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 March 31, 2001
|_| 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. [X] Yes [ ] No.
The number of shares of Common Stock outstanding as of April 30, 2001 was
36,613,233.
BE INCORPORATED
FORM 10-Q
TABLE OF CONTENTS
PAGE
PART I. FINANCIAL INFORMATION
Item 1. Condensed Financial Statements:
Consolidated Balance Sheets at March 31, 2001
and December 31, 2000 2
Consolidated Statements of Operations for the three months
ended March 31, 2001 and March 31, 2000 3
Consolidated Statements of Cash Flows for the three months
ended March 31, 2001 and March 31, 2000 4
Notes to Condensed Consolidated Financial Statements 5
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 9
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
1
PART I - FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
BE INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands; unaudited)
March 31, December 31,
2001 2000
--------- ---------
ASSETS
Current assets:
Cash and cash equivalents ......................... $ 6,574 $ 9,463
Short-term investments ............................ 2,741 4,594
Accounts receivable ............................... 454 26
Prepaid and other current assets .................. 552 549
Total current assets .......................... 10,321 14,632
--------- ---------
Property and equipment, net .......................... 379 391
Other assets, net of accumulated amortization ........ 894 1,048
Total assets ................................. $ 11,594 $ 16,071
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable .................................. $ 172 $ 362
Accrued expenses .................................. 1,704 1,502
Technology license obligations, current portion ... 417 454
Deferred revenue .................................. 477 109
Total current liabilities ..................... 2,770 2,427
--------- ---------
Technology license obligations, net of current portion 232 320
Total liabilities ............................. 3,002 2,747
--------- ---------
Stockholders' Equity:
Common stock ...................................... 36 36
Additional paid-in capital ........................ 109,334 108,880
Accumulated other comprehensive gain .............. 8 1
Deferred stock compensation ....................... (854) (1,218)
Accumulated deficit ............................... (99,932) (94,375)
Total stockholders' equity .................... 8,592 13,324
--------- ---------
Total liabilities and stockholders' equity ... $ 11,594 $ 16,071
========= =========
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; unaudited)
Three Months
Ended March 31,
2001 2000
Net revenues ........................................... $ 100 $ 254
Cost of revenues ....................................... 251 293
-------- --------
Gross profit (loss) .................................... (151) (39)
Operating expenses:
Research and development, including amortization
of deferred stock compensation of $102 and $312 2,481 2,460
Sales and marketing, including amortization
of deferred stock compensation of $64 and $237 1,618 2,328
General and administrative, including amortization
of deferred stock compensation of $136 and $484 1,146 1,514
Restructuring charge ................................ 307 --
Total operating expenses ........................ 5,552 6,302
-------- --------
Loss from operations ................................... (5,703) (6,341)
Interest expense ....................................... (15) (34)
Other income and expenses, net ......................... 161 375
-------- --------
Net loss ............................................... (5,557) (6,000)
======== ========
Net loss per common share--basic and diluted ........... $ (.15) $ (.17)
======== ========
Shares used in per common share
calculation--basic and diluted ...................... 36,194 34,999
======== ========
The accompanying notes are an integral part of these
consolidated financial statements.
