture their customers'
preferences and enhance their customer experience.
BEA E-Commerce Integration Products. BEA delivers a comprehensive
integration solution that enables businesses to manage interactions among
their customers, suppliers and trading partners as well as among internal
computer systems and legacy applications.
BEA E-Commerce Services. Customers also rely on BEA's 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
BEA's strategy is to extend its current leadership position in Java-based
Web application servers and distributed transaction processing by penetrating
new customer accounts, particularly e-commerce sites, through its products or
services, and then to proliferate within those customers, servicing higher
usage volumes and selling additional products. Key elements of BEA's strategy
include:
. Increasing direct sales capacity by hiring more direct sales
representatives and by enabling the Web as an effective sales and
communication channel. At the end of fiscal 2001, BEA had over 600
quota-bearing sales representatives, a 60 percent increase over the end
of fiscal 2000. In addition, system and application developers are able
to download free trial versions through the Company's Web site at
www.bea.com.
. Increasing indirect sales capacity by aggressively allying with ISVs,
ASPs, SIs, hardware vendors and value added resellers. At the end of
fiscal 2001, BEA had signed more than 1,500 customer and channel
partnerships and alliances to promote, sell and service BEA products.
. 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 technology leadership through research and development efforts
and through acquisition of complementary companies, products and
technologies. Through BEA's research and development efforts or
acquisitions, BEA has embraced new standards, such as Wireless
Application Protocol ("WAP"), Simple Object Access Protocol ("SOAP") and
Electronic Business XML ("ebXML"), 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.
. Driving the continuing adoption of Enterprise Java, object-based
solutions and e-business through development of products and
participation in standards-setting bodies. BEA believes that EJB,
object-based computing at the enterprise level, and electronic business
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.
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Customers
The total number of licensees of BEA products and solutions is greater than
9,400 worldwide. BEA's target end-user customers are organizations with
sophisticated, high-end information systems with numerous, often
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 2001, 2000 or 1999.
Sales and Marketing
BEA's sales strategy is to pursue opportunities worldwide within large
organizations and organizations that are establishing e-businesses, through
its direct sales, services and technical support organizations, complemented
by indirect sales channels such as hardware original equipment manufacturers
("OEMs"), ISVs, ASPs and SIs. The Company currently intends to continue to add
to its direct sales and support organizations in major worldwide markets, as
well as investing in building its indirect distribution channel through
relationships with SIs, packaged application developers and others.
Direct Sales Organization. BEA markets its software and services primarily
through its direct sales organization. As of January 31, 2001, BEA had over
1,970 employees in consulting, training, sales, support and marketing,
including over 600 sales representatives, located in 90 offices in 30
countries. BEA is currently investing in building its direct sales capacity by
aggressively hiring sales and technical sales support personnel. 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 available trial developer copies of many of
its products available for free download over its Web site. There were over
900,000 downloads of BEA software in fiscal 2001. In addition, BEA
periodically provides developer training and trial licenses through technical
seminars in various locations worldwide. BEA also maintains a developers' Web
site, with over 180,000 registered developers as of the end of fiscal 2001.
The developers' Web site is designed to create a community among developers
who use BEA products, providing a forum to exchange technical information and
sample code, as well as feedback to BEA on BEA products and industry
directions that BEA should pursue.
Strategic Relations. An important element of the Company's sales and
marketing strategy is to expand its relationships with third parties and
strategic allies to increase the market awareness, demand and acceptance of
BEA and its solutions. Allies have often generated and qualified sales leads,
made initial customer contacts, assessed needs, recommended use of BEA
solutions prior to BEA's introduction to the customer, and introduced BEA at
high levels within the customer organization. A strategic ally can provide
customers with additional resources and expertise, especially in vertical or
geographic 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 allies 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.
Packaged application software developers. BEA licenses its software to
packaged application software vendors. These vendors build on BEA software
as an infrastructure for the applications they supply, giving these
applications increased distribution, scalability and portability across all
platforms on
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which the BEA platform runs. Customers can also easily integrate other
applications built using BEA solutions with these packaged applications.
Application service providers. ASPs buy and maintain the hardware,
infrastructure software and application software necessary for Web sites
and e-businesses, and rent access to these systems to their customers,
primarily small and medium sized businesses, who do not have the resources
or the desire to buy and maintain these systems themselves. BEA licenses
its software to ASPs who use it as an exclusive or optional feature in
their systems.
Systems integrators and independent consultants. SIs 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 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, 2001, the
Company was represented by 36 distributors.
Services. The Company believes that its services organization plays an
important role in facilitating initial license sales and enabling customers to
successfully architect, design, develop, deploy and manage systems and
applications. Fees for services are generally charged on a time and materials
basis and vary depending upon the nature and extent of services to be
performed. BEA's services organization works directly with end user customers
and also with SIs. In addition, the Company offers introductory and advanced
classes and training programs at the Company's offices, customer sites and
training centers worldwide. These classes and training programs cover the use
of BEA products and are designed for end user customers, SIs and packaged
application developers.
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
offers a variety of support offerings. Broad support offerings such as 7x24
support contracts are also available, typically on an annual fee basis.
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. BEA's competitors are
diverse and offer a variety of solutions directed at various segments
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of this marketplace. These competitors include operating system vendors such
as IBM, Sun Microsystems and Hewlett-Packard 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 its .NET Web services initiative. In addition, there are
other companies offering and developing application server and integration
software products and related services that directly compete with products the
Company offers. 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 the Company offers. A number of
BEA's 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 the
Company.
BEA's 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, Sun Microsystems
and Hewlett-Packard are the primary hardware vendors who offer a line of
application server and integration solutions for their customers. IBM's sale
of application server and integration functionality along with its IBM
proprietary hardware systems requires BEA 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 the Company does not differentiate its products based on
functionality, interoperability with non-IBM systems, performance and
reliability, and establish its products as more effective solutions to
customers' needs, its revenues and operating results will suffer.
Microsoft has announced that it intends to include certain application
server and integration functionality in its .NET Web services initiative. The
bundling of competing functionality in versions of .NET servers requires BEA
to compete with Microsoft in the Web services 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 broad product line and
features into a Web services environment. The Company needs to differentiate
its products from Microsoft's based on scalability, functionality,
interoperability with non-Microsoft platforms, performance and reliability,
and needs to establish its products as more effective solutions to customers'
needs. The Company may not be able to successfully differentiate its products
from those offered by Microsoft, and Microsoft's entry into the application
server and integration market could materially adversely affect the Company's
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 its 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 the Company's ability to sell additional software licenses
and maintenance, consulting and support services on terms favorable to us.
