-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, RJbUJBcnpjPVGzQ+MIP722xrmSjW8U+qa05hgpivJvfTW8rHYzgcI9Q1jF+3wKOP Dt5fK6EJXqWLiedQAIEzzA== 0001012870-98-002355.txt : 19980911 0001012870-98-002355.hdr.sgml : 19980911 ACCESSION NUMBER: 0001012870-98-002355 CONFORMED SUBMISSION TYPE: 10-Q/A PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19980430 FILED AS OF DATE: 19980910 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: BEA SYSTEMS INC CENTRAL INDEX KEY: 0001031798 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-COMPUTER PROGRAMMING SERVICES [7371] IRS NUMBER: 770394711 STATE OF INCORPORATION: DE FISCAL YEAR END: 0131 FILING VALUES: FORM TYPE: 10-Q/A SEC ACT: SEC FILE NUMBER: 000-22369 FILM NUMBER: 98707476 BUSINESS ADDRESS: STREET 1: 385 MOFFETT PK DR STREET 2: SUITE 105 CITY: SUNNYVALE STATE: CA ZIP: 94404 BUSINESS PHONE: 4087434000 MAIL ADDRESS: STREET 1: 385 MOFFETT PARK DRIVE STREET 2: SUITE 105 CITY: SUNNYVALE STATE: CA ZIP: 94089 10-Q/A 1 FORM 10-Q/A UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D. C. 20549 FORM 10-Q/A (Mark One) X Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange - --- Act of 1934 For the quarterly period ended April 30, 1998 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 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) (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 --- --- As of May 28, 1998, there were approximately 66,442,000 shares of the Registrant's Common Stock outstanding. 1 BEA SYSTEMS, INC. EXPLANATORY NOTE The Registrant's quarterly report on Form 10-Q for the three month period ended April 30, 1998 has been amended to include the results of operations, financial position and cash flows for the Leader Group, Inc. See Note 1 and Note 4 to the Notes to Condensed Consolidated Financial Statements. INDEX
PART I. FINANCIAL INFORMATION Item 1. Financial Statements: Page No. -------- Condensed Consolidated Statements of Operations Three months ended April 30, 1998 and 1997.................... 3 Condensed Consolidated Balance Sheets April 30, 1998 and January 31, 1998........................... 4 Condensed Consolidated Statements of Cash Flows Three months ended April 30, 1998 and 1997................................. 5 Notes to Condensed Consolidated Financial Statements............. 6 Item 2. Management's Discussion and Analysis of Financial Condition And Results of Operations .................................... 10 Item 3. Quantitative and Qualitative Disclosure about Market Risks....... 22 PART II. OTHER INFORMATION Item 5. Other Information................................................ 23 Item 6. Exhibits and Reports on Form 8-K................................. 23 Signatures....................................................... 23
2 PART I. FINANCIAL INFORMATION ITEM I. FINANCIAL STATEMENTS BEA SYSTEMS, INC. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except per share data) (Unaudited)
Three months ended April 30, --------------------------------- 1998 1997 ------------ ------------ Revenues: License fees $ 39,741 $ 24,478 Services 17,709 6,968 ------------ ------------ Total revenues 57,450 31,446 Cost of revenues: Cost of license fees 775 578 Cost of services 11,113 4,498 Amortization of certain acquired intangible assets 3,182 2,603 ------------ ------------ Total cost of revenues 15,070 7,679 ------------ ------------ Gross margin 42,380 23,767 Operating expenses: Sales and marketing 25,299 15,980 Research and development 9,268 5,143 General and administrative 5,341 3,664 Acquisition-related charges 491 16,000 ------------ ------------ Total operating expenses 40,399 40,787 ------------ ------------ Income (loss) from operations 1,981 (17,020) Interest and other, net 214 (2,477) ------------ ------------ Income (loss) before provision for income taxes 2,195 (19,497) Provision for income taxes 623 572 ------------ ------------ Net income (loss) $ 1,572 $ (20,069) ============ ============ Net income (loss) per share: Basic $ 0.02 $ (0.97) ============ ============ Diluted $ 0.02 $ (0.97) ============ ============ Pro forma $ (0.39) ============ Shares used in computing: Basic net income (loss) per share 66,005 20,884 ============ ============ Diluted net income (loss) per share 72,145 20,884 ============ ============ Pro forma net income (loss) per share 51,271 ============
See accompanying notes. 3 BEA SYSTEMS, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (in thousands)
April 30, 1998 January 31, 1998 ----------------- ----------------- (Unaudited) ASSETS Current assets: Cash and cash equivalents $ 92,521 $ 90,651 Short-term investments 4,759 8,708 Accounts receivable, net 52,441 47,422 Other current assets 4,369 2,970 ----------------- ----------------- Total current assets 154,090 149,751 Computer equipment, furniture and leasehold improvements, net 8,136 7,845 Acquired intangible assets, net 14,631 12,315 Other assets 5,365 2,905 ================= ================= Total assets $ 182,222 $ 172,816 ================= ================= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Borrowing under lines of credit $ 2,843 $ 1,879 Accounts payable 7,337 5,040 Accrued payroll and related liabilities 14,956 14,590 Accrued liabilities 12,261 10,841 Accrued income taxes 2,909 2,741 Deferred revenues 17,946 14,639 Current portion of notes payable and capital lease obligations 38,037 42,301 ----------------- ----------------- Total current liabilities 96,289 92,031 Notes payable and capital lease obligations 595 691 Stockholders' equity: Common stock 66 66 Additional paid-in capital 214,755 210,253 Accumulated deficit (127,928) (128,508) Notes receivable from shareholders (544) (544) Deferred compensation (540) (601) Accumulated other comprehensive loss (471) (572) ----------------- ----------------- Total stockholders' equity 85,338 80,094 ----------------- ----------------- Total liabilities and stockholders' equity $ 182,222 $ 172,816 ================= =================
See accompanying notes. 4 BEA SYSTEMS, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) (Unaudited)
Three months ended April 30, --------------------------------- 1998 1997 ------------ ------------- Operating activities: Net income (loss) $ 1,572 $ (20,069) Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Depreciation 569 590 Amortization of deferred compensation 61 61 Amortization of acquired intangible assets and certain acquisition-related charges 3,383 18,660 Changes in operating assets and liabilities, net of business combinations (2,143) (4,898) Other (30) 255 ------------ ------------- Net cash provided by (used in) operating activities 3,412 (5,401) ------------ ------------- Investing activities: Purchase of computer equipment, furniture and leasehold improvements (857) (99) Payments for business combinations, net of cash acquired (1,575) - Net sales of available-for-sale short-term investments 3,949 - ------------ ------------- Net cash provided by (used in) investing activities 1,517 (99) ------------ ------------- Financing activities: Net borrowings (payments) under lines of credit 964 (4,595) Net payments on notes payable and capital lease obligations (4,400) (12,514) Proceeds from issuance of common stock, net 276 25,709 ------------ ------------- Net cash provided by (used in) financing activities (3,160) 8,600 ------------ ------------- Net increase in cash and cash equivalents 1,769 3,100 Cumulative foreign currency translation adjustment 101 137 Cash and cash equivalents at beginning of quarter 90,651 3,856 ------------ ------------- Cash and cash equivalents at end of quarter $ 92,521 $ 7,093 ============ =============
See Notes 1 and 4 for supplemental information of noncash investing activity relating to the Merger with the Leader Group, Inc. See accompanying notes. 5 BEA SYSTEMS, INC. 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. 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 or Plan of Operations contained in BEA Systems, Inc.'s ("BEA" or the "Company") Annual Report on Form 10-KSB for the fiscal year ended January 31, 1998 and the supplemental consolidated financial statements and notes thereto, contained in the Company's current report on Form 8-K as filed with the Securities and Exchange Commission on September 10, 1998, reflecting the merger with the Leader Group, Inc. ("Leader Group"). The results of operations for the three months ended April 30, 1998 are not necessarily indicative of the results for the entire fiscal year ending January 31, 1999. The consolidated balance sheet at January 31, 1998 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. As described in Note 4, on April 30, 1998, the Company acquired all of the outstanding shares of Leader Group in a transaction accounted for as a pooling of interests. The Company's financial statements have been recast to include the results of operations, financial position and cash flows of Leader Group for the periods presented. In connection with the transaction, the Company incurred approximately $ 491,000 in merger-related expenses consisting primarily of legal and other professional fees in the first quarter ended April 30, 1998. The results of operations for the separate companies and the combined amounts presented in the consolidated financial statements follow (in thousands):
