-----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, DAVmyMz0jaht/yJUZttwjJJg/ThKT+Fud4xZAY0856CTv+Sl22PlOV8qhdGkURl0 lPaRGm7HBabxMVghFCp65g== /in/edgar/work/20000811/0000895921-00-000010/0000895921-00-000010.txt : 20000921 0000895921-00-000010.hdr.sgml : 20000921 ACCESSION NUMBER: 0000895921-00-000010 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20000630 FILED AS OF DATE: 20000811 FILER: COMPANY DATA: COMPANY CONFORMED NAME: BE INC CENTRAL INDEX KEY: 0000895921 STANDARD INDUSTRIAL CLASSIFICATION: [7373 ] IRS NUMBER: 943123667 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-26387 FILM NUMBER: 694898 BUSINESS ADDRESS: STREET 1: 800 EL CAMINO RD STREET 2: SUITE 300 CITY: MENLO PARK STATE: CA ZIP: 95117 BUSINESS PHONE: 6504624100 MAIL ADDRESS: STREET 1: 800 EL CAMINO REAL STREET 2: SUITE 300 CITY: MENLO PARK STATE: CA ZIP: 95117 10-Q 1 0001.txt FORM 10-Q FOR QUARTER ENDED 6/30/00 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q |X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 2000 |_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission File Number: 000-26387 BE INCORPORATED (Exact name of Registrant as specified in its charter) Delaware 94-3123667 (State or other jurisdiction of (IRS Employer Identification No.) incorporation or organization) 800 El Camino Real, Menlo Park, CA 94025 (Address of principal executive offices, including zip code) (650) 462-4100 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes (1) Yes (2) The number of shares of Common Stock outstanding as of July 31, 2000 was 36,037,748. BE INCORPORATED FORM 10-Q TABLE OF CONTENTS PAGE PART I. FINANCIAL INFORMATION Item 1. Condensed Financial Statements: Consolidated Balance Sheets at June 30, 2000 and December 31, 1999 ...............................................2 Consolidated Statements of Operations for the three and six month periods ended June 30, 2000 and June 30, 1999..........3 Consolidated Statements of Cash Flows for the six month periods ended June 30, 2000 and June 30, 1999....................4 Notes to Condensed Consolidated Financial Statements.............5 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations........................................7 Item 3. Quantitative and Qualitative Disclosures About Market Risk......26 PART II. OTHER INFORMATION Item 1. Legal Proceedings...............................................27 Item 2. Changes in Securities and Use of Proceeds ......................27 Item 3. Defaults upon Senior Securities ................................27 Item 4. Submission of Matters to a Vote of Security Holders ............27 Item 5. Other Information ..............................................27 Item 6. Exhibits and Reports on Form 8-K ...............................28 Signatures .....................................................29 Exhibit 27.1 - Financial Data Schedule 1 PART I - FINANCIAL INFORMATION ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS BE INCORPORATED AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (in thousands)
June 30, December 31, 2000 1999 --------- --------- (unaudited) (audited) ASSETS Current assets: Cash and cash equivalents ......................... $ 13,717 $ 6,500 Short-term investments ............................ 8,587 22,629 Accounts receivable ............................... 129 167 Prepaid and other current assets .................. 585 730 Total current assets ........................... 23,018 30,026 --------- --------- Property and equipment, net .......................... 477 562 Other assets, net of accumulated amortization ........ 1,381 1,722 Total assets ................................. $ 24,876 $ 32,310 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable .................................. $ 289 $ 860 Accrued expenses .................................. 1,358 1,550 Technology license obligations, current portion ... 599 777 Deferred revenue .................................. 80 99 --------- --------- Total current liabilities ...................... 2,326 3,286 Technology license obligations, net of current portion 505 597 --------- --------- Total liabilities .............................. 2,831 3,883 --------- --------- Stockholders' Equity: Common stock ...................................... 36 35 Additional paid-in capital ........................ 108,616 106,322 Accumulated other comprehensive loss .............. (4) (17) Deferred stock compensation ....................... (2,261) (4,690) Accumulated deficit ............................... (84,342) (73,223) Total stockholders' equity ..................... 22,045 28,427 --------- --------- Total liabilities and stockholders' equity ... $ 24,876 $ 32,310 ========= =========
The accompanying notes are an integral part of these consolidated financial statements. 2 BE INCORPORATED AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except per share amounts)
Three Months Ended Six Months Ended -------------------- -------------------- June 30, June 30, 2000 1999 2000 1999 -------- -------- -------- -------- (unaudited) (unaudited) Net revenues .................................................... $ 142 $ 537 $ 396 $ 846 Cost of revenues ................................................ 261 239 554 324 -------- -------- -------- -------- Gross profit (loss) ............................................. (119) 298 (158) 522 Operating expenses: Research and development, excluding amortization of deferred . 1,843 1,783 3,991 3,670 stock compensation of $197, $523, $509 and $1,109 Sales and marketing, excluding amortization of deferred ...... 1,983 2,459 4,154 4,341 stock compensation of $189, $494, $426 and $895 General and administrative, excluding amortization of deferred 839 822 1,789 1,559 stock compensation of $271, $696, $755 and $1,374 Amortization of deferred stock compensation ............................................... 657 1,713 1,690 3,378 Total operating expenses ................................. 5,322 6,777 11,624 12,948 -------- -------- -------- -------- Loss from operations ............................................ (5,441) (6,479) (11,782) (12,426) Interest expense ................................................ (29) (38) (63) (74) Other income and expenses, net .................................. 351 70 726 207 -------- -------- -------- -------- Net loss ........................................................ (5,119) (6,447) (11,119) (12,293) -------- -------- -------- -------- Accretion of mandatorily redeemable convertible preferred stock .................................. $ -- $ (131) $ -- $ (264) Net loss attributable to common stockholders ................................................. $ (5,119) $ (6,578) $(11,119) $(12,557) ======== ======== ======== ======== Net loss per common share--basic and diluted .................... $ (.14) $ (1.54) $ (.32) $ (3.07) ======== ======== ======== ======== Shares used in per common share calculation--basic and diluted ............................... 35,496 4,266 35,247 4,090 ======== ======== ======== ========
The accompanying notes are an integral part of these consolidated financial statements. 3 BE INCORPORATED AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands)
Six Months Ended June 30, 2000 1999 -------- -------- (unaudited) Cash flows from operating activities: Net loss ............................................ $(11,119) $(12,293) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization ................... 580 447 Amortization of discount on technology license obligations ................. 63 61 Compensation expense incurred on issuance of stock ....................................... 33 497 Amortization of deferred stock compensation ..... 1,690 3,378 Changes in assets and liabilities Accounts receivable .......................... 38 235 Prepaid and other current assets ............. 174 (54) Other assets ................................. -- 64 Accounts payable ............................. (621) 522 Accrued expenses ............................. (167) (162) Deferred revenue ............................. (19) 174 -------- -------- Net cash used in operating activities ...... (9,348) (7,131) -------- -------- Cash flow provided by investing activities: Acquisition of property and equipment ............... (89) (371) Acquisition of licensed technology .................. (389) (452) Purchases of short-term investments ................. (37,546) (1,035) Sales of short-term investments ..................... 51,588 6,953 -------- -------- Net cash provided by investing activities .. 13,564 5,095 -------- -------- Cash flows provided (used in) by financing activities: Proceeds from issuance of common stock: pursuant to common stock options .................. 2,181 59 pursuant to common stock warrants ................. 455 -- under Employee Stock Purchase Plan ................ 368 -- Initial public offering costs ....................... -- (96) Repurchase of common stock .......................... (3) (3) -------- -------- Net cash provided (used in) by financing activities ................ 3,001 (40) -------- -------- Net increase (decrease) in cash and cash equivalents ... 7,217 (2,076) Cash and cash equivalents, beginning of period ......... 6,500 3,394 -------- -------- Cash and cash equivalents, end of period ............... $ 13,717 $ 1,318 ======== ========