Further, competitive pressures could require BEA to reduce the price of its
products and related services, which could materially adversely affect its
business, operating results and financial condition. The Company 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 its 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."
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Product Development
BEA's total research and development expenses were approximately $89.2
million, $61.0 million and $42.6 million in fiscal 2001, 2000 and 1999,
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 of 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.
BEA continues to invest in product development, particularly BEA WebLogic
Collaborate(TM), BEA WebLogic Commerce Server(TM), BEA WebLogic
Personalization Server(TM) and new releases of BEA WebLogic Server(TM). BEA
WebLogic Collaborate(TM) is business-to-business integration software that
provides an open, scalable and dynamic way to rapidly create and manage multi-
party trading exchanges. BEA WebLogic Commerce Server(TM) and BEA WebLogic
Personalization Server(TM) help enable companies to quickly deliver highly
personalized e-commerce applications. BEA WebLogic Server(TM) accounts for the
majority of BEA's license revenues and is a platform for Java and EJB
applications. BEA recently announced a major release of BEA WebLogic
Server(TM), which adds new transaction, multicasting, Java messaging services
and XML support, as well as other features. BEA's planned investment in these
efforts may affect BEA's anticipated overall financial results, particularly
cost of revenues as a percentage of total revenues 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 investments do not materialize. 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; Plano, Texas; Maynard, Massachussetts; Liberty Corner, New Jersey;
Nashua, New Hampshire; Boulder, Colorado; and Toronto, Canada. As of January
31, 2001, the Company had a research and software development staff of over
500 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 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.
Intellectual Property and Licenses
BEA's success depends upon its proprietary technology. The Company relies
on a combination of patent, copyright, trademark and trade secret rights,
confidentiality procedures and licensing arrangements to establish and protect
its proprietary rights. It is possible that other companies could successfully
challenge the validity or scope of BEA's patents and that BEA's patents may
not provide a competitive advantage to BEA.
As part of its confidentiality procedures, the Company generally enters
into non-disclosure agreements with its employees, distributors and corporate
partners and into license agreements with respect to its software,
documentation and other proprietary information. Despite these precautions,
third parties could copy or otherwise obtain and use its products or
technology without authorization, or develop similar technology independently.
In particular, the Company has, in the past, provided certain hardware OEMs
with access to its source code, and any unauthorized publication or
proliferation of this source code could materially adversely affect its
business, operating results and financial condition. It is difficult for BEA
to police unauthorized use of its products, and
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although the Company is unable to determine the extent to which piracy of its
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 its proprietary rights may not be
adequate and its competitors could independently develop similar technology,
duplicate its products, or design around patents and other intellectual
property rights the Company holds. 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, 2001, BEA had approximately 3,000 full-time employees,
including 500 in research and development, 1,970 in consulting, training,
sales, support and marketing and 530 in administration. None of BEA's
employees are 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 subleased approximately 36,000 square feet of such offices. 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 15 of Notes to Consolidated Financial Statements for information
regarding the Company's lease obligations. In the first quarter of fiscal
2002, the Company entered into a lease agreement for the lease of
approximately 40 acres of land adjacent to its San Jose, California offices to
construct additional corporate offices and research and development
facilities. See Note 17 of Notes to Consolidated Financial Statements for
information regarding the Company's lease agreement in fiscal 2002.
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 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.
No matters were submitted to a vote of security holders during the fourth
quarter of fiscal year 2001.
PART II
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
8
approximately 717 stockholders of record as of March 30, 2001. 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
------ ------
Fiscal year ended January 31, 2001:
Fourth Quarter.............................................. $41.75 $84.13
Third Quarter............................................... 41.00 89.50
Second Quarter.............................................. 29.38 62.50
First Quarter............................................... 25.50 78.88
Fiscal year ended January 31, 2000:
Fourth Quarter.............................................. $11.45 $47.50
Third Quarter............................................... 5.25 11.59
Second Quarter.............................................. 3.67 8.03
First Quarter............................................... 3.33 4.63
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.
During the fourth quarter of fiscal 2001, the Company had no 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.
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,
-----------------------------------------------------
2001(2) 2000(2) 1999(1)(2) 1998(1)(2) 1997(1)(2)
--------- --------- ---------- ---------- ----------
(in thousands, except per share data)
Total revenues.......... $ 819,760 $ 464,410 $289,042 $166,447 $64,566
Net income (loss)....... 17,082 (19,574) (51,582) (22,912) (87,834)
Net income (loss) per
share:
Basic................... 0.05 (0.06) (0.18) (0.11) (2.21)
Diluted................. 0.04 (0.06) (0.18) (0.11) (2.21)
Total assets............ 1,592,336 1,258,841 403,011 174,203 59,276
Long-term obligations
(3).................... 564,082 578,489 250,112 766 49,540
Redeemable convertible
preferred stock........ - - - - 83,120
- --------
(1) Restated to include the results of Leader Group, Inc. and WebLogic, Inc.,
which were acquired in pooling of interests transactions. In addition, all
share and per-share amounts have been restated to reflect the two-for-one
common stock splits on each of December 19, 1999 and April 24, 2000.
(2) No cash dividends have been declared or paid in any period presented.
(3) Excludes any long-term deferred tax liabilities.
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-
business infrastructure software that helps companies of all sizes build e-
business 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 primarily through BEA's direct sales
force, and also through hardware vendors, independent software vendors
("ISVs") and systems integrators ("SIs") that are BEA partners and
distributors. BEA's products have been adopted in a wide variety of
industries, including commercial and investment banking, securities trading,
telecommunications, airlines, services, retail, manufacturing, package
delivery, insurance and government. The BEA WebLogic E-Business Platform(TM)
provides infrastructure for building an integrated e-business, allowing
customers to integrate private client/server networks, the Internet,
intranets, extranets, and mainframe and legacy systems as system components.
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-central
processing unit basis, but BEA also offers licenses priced on a per-user
basis.