Three months ended April 30, 1998 1997 ------------- ------------- Total revenues: BEA Systems, Inc. $ 56,343 $ 30,389 Leader Group, Inc. 1,107 1,057 ------------- ------------- Combined $ 57,450 $ 31,446 ============= ============= Net income (loss): BEA Systems, Inc. $ 1,455 $ (20,371) Leader Group, Inc. 117 302 ------------- ------------- Combined $ 1,572 $ (20,069) ============= =============
As required by generally accepted accounting principles, the effect of transactions between the Company and Leader Group prior to the combination have been eliminated. 6 Note 2. Earnings Per Share The Company adopted Statement of Financial Accounting Standard No. 128 ("FAS 128"), "Earnings per Share," in the fourth quarter of the fiscal year ended January 31, 1998. As a result, the Company has changed the method used to compute net earnings per share and has restated net earnings per share for all prior periods as required by FAS 128. The adoption of FAS 128 did not have a material impact on the Company's consolidated results of operations. The following is a reconciliation of the numerators and denominators of the basic and diluted earnings per share computations (in thousands, except per share data):
Three months ended April 30, 1998 1997 ------------- ------------- Numerator: Net income (loss) $ 1,572 $ (20,069) Effect of Series B redeemable convertible preferred stock dividends - (268) ------------- ------------- Net income (loss) available to common stockholders for basic earnings (loss) per share $ 1,572 $ (20,337) ============= ============= Denominator: Weighted average shares - Basic 66,005 20,884 Dilutive effect of outstanding stock options 6,140 - ------------- ------------- Weighted average shares - Diluted 72,145 20,884 ============= ============= Basic net income (loss) per share $ 0.02 $ (0.97) ============= ============= Diluted net income (loss) per share $ 0.02 $ (0.97) ============= ============= For the quarter ended April 30, 1997, the pro forma net loss per share assuming conversion of preferred stock and convertible line of credit on an as-converted basis as of the date of issuance is as follows: Numerator: Net loss $ (20,069) ============= Denominator: Weighted average shares 20,884 Dilutive effect of conversion of preferred stock and convertible line of credit 30,387 ------------- 51,271 ============= Pro forma net loss per share $ (0.39) =============
7 Note 3. Comprehensive Income Effective February 1, 1998, the Company adopted Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income," ("FAS 130"). FAS 130 requires the reporting of comprehensive income (loss) and its components and requires foreign currency translation adjustment and unrealized gains or losses on the Company's available-for-sale investments, which prior to adoption were reported in shareholders' equity, to be included in other comprehensive income. Prior year financial statements have been restated to conform to the requirements of FAS 130. The components of comprehensive income, net of tax, are as follows (in thousands):
Three Months Ended April 30, 1998 1997 ------------- --------------- Net income (loss) $ 1,572 $ (20,069) Foreign currency translation adjustment 71 96 Change in unrealized gain (loss) on available-for-sale investments (21) - ------------- --------------- Comprehensive income (loss) $ 1,622 $ (19,973) ============= ===============
Note 4. Acquisitions In March 1998, the Company acquired certain assets of Penta Systems Technology, Inc. ("Penta"), a distributor of BEA TUXEDO in Korea. The purchase price of the transaction was approximately $5.7 million, paid with a combination of cash and common stock. The Company has accounted for the acquisition using the purchase method. On April 30, 1998, the Company issued 560,704 shares of its common stock for all outstanding stock of Leader Group, a Denver-based private company specializing in consulting solutions for the development, deployment and delivery of mission-critical distributed object applications. The transaction was valued at approximately $14.5 million and has been accounted for using the pooling of interests method. The Company's consolidated results of operations for prior periods have been recast to reflect the pooling of interests with the Leader Group. Note 5. Notes Payable and Capital Lease Obligations Notes payable and capital lease obligations consist of the following (in thousands):
April 30, January 31, 1998 1998 -------------- -------------- Note payable to Novell, Inc. $ 35,337 $ 38,734 Other notes payable 2,321 3,162 Capital lease obligations 974 1,096 -------------- -------------- 38,632 42,992 Less amounts due within one year (38,037) (42,301) -------------- -------------- Notes payable and capital lease obligations due after one year $ 595 $ 691 ============== ==============
Note 6. Subsequent Events In June 1998, the Company completed the acquisition of the TOP END product line from NCR Corporation ("NCR") for approximately $92.4 million in cash. The transaction was accounted for as a purchase of assets and the Company will record a one-time charge of $38.3 million for acquired in-process research and development in its second quarter ended July 31, 1998. 8 On June 12, 1998, the Company completed the sale of $200 million of its 4% Convertible Subordinated Notes (the "Notes") due June 15, 2005 in an offering to qualified institutional investors. On July 7, 1998, initial purchasers exercised an option to purchase an additional $50 million to cover over-allotments. The Notes are subordinated to all existing and future senior indebtedness of the Company and are convertible into common stock of the Company at a conversion price of approximately $26.41 per share. The Company has agreed to file a shelf registration statement with respect to the Notes and the common stock issuable upon conversion thereof within 90 days after the date of original issuance of the Notes. The Notes are redeemable at the option of the Company in whole or in part at any time on or after June 20, 2001, in cash plus accrued interest through the redemption date, if any, subject to certain events. 9 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion of the financial condition and results of operations of BEA Systems, Inc. should be read in conjunction with Management's Discussion and Analysis or Plan of Operations and the Consolidated Financial Statements and the Notes thereto included in the Company's Annual Report on Form 10-KSB for the year ended January 31, 1998 and the Company's audited supplemental consolidated financial statements and notes thereto included in the Company's current report on Form 8-K as filed with the Securities and Exchange Commission on September 10, 1998. This discussion contains forward- looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, including statements regarding beliefs, plans, expectations or intentions regarding the future. All forward-looking statements included in this document are made as of the date hereof, based on information available to BEA as of the date thereof, and BEA assumes no obligation to update any forward-looking statement. These forward-looking statements involve risks and uncertainties and actual results could differ materially from those discussed in the forward-looking statements. These risks and uncertainties include, but are not limited to, those described under the heading "Factors That May Impact Future Operating Results." All financial information for dates and periods prior to the merger with the Leader Group, Inc. ("Leader Group") have been recast to reflect the combined operations of the Company and Leader Group. Results of Operations Revenues The Company's consolidated revenues for the quarter ended April 30, 1998 were $57.5 million, which represented an 83 percent increase from the same quarter of the prior fiscal year of $31.4 million. The increase in revenues was due to continued customer acceptance of the Company's middleware products as well as an increase in related consulting, education and support services. The Company experienced revenue increases from customers in the Americas and Europe, with the European region experiencing particularly strong performance. Revenues from the Asia/Pacific region for the quarter ended April 30, 1998 comprised a lower percentage of total revenues than the Company had historically experienced due to economic, banking and currency difficulties in that region, which resulted in the delay of orders for the Company's products from certain Asian customers and is likely to result in further delays and possibly the cancellation, of such orders. The Company anticipates that its financial results will continue to be adversely impacted by weak Asian economic conditions. The Company continues to derive the majority of its license revenues from BEA TUXEDO and products that work in conjunction with BEA TUXEDO. Additionally, service revenues, including software maintenance and support, training and consulting, relate principally to the BEA TUXEDO product family. Management expects that license and service revenues from BEA TUXEDO will continue to account for the majority of the Company's revenues for the foreseeable future. License Revenues. Consolidated license revenues in the quarter ended April 30, 1998 were $39.7 million, which represented a 62 percent increase from $24.5 million in the same period of the prior fiscal year. The increase was mainly due to continued customer acceptance of and increase in market awareness for the Company's products, expansion of the Company's direct sales force and the development of indirect sales channels, such as value added resellers and distributors. License revenues represented 69 percent and 78 percent of total revenues in the first quarter of fiscal years 1999 and 1998, respectively. The decrease in license revenues as a percentage of total revenues was primarily due to the substantial increase in service revenues as a result of the Company's increased focus on its service offerings. 