UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
(Mark One)
| x | QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended April 30, 2003
OR
| ¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Commission File Number: 0-22369
BEA SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
| Delaware (State or other jurisdiction of incorporation or organization) |
77-0394711 (I. R. S. Employer Identification No.) |
2315 North First Street
San Jose, California 95131
(Address of principal executive offices)
(408) 570-8000
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark whether Registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes x No ¨
As of May 31, 2003, there were approximately 401,426,016 shares of the Registrant’s common stock outstanding.
INDEX
| Page No. | ||||
| PART I. FINANCIAL INFORMATION |
||||
| ITEM 1. |
Financial Statements (Unaudited): |
|||
| 3 | ||||
| Condensed Consolidated Balance Sheets as of April 30, 2003 and January 31, 2003 |
4 | |||
| Condensed Consolidated Statements of Cash Flows for the three months ended April 30, 2003 and 2002 |
5 | |||
| 6 | ||||
| ITEM 2. |
Management’s Discussion and Analysis of Financial Condition and Results of Operations |
14 | ||
| ITEM 3. |
36 | |||
| ITEM 4. |
38 | |||
| PART II. OTHER INFORMATION |
||||
| ITEM 6. |
40 | |||
| 41 | ||||
| 42 | ||||
| 43 | ||||
2
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE INCOME
(in thousands, except per share data)
(Unaudited)
| Three Months Ended April 30, |
||||||||
| 2003 |
2002 |
|||||||
| Revenues: |
||||||||
| License fees |
$ | 122,339 | $ | 131,138 | ||||
| Services |
114,955 | 93,705 | ||||||
| Total revenues |
237,294 | 224,843 | ||||||
| Cost of revenues: |
||||||||
| Cost of license fees |
5,897 | 4,657 | ||||||
| Cost of services |
46,817 | 41,890 | ||||||
| Amortization of acquired intangible assets |
5,017 | 7,695 | ||||||
| Total cost of revenues |
57,731 | 54,242 | ||||||
| Gross profit |
179,563 | 170,601 | ||||||
| Operating expenses: |
||||||||
| Sales and marketing |
91,909 | 93,928 | ||||||
| Research and development |
34,830 | 31,335 | ||||||
| General and administrative |
18,610 | 18,929 | ||||||
| Total operating expenses |
145,349 | 144,192 | ||||||
| Income from operations |
34,214 | 26,409 | ||||||
| Interest and other, net: |
||||||||
| Interest expense |
(5,543 | ) | (5,544 | ) | ||||
| Write-down of equity investments |
— | (22,386 | ) | |||||
| Net gain (loss) on sale of equity investments |
(198 | ) | 453 | |||||
| Interest income and other, net |
6,463 | 6,594 | ||||||
| Total interest and other, net |
722 | (20,883 | ) | |||||
| Income before provision for income taxes |
34,936 | 5,526 | ||||||
| Provision for income taxes |
10,481 | 1,658 | ||||||
| Net income |
24,455 | 3,868 | ||||||
| Other comprehensive income: |
||||||||
| Foreign currency translation adjustments |
83 | (365 | ) | |||||
| Unrealized gain (loss) on available-for-sale investments, net of income taxes |
(221 | ) | 6 | |||||
| Comprehensive income |
$ | 24,317 | $ | 3,509 | ||||
| Net income per share: |
||||||||
| Basic and diluted net income per share |
$ | 0.06 | $ | 0.01 | ||||
| Number of shares used in per share calculations: |
||||||||
| Basic |
402,710 | 403,980 | ||||||
| Diluted |
419,130 | 421,170 | ||||||
See accompanying notes to condensed consolidated financial statements.