The Company's core business has been providing infrastructure for e-
business systems and high-volume transaction systems, such as Web-based retail
sites, inventory systems, telecommunications billing applications, commercial
bank ATM networks and account management systems, credit card billing systems
and securities trading account management systems. These Web-based and
distributed systems must be highly available, scale to process high
transaction volumes and accommodate large numbers of users. As the Internet
and e-commerce continue to develop and become more richly integrated, 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-business 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. In addition,
BEA provides a personalization engine and components used to build common e-
commerce functionality, such as online catalog, dynamic pricing, shopping cart
and order processing.
Seasonality. As is common in the software industry, we believe that our
fourth quarter orders are favorably impacted by a variety of factors including
year-end capital purchases by larger corporate customers and the commission
structure for our sales force. This increase typically results in first
quarter customer orders being lower than orders received in the immediately
preceding fourth quarter. BEA anticipates that this seasonal impact is likely
to continue.
Investment in Distribution Channels. BEA is currently expanding its direct
sales capacity by aggressively hiring sales and technical sales support
personnel. In addition, in August 2000, BEA announced a major planned
investment in expansion of its indirect distribution network through stronger
relationships with system platform companies, packaged application software
developers, SIs and independent consultants, ISVs, and distributors. These
investments result in an immediate increase in expenses, especially in sales
and marketing.
Service Revenues as a Percentage of Total Revenues. For the year ended
January 31, 2001, service revenues increased as a percentage of total
revenues. BEA believes that its customer base has been in the process of
transitioning to mission-critical applications based on Java, Enterprise Java
Beans ("EJB"), and, in some cases, CORBA programming models, but that
customers typically have not had sufficient numbers of system architects and
application developers experienced in building large, reliable systems on
these programming models. BEA believes that by providing its customers with
additional services, especially in architecting, building and deploying Java,
EJB and CORBA systems, and training system architects and customers'
application developers to develop these systems, BEA can help facilitate
customers' deployment of systems
10
based on our platform products. An important element of our strategy of
investing in an indirect distribution channel is to supplement BEA's service
offerings through relationships with SIs and other strategic partners,
allowing BEA to focus on architecture services and increase the number of
projects available for licensing BEA's products through SIs' application
development efforts. Investment in these efforts results in an immediate
increase in expenses, 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 investments do not materialize.
Over the four quarters of fiscal 2001, as we have increased our focus on
using strategic partners to provide services related to the deployment and use
of our software solutions, we have experienced a slowdown in the growth rate
of our services revenue, particularly revenue derived from our lower-margin
consulting services. As a result, services revenue as a percentage of total
revenue has dropped from 44.5 percent in the first quarter of fiscal 2001 to
37.9 percent in the fourth quarter of fiscal 2001. This trend may continue or
even worsen, particularly if the recent industry-wide oversupply in software
infrastructure consultants further increases the willingness and ability of
our strategic partners to provide such services or if the current economic
slowdown continues or worsens.
Product Development. In fiscal 2001, BEA continued to invest in product
development, particularly BEA WebLogic Collaborate(TM), BEA WebLogic Commerce
Server(TM), BEA WebLogic Personalization Server(TM) and new releases of BEA
WebLogic Server(TM). BEA WebLogic Collaborate(TM) is business-to-business
integration software that provides an open, scalable and dynamic way to
rapidly create and manage multi-party trading exchanges. BEA WebLogic Commerce
Server(TM) and BEA WebLogic Personalization Server(TM) help enable companies
to quickly deliver highly personalized e-commerce applications. BEA WebLogic
Server(TM) accounts for the majority of BEA's license revenues and is a
platform for Java and EJB applications. BEA recently announced a major release
of BEA WebLogic Server(TM), which adds new transaction, multicasting, Java
messaging services and XML support, as well as other features. This release
became generally available in the fourth quarter of fiscal 2001. BEA's planned
investment in these efforts may affect BEA's anticipated overall financial
results, particularly cost of revenues as a percentage of total revenues 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 investments do not
materialize.
Acquisitions. Since its inception, BEA has acquired several companies and
product lines, as well as 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 two to five years after completion of the
acquisitions. BEA's management views the markets for its products as growing,
and that companies serving those markets are consolidating. This consolidation
presents an opportunity for BEA to further expand its product lines and
functionality, distribution capacity and service offerings and to add new,
related lines of business. BEA anticipates that it may make additional,
perhaps material, acquisitions in the future. The timing of any such
acquisition is impossible to predict and the charges associated with any such
acquisition could materially adversely affect BEA's results of operations,
beginning in the periods in which any such acquisition is completed.
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. During fiscal 2001, the Company
incurred $13.3 million of employer payroll tax expense resulting from employee
exercises of stock options. Because we are unable to predict how many stock
11
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 certain line items in BEA's consolidated
statements of operations as a percentage of total revenues for the fiscal
years ended January 31, 2001, 2000, and 1999.
Fiscal year ended
January 31,
--------------------
2001 2000 1999
----- ----- -----
Revenues:
License fees...................................... 58.1% 63.1% 66.9%
Services.......................................... 41.9 36.9 33.1
----- ----- -----
Total revenues.................................. 100.0 100.0 100.0
Cost of revenues:
Cost of license fees(1)........................... 4.1 2.2 1.7
Cost of services(1)............................... 57.6 57.1 59.8
Amortization of certain acquired intangible
assets........................................... 4.7 6.5 8.1
----- ----- -----
Total cost of revenues.......................... 31.2 29.0 29.0
----- ----- -----
Gross margin........................................ 68.8 71.0 71.0
Operating expenses:
Sales and marketing............................... 40.9 45.5 48.1
Research and development.......................... 10.9 13.1 14.7
General and administrative........................ 7.0 8.2 8.6
Amortization of goodwill.......................... 7.2 3.4 1.0
Acquisition-related charges....................... 0.3 0.6 14.6
----- ----- -----
Income (loss) from operations....................... 2.5 0.1 (16.0)
Interest income (expense) and other, net............ 3.3 (1.3) (0.2)
----- ----- -----
Income (loss) before provision for income taxes..... 5.8 (1.2) (16.2)
Provision for income taxes.......................... 3.7 3.0 1.7
----- ----- -----
Net income (loss)................................... 2.1% (4.2)% (17.8)%
===== ===== =====
- --------
(1) Cost of license fees and cost of services are stated as a percentage of
license fees and services, respectively.
Revenues
BEA's revenues are derived from fees for software licenses, customer
support, education and consulting services. Total revenues increased 76.5
percent to $819.8 million in fiscal 2001 from $464.4 million in fiscal 2000,
when it increased 60.7 percent from $289.0 million in fiscal 1999. These
increases reflect the continued adoption of our software solutions.