The accompanying notes are an integral part of these consolidated financial statements. 4 BE INCORPORATED AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) 1. Organization and Business Be Incorporated (the "Company" or "Be") was founded in 1990 and offers software platforms designed for Internet appliances and digital media applications. The Company's two software platforms are (i) BeIA, a turnkey integrated software platform and development tools that enable the creation of customized Internet appliances, and (ii) BeOS, the Company's desktop operating system optimized for digital media applications. Prior to 1998, the Company was engaged primarily in research and development, raising capital and development of its markets and was in the development stage. 2. Basis of Presentation The condensed consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All significant intercompany balances and transactions have been eliminated. The condensed consolidated financial statements have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission ("SEC") applicable to interim financial information. Certain information and footnote disclosures included in financial statements prepared in accordance with generally accepted accounting principles have been omitted in these interim statements pursuant to such SEC rules and regulations. Management recommends that these interim financial statements be read in conjunction with the audited financial statements of the Company for the year ended December 31, 1999 and the notes thereto contained in the Company's Annual Report on Form 10-K. Interim results are not necessarily indicative of the results to be expected for the full year. The December 31, 1999 balance sheet was derived from audited financial statements, but does not include all disclosures required by Generally Accepted Accounting Principles. In management's opinion, the condensed consolidated financial statements include all adjustments necessary to present fairly the financial position and results of operations for each interim period shown. Interim results are not necessarily indicative of results to be expected for a full fiscal year. 3. Recent Accounting Pronouncements In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133, or SFAS 133, Accounting for Derivative Instruments and Hedging Activities. SFAS 133 establishes new standards of accounting and reporting for derivative instruments and hedging activities. SFAS 133 requires that all derivatives be recognized at fair value in the statement of financial position, and that the corresponding gains or losses be reported either in the statement of operations or as a component of comprehensive income, depending on the type of hedging relationship that exists. SFAS 133 will be effective for fiscal quarters of all fiscal years beginning after June 15, 2000. The Company is currently evaluating the impact of the requirements of SFAS 133 and the effects if any on its financial statements and does not expect any material impact from its application. The Company does not currently hold derivative instruments or engage in hedging activities. 5 In December 1999, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 101 (SAB 101), "Revenue Recognition in Financial Statements." SAB 101 provides guidance for revenue recognition under certain circumstances. The Company is currently evaluating the impact of SAB 101 and has not yet determined whether its application will have a material impact on its financial position or results of operation. The accounting and disclosures prescribed by SAB 101 will be effective in the fourth quarter of 2000. In March 2000, the Financial Accounting Standards Board issued Interpretation No.44 (FIN 44) Accounting for Certain Transactions involving Stock Compensation an interpretation of APB Opinion No.25. FIN 44 clarifies the application of Opinion 25 for (a) the definition of an employee for purposes of applying Opinion 25, (b) the criteria for determining whether a plan qualifies as a noncompensatory plan, (c) the accounting for an exchange of stock compensation awards in a business combination. FIN 44 is effective July 1, 2000, but certain conclusions cover specific events that occur after either December 15, 1998, or January 12, 2000. The Company is currently evaluating the effect on its financial position and results of operations. 4. Net Loss Per Share Basic net loss per common share is computed by dividing net loss available to common stockholders by the weighted average number of vested common shares outstanding for the period. Diluted net loss per common share is computed giving effect to all dilutive potential common shares, including options, warrants and preferred stock. Options, warrants and preferred stock were not included in the computation of diluted net loss per common share because the effect would be antidilutive. A reconciliation of the numerator and denominator used in the calculation of basic and diluted net loss per common share follows (in thousands, except per share data):
Three Months Ended Six Months Ended June 30, June 30, 2000 1999 2000 1999 -------- -------- -------- -------- (unaudited) (unaudited) Historical net loss per common share, basic and diluted: Net loss ............................................... $ (5,119) $ (6,447) $(11,119) $(12,293) Accretion of mandatorily redeemable convertible preferred stock .......................... -- (131) -- (264) -------- -------- -------- -------- Numerator for net loss, basic and diluted .............. (5,119) (6,578) (11,119) (12,557) Denominator for basic and diluted loss per common share: Weighted average common shares outstanding ........................................ 35,496 4,266 35,247 4,090 ======== ======== ======== ======== Net loss per common share basic and diluted ............ $ (.14) $ (1.54) $ (.32) $ (3.07) ======== ======== ======== ======== Antidilutive securities: Options to purchase common stock ..................... 4,433 5,664 5,210 5,664 Common stock not yet vested .......................... 332 883 332 883 Preferred stock ...................................... -- 22,499 -- 22,499 Warrants ............................................. 2,130 2,870 2,130 2,870 -------- -------- -------- -------- 6,895 31,916 7,672 31,916 ======== ======== ======== ========
6 5. Comprehensive Income (loss) Statement of Financial Accounting Standard No. 130 (SFAS 130), "Reporting Comprehensive Income" establishes rules for reporting and display of comprehensive income (loss) and its components. The following are the components of comprehensive income (loss) (in thousands):
Three Months Ended Six Months Ended June 30, June 30, 2000 1999 2000 1999 ------ ------ ------- ------- (unaudited) (unaudited) Net loss ............................... $ (5,119) $ (6,447) $(11,119) $(12,293) Unrealized gain on marketable securities 5 -- 13 -- ------ ------ ------- ------- Comprehensive loss ..................... (5,114) (6,447) (11,106) (12,293) ====== ====== ======= =======
The components of accumulated other income, net of related tax are as follows (in thousands):
June 30, December 31, 2000 1999 ----- ----- (unaudited) (audited) Unrealized loss on marketable securities .............$ (4) $(17) ----- ----- $ (4) $(17) ===== =====
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Forward Looking Statements THIS REPORT CONTAINS FORWARD-LOOKING STATEMENTS THAT HAVE BEEN MADE PURSUANT TO THE PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995. SUCH FORWARD-LOOKING STATEMENTS ARE BASED ON CURRENT EXPECTATIONS, ESTIMATES AND PROJECTIONS ABOUT THE COMPANY'S BUSINESS, MANAGEMENT'S BELIEFS AND ASSUMPTIONS MADE BY MANAGEMENT. WORDS SUCH AS "ANTICIPATES," "EXPECTS," "INTENDS," "PLANS," "BELIEVES," "SEEKS," "ESTIMATES," "LIKELY, "VARIATIONS OF SUCH WORDS AND SIMILAR EXPRESSIONS ARE INTENDED TO IDENTIFY SUCH FORWARD-LOOKING STATEMENTS. THESE STATEMENTS ARE NOT GUARANTEES OF FUTURE PERFORMANCE AND ARE SUBJECT TO CERTAIN RISKS, UNCERTAINTIES AND ASSUMPTIONS THAT ARE DIFFICULT TO PREDICT; THEREFORE, ACTUAL RESULTS AND OUTCOMES MAY DIFFER MATERIALLY FROM WHAT IS EXPRESSED OR FORECASTED IN ANY SUCH FORWARD-LOOKING STATEMENTS. SUCH RISKS AND UNCERTAINTIES INCLUDE THOSE SET FORTH BELOW UNDER "FACTORS AFFECTING OUR BUSINESS, OPERATING RESULTS AND FINANCIAL CONDITION" AND ELSEWHERE IN THIS REPORT AS WELL AS THOSE NOTED IN OUR ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 1999 AND OUR OTHER PUBLIC FILINGS WITH THE SECURITIES AND EXCHANGE COMMISSION. THE COMPANY UNDERTAKES NO OBLIGATION TO UPDATE PUBLICLY ANY FORWARD- LOOKING STATEMENTS, WHETHER AS A RESULT OF NEW INFORMATION, FUTURE EVENTS OR OTHERWISE. 7 Overview Be was founded in 1990. We offer software platforms designed for Internet appliances and digital media applications. Our two software platforms are (i) BeIA, a turnkey integrated software platform and development tools that enable the creation of customized Internet appliances, and (ii) BeOS, our desktop operating system optimized for digital media applications. Prior to 1998, we had no revenues and our operations consisted primarily of research and development. In December 1998, we shipped the first version of BeOS, our desktop operating system that was targeted primarily to end users. Prior releases of BeOS were targeted primarily to software developers. In February of 2000, we announced the availability of BeIA, our software platform intended for the Internet appliances market. Our revenues to date have been primarily generated from the following sources: sale of BeOS to resellers, distributors and publishers, and direct sales of BeOS to end users through our BeDepot.com Web site. We also generated revenue by collecting commission from sales of third party software through our BeDepot.com Web site. In the first quarter of 2000, we shifted our resources to focus primarily on the market for Internet appliances. We made a version of BeOS available for personal use at no charge and a more fully featured version is available through third party publishers. The personal edition was released at the end of March and publishers began shipping the commercial version in April. Since this shift in focus, revenues have been primarily generated from royalties on sales by publishers. We have very little or no influence over the marketing and promotional efforts of these third party publishers and we may not generate any meaningful revenues from sales of BeOS through these publishers in the foreseeable future. We expect our future revenues to be primarily generated through royalty payments and service fees from developers and manufacturers of Internet appliances, and other systems and hardware manufacturers incorporating BeIA into their products. Since adopting and incorporating BeIA as a software platform solution generally represents a significant product decision for developers and manufacturers of Internet appliances and related systems and hardware, we expect longer sales cycle as we collaborate with and educate customers and partners on the use and benefits of BeIA. We expect our revenues in the future to be dependent in large part upon the success of our customers' products using our BeIA platform. We have little or no influence over the development and marketing efforts of our customers. Our customers are generally under no minimum payment obligations or minimum purchase requirements. Our customers and partners are free to use software platforms developed by other companies in their Internet appliance products and are under no obligation to develop or market products based on our software platform. As a result, we have very limited ability to evaluate the success of our partnership efforts and predict the realization or timing of any revenues. Similarly, in the desktop market, we are highly dependent on the marketing efforts and success of our third party publishers. We have little or no influence over these publishers and which makes it difficult to predict the realization or timing of any revenues from BeOS. It has been our policy to record revenues, in accordance with the provisions of software revenue recognition rules, from sales to distributors and resellers and we will apply such a policy in the future on sales of BeOS to publishers and other partners and on royalty payments and other fees received for licensing of BeIA to OEM's and other partners. We also defer an allocated portion of revenues attributable to free product upgrades. We recognize revenues from sales to distributors and resellers when we have evidence that our product has been sold to end users. For example, we typically recognize revenue when we receive confirmation from the distributor or reseller of sales to end users. Revenues deferred due to free product upgrades are recognized as upgrades are shipped. As of June 30, 2000, we had $80,000 in deferred revenues, related to development work being performed for one of our customers. 