10 Service Revenues. For the quarter ended April 30, 1998, service revenues were $17.7 million, an increase of 154 percent from $7.0 million in the same period of the prior fiscal year. Service revenues represented 31 percent and 22 percent of total revenues in the first quarter of fiscal years 1999 and 1998, respectively. The increase in service revenues was due to an increase in consulting, education and support services offered by the Company and an increase in the number of support and services personnel. Cost of Revenues Consolidated cost of revenues in the quarter ended April 30, 1998 was $15.1 million as compared to $7.7 million for the same period in the prior fiscal year, an increase of 96 percent. As a percent of total revenue, total cost of revenues increased from 24 percent in the first quarter ended April 30, 1997 to 26 percent in the quarter ended April 30, 1998. This percentage increase was primarily the result of the increase in services as a percentage of total revenues and the fact that the cost of revenues for such services is substantially higher than the cost of revenues for licenses. Cost of Licenses. Cost of licenses includes expenses related to the purchase of compact discs, costs associated with transferring the Company's software to electronic media, the printing of user manuals, packaging and distribution costs. Cost of licenses totaled $775,000 and $578,000 for the first quarter of fiscal years 1999 and 1998, respectively, representing approximately 2 percent of license revenues for both periods. Cost of Services. Cost of services, which consists primarily of salaries and benefits for the Company's consulting and product support personnel, were $11.1 million and $4.5 million for the first quarter of fiscal years 1999 and 1998, respectively, representing 63 percent and 65 percent of total service revenues in each period. The increase in cost of services in absolute dollars was partially due to the hiring of additional consulting, education and support personnel in response to the increased demand for the Company's services. Additionally, support costs increased due to the costs associated with expansion of customer support centers in Europe and Asia and costs to improve the Company's overall customer support infrastructure. In the future, management expects the cost of services as a percentage of total service revenue to range between 65 percent and 70 percent as the Company continues to build its support and service organization, although there can be no assurance that the Company will be able to maintain such percentages. Amortization of Certain Acquired Intangible Assets. The amortization of certain acquired intangible assets, consisting of developed technology, distribution rights, trademarks and tradenames, totaled $3.2 million and $2.6 million for the first quarter of fiscal years 1999 and 1998, respectively. As a percentage of total revenues, amortization expense decreased from 8 percent in the first quarter of fiscal year 1998 to 6 percent in the first quarter of fiscal year 1999 as a result of the Company's higher total revenues. In the future, amortization expense associated with intangible assets acquired through April 30, 1998 (excluding amounts, relating to the acquisition of TOP END enterprise middleware technology and product family from NCR) is expected to total approximately $2.7 million, $2.0 million and $1.4 million for the second, third and fourth quarter of fiscal year 1999, approximately $4.5 million for the fiscal year ending January 31, 2000 and approximately $2.0 million in aggregate through the fiscal year ending January 31, 2002. Operating Expenses Sales and Marketing. Sales and marketing expenses include salaries, 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 expositions. Sales and marketing expenses were $25.3 million and $16.0 million for the first quarter of fiscal years 1999 and 1998, respectively, representing 44 percent and 51 percent of total consolidated revenues in each period. While decreasing as a percentage of total revenues, sales and marketing expenses increased in absolute dollars due to the expansion of the Company's direct sales force and an increase in marketing personnel and programs. The Company expects to continue to invest in sales channel expansion and marketing 11 programs to promote the Company's products and competitive position. Accordingly, the Company expects sales and marketing expenses to continue to increase in future periods in absolute dollars while remaining constant as a percentage of total revenues, although there can be no assurance that total revenues will increase to maintain such percentage. 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. For the fiscal quarters ended April 30, 1998 and 1997, research and development expenses were $9.3 million and $5.1 million, respectively, representing 16 percent of total revenues in each period. The increase in research and development spending in absolute dollars was attributed to an increase in software development personnel and related expenses. The Company expects to continue to commit substantial resources to product development and engineering in future periods. As a result, the Company expects research and development expenses to continue to increase in 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, information technology and general management functions, as well as the amortization of goodwill associated with various acquisitions. General and administrative expenses were $5.3 million and $3.7 million for the first quarter of fiscal years 1999 and 1998, respectively, representing 9 percent and 12 percent of total revenues for each period. The increase in general and administrative expenses in absolute dollars was attributed to the expansion of the Company's support infrastructure, including information systems and associated expenses necessary to manage the Company's growth. The decrease in general and administrative expenses as a percentage of total revenue was due to the substantial increase in the Company's total revenues and economies of scale achieved in its administrative functions. Goodwill amortization totaled $201,000 and $57,000 in the first quarter of fiscal years 1999 and 1998, respectively. In the future, amortization of goodwill acquired prior to April 30, 1998 (excluding amounts relating to the acquisition of TOP END enterprise middleware technology and product family from NCR) is expected to total $201,000 for each of the remaining quarters in fiscal year 1999, approximately $804,000 for the fiscal year ending January 31, 2000 and approximately $468,000 in aggregate through the fiscal year ending January 31, 2003. The Company anticipates that general and administrative expenses will continue to decrease as a percentage of total revenues, while increasing in absolute dollars in order to support the Company's anticipated growth. Acquisition-related Charges. Acquisition-related charges for the quarter ended April 30, 1998 consist of costs associated with the merger with Leader Group. For the quarter ended April 30, 1997, the Company incurred a $16.0 million charge associated with the write-off of acquired in-process research and development expenses relating to certain technologies and products purchased from Digital Equipment Corporation. Interest and Other, Net. Interest expense was approximately $1.3 million in the first quarter of fiscal year 1999 and $2.0 million in the same period of the prior fiscal year, while interest income was $1.3 million in the quarter ended April 30, 1998 and not material in the same period of the prior fiscal year. The decrease in interest expense was due to a lower average amount of outstanding borrowings in the first quarter of fiscal year 1999 compared to the prior year. Interest income increased due to the investment of higher average cash, cash equivalents and short-term investment balances, generated