3
BEA SYSTEMS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
(Unaudited)
| April 30, 2003 |
January 31, 2003 |
|||||||
| ASSETS | ||||||||
| Current assets: |
||||||||
| Cash and cash equivalents |
$ | 553,071 | $ | 578,717 | ||||
| Restricted cash |
1,829 | 4,369 | ||||||
| Short-term investments |
681,254 | 688,753 | ||||||
| Accounts receivable, net |
189,317 | 208,189 | ||||||
| Other current assets |
42,218 | 43,869 | ||||||
| Total current assets |
1,467,689 | 1,523,897 | ||||||
| Property and equipment, net |
61,870 | 63,938 | ||||||
| Goodwill, net |
54,366 | 53,565 | ||||||
| Acquired intangible assets, net |
18,503 | 16,159 | ||||||
| Long-term restricted cash |
152,727 | 131,727 | ||||||
| Other long-term assets (see Note 2—Related Party Transactions) |
22,569 | 20,673 | ||||||
| Total assets |
$ | 1,777,724 | $ | 1,809,959 | ||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
| Current liabilities: |
||||||||
| Accounts payable |
$ | 14,240 | $ | 10,807 | ||||
| Accrued facilities consolidation charges |
17,010 | 17,617 | ||||||
| Accrued payroll and related liabilities |
42,225 | 54,295 | ||||||
| Accrued income taxes |
36,953 | 38,992 | ||||||
| Other accrued liabilities |
86,267 | 89,512 | ||||||
| Deferred revenues |
231,018 | 233,758 | ||||||
| Deferred tax liabilities |
600 | 600 | ||||||
| Total current liabilities |
428,313 | 445,581 | ||||||
| Deferred tax liabilities |
1,788 | 4,214 | ||||||
| Notes payable and other long-term obligations |
4,352 | 4,215 | ||||||
| Convertible subordinated notes |
550,000 | 550,000 | ||||||
| Commitments and contingencies |
||||||||
| Stockholders’ equity: |
||||||||
| Common stock |
401 | 406 | ||||||
| Additional paid-in capital |
1,015,584 | 1,002,846 | ||||||
| Treasury stock, at cost |
(94,089 | ) | (42,095 | ) | ||||
| Accumulated deficit |
(113,220 | ) | (137,675 | ) | ||||
| Deferred compensation |
(16,213 | ) | (18,479 | ) | ||||
| Accumulated other comprehensive income |
808 | 946 | ||||||
| Total stockholders’ equity |
793,271 | 805,949 | ||||||
| Total liabilities and stockholders’ equity |
$ | 1,777,724 | $ | 1,809,959 | ||||
See accompanying notes to condensed consolidated financial statements.
4
BEA SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)
| Three Months Ended April 30, |
||||||||
| 2003 |
2002 |
|||||||
| Operating activities: |
||||||||
| Net income |
$ | 24,455 | $ | 3,868 | ||||
| Adjustments to reconcile net income to net cash provided by operating activities: |
||||||||
| Depreciation |
7,297 | 7,969 | ||||||
| Amortization of deferred compensation |
2,266 | 1,099 | ||||||
| Amortization of acquired intangible assets |
5,017 | 7,695 | ||||||
| Write-down of equity investments |
— | 22,386 | ||||||
| Changes in operating assets and liabilities |
(4,098 | ) | 10,565 | |||||
| Other |
5,560 | 2,151 | ||||||
| Net cash provided by operating activities |
40,497 | 55,733 | ||||||
| Investing activities: |
||||||||
| Purchases of property and equipment |
(3,961 | ) | (11,658 | ) | ||||
| Payments for acquisitions, net of cash acquired, and other equity investments |
(4,129 | ) | (7,349 | ) | ||||
| Purchases of available-for-sale short-term investments |
(145,582 | ) | (120,417 | ) | ||||
| Proceeds from maturities of available-for-sale short-term investments |
30,800 | 99,334 | ||||||
| Proceeds from sales of available-for-sale short-term investments |
119,318 | — | ||||||
| Other |
353 | 1,500 | ||||||
| Net cash used in investing activities |
(3,201 | ) | (38,590 | ) | ||||
| Financing activities: |
||||||||
| Increase in restricted cash for collateral on land lease transaction and for certain banking requirements in foreign countries |
(21,226 | ) | (1,263 | ) | ||||
| Net proceeds received for employee stock purchases |
9,836 | 16,308 | ||||||
| Purchases of treasury stock |
(51,999 | ) | — | |||||
| Net cash provided by (used in) financing activities |
(63,389 | ) | 15,045 | |||||
| Net increase (decrease) in cash and cash equivalents |
(26,093 | ) | 32,188 | |||||
| Effect of exchange rate changes on cash |
447 | 1 | ||||||
| Cash and cash equivalents at beginning of period |
578,717 | 821,802 | ||||||
| Cash and cash equivalents at end of period |
$ | 553,071 | $ | 853,991 | ||||
See accompanying notes to condensed consolidated financial statements.