8 Prior to the shift in focus, our cost of revenues consisted primarily of the cost of packaging, software duplication, documentation, translation and product fulfillment. We also included in the cost of revenues the amortized costs relating to the license of third party technology used in the development of BeOS. In the future, we expect cost of revenues to be mainly related to the licensing of third party technology. Our research and development expenses consist primarily of compensation and related costs for research and development personnel. We also include in research and development expenses the costs relating to licensing of technologies and amortization of costs of software tools used in the development of our operating system. Costs incurred in the research and development of new releases and enhancements are expensed as incurred. These costs include the cost of licensing technology that is incorporated into a product or an enhancement which is still in preliminary development and technological feasibility has not been established. Once the product is further developed and technological feasibility has been established, development costs are capitalized until the product is available for general release. To date, products and enhancements have generally reached technological feasibility and have been released for sale at substantially the same time. We expect that research and development expenses will increase substantially in the future as we further develop and enhance our products and develop new products including those intended for the Internet appliances market. Our sales and marketing expenses consist primarily of compensation and related costs for sales and marketing personnel, marketing programs, public relations, promotional materials, travel and related expenses for attending trade shows. We also include costs relating to third party application developers, such as the cost of technical support provided to them in our sales and marketing expenses. We expect our sales and marketing expenses to increase as we further promote awareness of our software platform, work on establishing new relationships with partners and hire new personnel. Sales and marketing expenses will also increase as we further develop and expand our relationships with existing and potential partners including expenses related to co-marketing programs. General and administrative expenses consist primarily of compensation and related expenses for finance and accounting personnel, professional services and related fees, occupancy costs and other expenses. General and administrative expenses may increase in the future as we expand our existing facilities or relocate to new facilities that better address any growth that we may experience. We also expect general and administrative expenses to increase as we hire additional personnel and incur costs related to the anticipated growth in our business and cost of operating as a public company. We market and sell our products in the United States and internationally. International sales of products accounted for approximately 19% and 9% of total revenues for the three month period ended June 30, 2000 and for the six month period ended June 30, 2000 respectively. We have a subsidiary located in France to market and sell our software platform in Europe. In addition, we may in the future open new offices in other countries to market and sell in those countries and surrounding regions. We do not currently engage in currency hedging activities. Although exposure to currency fluctuations to date has been insignificant, future fluctuations in currency exchange rates may adversely affect revenues from international sales. 9 From time to time in the past, we have granted stock options to employees, consultants and non-employee directors and expect to continue to do so in the future. As of June 30, 2000, we had recorded deferred compensation related to these options in the total amount of $15.9 million, net of cancellations, representing the difference between the deemed fair value of our common stock, as determined for accounting purposes, and the exercise price of option at the date of grant. Of this amount, $955,000 were amortized in 1996, $867,000 in 1997, $3.9 million in 1998, $6.2 million in 1999 and $1.7 million in the six month period ended June 30, 2000. Future amortization of expense arising out of options granted through June 30, 2000 is estimated to be $936,000 in the remaining six months of 2000, $1.0 million in 2001, $290,000 in 2002 and $3,000 in 2003. We amortize the deferred compensation charge monthly over the vesting period of the underlying option. Comparison of the Three Month Period ended June 30, 2000 to the Three Month Period ended June 30, 1999 Net Revenues. Net revenues decreased $395,000 to $142,000 for the three month period ended June 30, 2000 from $537,000 for the three month period ended June 30, 1999. This decrease is primarily attributable to lower shipments of BeOS, which we believe resulted from our announcement in January 2000 to make a version of BeOS available for free download. During the quarter ended June 30, 2000, revenues were primarily attributable to shipments under the recently announced publisher agreements. To date, all of our revenues have been derived from BeOS, with future revenues to be dependent primarily on BeIA, our software platform for Internet appliances. Cost of Revenues. Cost of revenues increased $22,000 to $261,000 for the three month period ended June 30, 2000 from $239,000 for the three month period ended June 30, 1999. Gross margin is negative this quarter as a result of the continuing amortization of technology license agreements. Research and Development. Research and Development expenses were stable at $1.8 million for the three month period ended June 30, 2000 as compared with the three month period ended June 30, 1999. Sales and Marketing. Sales and Marketing expenses decreased $476,000 to $2.0 million, or 19%, for the three month period ended June 30, 2000 from $2.5 million for the three month period ended June 30, 1999. This decrease is primarily attributable to the refocusing of the Company initiated in the first quarter of 2000, following which, the Company's target audience shifted from end users to OEM's (original equipment manufacturers) and ODM's (original design manufacturers). Additionally, the Web site technology purchased in 1998 is now fully amortized. General and Administrative. General and administrative expenses were stable at $800,000 for the three month period ended June 30, 2000 as compared with the three month period ended June 30, 1999. This reflects an increase in personnel expenses and premiums related to insurance coverage obtained concurrently with the initial public offering and a decrease in the allocation of facilities expenses. Amortization of Deferred Stock Compensation. Amortization of deferred stock compensation decreased $1.1million, or 62%, to $657,000 for the three month period ended June 30, 2000, from $1.7 million for the three month period ended June 30, 1999. The decrease is attributable to the cancellation of options and to the amortization methodology. These amounts represent the allocated portion of the difference between the deemed fair value of our common stock and the exercise price of stock options granted by us to employees, consultants and non-employee directors. Other Income (Expense), Net. Net other income increased $290,000 to $322,000 for the three month period ended June 30, 2000 from $32,000 for the three month period ended June 30, 1999. The increase is primarily attributable to the increase in interest income due to the increased balances in our investment portfolio following our initial public offering. 10 Comparison of the Six Month Period ended June 30, 2000 to the Six Month Period Ended June 30, 1999 Net Revenues. Net revenues decreased $450,000 to $396,000 for the six month period ended June 30, 2000 from $846,000 for the six month period ended June 30, 1999. This decrease is primarily attributable to lower shipments of BeOS, which we believe resulted from our announcement in January 2000 to make a version of BeOS available for free download. During the second quarter of 2000, revenues were primarily attributable to shipments under the recently announced publisher agreements, while in the first quarter they were generated from revenue deferred in previous quarters. To date, all of our revenues have been derived from BeOS, with future revenues to be dependent primarily on BeIA, our software platform for Internet appliances Cost of Revenues. Cost of revenues increased $230,000 to $554,000 for the six month period ended June 30, 2000 from $324,000 for the six month period ended June 30, 1999. Gross margin is negative for the first half of 2000 as a result of the continuing amortization of technology license agreements. Research and Development. Research and Development increased $321,000, or 9%, to $4.0 million for the six month period ended June 30, 2000 from $3.7 million for the six month period ended June 30,1999. The increase results primarily from an increase in personnel expenses following the hiring of additional staff and in the allocation of facilities expenses. Sales and Marketing. Sales and Marketing decreased $187,000, or 4%, to $4.2 million for the six month period ended June 30, 2000 from $4.3 million for the six month period ended June 30,1999. This decrease is primarily attributable to the impact of refocusing of marketing activities initiated in the first quarter of 2000, net of an increase in personnel costs following the hiring of additional sales and marketing personnel. The refocusing of marketing activities resulted in an increase in public relations activities and a decrease in the costs relating to our third party developer programs for a net decrease of approximately $300,000. Personnel expenses increased by $450,000, before the effect of a one-time charge of $347,000 relating to the grant of immediately vested stock options in 1999. General and Administrative. General and administrative expenses increased $230,000, or 15%, to $1.8 million for the six month period ended June 30, 2000 from $1.6 million for the six month period ended June 30, 1999. The increase results primarily from increases in personnel expenses, premiums related to insurance coverage obtained concurrently with the initial public offering and expansion of leased facilities, net of a decrease in expenses incurred in preparation of the initial public offering process in 1999. Amortization of Deferred Stock Compensation. Amortization of deferred stock compensation decreased $1.7 million, or 50%, to $1.7 million for the six month period ended June 30, 2000, from $3.4 million for the six month period ended June 30, 1999. The decrease is attributable to the cancellation of options and to the amortization methodology. These amounts represent the allocated portion of the difference between the deemed fair value of our common stock and the exercise price of stock options granted by us to employees, consultants and non-employee directors. 