primarily from the Company's initial public offering and follow-on offering of its common stock in fiscal year 1998. Provision for Income Taxes. The Company recorded an income tax provision of $623,000 and $572,000 in the first quarter of fiscal years 1999 and 1998, respectively. The tax provision in the first quarter of fiscal year 1999 was primarily due to the Company's transition to profitable operations, after giving consideration to federal and state net operating loss carryforwards. The tax provision for the three 12 months ended April 30, 1997 primarily resulted from taxable income and withholding taxes payable in certain foreign jurisdictions. The Company's effective income tax rate for fiscal year 1999 will be impacted by the acquisition of assets from NCR, as well as he benefit of net operating losses and tax credit carryovers. The effective income tax rate could fluctuate based on a change in the estimated amount or geographic mix of the Company's earnings, the amount of permanent reinvestment offshore of a portion of the Company's fiscal year 1999 earnings, changes in U.S. tax law and the tax effect of future acquisitions, including the acquisition of the TOP END enterprise middleware technology and product family from NCR. Liquidity and Capital Resources At April 30, 1998, cash, cash equivalents and short-term investments totaled $97.3 million as compared to $99.4 million at January 31, 1998, a decrease of $2.1 million. While the Company generated approximately $3.4 million of cash from operations, cash was used to repay portions of the Company's outstanding notes payable and capital lease obligations and as partial consideration to acquire certain assets of Penta, a distributor of BEA products in Korea. Working capital totaled $57.8 million at April 30, 1998, as compared to $57.7 million at January 31, 1998. At April 30, 1998, the Company's outstanding short and long-term debt obligations were $41.5 million, representing a decrease of $3.4 million from $44.9 million at January 31, 1998. At April 30, 1998, the Company's outstanding debt obligations consist principally of $35.3 million ($38.7 million at January 31, 1998) due to Novell, Inc. in connection with the acquisition of TUXEDO. In addition to the Company's outstanding debt obligations, the Company has outstanding lease commitments for facilities. In December 1997, the Company entered into a ten-year lease agreement for approximately 225,000 square feet of office space in San Jose, California to house the Company's corporate headquarters, sales, marketing and research personnel. The Company occupied the facility at the end of August 1998. Initially, the Company intends to temporarily sublease as much as 100,000 square feet. In June 1998, the Company completed an acquisition of the TOP END product line from NCR for approximately $92.4 million in cash. The transaction was accounted for as a purchase of assets and the Company will record a one-time charge of $38.3 million for acquired in-process research and development in its second quarter ended July 31, 1998. On June 12, 1998, the Company completed the sale of $200 million of its 4% Convertible Subordinated Notes ("Notes") due June 15, 2005 in an offering to qualified institutional investors. On July 7, 1998, initial purchasers exercised an option to purchase an additional $50 million to cover over-allotments. The Notes are convertible into the Company's common stock at any time on or after the 90th day following June 8, 1998 and prior to the close of business on the maturity date unless previously redeemed or repurchased, at a conversion price of approximately $26.41 per share. On or after June 20, 2001, the Notes will be redeemable at the option of the Company, subject to certain limitations. In addition to normal operating expenses, cash requirements are anticipated for development of new software products and enhancement of existing products, financing anticipated growth, payment of outstanding debt obligations and the acquisition of products and technologies complementary to the Company's business. The Company believes that its existing cash, cash equivalents, short-term investments, borrowing from the Notes, and cash generated from operations, if any, will be sufficient to satisfy its currently anticipated cash requirements for fiscal year 1999. However, the Company intends to 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 financings will be available, if at all, or on terms favorable to the Company. 13 Impact of the Year 2000 The Company has designed, developed and tested the most current version of BEA TUXEDO and its other software products to be Year 2000 compliant. However, some of the Company's customers may be using software versions that are not Year 2000 compliant. The Company has been encouraging such customers to upgrade to current product versions. It is possible that the Company may experience additional costs associated with assisting customers with these upgrades. In addition, the current products may contain undetected errors or defects associated with Year 2000 functions that may have a material adverse effect on the Company's business, results of operations and financial condition. Year 2000 compliance issues are expected to result in a significant amount of litigation against software vendors and the extent to which the Company may be affected is uncertain. The Company has been informed by substantially all of its business application software suppliers that their software is Year 2000 compliant. The software from these suppliers is used in the Company's financial, sales, customer support and administrative operations. Accordingly, the Company expects that the advent of the millennium will have no adverse effect on its business, operating results and financial condition. However, there can be no assurances that Year 2000 problems will not occur with respect to the Company's computer systems. The Year 2000 problem may affect other entities with which the Company transacts business and the Company cannot predict the effect of the Year 2000 problem on such entities. Factors That May Impact Future Operating Results BEA Systems, Inc. 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. Limited Operating History; Integration of Acquisitions; No Assurance of Profitability The Company was incorporated in January 1995 and, accordingly, has a limited operating history upon which an evaluation of the Company and its prospects can be based. Revenues generated by the Company to date have been derived primarily from sales of BEA TUXEDO, a product to which the Company acquired worldwide rights in February 1996, and from fees for related services. Since its inception, the Company has acquired a number of businesses, technologies and products. Prior to the consummation of these acquisitions, the Company had no revenues and limited business activities. Accordingly, the Company is subject to the risks inherent both in the operation of a business with a limited operative history and the integration of a number of separate and independent business operations and there can be no assurance that the Company will be able to address these risks successfully. Although the Company has experienced recent revenue growth and has been profitable for each of the two previous quarters ended January 31, 1998 and April 30, 1998, the Company has incurred significant net losses including losses of approximately $21.0 million and $87.7 million for the fiscal years ended January 31, 1998 and 1997, respectively. At April 30, 1998, the Company had an accumulated deficit of approximately $127.9 million. In addition, in connection with certain acquisitions completed prior to April 30, 1998, the Company recorded approximately $129.0 million as intangible assets, approximately $114.4 million of which has already been amortized and approximately $14.6 million of which is expected to be amortized in future periods through the Company's fiscal year ending January 31, 2003. The amount of such acquired intangible assets to be expensed to cost of revenues and general and administrative expense in future periods, for intangible assets acquired prior to April 30, 1998 (excluding amounts relating to the acquisition of TOP END enterprise middleware technology and product family from NCR), is expected to be $10.1 million and $5.3 million in the fiscal years ending January 31, 1999 and 2000, respectively. In June 1998, the Company completed the acquisition of the TOP END enterprise middleware technology product family from NCR. This acquisition will result in significant additional amortization of intangible assets and a significant one-time expense for acquired in-process research and development. To the extent the Company makes additional acquisitions of businesses, products and technologies in the future, the Company may report additional, potentially significant, expenses related thereto. To the extent future 14 events result in the impairment of any capitalized intangible assets, amortization expenses may occur sooner than the Company expects. For