3
BE INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands; unaudited)
Three Months
Ended March 31,
2001 2000
-------- --------
Cash flows from operating activities:
Net loss ............................................ $ (5,557) $ (6,000)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization ................... 267 266
Amortization of discount on
technology license obligations ................. 15 33
Loss on disposal of fixed assets ................ 6 --
Compensation expense incurred on issuance
of stock ....................................... -- 33
Amortization of deferred stock compensation ..... 302 1,033
Changes in assets and liabilities
Accounts receivable .......................... (428) 95
Prepaid and other current assets ............. (3) 106
Other assets ................................. -- 41
Accounts payable ............................. (190) (395)
Accrued expenses ............................. 202 (244)
Deferred revenue ............................. 368 (19)
-------- --------
Net cash used in operating activities ...... (5,018) (5,051)
-------- --------
Cash flow provided by investing activities:
Acquisition of property and equipment ............... (72) (66)
Acquisition of licensed technology .................. (175) (220)
Purchases of short-term investments ................. (1,728) (17,304)
Sales of short-term investments ..................... 3,588 28,087
-------- --------
Net cash provided by investing activities .. 1,613 10,497
-------- --------
Cash flows provided by financing activities:
Proceeds from issuance of common stock:
pursuant to common stock options .................. 12 2,140
pursuant to common stock warrants ................. 180 430
under Employee Stock Purchase Plan ................ 324 369
Repurchase of common stock .......................... -- (3)
-------- --------
Net cash provided by financing activities .. 516 2,936
-------- --------
Net increase (decrease) in cash and cash equivalents ... (2,889) 8,382
-------- --------
Cash and cash equivalents, beginning of period ......... 9,463 6,500
-------- --------
Cash and cash equivalents, end of period ............... $ 6,574 $ 14,882
======== ========
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") was founded in 1990 and offers software
platforms designed for Internet appliances and digital media applications.
The Company's software platforms are (i) BeIA: consisting of three
components; BeIA Client Platform, BeIA Management and Administration
Platform, and BeIA Integrations Services; (ii) Home Audio Reference
Platform (HARP), a BeIA-based reference platform or prototype for
Internet-enabled home stereo devices; and (iii) BeOS, the Company's
operating system designed for digital media applications and which serves
as the development platform for BeIA.
The Company's revenues to date have been primarily generated from the
following sources: sale of BeOS to resellers and distributors, direct sales
of BeOS to end users through its BeDepot.com Web site and royalties
received for the BeIA Client Platform starting in the first quarter of
2001. Additionally, the Company expects to recognize the amounts of
deferred revenue at March 31, 2001, and for which payment was subsequently
received, as revenues for BeIA Integration Services in the second quarter
of 2001. In 2000, the Company shifted its resources to focus primarily on
the market for Internet appliances and the further development and
marketing of BeIA, its software platform intended for Internet appliances.
At the same time it announced that it would be making available at no
charge a version of BeOS for personal use, and a more fully featured
version would be available for a charge through third party publishers.
During 2000, the Company discontinued sales of software through its
BeDepot.com website. Since inception, the Company has experienced losses
and negative cash flow from operations and expects to continue to
experience significant negative cash flow in the foreseeable future.
The Company operates in one business segment, software platforms designed
for Internet appliances and digital media applications.
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, 2000 and the notes thereto contained in the
Company's Annual Report on Form 10-K. The December 31, 2000 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.
5
At the end of the first quarter of 2001, the Company stated in its Annual
Report on Form 10-K that it believed existing cash and cash equivalents
would not be sufficient to meet the Company's operating and capital
requirements at its anticipated level of operations beyond the end of the
second quarter of 2001. Following the reduction in workforce carried out at
the beginning of the second quarter, the Company anticipates additional
sufficient capital will be necessary to fund the Company's operations at
the currently anticipated levels beyond the third quarter of 2001. Further,
in April 2001, the Company also announced its Board of Directors has
engaged an investment banking firm to assist it in exploring various
strategic and financial alternatives for maximizing shareholder value on a
near-term basis. While the Company is actively considering various funding
alternatives, the Company has not secured or entered into any arrangements
to obtain additional capital. There can be no assurance the Company will be
able to obtain additional funds, on acceptable terms or at all. If the
Company cannot raise additional capital to continue its present level of
operations, it will have to continue to scale back its business which could
include among other things, a further reduction in its workforce. As a
result, it may not be able to further develop or enhance its product
offering, take advantage of future opportunities or respond to competitive
pressures, any of which could have a material adverse effect on its
business and results of operations. The Company's liquidity may also be
adversely affected in the future by factors such as higher interest rates,
inability to borrow without collateral, availability of capital financing
and continued operating losses.
The consolidated financial statements do not include any adjustments that
might result from the outcome of these uncertainties.
3. Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board, ("FASB"), 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 deferred item depending on the type of hedge
relationship that exists with respect of such derivatives. In July 1999,
the Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 137, or SFAS 137, "Accounting for Derivative
Instruments and Hedging Activities - Deferral of the Effective Date of FASB
Statement No. 133." SFAS 137 deferred the effective date until fiscal years
beginning after June 30, 2000. In June 2000, the Financial Accounting
Standards Board issued Statement of Financial Accounting Standards No. 138,
or SFAS 138, "Accounting for Derivative Instruments and Hedging Activities
- An Amendment of FASB Statement 133." SFAS 138 amends the accounting and
reporting standards for certain derivative activities such as net
settlement contracts, foreign currency transactions and intercompany
derivatives. The Company's implementation of SFAS 133 since January 1,
2001, has not had a material impact on its financial position or results of
operations.
In various areas, including revenue recognition and stock-based
compensation accounting standards and practices continue to evolve. The SEC
continues to issue interpretative guidance relating to SAB 101, and the
FASB and the Emerging Issues Task Force continue to address revenue and
other related accounting issues. Management believes it is compliance with
all of the rules and related guidance as they currently exist. However, any
changes to generally accepted accounting principles in these areas could
impact the Company's accounting for its operations.
6
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 and warrants. Options and warrants 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
March 31,
2001 2000
------ ------
(unaudited)
Historical net loss per common share, basic and diluted:
Numerator for net loss, basic and diluted ........... $ (5,557) $ (6,000)
Denominator for basic and diluted loss
per common share:
Weighted average common shares
outstanding ..................................... 36,194 34,999
====== ======
Net loss per common share basic and diluted ......... $ (.15) $ (.17)
====== ======
Antidilutive securities:
Options to purchase common stock .................. 7,088 6,116
Common stock not yet vested ....................... 174 403
Warrants .......................................... -- 2,155
------ ------
7,262 8,674
====== ======
7
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
March 31,
2001 2000
-------- --------
(unaudited)
Net loss ............................... $ (5,557) $ (6,000)
Unrealized gain on marketable securities 7 8
-------- --------
Comprehensive loss ..................... $ (5,550) $ (5,992)
======== ========
The components of accumulated other income, net of related tax are as follows
(in thousands):
March 31, December 31,
2001 2000
----- -----
(unaudited) (audited)
Unrealized gain (loss) on marketable securities.......$ 8 $ 7
----- -----
$ 8 $ 7
===== =====
6. Restructuring Charge
On April 2, 2001, the Company announced its decision, made at the end of
the first quarter, to restructure its operations to reflect current market
and financial conditions by closing its European office in Paris and
eliminate positions principally in the Company's sales, marketing and
general administration departments in the United States. As a result, in
accordance with the provisions of SFAS 88, the Company recorded a
restructuring charge of $307,000 in the first quarter for the closing of
its European office, which is comprised of $272,000 for involuntary
termination benefits and $35,000 for termination of operating contracts and
professional fees. In accordance with the provisions of EITF 98-3, the
Company expects to record a restructuring charge of approximately $150,000
in the second quarter for the involuntary termination benefits related to
the elimination of 22 positions in the U.S.
7. Legal Proceedings
As previously disclosed in Form 10K for the fiscal year ended December 31,
2000, in November 2000, the Company's stock transfer agent, Wells Fargo
Bank Minnesota, N.A., received a demand letter from a stockholder alleging
damages resulting from the transfer agent's failure to timely issue its
stock certificates. While Be was not a party named in such demand letter,
and no claim has yet been filed with any court of competent jurisdiction,
Be is named as a party on the stockholder's draft claim attached to the
demand letter. The Company has been participating in communications with
the parties in an effort to resolve the matter prior to a lawsuit being
filed. Be management believes that the allegations as they relate to Be in
the potential and draft claim are without merit and intends to vigorously
defend Be against any potential future related legal action. However, there
can be no assurance this threatened claim will be resolved without costly
litigation, or require Be's participation in the settlement of such claim,
in a manner that is not adverse to its financial position, results of
operations or cash flows. No estimate can be made of the possible loss or
possible range of loss associated with the resolution of this contingency.
If Be were held liable, it is the its intent to seek reimbursement under
its D&O insurance policy.