11 Other Income (Expense), Net. Net other income increased $530,000 to $663,000 for the six month period ended June 30, 2000 from $133,000 for the six month period ended June 30, 1999. The increase is primarily attributable to the increase in interest income due to the increased balances in our investment portfolio following our initial public offering. Liquidity and Capital Resources Since our inception, we have financed our operations primarily through the sale of our equity securities and through borrowing arrangements. Cash and cash equivalents and short-term investments decreased approximately $6.8 million to $22.3 million at June 30, 2000, from $29.1 million at December 31, 1999. This decrease is primarily attributable to the amounts used to fund operations, net of the proceeds of stock-option exercises. Cash used in operating activities increased $2.2 million to $9.3 million for the six month period ended June 30, 2000 as compared to $7.1 million for the six month period ended June 30, 1999. This increase is primarily attributable to the increase in net loss, net of non-cash items, and to decreased payables balances, during the six month period ended June 30, 2000. Cash provided by investing activities increased approximately $8.5 million to $13.6 million for the six month period ended June 30, 2000 as compared to $5.1 million for the six month period ended June 30, 1999. This increase is primarily attributable to net sales of short-term investments in the six month period ended June 30, 2000. Cash provided by financing activities for the six month period ended June 30, 2000 was approximately $3.0 million as compared with cash used in financing activities of $40,000 in the six month period ended June 30, 1999. This increase is primarily attributable to the proceeds of $2.2 million received from the exercise of stock options.. We require substantial working capital to fund our operations. We expect to continue to experience losses from operations and negative cash flows for at least the next twelve month period. In the first quarter of 2000, we shifted our resources to focus primarily on the market for Internet appliances. We made a version of BeOS available for personal use at no charge and a more fully featured version is available through third party publishers. The personal edition was released at the end of March and publishers began shipping the commercial version in April. Sales of BeOS have been our primary source of revenue in the past. We have little or no influence over the marketing and promotional efforts of third party publishers and their success, and we may not generate any meaningful revenues from sale of BeOS in the future through these publishers. We expect our revenues and cash flow for the future periods to be negatively impacted as a result of providing a version of BeOS for free. In July 1999, we completed the initial public offering of our common stock and raised approximately $32.2 million in net cash proceeds. We raised an additional $3.1 million in net proceeds in August 1999 upon the underwriters' exercise of their over-allotment option. The proceeds of the initial public offering are and will be used for working capital and general corporate purposes, including any expansion of our sales and marketing efforts, increases in research and development activities, and licensing and acquisition of new technologies. Since inception, we have experienced losses and negative cash flow from operations and expect to continue to experience significant negative cash flow in the foreseeable future. In addition, in the future, we will need to raise additional capital and we cannot be certain that we will be able to obtain additional financing on favorable terms, if at all. If we cannot raise additional capital on acceptable terms, if and when needed, we may not be able to further develop or enhance our product offering, take advantage of future opportunities or respond to competitive pressures or unanticipated requirements, any of which could have a material adverse effect on our business and results of operations. 12 FACTORS AFFECTING OUR BUSINESS, OPERATING RESULTS AND FINANCIAL CONDITION The following is a discussion of certain risks, uncertainties and other factors that currently impact or may impact Be's business, operating results and/or financial condition. Anyone making an investment decision with respect to Be's Common Stock or other securities of the Company is cautioned to carefully consider these factors, along with the "Risk Factors" discussed in the Company's Annual Report on Form 10-K for the year ended December 31, 1999 and our other public filings with the Securities and Exchange Commission. We have incurred significant net losses and we may never achieve profitability. We incurred significant net losses of approximately $10.4 million in 1997, $16.9 million in 1998, $24.5 million in 1999 and $11.1 million for the six month period ended June 30, 2000. As of June 30, 2000, we had an accumulated deficit of approximately $84.3 million. We expect to incur significant additional losses and continued negative cash flow from operations in 2000 and beyond and we may never become profitable. We expect to continue to incur significant sales and marketing, research and development and general and administrative expenses. Sales of BeOS, our desktop operating system, to resellers and distributors and direct sales to end users have accounted for the primary source of our revenues to date. In the first quarter of 2000, we shifted our resources to focus primarily on the market for Internet appliances. We made a version of BeOS available for personal use at no charge and a more fully featured version is available through third party publishers. The personal edition was released at the end of March and publishers began shipping the commercial version in April. As a result, we may not generate any meaningful revenues from sales of BeOS in the foreseeable future. Our shift to focus primarily on the market for Internet appliances may not result in any increase in our revenues or any improvement in our operations or financial condition and may not offset the loss of revenues from sales of BeOS. We will need to generate significant revenues to achieve profitability and positive operating cash flows. Even if we do achieve profitability and positive operating cash flow, we may not be able to sustain or increase profitability or positive operating cash flow on a quarterly or annual basis. We will need to raise additional capital that may not be available to us. We currently believe that our existing capital resources will be sufficient to meet our presently anticipated cash requirements for the next 12 months. However, we may need to raise additional capital and we cannot be certain that we will be able to obtain additional financing on favorable terms, if at all. If we cannot raise additional capital on acceptable terms, we may not be able to expand our sales and marketing efforts, further develop or enhance our products, take advantage of future opportunities or respond to competitive pressures or unanticipated requirements. Any of these events could have a material adverse effect on our business and results of operations. If additional capital is raised through the issuance of equity securities, our stockholders' percentage ownership of the common stock will be reduced and our stockholders may experience dilution in net book value per share, or the new equity securities may have rights, preferences or privileges senior to those of our stockholders. Any debt financing, if available, may involve covenants limiting or restricting our operations or future opportunities. 13 We have recently shifted our resources to focus primarily on a new and undeveloped market. In the first quarter of 2000, we shifted our resources to focus primarily on the market for Internet appliances and the further development and marketing of BeIA, our software platform intended for Internet appliances. We may be unsuccessful in our attempt to focus primarily on this market and face significant challenges often encountered with companies undergoing a strategic reorganization, which include: o inability to effectively shift existing product development and engineering, sales and marketing and management resources to focus on the market for Internet appliances; o management distraction and loss of key personnel as we focus on this market and shift resources towards the development and marketing of our software platform for Internet appliances market; o inadequacy of our existing resources to understand the needs and requirements of developers and manufacturers of Internet appliances; o inability to train existing personnel or hire and train new qualified personnel to address the market for Internet appliances; and o failure to adapt to new and evolving trends in Internet appliances. We may not successfully meet any or all of these challenges. Our failure to meet one or more of these challenges could materially adversely affect our business and prospects. In addition, our business and prospects are highly dependent on the development and market acceptance of Internet appliances and our ability to successfully market BeIA as a viable software platform for Internet appliances. The market for Internet appliances is new, unproven and subject to rapid technological change. This market may never develop or may develop at a slower rate than we anticipate. In addition, our success in marketing BeIA as a software platform for Internet appliances