the foregoing reasons, there can be no assurance that the Company will be profitable in any future period and recent operating results should not be considered indicative of future financial performance. Potential Fluctuations in Quarterly Operating Results The Company expects that it will experience significant fluctuations in future quarterly operating results as a result of many factors, including, among others: the size and timing of customer orders, introduction or enhancement of products by the Company or its competitors, market acceptance of middleware products, the lengthy sales cycle for the Company's products, technological changes in computer systems and environments, the structure and timing of future acquisitions of businesses, products and technologies, the impact and duration of deteriorating economic and political conditions in Asia and related declines in Asian currency values, general economic conditions which can affect customers' capital investment levels, the ability of the Company to develop, introduce and market new products on a timely basis, changes in the Company's or its competitors' pricing policies, customer order deferrals in anticipation of future new products and product enhancements, the Company's success in expanding its sales and marketing programs, mix of products and services sold, mix of distribution channels, ability to meet the service requirements of its customers, costs associated with acquisitions, the terms and timing of financing activities, loss of key personnel and fluctuations in other foreign currency exchange rates and interpretations of the recently introduced statement of position on software revenue recognition. As a result of all of these factors, the Company believes that quarterly revenues and operating results are difficult to forecast and period-to-period comparisons of its results of operations are not necessarily meaningful and should not be relied upon as indications of future performance. A portion of the Company's revenues are derived from large orders as customers deploy BEA products throughout their organizations. As the revenue size of individual license transactions increases, the risk of fluctuation in future quarterly results can also be expected to increase. Any inability of the Company to generate large customer orders, or any delay or loss of such orders in a particular quarter, will have a material adverse effect on the Company's revenues and, more significantly on a percentage basis, its net income or loss in that quarter. Moreover, the Company typically receives and fulfills a majority of its orders within the quarter, with a substantial portion occurring in the last month of a fiscal quarter. As a result, the Company may not learn of revenue shortfalls until late in a fiscal quarter. Additionally, the Company's operating expenses are based in part on its expectations for future revenue and are relatively fixed in the short term. Any revenue shortfall below expectations could have an immediate and significant adverse effect on the results of operations. As is common in the software industry, the Company believes that its fourth quarter orders are favorably impacted by a variety of factors including year-end capital purchases by larger corporate customers and sales incentive programs. This increase typically results in first quarter customer orders being lower than orders received in the immediately preceding fourth quarter. The Company anticipates that this seasonal impact is likely to increase as it continues to focus on large corporate accounts. Similarly, shortfalls in BEA's revenues and earnings from levels expected by securities analysts could have an immediate and significant adverse effect on the trading price of the Company's common stock. Moreover, the Company's stock price is subject to the volatility generally associated with software and technology stocks and may also be affected by broader market trends unrelated to the Company's performance. Past and Future Acquisitions From its inception in January 1995, the Company has 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 the Company's management team and 15 may have a material adverse effect on the Company's operating results in future quarters. In addition, in connection with certain of its acquisitions, the Company is required to make certain future payments. Any failure to make such payments or otherwise perform continuing obligations relative to these acquisitions would result in the loss of certain of its rights in the acquired businesses or products and would have a material adverse effect on the Company's business, operating results and financial condition. Most recently, the Company acquired Leader Group and a business unit of Penta Systems, Inc. in the quarter ended April 30, 1998 and acquired the TOP END product line from NCR Corporation in June 1998. The Company intends to make additional acquisitions in the future, although there can be no assurance that suitable companies, divisions or products will be available for acquisition. Such acquisitions entail numerous risks, including an inability to successfully assimilate acquired operations and products, an inability to retain key employees of the acquired operations, diversion of management's attention, and difficulties and uncertainties in transitioning the key business relationships from the acquired entity to the Company. In addition, future acquisitions by the Company may result in the issuance of dilutive securities, the assumption or incurrence of debt obligations, large one-time expenses and the creation of intangible assets that result in significant future amortization expense. These factors could have a material adverse effect on the Company's business, operating results and financial condition. In June 1998, the Company completed an Asset Purchase Agreement with NCR to purchase NCR's TOP END enterprise middleware technology product family for approximately $93 million in cash. The acquisition is subject to a number of risks that could adversely affect the Company's ability to achieve the anticipated benefits of the acquisition. These risks may be exacerbated by the fact that the TOP END operations and personnel are located in San Diego, California, where the Company does not currently have any material operations. The need to focus management's attention on establishing relationships with, and procedures for communicating with, TOP END employees may reduce the ability of the Company to successfully pursue other opportunities for a period of time. The departure of key TOP END employees or significant numbers of other TOP END employees could have a material adverse effect on the Company. The Company may face difficulties in retaining TOP END customers, and customers' uncertainties as to the Company's plans and abilities to support both the TOP END products and BEA TUXEDO after the acquisition could adversely affect the Company's ability to retain these customers, which could have a material adverse effect on the Company. The acquisition will also result in a significant write-off related to acquire in-process research and development projects and substantial ongoing amortization expenses, which will have a negative impact on the Company's future operating results. Product Concentration The Company currently derives the majority of its license and service revenues from BEA TUXEDO and from related products and services. These products and services are expected to continue to account for the majority of the Company's revenues for the foreseeable future. As a result, factors adversely affecting the pricing of or demand for BEA TUXEDO, such as competition, product performance or technological change, could have a material adverse effect on the Company's business and consolidated results of operations and financial condition. Lengthy Sales Cycle The Company's products are typically used to integrate large, sophisticated applications that are critical to a customer's business and the purchase of the Company's products is often part of a customer's implementation of a distributed computing environment. Customers evaluating the Company's 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 the Company's products is lengthy and is subject to delays or cancellation over which the Company has little or no control. To the extent the revenue size of license transactions increases, customer evaluations and procurement processes are expected to lengthen the overall sales cycle. The Company believes its sales cycles can be affected by general economic conditions which impact customers' capital investment 16 decisions. Any significant change in the Company's sales cycle could have a material adverse effect on the Company's business, results of operations and financial condition. Although the Company has a standard license agreement which meets the revenue recognition criteria under current generally accepted accounting principles, the Company must often negotiate and revise terms and conditions of this standard agreement, particularly in larger sales