License Revenues. License revenues increased 62.7 percent to $476.6 million
in fiscal 2001 from $292.9 million in fiscal 2000, when it increased 51.3
percent from $193.5 million in fiscal 1999. These increases were mainly due to
the rapid adoption of BEA WebLogic Server(TM) as well as the adoption of other
products in our WebLogic E-Business Platform(TM), expansion of our direct
sales force, introduction of new products and new versions of existing
products. License revenues as a percentage of total revenues decreased from
63.1 percent in fiscal 2000 to 58.1 percent in fiscal 2001 and from 66.9
percent in fiscal 1999 to 63.1 percent in fiscal 2000. These percentage
decreases were attributable to the significant increase in service revenues.
Service Revenues. Service revenues increased 100.0 percent to $343.2
million in fiscal 2001 from $171.6 million in fiscal 2000, when it increased
79.6 percent from $95.5 million in fiscal 1999. Service revenues
12
as a percentage of total revenues increased from 36.9 percent in fiscal 2000
to 41.9 percent in fiscal 2001 and increased from 33.1 percent in fiscal 1999
to 36.9 percent in fiscal 2000. The Company's service business experienced
very strong growth in support, education and consulting, particularly outside
the U.S. Over the four quarters of fiscal 2001, as we have increased our focus
on using strategic partners to provide services related to the deployment and
use of our software solutions, we have experienced a slowdown in the growth
rate of our services revenue, particularly revenue derived from our lower-
margin consulting services.
International Revenues. International revenues increased 81.8 percent to
$341.1 million in fiscal 2001 from $187.7 million in fiscal 2000 and increased
62.1 percent from $115.7 in fiscal 1999. International revenues as a percent
of total revenues were 41.6 percent, 40.4 percent and 40.0 percent in fiscal
2001, 2000 and 1999, respectively. Revenues from the Europe, Middle East and
Africa region ("EMEA") increased by 70.2 percent and 50.4 percent during
fiscal 2001 and 2000, respectively. Revenues from the Asia/Pacific region
("APAC") increased by 104.7 percent and 125.9 percent during fiscal 2001 and
2000, respectively. Revenues from other international regions were
insignificant. The increases were the result of expansion of the Company's
international sales force.
Cost of Revenues
Total cost of revenues increased 89.7 percent to $255.8 million in fiscal
2001 from $134.8 million in fiscal 2000, when it increased by 61.1 percent
from $83.7 million in fiscal 1999. Total cost of revenues as a percentage of
total revenues represented 31.2 percent in fiscal 2001 and 29.0 percent in
fiscal 2000 and 1999, respectively. The increase in fiscal 2001 was primarily
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.
Cost of Licenses. Cost of licenses increased 206.0 percent to $19.7 million
in fiscal 2001 from $6.4 million in fiscal 2000, when it increased 99.8
percent from $3.2 million in fiscal 1999. Cost of licenses includes expenses
related to the purchase of compact discs, costs associated with transferring
the Company's software to electronic media, the printing of user manuals,
packaging and distribution costs as well as royalties paid to third parties.
Cost of licenses represented 4.1 percent, 2.2 percent and 1.7 percent of
license revenues in fiscal 2001, 2000 and 1999, respectively. The increases
were primarily due to increases in royalties paid to third parties primarily
resulting from license agreements signed in the third quarter of fiscal 2000
which were in place for all of fiscal 2001.
Cost of Services. Cost of services increased 101.6 percent to $197.6
million in fiscal 2001 from $98.0 million in fiscal 2000, when it increased by
71.4 percent from $57.2 million in fiscal 1999. Cost of services consists
primarily of salaries and benefits for consulting, education and product
support personnel. Cost of services represented 57.6 percent, 57.1 percent and
59.8 percent of service revenues in fiscal 2001, 2000 and 1999, respectively.
Cost of services as a percentage of service revenues increased slightly in
fiscal 2001 compared to fiscal 2000 due to an increase in consulting costs
offset by a higher mix of support revenues. In contrast, cost of services as a
percentage of service revenues decreased in fiscal 2000 as compared to fiscal
1999 due to spreading costs over a higher mix of support revenues versus
consulting revenues.
Amortization of Certain Acquired Intangible Assets, included in Cost of
Revenues. The amortization of certain acquired intangible assets, consisting
primarily of developed technology, non-compete agreements, distribution
rights, trademarks and tradenames, totaled $38.5 million, $30.4 million and
$23.3 million in fiscal 2001, 2000 and 1999, respectively. These increases
were primarily due to additional intangible assets acquired as a result of a
number of strategic acquisitions completed in fiscal 2000 and 2001,
particularly the acquisition of The Theory Center, Inc. ("TTC"), which was
completed in the fourth quarter of fiscal 2000. In the future, amortization
expense associated with intangible assets recorded prior to January 31, 2001
is expected to total approximately $26.1 million, $17.1 million, $9.0 million
and $129,000 for the fiscal years ending January 31, 2002, 2003, 2004 and
thereafter, respectively.
13
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 58.7 percent to
$335.5 million in fiscal 2001 from $211.4 million in fiscal 2000 and increased
52.2 percent in fiscal 2000 from $138.9 million in fiscal 1999. These
increases were due to the expansion of the Company's direct sales force,
increased commissions on the Company's increased revenue base, an increase in
marketing personnel, logo re-branding and advertising campaigns to build brand
awareness. Sales and marketing expenses decreased as a percentage of total
revenues to 40.9 percent in fiscal 2001 from 45.5 percent in fiscal 2000 and
from 48.1 percent in fiscal 1999. These decreases were due to spreading the
increased sales and marketing expenses over a larger revenue base. The Company
expects to continue to invest in the expansion of the direct and indirect
sales channels, as well as marketing programs to promote the Company's
products and brand. Accordingly, the Company expects sales and marketing
expenses to increase in absolute dollars.
Research and Development. Research and development expenses consist
primarily of salaries and benefits for software engineers, contract
development fees, costs of computer equipment used in software development and
facilities expenses. Total expenditures for research and development increased
46.4 percent to $89.2 million in fiscal 2001 from $61.0 million in fiscal 2000
and increased 43.2 percent in fiscal 2000 from $42.6 million in fiscal 1999.