is dependent upon developing and maintaining relationships with industry-leading computer and consumer electronics companies, system and hardware manufacturers, and Internet service and content providers. Our failure to establish relationships with companies that offer Internet appliances and establish BeIA in this market would have a material adverse effect on our business and prospects. We face intense competition from companies with significantly greater financial, marketing, and technical resources. There is already intense competition to develop and market operating systems. This competition exists in the market for desktop operating systems as well as operating systems and software platforms intended for the Internet appliances market. Companies such as Microsoft Corporation, Apple Computer, Inc., QNX Software Systems Ltd., Palm, Inc., vendors of UNIX-based operating systems such as Linux, and vendors of embedded operating systems, have operating systems that are being used or may be used for Internet appliances. We also face competition from vendors of embedded browsers and manufacturers of set-top boxes and terminals. Many of these companies have an established market presence, relationships with OEMs and consumer electronic manufacturers such as those developing and marketing Internet appliances, and have significantly greater financial, marketing and technical resources than we do. As a result, we may have difficulty attracting manufacturers and developers to create devices and software that will use our software platform. These more established companies, together with a large number of smaller companies who offer software platforms that may be used for Internet appliances, may capture a larger portion of the market than we do. We also expect to face increased competition from new entrants offering software platforms intended for use on Internet appliances. 14 We expect our competitors to continue to improve and enhance their current products and to introduce new products and software platforms, especially those intended for the Internet appliances market. Successful product introductions and product improvements by our competitors could reduce or eliminate any perceived advantages in our software platform over these competitors and could reduce market acceptance for our software platform and make it obsolete. To be competitive, we must continue to invest significant resources in research and development, sales and marketing, and continue to enhance and improve our software platform. We may have insufficient resources to make these investments and may be unable to make the advances necessary to be competitive. Our failure to compete successfully against current or future competitors would have a material adverse effect on our business and prospects. Our success depends on our ability to establish and maintain strategic relationships, and the loss of any of our strategic relationships could harm our business and have an adverse impact on our revenue. Our success depends in large part on our ability to establish and maintain strategic relationships with industry-leading computer and consumer electronic companies, hardware and systems manufacturers, and Internet service and content providers. In the Internet appliance market, we have agreements with Compaq Computer Corporation, Qubit Technology and Fountain Technologies Inc., and collaboration arrangements with National Semiconductor, Inc., First International Computer, Inc. (FIC), Arima Computer Corporation (Arima) and DT Research, Inc. We cannot be certain that we will be able to reach agreements with additional partners on a timely basis or at all, or that these partners will devote adequate resources to promote our software platform. We may be unable to enter into new agreements with additional partners on terms favorable to us or at all. The market for Internet appliances is new and subject to rapid technological change. We may be unable to successfully meet the requirements of existing or future strategic partners. As a result, we may be unable to maintain strategic relationships with developers and manufacturers of Internet appliances and Internet service and content providers. If we are unable to develop or maintain relationships with strategic partners and customers, we will have difficulty selling and gaining market acceptance for our products and our business and results of operations will be materially adversely affected. Agreements with strategic partners may not result in any increase in our revenues or improvement in our operations or financial conditions. Existing agreements with OEM customers, for example, those with Compaq, Qubit and Fountain, and arrangements with our other strategic partners including National Semiconductor, FIC and Arima, generally do not contain any minimum purchase commitments or minimum payment obligations. Similarly, new agreements with additional OEM customer and arrangements with new strategic partners, may not contain any minimum purchase commitments or minimum payment obligations. Agreements with existing and new OEM customers may be limited to a pilot or test program. These partners are free to use software platforms developed by other companies in their Internet appliance products and are under no obligation to develop or market products based on our software platform. In addition, our arrangements with existing and new strategic partners may not result in the marketing or shipment of any commercial products based on our platform or may include only a limited number of demonstration models. As a result, existing arrangements and new arrangements, if any, with strategic partners may not result in any actual sales, any increase in our revenues, or any improvement in our operations or financial condition. 15 We are dependent upon the success of the products and services offered by our partners and customers in the Internet appliances market. We expect to market BeIA primarily to developers and manufacturers of Internet appliances and providers of services to access information and entertainment over Internet. Our intent is that that these manufacturers and service providers will incorporate our software platform into their products and services. Our BeIA customers may include computer and consumer electronic companies, manufacturers of the hardware and systems used in Internet appliances, and Internet service and content providers. As a result, our success is dependent in large part on factors which are outside our control which include, the performance of our customers and the market acceptance of our customers' products and services based on our software platform. We have little or no ability to influence the development and marketing efforts of our customers and customers may fail to dedicate adequate resources necessary to successfully develop and market products based on our software platform. We expect long sales cycles associated with our software platform intended for the Internet appliances market and our stock price could decline if sales are delayed or cancelled. We believe that the adoption of BeIA as the software platform represents a significant product decision for the developers and manufacturers of Internet appliances and we expect long sales cycles as we collaborate and educate customers and partners on the use and benefits of our software platform. We similarly expect that customers and partners will spend a significant amount of time performing internal reviews and testing our software platform before accepting and adopting our product. Any failure to gain acceptance for our software platform and any delays in sales of our product could cause our quarterly operating results to vary significantly from projected results, which could cause our stock price to decline. Our products may never gain broad market acceptance. We have two principle products, BeIA, our software platform intended for the Internet appliances market and BeOS, our operating system intended for the desktop market. BeOS has been our primary source of revenues in the past and it has been used primarily by a limited number of enthusiasts and application developers. Our business and prospects are dependent on the broader market acceptance of our products, especially the acceptance of BeIA as a viable software platform for a broad range of Internet appliances and devices enabling Internet-based and digital media applications. In an effort to increase the market acceptance of our software platform, a version of BeOS has been made available for personal use for no charge. Despite these efforts, we may not experience any significant increase in the number of BeOS users or a broader market acceptance of our software platform and developers may decide not to adopt or develop products based on our software platform. We may be unsuccessful at marketing BeIA as the software platform of choice for Internet appliances, and developers and manufacturers of Internet appliances and Internet service and content providers may not elect to incorporate BeIA in their products and services. Potential customers may not perceive any significant advantages over other operating systems such as Microsoft Windows CE, QNX, the UNIX-based operating systems, Linux, or embedded browsers and operating systems. In addition, we may be unable to demonstrate the commercial viability and cost-effective nature of our products. If our products, especially our software platform intended for the Internet appliances, are not accepted or adopted by an increasing number of developers and manufacturers, our business and prospects will be materially adversely affected. 