transactions. Negotiation of mutually acceptable language can extend the sales cycle and in certain situations, may require the Company to defer recognition of revenue on the sale. In addition, while the recently issued Statement of Position (SOP) 97-2, Software Revenue Recognition (as amended by SOP 98-4), is not expected to have a material impact on the Company's revenues and earnings, detailed implementation guidance of these standards has not yet been issued. Once issued, such guidance could lead to unanticipated changes in the Company's current revenue recognition practices and have an adverse impact on revenues and earnings. In the event that implementation guidance is different, the Company believes that it can adapt its current business practice to comply with this guidance; however, there can be no assurances that this will be the case. Competition The market for middleware software and related services is highly competitive. The Company's competitors are diverse and offer a variety of solutions directed at various segments of the middleware software marketplace. These competitors include system and database vendors such as IBM and database vendors such as Oracle, which offer their own middleware functionality for use with their proprietary systems. Microsoft has released a product that includes certain middleware functionality and has demonstrated and announced that it intends to include this functionality in the future versions of its Windows NT operating system. In addition, there are companies offering and developing middleware and integration software products and related services that directly compete with products offered by the Company. Further, the software development tool vendors typically emphasize the broad versatility of their toolsets and, in some cases, offer complementary middleware software that supports these tools and performs messaging and other basic middleware functions. Last, internal development groups within prospective customers' organizations may develop software and hardware systems that may substitute for those offered by the Company. A number of the Company'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. The Company's principal competitors currently include hardware vendors who bundle their own middleware software products with their computer systems and database vendors that advocate client/server networks driven by the database server. IBM is the primary hardware vendor who offers a line of middleware and database solutions for its customers. The bundling of middleware functionality in IBM proprietary hardware and database systems requires the Company 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 middleware functionality with its proprietary hardware and database systems. The Company needs to 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. Oracle is the primary relational database vendor offering products that are intended to serve as alternatives to the Company's enterprise middleware solutions. There can be no assurance that the Company will compete successfully with hardware, database, or other vendors, or that the products offered by such vendors will not achieve greater market acceptance than the Company's products. Microsoft has demonstrated certain middleware functionality and announced that it intends to include this functionality in future versions of its Windows NT operating system. Microsoft has also introduced a product that includes certain middleware functionality. The bundling of middleware functionality in Windows NT will require the Company to compete with Microsoft in the Windows NT marketplace, where Microsoft will have certain inherent advantages due to its significantly greater financial, technical, marketing and other resources, greater name recognition, its substantial installed base and the integration of 17 its middleware functionality with Windows NT. If Microsoft successfully incorporates middleware software products into Windows NT or separately offers middleware applications, the Company will need to differentiate its products based on functionality, interoperability with non-Microsoft platforms, performance and reliability and establish its products as more effective solutions to customers' needs. There can be no assurance that the Company will be able to successfully differentiate its products from those offered by Microsoft, or that Microsoft's entry into the middleware market will not 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 the Company's 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 education, consulting and support services on terms favorable to the Company. Further, competitive pressures could require the Company to reduce the price of its products and related services, which could materially adversely affect the Company's business, operating results and financial condition. There can be no assurance that the Company will be able to compete successfully against current and future competitors and the failure to do so would have a material adverse effect upon the Company's business, operating results and financial condition. International Operations International revenues accounted for 54 percent and 49 percent of consolidated revenues in the quarter ended April 30, 1998 and the quarter ended April 30, 1997, respectively. The Company sells its products and services through a network of branches and subsidiaries located in 24 countries worldwide. In addition, the Company also markets through distributors in Europe and the Asia/Pacific region. Management believes that its success depends upon continued expansion of its international operations. The Company's 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 BEA does business, in particular the French franc, the German mark, the British pound, the Japanese yen, the Australian dollar and the Korean won. The Company's international revenues may also be impacted by general economic and political conditions in these foreign markets. Since the late summer of 1997, a number of Pacific Rim countries have experienced economic, banking and currency difficulties that have led to economic downturns in those countries. Among other things, the decline in value of Asian currencies, together with difficulties obtaining credit, has resulted in a decline in the purchasing power of the Company's Asian customers, which in turn has resulted in the delay of orders for the Company's products from certain Asian customers and is likely to result in further delays and, possibly the cancellation, of such orders. As a result of such delays, the Company's revenues from Asia for the quarter ended April 30, 1998 comprised a lower percentage of total revenues than the Company has historically experienced. The Company anticipates that its financial results will continue to be adversely impacted by the weak Asian economic conditions. The extent of the future impact of these conditions is difficult to predict. There can be no assurances that these factors and other factors will not have a material adverse effect on the Company's future international revenues and consequently on the Company's business and consolidated financial condition and results of operations. Management of Growth The Company currently is continuing to experience a period of rapid and substantial growth that has placed, and is expected to continue to place, a strain on the Company's administrative and operational infrastructure. The number of Company employees has increased from 120 employees in three offices in the United States at January 31, 1996 to over 950 employees in 50 offices in 24 countries at April 30, 1998. The Company's ability to manage its staff and growth effectively will require continued improvement in its 18 operational, financial and management controls, reporting systems and procedures. In this regard, the Company is currently updating its management information systems to integrate financial and other reporting among the Company's multiple domestic and foreign offices. In addition, the Company intends to continue to increase its staff worldwide and to continue to improve financial reporting and controls for the Company's global operations. There can be no assurance that the Company will be able to successfully implement improvements to its management information and control systems in an efficient or timely manner or that, during the course of this implementation, deficiencies in existing systems and controls will be discovered. If management of the Company is unable to manage growth effectively, the Company's business, results of operations and financial condition will be materially adversely affected. Dependence on Growth of Market for Middleware The middleware market, in which the Company conducts its business, is emerging and is characterized by continuing technological developments, evolving industry standards and changing customer requirements. BEA's success is dependent in large part on the Company's middleware software products' achieving market acceptance by large customers with substantial legacy mainframe systems. The