These increases were attributed to an increase in product development
personnel and expenses associated with the release of several new products and
product versions. Research and development expenses represented 10.9 percent
of total revenues in fiscal 2001 and 13.1 percent and 14.7 percent in fiscal
2000 and 1999, respectively. These decreases were primarily due to spreading
the increased research and development expenses over a larger revenue base.
The Company believes that a significant level of research and development is
required to remain competitive and expects to continue to commit substantial
resources to product development and engineering in future periods. As a
result, the Company expects research and development expenses to continue to
increase in absolute dollars in future periods. Additionally, management
intends to continue recruiting and hiring experienced software development
personnel and to consider the licensing and acquisition of technologies
complementary to the Company's business.
General and Administrative. General and administrative expenses include
costs for the Company's human resources, finance, legal, information
technology, facilities and general management functions. General and
administrative expenses increased 51.3 percent to $57.6 million in fiscal 2001
from $38.1 million in fiscal 2000 and increased 52.9 percent in fiscal 2000
from $24.9 million in fiscal 1999. These increases were attributed to the
expansion of the Company's support infrastructure, including information
systems and associated expenses necessary to manage the Company's growth. We
expect general and administrative expenses to increase in absolute dollars, as
we expand our operations.
Amortization of Goodwill. Amortization of goodwill increased in fiscal 2001
compared to fiscal 2000, due to goodwill resulting from various acquisitions
completed in fiscal 2001 and 2000. Amortization of goodwill totaled $59.2
million, $15.8 million and $3.0 million in fiscal 2001, 2000 and 1999,
respectively. In the future, amortization of goodwill recorded prior to
January 31, 2001 is expected to total approximately $53.9 million, $47.4
million, $36.1 million, and $1.0 million for the fiscal years ending January
31, 2002, 2003, 2004 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 fiscal 2001,
acquisition related charges were related to the write-off of the acquired in-
process research and development of approximately $2.2 million relating to The
Workflow Automation Corporation ("Workflow") acquisition, which occurred in
the first quarter of fiscal 2001. In fiscal 2000, acquisition related charges
of $3.0 million were related to the write-off of acquired in-process research
and development relating to the acquisition of The Theory Center ("TTC"),
while in fiscal 1999, acquisition related charges of $42.2 million were
primarily related to the acquisition of the TOP END enterprise middleware
technology and product family of the NCR Corporation.
14
In October 2000, the Company completed its purchase of Bauhaus Technologies
Inc. ("Bauhaus"), an IT and e-commerce consulting company. The purchase price
was approximately $19.8 million in cash, and the acquisition was accounted for
using the purchase method of accounting. Substantially all of the purchase
price was allocated to intangible assets, including assembled workforce, non-
compete agreements, customer base and goodwill. The intangibles are being
amortized on a straight-line basis over two to three years.
In April 2000, the Company completed its purchase of the services business
of The Object People, Inc. ("TOP"), headquartered in Ottawa, Canada. The
purchase price was approximately $20.5 million in cash. The acquisition was
accounted for using the purchase method of accounting with substantially all
of the purchase price allocated to intangible assets, including assembled
workforce and goodwill. The intangibles are being amortized on a straight-line
basis over three years.
In March 2000, the Company acquired Workflow, a software development
company based in Toronto, Canada. Workflow was purchased with a combination of
$4.9 million of cash and the issuance of 470,718 shares of BEA common stock,
valued at $49.41 per share, resulting in a total purchase price of
approximately $28.6 million. The acquisition was accounted for using the
purchase method with substantially all of the purchase price allocated to
intangible assets, including purchased technology, non-compete agreements,
assembled workforce and goodwill. 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 in
determining the fair value of each identifiable tangible and intangible asset
and in allocating the purchase price among the acquired assets. The Company
recorded a charge to income of $2.2 million or $0.01 per diluted share,
resulting from the write-off of acquired research and development. Standard
valuation procedures and techniques were utilized in determining the fair
value of the acquired core/developed, in-process technology, non-compete
agreements and assembled workforce.
Core technology and in-process technology were identified and valued
through analysis of Workflow'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 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 core technology, completed technology, in-
process technology, 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.
In November 1999, BEA completed its merger with TTC. TTC was purchased with
the issuance of approximately 10.9 million shares of BEA common stock and
stock options valued at approximately $154.9 million. An independent valuation
of the purchased assets was performed to assist the Company in determining the
fair value of each identifiable and intangible asset and in the allocation of
the purchase price. The transaction was accounted for using the purchase
method with $3.0 million allocated to in-process technology, $122.4 million to
goodwill and the remaining $29.5 million representing other intangible assets
and liabilities assumed. The intangibles, including purchased technology,
trademarks and tradenames, non-compete agreements, assembled workforce and
goodwill, are being amortized on a straight-line basis over lives ranging from
two to four years.
Interest Expense. Interest expense was $22.9 million in fiscal 2001,
compared to $20.4 million and $10.4 million in fiscal 2000 and 1999,
respectively. The increases in fiscal 2001 and 2000 as compared to fiscal 1999
were 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
15
premiums paid in connection with the conversion of a majority of the $250
million 4% Convertible Subordinated Notes due June 12, 2005 ("2005 Notes")
which were issued during fiscal 1999 and outstanding for substantially all of
fiscal 2000.
Interest Income and Other, Net. Interest income and other, net increased
247.2 percent to $50.1 million in fiscal 2001 from $14.4 million in fiscal
2000 and increased 44.7 percent from $10.0 million in fiscal 1999. These
amounts include interest income of $47.9 million, $15.7 million and $9.1
million in fiscal 2001, 2000 and 1999, respectively. The increases in interest
income were 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 recognized other income and expense of approximately $2.2
million during fiscal 2001. Other income related primarily to a net gain of
$18.6 million as a result of the sale of a portion of the Company's investment
in WebGain, Inc. ("WebGain") Series A Preferred Stock and an $18.0 million
convertible note receivable from WebGain to Warburg, Pincus Equity Partners,
LP ("WP Equity Partners"). In exchange for these Series A Preferred Shares and
the convertible note, the Company received a note receivable from WP Equity
Partners for approximately $50.0 million. The net gain in the aforementioned
transaction was offset by the write-down of approximately $16.2 million of
certain investments in equity securities which were determined to be other
than temporarily impaired.