16 In addition, traditional operating systems could evolve and new operating systems could emerge to more effectively address the needs of the manufacturers and developers of Internet appliances and the digital media requirements of users and OEMs. For example, enhancements and features could be added to Microsoft's Windows operating system and Apple's Mac OS which could significantly decrease the differences between our products and these operating systems. As a result, any technical or marketing advantage we may have in the market for operating systems could be lost and the demand and acceptance of our products would diminish. We are dependent upon third party publishers for the marketing and sale of the commercial version of BeOS and we have little or no control over the efforts and operation of these publishers. In March of 2000, a version of BeOS was made available for personal use at no charge. In April of 2000, we also made the commercial version of BeOS available through third party publishers. Our success in the desktop market is highly dependent on these publishers' ability to sell and market BeOS and incorporate it as part of successful product offerings. We have little or no ability to influence the marketing and promotional efforts of these publishers and these companies may fail to dedicate adequate resources necessary to successfully market and promote the commercial version of BeOS. We have limited experience marketing and selling our products, which makes it difficult to evaluate our business. We were founded in 1990 and shipped our first commercial product in December 1998. Prior to 1998, our business was primarily focused on research and product development activities. To date, we have not generated any significant revenues from sales of our products and this makes it difficult to evaluate our business and prospects. In January 2000, we announced a shift in our resources to focus primarily on the Internet appliances market, a new and unproven market and a market in which we have little experience competing. Your evaluation of our business and prospects must be made in light of the risks and uncertainties frequently encountered by companies in an early stage of development and offering products in a market featuring intense competition from companies with substantially greater financial and marketing resources. Risks faced in this regard include: o our inability to manage or adapt to new and evolving trends in Internet appliances and digital media; o our inability to market our product as a viable software platform, especially to leading developers and manufacturers of Internet appliances; o our failure to gain any sustainable level of market share or to compete with operating systems and software platforms offered by others; and o costs and delays in releasing new versions and product upgrades. We may not successfully meet any of these challenges. Our failure to meet one or more of these challenges could materially adversely affect our business and prospects. It is also difficult to predict the size and future growth rate, if any, of the market for our software platform. We have limited experience upon which to determine or predict trends that may emerge and adversely affect our business or prospects. The market for our software platform may not develop or may develop more slowly than we anticipate, and may never become economically sustainable. 17 We may not be able to respond to the rapid technological change in the markets in which we compete. The markets in which we participate or seek to participate are subject to: o rapid technological change; o frequent product upgrades and enhancements; o changing customer requirements for new products and features; and o multiple, competing and evolving industry standards. The introduction of software platforms that contain new technologies and the emergence of new industry standards could render our products less desirable or obsolete. In particular, we expect that changes in the Internet-based technology and digital media enabling technology will require us to rapidly evolve and adapt our products to be competitive. As a result, the life cycle of each release of our products is difficult to estimate. To be competitive, we will need to develop and release new products and software platform upgrades that respond to technological changes or evolving industry standards on a timely and cost-effective basis. We cannot be certain that we will successfully develop and market these types of products and software platform upgrades or that our products will achieve market acceptance. If we fail to produce technologically competitive products in a cost-effective manner and on a timely basis, our business and results of operations could suffer materially. Our revenues and operating results are subject to significant fluctuations and our stock price may fall if we fail to meet the expectations of the public market. Our revenues and operating results will likely vary significantly from period to period due to a number of factors, some of which are under our control, such as product enhancements by us, and many of which are outside our control, such as new product releases and product enhancements by our competitors. Customer orders may be deferred in anticipation of new product releases, product enhancements or upgrades by us or by our competitors. In addition, changes in the pricing policies or marketing efforts of our competitor and our response to these changes, which could include price reductions or increased marketing efforts by us, may cause significant fluctuations in our revenues and operating results. Based on these factors, we may fail to meet the expectations of the public market in any given period and our stock price would likely be materially adversely affected. 18 We may be unable to adjust expenses in a timely manner to compensate for revenue shortfalls. Our expense levels are fixed and based, in part, on our expectations of future sales. We may be unable to adjust spending in a timely manner to compensate for any sales shortfall. A significant portion of our expenses include minimum payments for licensed technology under licensing agreements, payment obligations under non-cancellable lease arrangements, rent and other payments that are fixed and do not vary with revenues. We plan to increase our operating expenses to: o expand our sales and marketing efforts; o fund greater levels of product development and engineering; o expand and increase the number of our relationships with strategic partners; and o broaden our customer support capabilities. Any delay in generating revenue could cause significant variations in our operating results from quarter to quarter and could result in substantial operating losses. If we fail to generate sufficient sales or if our sales are below expectations, operating results are likely to be materially adversely affected. The demand for our software platform is dependent on our ability to support key industry standards and access to enabling technologies. The demand and acceptance of our product is dependent upon our ability to support a wide range of industry standards such as those used for streaming media and Internet browsing and access to key enabling technologies. These key technologies include a Web browser under license from Opera Software A/S. If we were to lose our rights to this Web browser or any other key technology incorporated into our products, we may be required to devote significant time and resources to replace such browser or other key technologies. This could in turn be costly, result in the unavailability or delay the release of our products, and would materially adversely affect our business and operating results. We also license other enabling technologies for inclusion in our product, such as third party compression and decompression algorithms known as "codecs." We may be unable to license these enabling technologies at favorable terms or at all which may result in lower demand for our products. In our effort to increase market acceptance for our products, we may forego near-term revenue by providing our products at little or no cost to potential customers. In an attempt to increase the market acceptance of our software platform, we have made a version of BeOS available to end users for free. In the future, we may decide to continue to forego immediate revenue potential by providing other versions of BeOS at little or no cost. We may also forego near-term revenue potential in the Internet appliances market by providing BeIA to developers and manufactures at little to no cost. Customers, whether end-users or the developers or manufacturers of Internet appliances, may be unwilling to pay for any upgrades or enhanced versions of our products. Our decision to forego near-term revenue in expectation of increasing the users and adopters of our software platform may not yield any increase or sustainable market acceptance for our products and may not result in any future revenues. In addition, we may reduce prices in response to competitive factors or to pursue new market opportunities. 19 Our success depends upon availability of third party applications that operate on our software platform. Demand and market acceptance for our products will depend upon the availability of an increasing number of third party applications that operate on our software platform. These applications include video and audio editing, 3D games, creative audio and video content development and manipulation, and personal productivity applications. In part to encourage the development of an increasing number of applications that operate on our software platform and to increase market acceptance for our products, we have made a version of BeOS available for personal use at no charge. However, providing a version of BeOS to end-users for free may not result in any significant increase in the number of BeOS users and third party developers, which are generally under no obligation to develop applications based on our software platform, may not increase their development of applications that run on our products. A developer's decision to write applications for our software platform is based in part on the perception and analysis of the relative technical, financial and other benefits of developing applications for our platform versus writing applications for more popular operating systems such as Microsoft's Windows, Apple's Mac OS, Palm OS, or Linux. If we fail to attract a sufficient number of application developers who develop and market successful applications on out software platform, the demand for our products and our business will suffer. Moreover, any delay or unsuccessful release of third party applications could have a material adverse effect on our business and results of operations. Our success is dependent on the continued growth and improvement of the Internet and adoption of Internet appliances. Our future success depends on the continued growth of and reliance by consumers and businesses on the Internet, particularly in the Internet appliance market. Use and growth of the Internet will depend in significant part on continued rapid growth in the number of households and commercial, educational and government institutions with access to the Internet. The use and growth of the Internet will also depend on the number and quality of products and services designed for use on the Internet. Because use of the Internet as a source of information, products and services is a relatively recent phenomenon, it is difficult to predict whether the number of users drawn to the Internet will continue to increase and whether any significant market for commercial use of the Internet will continue to develop and expand. Either Internet use patterns may decline as the novelty of the medium recedes or the quality of products and services offered online may not support continued or increased use. The rapid rise in the number of Internet users and the growth of electronic commerce and applications for the Internet has placed increasing strains on the Internet's communications and transmission infrastructure. This could lead to significant deterioration in transmission speeds and the reliability of the Internet as a commercial medium and could reduce the use of the Internet by businesses and individuals. The Internet may not be able to support the demands placed upon it by this continued growth. Any failure of the Internet to support growth due to inadequate infrastructure or for any other reason would seriously limit its development as a viable source of commercial and interactive content and services. This could impair the development and acceptance of Internet appliances which could in turn materially adversely affect our business and prospects. 