There have not been any developments regarding this matter since it was
disclosed in Form 10K for the fiscal year ended December 31, 2000.
8. Subsequent Events
Subsequent to the end of the quarter under review, the Company entered into
an agreement with an investment banking firm to assist it in exploring
various strategic and financial alternatives for maximizing shareholder
value on a near-term basis. Financial terms include the payment of fees on
a retainer basis, as defined in the agreement.
8
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" AND 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 IN THIS SECTION 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, 2000 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.
Overview
Be was founded in 1990. We offer software solutions designed for Internet
appliances and digital media applications. Our software solutions are (i) BeIA:
the Complete Internet Appliance Solution(TM), consisting of three components;
BeIA Client Platform, BeIA Management and Administration Platform, and BeIA
Integration Services; (ii) Home Audio Reference Platform (HARP), a BeIA-based
reference platform or prototype for Internet-enabled home stereo devices; and
(iii) BeOS, our operating system designed for digital media applications and
which serves as the development platform for BeIA. 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 targeted primarily to end users. Prior releases of BeOS were targeted
primarily to software developers. Throughout 1999 we focused on delivering BeOS
as a desktop operating system to end users, and while we were slowly gaining
users and traction within the desktop operating system market, we determined the
cost of competing in that market was more than we could afford. In recognition
of this, and to address shareholder value, in 2000 we shifted our resources to
focus primarily on the market for Internet appliances and the further
development, marketing and deployment of BeIA, our software solution intended
for Internet appliances. At the same time we announced that we would be making
available at no charge a version of BeOS for personal use, and a more fully
featured version would be available for a charge through third party publishers.
9
Our revenues in 2000 were primarily generated from the sale of BeOS to our
licensed third party publishers, and other resellers and distributors, 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 2001, we began
recognizing revenue from royalties and fees related to our BeIA software
platform.
We expect our future revenues to continue to be primarily generated through
royalty payments, maintenance and support fees, and professional services and
integration fees from developers and manufacturers of Internet appliances, and
other systems and hardware manufacturers incorporating BeIA into their products.
We expect that any revenues from BeIA will be generally derived through
licensing of BeIA to developers and manufacturers of Internet appliances and
related service fees including integration, support and maintenance fees. The
revenues from BeIA have not offset the loss of revenues from sales of BeOS and
we expect that our revenues and cash flow for the future periods to continue to
be negatively impacted.
Since adopting and incorporating BeIA as a software solution generally
represents a significant product decision for developers and manufactures of
Internet appliances and related systems and hardware, we have experienced a
longer sales cycle as we have collaborated with and educated 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 solution. 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 solution. 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.
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 research and development expenses will
increase in the future as we further develop and enhance BeIA and develop new
products 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, investor relations, promotional materials, travel, and related
expenses for attending trade shows. We expect that our sales and marketing
expenses in the future will be in large part dependent on our ability to secure
sufficient capital to fund our ongoing operations. If we are able to secure
sufficient capital, we expect our sales and marketing expenses to increase as we
further promote awareness of our software solution and further develop and
expand our relationships with existing and potential partners.
10
General and administrative expenses consist primarily of compensation and
related expenses for management, finance, and accounting personnel, professional
services and related fees, occupancy costs and other expenses. We expect that
our general and administrative expenses in the future will be in large part
dependent on our ability to secure sufficient capital to fund our ongoing
operations. If we are able to secure sufficient capital, we expect our general
and administrative expenses to increase as we expand our existing facilities or
relocate to new facilities that better address any growth we may experience or
incur costs related to any growth in our business and the costs 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 0% and 27% of total
revenues for the three month periods ended March 31, 2001 and March 31, 2000
respectively. Because of our shift in focus away from BeOS, we expect that in
the future a higher percentage of our total revenues will be derived from North
America as compared with revenues to date. While, to date, the majority of our
international revenues have been denominated in US dollars, we expect most of
our international revenues to be denominated in local currencies. 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.