The Company has a hedging program to reduce the effect of foreign exchange
transaction gains and losses from recorded foreign currency-denominated assets
and liabilities. This program involves the use of forward foreign exchange
contracts in certain European and Asian currencies. The Company does not
currently hedge anticipated foreign currency-denominated revenues and expenses
not yet incurred. Net gains and losses on foreign currency transactions, which
are included in interest income and other, net, were $(787,000), $287,000, and
$340,000 in fiscal 2001, 2000 and 1999, respectively.
The Company's international operations generally consist of sales,
distribution and support organizations that generate revenues and incur
product and service costs, marketing and general and administrative expenses
in local currencies. Research and development, corporate marketing and
administrative expenses are primarily incurred in 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. The Company has provided for income taxes of
$30.4 million, $13.9 million and $4.9 million for fiscal 2001, 2000, and 1999,
respectively. The income tax expense provided in each year consists primarily
of domestic minimum taxes, foreign withholding taxes and foreign income tax
expense incurred as a result of local country profits. The increases in income
taxes for fiscal 2001 relative to fiscal 2000 and fiscal 2000 relative to
fiscal 1999 are primarily due to an overall increase in foreign corporate
income taxes and service revenues and an increase in domestic state current
taxes due to book/tax differences in the amortization of acquired intangibles
and the timing of revenue recognition.
Under Statement of Financial Accounting Standards No. 109 Accounting for
Income Taxes ("FAS 109"), deferred tax assets and liabilities are determined
based on the difference between financial reporting and tax bases of assets
and liabilities and are measured using the enacted tax rates and laws that
will be in effect when the differences are expected to reverse. FAS 109
provides for the recognition of deferred tax assets if realization of such
assets is more likely than not. Based upon the available evidence, which
includes BEA's historical operating performance and the reported cumulative
net losses from prior years, the Company has provided a valuation allowance
against its net deferred tax assets to the extent that 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. See Note 9 of
Notes to Consolidated Financial Statements.
16
Liquidity and Capital Resources
As of January 31, 2001, cash, cash equivalents and short-term investments
totaled $940.9 million, up from $801.4 million at January 31, 2000. The
increase in cash, cash equivalents and short-term investments was primarily
due to cash generated from increased operating profitability and the sale of
common stock.
Cash generated from operating activities rose to $225.3 million in fiscal
2001, compared with $95.2 million in fiscal 2000 and $27.4 million in fiscal
1999. The increases were primarily due to increased operating profitability,
increases in deferred revenues and accrued liabilities, offset partially by an
increase in accounts receivable.
Investing activities consumed $156.7 million of cash during fiscal 2001,
compared with $119.9 million and $107.8 million in fiscal 2000 and 1999,
respectively. Cash used for investing activities in fiscal 2001 was primarily
for a number of strategic acquisitions and investments in equity and debt
securities amounting to approximately $122.8 million, capital expenditures of
$35.3 million, an increase in restricted cash of $3.4 million and purchases of
short-term investments of $186.9 million, offset by maturities of short-term
investments of $191.7 million. 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 $70.9 million, offset by maturities of short-term investments
of $32.9 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 purchases of short-term investments
of $1.4 million offset by maturities of short-term investments of $6.2
million.
The Company generated $81.7 million of cash from financing activities in
fiscal 2001, compared with $554.2 million and $221.1 million in fiscal 2000
and 1999, respectively. The primary source of cash from financing activities
in fiscal 2001 was the proceeds received from employee stock purchases and the
issuance of common stock by BEA pursuant to stock option exercises of $85.7
million, partially offset by payments on the Company's outstanding obligations
of $11.8 million. The primary source of cash from financing activities in
fiscal 2000 was the issuance of the $550 million 4% Convertible Subordinated
Notes due December 15, 2006 ("2006 Notes"), net of $14.6 million of debt
issuance costs. The primary source of cash from financing activities in fiscal
1999 was the issuance of the $250 million 4% Convertible Subordinated Notes
due June 15, 2005 ("2005 Notes") offset by $5.3 million of net 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,
Inc. related to the acquisition of distribution rights for Tuxedo(TM).
As of January 31, 2001, the Company's outstanding short and long-term
obligations were $577.4 million, up from $582.9 million at January 31, 2000.
At January 31, 2001, the Company's outstanding obligations consisted of $561.4
million of convertible notes and $16.0 million of other short-term and long-
term obligations. At January 31, 2000, the Company's outstanding obligations
consisted of $572.5 million of convertible notes and $10.4 million of other
short-term and long-term obligations.
During the first quarter of fiscal 2002, the Company entered into a lease
agreement for the lease of approximately 40 acres of land adjacent to the
Company's San Jose, California headquarters to construct additional corporate
offices and research and development facilities. The lease has an initial term
of five years with renewal options. Rent obligations commence at the beginning
of the third year. The total approximate minimum lease payments for the next
five years are currently estimated to be approximately $0 in fiscal 2002 and
2003 and $17.5 million in fiscal 2004, 2005 and 2006, respectively. The
minimum lease payments will fluctuate from time to time depending on short-
term interest rates. The Company has an option to purchase the land at the end
of the term of the lease for the lesser of $331 million or the outstanding
lease balance or, prior to the end of the lease, to arrange for the sale of
the property to a third party with the Company retaining an obligation to the
owner for the difference between the sales price and the guaranteed residual
value up to $328.7 million if the sales price is less than this amount,
subject to certain provisions of the lease. As part of the
17
lease transaction, the Company has restricted approximately $330 million of
its investment securities as collateral for specified obligations to the
lessor under the lease. The investment securities are restricted as to
withdrawal and are managed by a third party subject to certain limitations.
The Company must maintain certain covenants, as defined in the lease.
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, 2002. However, the Company may make additional
acquisitions and may need to raise additional capital through future debt or
equity financings 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.
Effect of New Accounting Pronouncements
In March 2000, the Financial Accounting Standards Board issued FASB
Interpretation No. 44, Accounting for Certain Transactions Involving Stock
Compensation--an Interpretation of APB Opinion No. 25, ("FIN 44"). FIN 44
clarifies the application of APB Opinion No. 25 and, among other issues,
clarifies the following: the definition of an employee for purposes of
applying APB Opinion No. 25; the criteria for determining whether a plan
qualifies as a noncompensatory plan; the accounting consequence of various
modifications to the terms of the previously fixed stock options or awards;
and the accounting for an exchange of stock compensation awards in a business
combination. FIN 44 was effective July 1, 2000. The application of FIN 44 has
not had a material impact on the Company's financial position or results of
operations.