Company's 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 through the use of middleware technology. There can be no assurance that the market for middleware technology and related services will continue to grow. If the middleware market fails to grow or grows more slowly than the Company currently anticipates, or if the Company experiences increased competition in this market, the Company's business, results of operations and financial condition will be adversely affected. Dependence on Key Personnel and Need to Hire Additional Personnel The Company believes its future success will depend upon its ability to attract and retain highly skilled personnel including the Company's founders, Messrs. William T. Coleman III, Edward W. Scott, Jr., Alfred S. Chuang and key members of management. Competition for such personnel is intense and there can be no assurance that the Company will be able to retain its key employees or that it will be successful in attracting, assimilating and retaining them in the future. As the Company seeks to expand its global organization, the hiring of qualified sales, technical and support personnel will be difficult due to the limited number of qualified professionals. Failure to attract, assimilate and retain key personnel would have a material adverse effect on the Company's business, results of operations and financial condition. Expanding Distribution Channels and Reliance on Third Parties To date, the Company has sold its products principally through its direct sales force, as well as through indirect sales channels, such as ISVs, hardware OEMs, systems integrators, independent consultants and distributors. The Company's ability to achieve significant revenue growth in the future will depend in large part on its success in expanding its direct sales force and in further establishing and maintaining relationships with distributors, ISVs and OEMs. In particular, a significant element of the Company's strategy is to embed its technology in products offered by the Company's ISV customers. The Company intends to seek distribution arrangements with other ISVs to embed the Company's technology in their products and expects that these arrangements will account for a significant portion of the Company's revenues in future periods. There can be no assurance that the Company will be able to successfully expand its direct sales force or other distribution channels, secure license agreements with additional ISVs on commercially reasonable terms or at all, or otherwise further develop its relationships with distributors and ISVs, or that any such expansion or additional license agreements would result in an increase in revenues. Although the Company believes that its investments in the expansion of its direct sales force and in the establishment of other distribution channels through third parties ultimately will improve the Company's operating results, to the extent that such investments are made and revenues do not correspondingly increase, the Company's business, results of operations and financial condition will be materially and adversely affected. 19 The Company relies on informal relationships with a number of consulting and systems integration firms to enhance its sales, support, service and marketing efforts, particularly with respect to implementation and support of its products as well as lead generation and assistance in the sale process. The Company will need to expand its relationships with third parties in order to support license revenue growth. Many such firms have similar, and often more established, relationships with the Company's principal competitors. There can be no assurance that these and other third parties will provide the level and quality of service required to meet the needs of the Company's customers, that the Company will be able to maintain an effective, long term relationship with such third parties, or that such third parties will continue to meet the needs of the Company's customers. Rapid Technology Change; Dependence on New Products and Product Enhancements The market for the Company's products is highly fragmented, competitive with alternative computing architectures and characterized by continuing technological development, 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 the Company's existing products obsolete and unmarketable. As a result, the Company's success depends upon its ability to enhance existing products, respond to changing customer requirements and develop and introduce in a timely manner new products that keep pace with technological developments and emerging industry standards. There can be no assurance that the Company's products will adequately address the changing needs of the marketplace or that the Company will be successful in developing and marketing enhancements to its 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 the Company's business, results of operations and financial condition. Risk of Software Defects The software products offered by the Company are internally complex and, despite extensive testing and quality control, may contain errors or defects, especially when first introduced. Such defects or errors could result in corrective releases for the Company's software products, damage to the Company's reputation, loss of revenue, product returns or order cancellations, or lack of market acceptance of its products, any of which could have a material and adverse effect on the Company's business, results of operations and financial condition. The Company's license agreements with its customers typically contain provisions designed to limit the Company's exposure to potential product liability claims. It is possible, however, that the limitation of liability provisions contained in the Company's license agreements may not be effective as a result of existing or future federal, state or local laws or ordinances or unfavorable judicial decisions. Although the Company has not experienced any product liability claims to date, the sale and support of its products may entail the risk of such claims, which could be substantial in light of the use of such products in mission-critical applications. A successful product liability claim brought against the Company could have a material adverse effect on the Company's business, results of operations and financial condition. Dependence on Proprietary Technology; Risk of Infringement The Company'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. No assurance can be given that competitors will not successfully challenge the validity or scope of the Company's patents or that such patents will provide a competitive advantage to the Company. 20 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, it may be possible for a third party to copy or otherwise obtain and use the Company's products or technology without authorization, or to 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 the Company's business, operating results and financial condition. Policing unauthorized use of the Company's products is difficult, and although the Company is unable to determine the extent to which piracy of its software products exists, software piracy can be expected to be a persistent problem. Effective protection of intellectual property rights is unavailable or limited in certain foreign countries. There can be no assurance that the Company's protection of its proprietary rights will be adequate or that the Company's competitors will not independently develop similar technology, duplicate the Company's products or design around any patents issued to the Company or other intellectual property rights of the Company. The Company does not believe that any of its products infringe the proprietary rights of third parties. There can be no assurance, however, that third parties will not claim such infringement by the Company with respect to current or future products. Any such claims, with or without merit, could result in costly litigation that could absorb significant management time, which could have a material adverse effect on the Company's business, operating results and financial condition. Such claims might require the Company to enter into royalty or license agreements. Such royalty or license agreements, if required, may not be available on terms acceptable to the Company or at all, which could have a material adverse effect upon the Company's business, operating results and financial condition. Control by Management and Current Stockholders As of April 30, 1998, the Company's officers and directors and their affiliates, in the aggregate, had voting control over approximately 62 percent of the Company's voting common stock. In particular, Warburg, Pincus Ventures, L.P. ("Warburg") had voting control over approximately 49 percent of the Company's voting common stock and beneficially owned approximately 64 percent of the Company's common stock (which includes the non-voting Class B common stock owned by Warburg). As a result, these stockholders will be able to control all matters requiring stockholder approval, including the