From time to time in the past, we have granted stock options to employees
and non-employee directors and expect to continue to do so in the future. As
March 31, 2001, we had recorded deferred compensation related to these options
in the total amount of $15.7 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 options at the date of grant. Of
this amount, $5.7 million had been amortized at December 31, 1998, with $6.2,
$2.6 million and $302,000, being amortized in 1999, 2000 and the quarter ended
March 31, 2001, respectively. Future amortization of expense arising out of
options granted through March 31, 2001 is estimated to be $640,000 for the
remaining nine months of 2001, $212,000 in 2002 and $2,000 in 2003. We amortize
the deferred compensation charge monthly over the vesting period of the
underlying option.
11
Comparison
Certain prior period costs have been reclassified to conform with the
current year presentation.
Operating expenses as shown in the Consolidated Statements of Operations,
include non-cash charges for stock compensation amortization as follows:
Quarter Ended March 31,
2001 2000
------ ------
(in thousands)
Amortization of deferred compensation included in:
Research and development ........................... $ 102 $ 312
Sales and marketing ................................ 64 237
General and administrative ......................... 136 484
------ ------
Total amortization of deferred stock compensation $ 302 $1,033
====== ======
Excluding the amortization of deferred compensation, operating expenses are
as follows:
Quarter Ended March 31,
2001 2000
--- ----
(in thousands)
Operating expenses:
Research and development ....................... $2,379 $2,148
Sales and marketing ............................ 1,554 2,091
General and administrative ..................... 1,010 1,030
Amortization of deferred stock compensation .... 302 1,033
------ ------
Total operating expenses .................... $5,245 $6,302
====== ======
Comparison of the Three Month Period ended March 31, 2001 to the Three Month
Period ended March 31, 2000
Net Revenues. Net revenues decreased $154,000, or 61%, to $100,000 for the
three month period ended March 31, 2001 from $254,000 for the three month period
ended March 31, 2000. Revenues are not directly comparable as they were
attributable to shipments of BeOS in 2000 and to royalties received for BeIA in
2001. As such, the first quarter of 2001 marks the first revenue recognized for
BeIA following our shift in focus to the market for Internet appliances.
Additionally, deferred revenue increased to $477,000 at March 31, 2001 from
$109,000 at December 31, 2000 as a result of payments due for ongoing BeIA
Integration Services. We plan to recognize the revenues in the second quarter.
Cost of Revenues. Cost of revenues decreased $42,000, or 14%, to $251,000,
for the three month period ended March 31, 2001 from $293,000 for the three
month period ended March 31, 2000. Gross margin remains negative as a result of
the continuing amortization of technology license agreements.
Research and Development. Research and Development expenses, exclusive of
stock compensation, increased $231,000, or 11%, to $2.4 million for the three
month period ended March 31, 2001 from $2.1 million for the three month period
ended March 31, 2000. The increase results primarily from increases of
approximately $310,000 in personnel expenses, primarily attributable to the
hiring of additional research and development personnel, net of savings of
approximately $80,000 on outside consulting expenses.
Sales and Marketing. Sales and Marketing expenses, exclusive of stock
compensation, decreased $537,000, or 25%, to $1.6 million for the three month
period ended March 31, 2001 from $2.1 million for the three month period ended
March 31, 2000. This decrease is primarily attributable to our shift in
resources to focus on the Internet appliances market, and resulting shift in our
potential customer base from end users to device and service providers. The
refocusing of marketing activities resulted in decreases in expenses related to
customer service efforts, developer programs, market research, public relations
and trade-show participation.
General and Administrative. General and administrative expenses, exclusive
of stock compensation, were level at $1.0 million for the three month periods
ended March 31, 2001 and March 31, 2000.
12
Restructuring charge. On April 2, 2001, we announced our decision, made at
the end of the first quarter, to restructure our operations to reflect current
market and financial conditions by closing our European office in Paris and
eliminate positions principally in the Company's sales, marketing and general
administration departments in the United States. As a result, we recorded a
restructuring charge of $307,000 in the first quarter for the closing of our
European office, which is comprised of $272,000 for involuntary termination
benefits and $35,000 for termination of operating contracts and professional
fees. We expect to record a restructuring charge of approximately $150,000 in
the second quarter for the involuntary termination benefits related to the
elimination of 22 positions in the U.S.