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. The application of SAB 101 has not
had a material impact on the Company's financial position or results of
operations.
In June 1998, the Financial Accounting Standards Board released Statement
of Financial Accounting Standards No. 133, Accounting for Derivative
Instruments and Hedging Activities ("FAS 133"). FAS 133 establishes the
accounting and reporting standards for derivative instruments, including
certain derivative instruments embedded in other contracts (collectively
referred to as derivatives) and for hedging activities. It requires that an
entity recognizes all derivatives as either assets or liabilities in the
statement of financial position and measures those instruments at fair value.
In July 1999, FAS No. 137, Accounting for Derivative Instruments and Hedging
Activities--Deferral of the Effective Data of FASB Statement 133 ("FAS 137")
was issued. FAS 137 deferred the effective date of FAS 133 until the first
fiscal quarter of fiscal years beginning after June 15, 2000. The Company will
adopt FAS 133 effective February 1, 2001. The Company does not currently
expect that the adoption of FAS 133 will have a material impact to its
financial position or results of operations.
Factors That May Impact Future Operating Results
BEA. operates in a rapidly changing environment that involves numerous
risks and uncertainties. The following section lists some, but not all, of
these risks and uncertainties which may have a material adverse effect on the
Company's business, financial condition or results of operations.
Significant unanticipated fluctuations in our actual or anticipated quarterly
revenues and operating results may cause us not to meet securities analysts'
or investors' expectations and may result in a decline in 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
18
generally associated with Internet, software and technology stocks and may
also be affected by broader market trends unrelated to our performance, such
as the declines in the prices of many such stocks since March 2000 to March
2001.
We expect to experience significant fluctuations in our future quarterly
revenues and operating results as a result of many factors, including:
. recent adverse economic conditions, which may increase the likelihood
that customers will unexpectedly delay or cancel orders and result in
revenue shortfalls
. difficulty predicting the size and timing of customer orders
. the mix of our products and services sold
. mix of distribution channels
. whether our strategy to further establish and expand our relationships
with distributors is successful
. introduction or enhancement of our products or our competitors' products
. 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 and whether any new products are accepted in the market
. 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
. the terms and timing of financing activities
. potential fluctuations in demand or prices of our products and services
. 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
. loss of key personnel
. fluctuations in foreign currency exchange rates
As a result of all of these factors, we believe that quarterly revenues and
operating results are difficult to forecast and period-to-period comparisons
of our results of operations are not necessarily meaningful and should not be
relied upon as indications of trends or future performance.
A material portion of our revenues has been derived from large orders, as
customers deployed our products. Increases in the dollar size of some
individual license transactions would also increase the risk of fluctuation in
future quarterly results. The majority of our revenue originates with a large
number of small development orders with the potential to turn into large
deployments. If we cannot generate large customer orders, turn development
orders into large deployments or customers delay or cancel such orders in a
particular quarter, it may have a material adverse effect on our revenues and,
more significantly on a percentage basis, our net income or loss in that
quarter. Moreover, we typically receive and fulfill most of our orders within
the quarter, with the substantial majority of our orders typically received in
the last month of each fiscal quarter. As a result, we may not learn of
19
revenue shortfalls until late in a fiscal quarter, after it is too late to
adjust expenses for that quarter. Moreover, recent adverse economic conditions
in the United States, particularly those related to the technology industry,
may increase the likelihood that customers will unexpectedly delay or cancel
orders and result in revenue shortfalls. This risk is particularly relevant
with respect to large customer orders which are more likely to be cancelled or
delayed and also have a greater financial impact on our operating results. A
number of technology companies, particularly software companies that, like
BEA, sell enterprise-wide software solutions, have recently announced that
these conditions have adversely affected their financial results.
Additionally, our operating expenses are based in part on our expectations for
future revenues and are difficult to adjust in the short term. Any revenue
shortfall below our expectations could have an immediate and significant
adverse effect on our results of operations.
We are subject to employer payroll taxes when our employees exercise their
stock options. The employer payroll taxes are assessed on each employee's
gain, which is the difference between the price of our common stock on the
date of exercise and the exercise price. During a particular period, these
payroll taxes could be material. These employer payroll taxes are recorded as
an expense and are assessed at tax rates that vary 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 that will be recorded in a future period or the
impact on our future financial results.
As is common in the software industry, we believe that our fourth quarter
orders are favorably impacted by a variety of factors including year-end
capital purchases by larger corporate customers and the commission structure
for our sales force. This increase typically results in first quarter customer
orders being lower than orders received in the immediately preceding fourth
quarter. BEA anticipates that this seasonal impact is likely to continue.
Although we use standardized license agreements designed to meet current
revenue recognition criteria under generally accepted accounting principles,
we must often negotiate and revise terms and conditions of these standardized
agreements, 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. While we believe that we are in compliance with Statement of Position
97-2, Software Revenue Recognition, ("SOP 97-2") as amended, the American
Institute of Certified Public Accountants continues to issue implementation
guidelines for these standards and the accounting profession continues to
discuss a wide range of potential interpretations. In addition, the Securities
and Exchange Commission ("SEC") issued Staff Accounting Bulletin No. 101,
Revenue Recognition in Financial Statements ("SAB 101"). BEA has adopted the
provisions of SAB 101 in its fourth fiscal quarter of 2001. Additional
implementation guidelines and changes in interpretations of such guidelines
could lead to unanticipated changes in our current revenue accounting
practices that could cause us to defer the recognition of revenue to future
periods or to recognize lower revenue and profits.
Our revenues are derived primarily from two main products and related
services, and a decline in demand or prices for either products or services
could substantially adversely affect our operating results
We currently derive the majority of our license and service revenues from
BEA WebLogic(TM), BEA TUXEDO(TM) and from related products and services. We
expect these products and services to continue to account for the majority of
our revenues in the immediate future. As a result, factors adversely affecting
the pricing of or demand for BEA WebLogic(TM), BEA TUXEDO(TM) or related
services, such as a general economic slowdown, competition, product
performance or technological change, could have a material adverse effect on
our business and consolidated results of operations and financial condition.
As we have increased our focus on using strategic partners to provide services
related to the deployment and use of our software solutions, we have recently
experienced a slowdown in the growth rate of our services revenue,
particularly revenue derived from our lower-margin consulting services. This
trend may continue or even worsen, particularly if the recent industry-wide
oversupply in software infrastructure consultants further increases the
willingness and ability of our strategic partners to provide such services or
if the current economic slowdown continues or worsens.