5
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Basis of Presentation
The condensed consolidated financial statements included herein are unaudited and reflect all adjustments (consisting only of normal recurring adjustments) which are, in the opinion of management, necessary for a fair presentation of the financial position, results of operations and cash flows for the interim periods presented. Certain amounts reported in prior periods have been reclassified to conform to the presentation adopted in the current period. Such reclassifications did not change the previously reported revenues, operating income or net income amounts. These condensed consolidated financial statements should be read in conjunction with the Consolidated Financial Statements and Notes thereto, together with Management’s Discussion and Analysis of Financial Condition and Results of Operations contained in the BEA Systems, Inc. (“BEA” or the “Company”) Annual Report on Form 10-K for the fiscal year ended January 31, 2003. The results of operations for the three months ended April 30, 2003 are not necessarily indicative of the results to be anticipated for the entire fiscal year ending January 31, 2004.
The condensed consolidated balance sheet at January 31, 2003 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements.
Use of estimates
The preparation of the financial statements in accordance with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and the accompanying notes. Actual results could differ materially from those estimates.
Revenue recognition
The Company recognizes revenues in accordance with the American Institute of Certified Public Accountants (“AICPA”) Statement of Position 97-2, Software Revenue Recognition, as amended. Revenue from software license agreements is recognized when persuasive evidence of an agreement exists, delivery of the product has occurred, the fee is fixed or determinable, and collection is probable. The Company uses the residual method to recognize revenue when a license agreement includes one or more elements to be delivered at a future date and vendor specific evidence of the fair value of all undelivered elements exists. Under the residual method, the fair value of the undelivered elements is deferred and the remaining portion of the arrangement fee is recognized as revenue. If evidence of the fair value of one or more undelivered elements does not exist, the revenue is deferred and recognized when delivery of those elements occurs or when fair value can be established.
When licenses are sold together with services, license fees are recognized upon delivery, provided that (1) the above criteria have been met, (2) payment of the license fees is not dependent upon the performance of the services, and (3) the services do not provide significant customization of the software products and are not essential to the functionality of the software that was delivered. The majority of license fees are recognized in this manner. For arrangements that do not meet the above criteria, the license and related services revenue is recognized in accordance with AICPA Statement of Position 81-1, Accounting for Performance of Construction-Type and Certain Production-Type Contracts.
If the fee due from the customer is not fixed or determinable, revenue is recognized as payment is due from the customer, assuming all other revenue recognition criteria have been met. Generally, the Company considers arrangements with extended payment terms not to be fixed or determinable unless the Company has an established history with a particular customer of granting extended payment terms and collecting payment without granting concessions. In certain regions or countries where collection risk is generally
6
BEA SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
considered to be high, such as Latin America, China and Korea, revenue is generally recognized only when full cash payment is received from the customer. Revenue arrangements with resellers are generally recognized on a sell-through basis, that is, when the Company receives persuasive evidence that the reseller has sold the products to an end user customer. Revenue from sales to independent software vendors (“ISV’s”) who embed BEA’s products into their software products is recognized either upon shipment to the ISV or on a sell-through basis, depending upon the facts and circumstances and BEA’s past experience with the particular ISV. The majority of ISV arrangements are recognized upon shipment to the ISV.
Services revenue includes consulting services, customer support and education. Consulting revenue and the related cost of services are recognized on a time and materials basis; however, revenues from certain fixed-price contracts are recognized on the percentage of completion basis, which involves the use of estimates. The amount of consulting contracts recognized on a percentage of completion basis has not been significant to date. Customer support agreements provide technical support and the right to unspecified future upgrades on an if-and-when available basis. Customer support revenue is recognized ratably over the term of the support period (generally one year) a