Amortization of Deferred Stock Compensation. Amortization of deferred stock
compensation decreased $731,000, or 71%, to $302,000 for the three month period
ended March 31, 2001, from $1.0 million for the three month period ended March
31, 2000. The decrease is attributable to the cancellation of options and to the
use of an amortization methodology, which tends to record higher compensation in
the initial years of the vesting period. 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 and non-employee
directors.
Other Income (Expense), Net. Net other income decreased $195,000, or 57%,
to $146,000 for the three month period ended March 31, 2001 from $341,000 for
the three month period ended March 31, 2000. The decrease is primarily
attributable to the decrease in interest income due to the reduced balances in
our investment portfolio used to fund operations.
Taxes
Since inception, the Company has generated net operating losses which
aggregated approximately $78.7 million as of March 31, 2001.The Company has
provided a full valuation allowance against the losses since it believes that it
is more likely than not that such benefits will not be realized. The amount of
available net operating losses will be reduced in the case of a change in
ownership as defined in the Internal Revenue Code.
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 $4.8 million to
$9.3 million at March 31, 2001 from $14.1 million at December 31, 2000. This
decrease is primarily attributable to the amounts used to fund operations.
Cash used in operating activities was level at $5.0 million for the three
month periods ended March 31, 2001 and March 31, 2000.
Cash provided by investing activities decreased approximately $8.9 million
to $1.6 million for the three month period ended March 31, 2001 as compared to
$10.4 million for the three month period ended March 31, 2000. This decrease is
primarily attributable to lower net sales of short-term investments in the three
month period ended March 31, 2001.
Cash provided by financing activities for the three month period ended
March 31, 2001 was approximately $500,000, which represents a $2.4 million from
the three month period ended March 31, 2001 of $2.9 million. This decrease is
primarily attributable to the proceeds of $2.1 million received from the
exercise of stock options in the first quarter of 2000.
13
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.
At the end of the first quarter of 2001, we stated in our Annual Report on
Form 10-K that we believed existing cash and cash equivalents would not be
sufficient to meet operating and capital requirements at our anticipated level
of operations beyond the end of the second quarter of 2001. Following the
reduction in workforce carried out at the beginning of the second quarter, we
anticipate additional sufficient capital will be necessary to fund the Company's
operations at the currently anticipated levels beyond the third quarter of 2001.
Further, in April 2001, the Company also announced its Board of Directors has
engaged an investment banking firm to assist it in exploring various strategic
and financial alternatives for maximizing shareholder value on a near-term
basis. While we are actively considering various funding alternatives, we have
not secured or entered into any arrangements to obtain additional capital. There
can be no assurance we will be able to obtain additional funds, on acceptable
terms or at all. If we cannot raise additional capital to continue our present
level of operations, we will have to continue to scale back our business which
could include among other things, a further reduction in our work force. As a
result we may not be able to further develop or enhance our product offering,
take advantage of future opportunities or respond to competitive pressures, any
of which could have a material adverse effect on our business and results of
operations. Our liquidity may also be adversely affected in the future by
factors such as higher interest rates, inability to borrow without collateral,
availability of capital financing and continued operating losses.
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 "Factors Affecting our Business,
Operating Results and Financial Condition" discussed in the Company's Annual
Report on Form 10-K for the year ended December 31, 2000 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, $21.2 million for the year ended
December 31, 2000 and $5.6 million for the three month period ended March 31,
2001. As of March 31, 2001, we had an accumulated deficit of approximately $99.9
million. We expect to incur significant additional losses and continued negative
cash flow from operations in 2001 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. Prior to this year,
sales of BeOS, our desktop operating system, to resellers and distributors and
direct sales to end users accounted for the primary source of our revenues. 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. Although we started to recognize revenues for BeIA in the first quarter
of 2001, 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.
14
We will need to raise additional capital that may not be available to us.