20
Any failure to maintain ongoing sales through distribution channels could
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, SIs 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, original equipment
manufacturers ("OEMs") and SIs. In particular, in August 2000, we announced a
significant initiative to further establish and expand relationships with our
distributors through these sales channels, especially ISVs and SIs. A
significant part of this initiative is to recruit and train a large number of
consultants employed by SIs and induce these SIs to more broadly use our
products in their consulting practices, as well as to embed our technology in
products our ISV customers offer. We intend to seek distribution arrangements
with additional ISVs to embed our Web application servers in their products.
It is possible that we will not be able to successfully expand our direct
sales force or other distribution channels, secure agreements with additional
SIs and ISVs on commercially reasonable terms or at all, and otherwise
adequately develop our relationships with indirect sales channels. Moreover,
even if we succeed in these endeavors, it still may not increase our revenues.
In particular, we need to carefully monitor the development and scope of our
indirect sales channels and create appropriate pricing, sales force
compensation and other distribution parameters to help ensure these indirect
channels complement our direct channels. If we invest resources in these types
of expansion and our overall revenues do not correspondingly increase, our
business, results of operations and financial condition will be materially and
adversely affected.
In addition, we already 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.
It is difficult to predict our future results for a variety of reasons
including our limited operating history and need to continue to integrate our
acquisitions
We were incorporated in January 1995 and therefore have a limited operating
history. We have generated revenues to date primarily from sales of BEA
WebLogic(TM), a software product which we acquired in September 1998, and from
BEA TUXEDO(TM), a software product to which we acquired worldwide distribution
rights in February 1996, and fees for software products and services related
to WebLogic(TM) and TUXEDO(TM). We have also acquired a number of additional
businesses, technologies and products. 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, 2001, we had an
accumulated deficit of approximately $185.9 million. In addition, in
connection with certain acquisitions completed prior to January 31, 2001, we
recorded approximately $511.0 million as intangible assets and goodwill. Under
current generally accepted accounting principles, intangible assets and
goodwill are required to be amortized in future periods. Approximately $320.3
million of these assets have been amortized as of January 31, 2001, and we
expect to amortize the remaining amount of approximately $190.7 million in
future periods through our fiscal year ending January 31, 2005. 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. We
first reported an operating profit under generally accepted accounting
principles in the second quarter of fiscal 2001. Because of our limited
operating history and ongoing expenses associated with our prior acquisitions,
there can be no assurance that we will continue to be profitable in any future
period, and recent operating results should not be considered indicative of
future financial performance.
21
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 timely and effectively enhance existing
products (such as our WebLogic Server product), respond to changing customer
requirements and develop and introduce in a timely manner new products (such
as our WebLogic Collaborate product) that keep pace with technological and
market developments and emerging industry standards. We are also developing
products designed to provide components for applications (such as our WebLogic
Commerce Server(TM), WebLogic Personalization Server(TM) and Campaign Manager
products) in an effort to further build out and increase the value of the e-
business software infrastructure platform we provide. 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.
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 often have not been directly related to the operating performance of such
companies, such as the declines in the stock prices of BEA and many such
companies since March 2000 to March 2001. 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 a number of 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. 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") proposed 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
22
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.
Recently, FASB proposed that purchased goodwill should not be amortized,
but rather, it should be periodically reviewed for impairment. FASB proposed
that at the time goodwill is considered impaired an amount equal to the
impairment loss should be charged as an operating expense in the income
statement. The timing of such an impairment (if any) of goodwill acquired in
past and future transactions is uncertain and difficult to predict. If this
proposal is adopted, our results of operations in periods following any such
impairment could be materially adversely affected.
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 an 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. This delay or
failure to complete large orders and sales in a particular quarter could
significantly reduce revenue that quarter, as well as subsequent quarters over
which revenue for the sale would likely be recognized.
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. BEA's 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 Hewlett-Packard 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 its .NET Web services initiative. In addition, there are other
companies offering and developing application server and integration software
products and related services that directly compete with products the Company
offers. 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 the Company offers. A number of BEA's 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.
BEA's 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, Sun Microsystems
and Hewlett-Packard are the primary hardware vendors who offer a line of
application server and integration solutions for their customers. IBM's sale
of application server and integration functionality along with its IBM
proprietary hardware systems requires BEA 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
23
functionality with computer hardware and software sales. Due to these factors,
if the Company does not differentiate its products based on functionality,
interoperability with non-IBM systems, performance and reliability, and
establish its products as more effective solutions to customers' needs, its
revenues and operating results will suffer.
Microsoft has announced that it intends to include certain application
server and integration functionality in its .NET Web services initiative. The
bundling of competing functionality in versions of .NET servers requires BEA
to compete with Microsoft in the Web services 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 broad product line and
features into a Web services environment. The Company needs to differentiate
its products from Microsoft's based on scalability, functionality,
interoperability with non-Microsoft platforms, performance and reliability,
and needs to establish its products as more effective solutions to customers'
needs. The Company may not be able to successfully differentiate its products
from those offered by Microsoft, and Microsoft's entry into the application
server and integration market could materially adversely affect the Company's
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 its 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 the Company's ability to sell additional software licenses
and maintenance, consulting and support services on terms favorable to us.
Further, competitive pressures could require BEA to reduce the price of its
products and related services, which could materially adversely affect the
Company's business, operating results and financial condition. The Company 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 its business,
operating results and financial condition.
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. Even if
they do grow they may grow more slowly than we anticipate, particularly in
view of the recent economic downturn affecting the technology sector in the
United States. 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 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.
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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 including their patent rights. Any such claims,
with or without merit, could cause costly litigation that could absorb
significant management time, which could materially adversely affect our
business, operating results and financial condition. These types of claims
could cause us to pay substantial damages on settlement amounts, cease
offering any subject technology and require us to enter into royalty or
license agreements. If required, we may not be able to obtain such royalty or
license agreements, or obtain them on terms acceptable to us, which could have
a material adverse effect upon our business, operating results and financial
condition.
Our international operations expose us to greater management, collections,
currency, intellectual property, regulatory and other risks
International revenues accounted for 41.6 percent, 40.4 percent and 40.0
percent of our consolidated revenues for the fiscal years ended January 31,
2001, 2000 and 1999, respectively. We sell our products and services through a
network of branches and subsidiaries located in 30 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 forei