election of directors and approval of significant corporate transactions. The voting power of Warburg and the Company's officers and directors under certain circumstances could have the effect of delaying or preventing a change in control of the Company. Significant Leverage; Debt Service In connection with the sale of 4% Convertible Subordinated Notes, the Company incurred $250 million indebtedness. As a result of this indebtedness, the Company's principal and interest payment obligations will increase substantially. The degree to which the Company will be leveraged could materially and adversely affect the Company's ability to obtain financing for working capital, acquisitions or other purposes and could make it more vulnerable to industry downturns and competitive pressures. The Company's ability to meet its debt service obligations will be dependent upon the Company's future performance, which will be subject to financial, business and other factors affecting the operations of the Company, many of which are beyond its control. The Company will require substantial amounts of cash to fund scheduled payments of interests on the Notes, payment of the principal amount of the Notes, payment of principal and interest on the Company's other indebtedness, future capital expenditures and any increased working capital requirements. If the Company is unable to meet its cash requirements out of cash flow from operations, there can be no assurance that it will be able to obtain alternative financing. In the absence of such financing, the Company's ability to respond to changing business and economic conditions, to make future acquisitions, to absorb adverse operating results or to fund capital expenditures or increased working capital 21 requirements may be adversely affected. If the Company does not generate sufficient increases in cash flow from operations to repay the Notes at maturity, it could attempt to refinance the Notes; however, no assurance can be given that such a refinancing would be available on terms acceptable to the Company, if at all. Any failure by the Company to satisfy its obligations with respect to the Notes at maturity (with respect to payments of principal) or prior thereto (with respect to payments of interest or required repurchases) would constitute a default under the Indenture and could cause a default under agreements governing other indebtedness, if any, of the Company. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISKS. Foreign Currency Forward Contracts The Company has a program to minimize the effect of foreign exchange transaction gains and losses from recorded foreign currency-denominated assets and liabilities. This program involves the use of forward foreign exchange contracts in certain European and Asian countries, principally U.K., France, Germany, Finland, Sweden, Switzerland, Japan and Australia. A forward foreign exchange contract obligates the Company to exchange predetermined amounts of specified foreign currencies at specified exchange rates on specified dates or to make an equivalent U.S. dollar payment equal to the value of such exchange. Each month the Company marks to market the foreign exchange contracts based on the change in the foreign exchange rates with any resulting gain or losses recorded in the interest and other expense. The Company does not currently hedge anticipated foreign currency-denominated revenues and expenses not yet incurred. 22 PART II. OTHER INFORMATION ITEM 5. OTHER INFORMATION. On June 12, 1998, the Company completed the sale of $200 million of its 4% Convertible Subordinated Notes (the "Notes") due June 15, 2005 in an offering to qualified institutional investors. On July 7, 1998, initial purchasers exercised an option to purchase an additional $50 million to cover over-allotments. The Notes are subordinated to all existing and future senior indebtedness of the Company and are convertible into common stock of the Company at a conversion price of approximately $26.41 per share. The Company has agreed to file a shelf registration statement with respect to the Notes and the common stock issuable upon conversion thereof within 90 days after the date of original issuance of the Notes. The Notes are redeemable at the option of the Company in whole or in part at any time on or after June 20, 2001, in cash plus accrued interest through the redemption date, if any, subject to certain events. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. (a) Exhibits The following exhibits are filed by attachment to this Form 10-Q: Exhibit Description ------- ----------- 27.1 Financial Data Schedule 27.2 Financial Data Schedule 27.3 Financial Data Schedule 27.4 Financial Data Schedule 99.1 Press release dated June 9, 1998 (b) Reports on Form 8-K No reports on Form 8-K were filed by the Company during the fiscal quarter ended April 30, 1998. Signatures Pursuant to the requirement of the Securities Exchange Act of 1934, the registrant has duly caused this amended report to be signed on its behalf by the undersigned thereunto duly authorized. Dated: September 9, 1998 BEA SYSTEMS, INC. (Registrant) /s/ STEVE L. BROWN ------------------ Steve L. Brown Executive Vice President, Secretary and Chief Financial Officer (Principal Financial and Chief Accounting Officer) 23 INDEX TO EXHIBITS Exhibit Description ------- ----------- 27.1 Financial Data Schedule 27.2 Financial Data Schedule 27.3 Financial Data Schedule 27.4 Financial Data Schedule 99.1 Press release dated June 9, 1998 EX-27.1 2 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THIS FORM 10-Q AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 3-MOS JAN-31-1999 APR-30-1998 92,521 4,759 54,830 2,389 0 154,090 12,660 4,524 182,222 96,289 0 0 0 66 85,272 182,222 39,741 57,450 775 55,469 0 467 214 2,195 623 1,572 0 0 0 1,572 (0.02) (0.02) For purposes of this exhibit, primary means basic. Amounts have been restated to comply with the provisions of Statement of Financial Accounting Standards No. 128, "Earnings per Share."
EX-27.2 3 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM APRIL 30, 1997 FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FORM 10-Q. 1,000 3-MOS JAN-31-1998 APR-30-1997 7,093 0 32,415 1,298 0 46,301 8,853 1,865 74,449 68,024 50,012 0 0 56 (43,643) 74,449 24,478 31,446 578 48,466 0 165 (2,477) (19,497) 572 (20,069) 0 0 0 (20,069) (0.97) (0.97) For purposes of this exhibit, primary means basic. Amounts have been restated to comply with the provisions of Statement of Financial Accounting Standards No. 128, "Earnings per Share."
EX-27.3 4 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM JULY 31, 1997 FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FORM 10-Q. 1,000 6-MOS JAN-31-1998 JUL-31-1997 108,021 0 34,670 1,276 0 145,398 9,179 2,329 172,536 63,418 42,401 0 0 63 66,654 172,536 50,590 67,153 1,168 84,562 0 258 4,306 (21,715) 1,172 (22,887) 0 0 0 (22,887) (0.59) (0.59) For purposes of this exhibit, primary means basic. Amounts have been restated to comply with the provisions of Statement of Financial Accounting Standards No. 128, "Earnings per Share."
EX-27.4 5 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM OCTOBER 30, 1997 FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FORM 10-Q. 1,000 9-MOS JAN-31-1998 OCT-31-1997 91,704 0 40,102 1,476 0 133,553 10,357 3,062 159,953 63,102 20,788 0 0 65 75,998 159,953 80,175 109,254 1,712 126,133 0 408 4,201 (21,080) 1,893 (22,973) 0 0 0 (22,973) (0.49) (0.49) For purposes of this exhibit, primary means basic. Amounts have been restated to comply with the provisions of Statement of Financial Accounting Standards No. 128, "Earnings per Share."
EX-99.1 6 PRESS RELEASE DATED 06/09/1998 PRESS RELEASE DATED JUNE 9, 1998 BEA PRICES $200 MILLION PRIVATE OFFERINGS OF 4% CONVERTIBLE SUBORDINATED NOTES SUNNYVALE, Calif., June 9, 1998 - BEA Systems, Inc. (Nasdaq: BEAS) announced today that it has sold $200 million of its 4 percent convertible subordinated notes due 2005 in an offering to qualified institutional investors. The offering is expected to close on June 12, 1998. The Company has granted the initial purchasers a 30-day option to purchase an additional $50 million of notes to cover over-allotments, if any. The notes will be convertible into common stock of the Company at a conversion price of approximately $26.41 per share. The net proceeds of the offering will be added to working capital and used for general corporate purposes. The Company may also use a portion of the net proceeds to fund acquisitions of complimentary businesses, products, or technologies. This announcement is neither an offer to sell nor a solicitation to buy any of these securities. The securities will not be registered under the Securities Act of 1933, as amended (the "Securities Act"), or any state securities laws, and unless so registered, may not be offered or sold in the United States except pursuant to an exemption from, or in a transaction not subject to, the registration requirements of the Securities Act and applicable state securities laws. -----END PRIVACY-ENHANCED MESSAGE-----