20 We may be unable to expand our sales and support organization to increase sales and market awareness for our products. We must expand our sales and marketing efforts aimed at computer and consumer electronic companies, systems and hardware manufacturers, and Internet service and content providers. Without this increase we may be unable to increase sales and market acceptance of our software platform. This would require a sophisticated sales force and the commitment of significant financial resources on our part. Competition for qualified sales personnel is intense, especially those with an understanding of emerging Internet-based technologies and markets. We may not be able to hire the type and number of sales personnel that we require on a timely basis or at all. We will need to increase our staff to support new customers and the expanding needs of existing customers. Hiring customer service and support personnel is very competitive in our industry due to the limited number of people available with the necessary technical skills and understanding of operating systems and Internet-based applications. If we cannot hire adequate numbers of qualified sales, marketing and customer service personnel, our business could suffer materially. We may be unable to manage any growth that we may experience. To succeed in the implementation of our business strategy, we must rapidly execute our sales and marketing strategy, further develop and enhance our products and product support capabilities especially those intended for the Internet appliance market, and implement effective planning and operating processes. To manage any anticipated growth we must: o establish and manage multiple relationships with OEMs, Internet service and content providers and other third parties; o continue to implement and improve our operational, financial and management information systems; and o hire, train and retain additional qualified personnel. Our systems, procedures and controls may not be adequate to support our operations, and our management may not be able to perform the tasks required to capitalize on market opportunities for our products and services. If we fail to manage our growth effectively, our business could suffer materially. We expect continued erosion in the average selling prices of our products. We anticipate that the average selling prices of our products will fluctuate and decrease in the future in response to a number of factors, including: o competitive pricing pressures; o rapid technological changes; and o sales discounts. We also anticipate that the average selling price of our products will decrease as we market our products to Internet appliance developers and manufacturers. Therefore, to maintain or increase our gross margins, we must develop and introduce new products and product enhancements on a timely basis. As our average selling prices decline, we must increase our unit sales volume to maintain or increase our revenue. If our average selling prices decline more rapidly than our costs, our gross margins will decline, which could seriously harm our business and results of operations. 21 The recent issuance by the SEC of an accounting bulletin related to revenue recognition, SAB 101, may have a material impact on our financial performance. In December 1999, the SEC issued Staff Accounting Bulletin No. 101. Revenue Recognition in Financial Statements, referred to as SAB 101. SAB 101 summarizes the SEC staff's views in applying generally accounting principles to revenue recognition in financial statements. We are currently in the process of evaluating SAB 101 and what effect it may have on our financial statements. Accordingly, we have not determined whether SAB 101 will have a material impact on our financial position or results of operations. In the event that the implementation of SAB 101 requires us to report a change in accounting principles related to our revenue recognition policy, we would be required to report such change no later than the quarter ending December 31, 2000. In addition to other uncertain risks related to SAB 101, it is possible that SAB 101 will result in increased fluctuations in our quarterly operating results and increase the likelihood that we may fail to meet expectations of securities analysts for any period. We are dependent on third party development tools. We are dependent on development tools provided by a limited number of third party vendors. Development tools are software applications that assist programmers in the development of applications. Together with our application developers, we primarily rely upon software development tools provided by Cygnus Solutions and Perforce Software. Cygnus Solutions was recently acquired by Red Hat Software, one of our competitors. If we lose access to these development tools or if Cygnus or Perforce fail to support or maintain these development tools, we will either have to devote resources to maintain and support the tools ourselves or transition to another vendor. Any maintenance or support of the tools by us or the transition could be costly, time consuming, could delay our product release and upgrade schedule, and could delay the development and availability of third party applications used on our products. Failure to procure the needed software development tools or any delay in the availability of third party applications could negatively impact our ability and the ability of third party application developers to release and support our software platform and the applications that run on it. These factors could negatively and materially affect the acceptance and demand for our products, our business and prospects. We depend on key personnel and attracting qualified employees for our future success. Our success depends to a significant degree upon the continued contributions of our executive management team, including our co-founders Jean-Louis Gassee, our Chief Executive Officer and Steve Sakoman, our Chief Operating Officer, and other senior level financial, technical, marketing and sales personnel. The loss of these or other members of our senior management team could have a material adverse effect on our business and results of operations. 22 As of June 30, 2000, we had 106 employees. We anticipate that the number of employees may increase during the next 12 months as we increase our research and development activities and sales and marketing efforts. Our success depends upon our ability to attract and retain additional highly qualified senior management and technical, sales and marketing personnel to support growing operations. Competition for qualified employees is intense. The process of locating and hiring personnel with the combination of skills and attributes required to carry out our strategy is time-consuming and costly. The loss of key personnel or our inability to attract additional qualified personnel to supplement or, if necessary, to replace existing personnel, could have a material adverse effect on our business and results of operations. Product defects may harm our business and reputation. Computer operating systems, such as our products, frequently contain errors or bugs. We have detected and may continue to detect errors and product defects in connection with new releases and upgrades of our operating system and related products. Despite our internal testing and testing by current and potential customers, errors may be discovered after our products or related software and tools are installed and used by customers. These errors could result in reduced or lost revenue, delay in market acceptance, diversion of development resources, damage to our reputation, or increased service and warranty costs, any of which could materially adversely affect our business and results of operations. Our products must successfully integrate with products from other vendors, such as third party software applications and computer hardware. As a result, when problems occur in an Internet appliance, a personal computer or any other device or network using our products, it may be difficult to identify the source of the problem. The occurrence of hardware and software errors, whether caused by our products or another vendor's products, may result in the reduction or loss of market acceptance of our products, and any necessary product revisions may force us to incur significant expenses. The occurrence of these problems could materially adversely affect our business and results of operations. Our success depends on our ability to protect and enforce our proprietary rights. Our success depends significantly on our ability to protect our proprietary rights to technologies used in our products. We rely primarily on a combination of copyright, trademark and trade secret laws, as well as confidentiality procedures and contractual provisions to protect our proprietary rights. To date, we have no patents and existing copyright laws afford only limited protection for our software. A substantial portion of our sales are derived from the licensing of products under "shrink wrap" license agreements that are not signed by licensees and, therefore, may be unenforceable under the laws of certain jurisdictions. Despite any measures taken to protect our proprietary rights, attempts may be made to copy aspects of our software platform or to obtain and use information that we regard as proprietary which could harm our business. In addition, the laws of some foreign countries do not protect our intellectual property to the same extent as U.S. laws. Finally, our competitors may independently develop similar technologies. The loss or misappropriation of any material trademark, trade name, trade secret or copyright could have a material adverse effect on our business and results of operations. The software industry is characterized by the existence of a large number of patents and frequent litigation based on allegations of patent infringement. As the number of entrants into our market increases, the possibility of an infringement claim against us grows. For example, we may be inadvertently infringing on a patent. In addition, because patent applications can take many years to issue, there may be a patent application now pending of which we are unaware upon which will be infringing when it issues in the future. Although we do not believe that our products infringes on the rights of third parties, third parties may still assert infringement claims against us in the future and this could result in costly litigation and distraction of management. To address such patent infringement claims, we may have to enter into royalty or licensing agreements. Licenses may not be available on reasonable terms or at all which could have a material adverse effect on our business and results of operations. 23 We face risks relating to our online operations. A significant barrier to widespread use of electronic commerce sites, such as our BeDepot.com Web site, is concern regarding the security of confidential information transmitted over public networks. We rely on encryption and authentication technology licensed from third parties to provide the security and authentication necessary to effect secure transmission of confidential information, such as customer credit card numbers. Concerns over the security of transactions conducted on the Internet and the privacy of users may also inhibit the growth of online services, especially as a means of conducting commercial transactions. Our failure to prevent any security breaches may have a material adverse effect on our business and results of operations. Despite our efforts to protect the integrity of our Web site and products sold on it, a party may be able to circumvent our security measures and could misappropriate proprietary information or cause interruptions in our operations and damage to our reputation. Any such action could negatively affect our customers' willingness to engage in online commerce with us. We may be required to expend significant capital and other resources to protect against these security breaches or to alleviate problems caused by these breaches. If any compromise of our security were to occur, it could materially adversely affect our reputation and business. Our stock price is highly volatile. The trading price of our common stock has fluctuated significantly and has ranged from $3.25 to $39.5625 over the past 12 months since our initial public offering in July 2000. In addition, many factors could cause the market price of our common stock to fluctuate substantially, including: o announcement by us or our competitors of significant strategic partnerships, joint ventures, significant contracts, or acquisitions, or rumors to that effect; o announcement by us of loss of significant strategic partnerships, joint ventures, significant contracts or acquisitions; o news and announcements relating to the ongoing antitrust actions involving Microsoft; o announcements by us or our competitors concerning software errors or delays in product releases; o availability of key software applications developed for our products or our competitor's products; and o changes in financial estimates by securities analysts. 24 Specifically, certain market segments such as the computer software industry have experienced dramatic price and volume fluctuations from time to time. These fluctuations may or may not be based upon any business or operating results. Our common stock may experience similar or even more dramatic price and volume fluctuations which may continue indefinitely. In the past, securities class action litigation has often been brought against a company following periods of volatility in the market price of its stock. We may in the future be the target of similar litigation. Securities litigation could result in substantial costs and diversion of management attention and resources, all of which could materially harm our business and results of operation. Our Amended and Restated Certificate of Incorporation, bylaws, Delaware law and change of control agreement with some of our key employees contain provisions that could discourage a third party from acquiring us and consequently decrease the market value of our common stock. Our Amended and Restated Certificate of Incorporation grants our board of directors the authority to issue up to 2,000,000 shares of preferred stock and to determine the price, rights, preferences, privileges and restrictions, including voting rights of these shares without any further vote or action by the stockholders. Since the preferred stock could be issued with voting, liquidation, dividend and other rights superior to those of the common stock, the rights of the holders of common stock will be subject to, and may be adversely affected by, the rights of the holders of any preferred stock that may be issued. The issuance of preferred stock could have the effect of making it more difficult for a third party to acquire a majority of our outstanding voting stock which could decrease the market value of our stock. Further, provisions in our Amended and Restated Certificate of Incorporation and bylaws and of Delaware law could have the effect of delaying or preventing a third party from acquiring us, even if a change in control would be in the best interest of our stockholders. These provisions include the inability of stockholders to act by written consent without a meeting and procedures required for director nomination and stockholder proposal. We have entered into a Change of Control Agreement with each of our officers and some of our other key employees. These agreements provide that, among other things, if an employee is terminated without cause or otherwise resigns for good reason during the period starting six months prior to the date of a change of control and ending eighteen months following our change of control, then the employee shall be entitled to a severance payment, and the acceleration and immediate exercisability of all unvested options. These provisions may discourage a third party from acquiring us. 25 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK We considered the provision of Financial Reporting Release No. 48 "Disclosure of Accounting Policies for Derivative Financial Instruments and Derivative Commodity Instruments, and Disclosure of Quantitative and Qualitative Information about Market Risk Inherent in Derivative Financial Instruments, Other Financial Instruments and Derivative Commodity Instruments." We had no holdings of derivative financial or commodity instruments at June 30, 2000. However, we are exposed to financial market risks, including changes in foreign currency exchange rates and interest rates. Much of our revenue and capital spending is transacted in U.S. dollars. However, the expenses and capital spending of our French subsidiary are transacted in French francs. Results of operations from our French subsidiary are not material to the results of our operations, therefore, we believe that foreign currency exchange rates should not materially adversely affect our overall financial position, results of operations or cash flows. We believe that the fair value of our investment portfolio or related income would not be significantly impacted by increases or decreases in interest rates due mainly to the short-term nature of our investment portfolio. However, a sharp increase in interest rates could have a material adverse effect on the fair value of our investment portfolio. Conversely, sharp declines in interest rates could seriously harm interest earnings of our investment portfolio. 26 PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS None. ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS Sales of Registered Securities and Use of Proceeds None. Sales of Unregistered Securities In the three month period ended June 30 2000, we sold 24,722 shares of our common stock to one stockholder pursuant to the exercise of warrants for an aggregate purchase price of $24,722. The sale and issuance of these securities was deemed to be exempt from registration under the Securities Act by virtue of Section 4(2) and Regulation D. ITEM 3. DEFAULT UPON SENIOR SECURITIES None. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS At the Company's 2000 Annual Meeting of Stockholders held on May 30, 2000, stockholders voted on the following: Proposal I - Election of Directors - The following directors were each elected for a three-year term expiring at the 2003 Annual Meeting of Stockholders: Nominee For Abstain ------------------------ --------- --------- Christian E. Marchandise 24,497,671 97,376 William F. Zuendt 24,510,519 84,528 The following directors will continue to serve as members of the Company's board of directors until their term is expired: Barry M. Weinman, Garrett P. Gruener, Andrei M. Manoliu, Ph.D., Jean-Louis F. Gassee and Stewart Alsop. Proposal II - Ratification of selection of PricewaterhouseCoopers LLP as the Company's Independent Auditors for the fiscal year ended December 31, 2000. For Against Abstain Broker Non-Vote ---------- ------- ------- --------------- 24,565,627 21,909 7,611 0 ITEM 5. OTHER INFORMATION None. 27 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits: 3.1* Amended and Restated Certificate of Incorporation 3.2* Bylaws 27.1 Financial Data Schedule (EDGAR version only) * Filed with the Company's Registration Statement on Form S-1, Registration No. 333-77855, declared effective by the Securities and Exchange Commission on July 20, 2000, incorporated herein by reference. (b) Reports on Form 8-K None 28 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. BE INCORPORATED By: /s/ JEAN-LOUIS F. GASSEE Date : August 11, 2000 Jean-Louis F. Gassee President, Chief Executive Officer and Director By: /s/ ALBERT A. LOMBARDO Date : August 11, 2000 Albert A. Lombardo Vice President, Finance and Accounting 29 EX-27.1 2 0002.txt FINANCIAL DATA SCHEDULE
5 This schedule contains summary financial information extracted from the Company's Financial Statements for the six month period ending June 30, 2000 included in the Company's Form 10-Q filed August 11, 2000 and is qualified in its entirety by reference to such statements. 0000895921 BE INCORPORATED 1,000 6-MOS DEC-31-2000 JAN-01-2000 JUN-30-2000 13,717 8,587 129 0 0 23,018 1,443 (966) 24,876 2,326 0 0 0 36 22,009 24,876 396 396 554 554 11,624 0 (63) (11,119) 0 (11,119) 0 0 0 (11,119) (0.32) (0.32)
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