At the end of the first quarter of 2001, we stated in our Annual Report on
Form 10-K that we believed existing cash and cash equivalents would not be
sufficient to meet operating and capital requirements at our anticipated level
of operations beyond the end of the second quarter of 2001. Following the
reduction in workforce carried out at the beginning of the second quarter, we
anticipate additional sufficient capital will be necessary to fund the Company's
operations at the currently anticipated levels beyond the third quarter of 2001.
Further, in April 2001, the Company also announced its Board of Directors has
engaged an investment banking firm to assist it in exploring various strategic
and financial alternatives for maximizing shareholder value on a near-term
basis. While we are actively considering various funding alternatives, we have
not secured or entered into any arrangements to obtain additional capital. There
can be no assurance we will be able to obtain additional funds, on acceptable
terms or at all. If we cannot raise additional capital to continue our present
level of operations, we will have to continue to scale back our business which
could include among other things, a further reduction in our work force. As a
result we may not be able to further develop or enhance our product offering,
take advantage of future opportunities or respond to competitive pressures, any
of which could have a material adverse effect on our business and results of
operations. Our liquidity may also be adversely affected in the future by
factors such as higher interest rates, inability to borrow without collateral,
availability of capital financing and continued operating losses.
If we are unable to comply with the Nasdaq National Markets continued listing
requirements, our common stock may be delisted from the Nasdaq.
On April 2, 2001, we received a letter from The Nasdaq Stock Market, Inc.
stating their concern over the Company's ability to sustain compliance with
Nasdaq's continued listing requirements based on a "going concern" opinion we
received from PricewaterhouseCoopers LLP, our independent accountants, in our
Annual Report on Form 10-K. We responded to Nasdaq in a letter dated April 23,
2001 providing them with an explanation of the Company's capital strategy and an
outline of recent steps we have taken to improve our financial position. While
we believe that we are currently in compliance with the Nasdaq's criteria for
continued listing, our common stock may be delisted at any time upon written
noticed from The Nasdaq National Market if we fail to meet Nasdaq's quantitative
or qualitative criteria for continued listing. If our common stock is delisted
from The Nasdaq National Market, it would seriously limit the liquidity of our
common stock and limit our potential to raise future capital through the sale of
our common stock, which could have a material adverse effect on our business.
15
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 solution 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
solution 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 solution 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 solution 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., Merinta 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 solution. 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.
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 solution over these competitors and could
reduce market acceptance for our software solution 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 solution. 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.
16
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 Sony
Electronics, TEAC, Compaq Computer Corporation, and Qubit Technology and
collaboration arrangements with National Semiconductor, Inc., Intel Corporation,
Acer Group, Arima Computer Corporation (Arima), DT Research, Inc., First
International Computer, Inc. (FIC), and Proview Group. We cannot be certain 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 solution. 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 and device and service providers 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 Sony, TEAC,
Compaq and Qubit, and arrangements with our other strategic partners including
National Semiconductor, Intel, Arima, DT Research, FIC and Proview, 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
solution. 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.
17
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 the Internet. Our intent is for these manufacturers and
service providers will incorporate our software solution 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 solution. We have little
or no ability to influence the development and marketing efforts of our
customers and our customers may fail to dedicate adequate resources necessary to
successfully develop and market products based on our software solution.
The demand for our software solution 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.
We expect long sales cycles associated with our software solution 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 their software solution represents
a significant product decision for the developers and manufacturers of Internet
appliances . We expect long sales cycles as we collaborate and educate customers
and partners on the use and benefits of our software solution. We similarly
expect customers and partners will spend a significant amount of time performing
internal reviews and testing our software solution before accepting and adopting
our product. Any failure to gain acceptance for our software solution 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 solution 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 solution 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 solution, 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 solution and developers may decide not to
adopt or develop products based on our software solution.
18
We may be unsuccessful at marketing BeIA as the software solution 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, PalmOS, 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 solution 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.
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 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 solution,
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 solution. 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 solution may not develop or
may develop more slowly than we anticipate, and may never become economically
sustainable.
19
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 that contain new technologies and the
emergence of new industry standards could render our products less desirable or
obsolete. In particular, we expect 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 solution 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 solution 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.
20
We may be unable to adjust expenses in a timely manner to compensate for revenue
shortfalls.
Our expense levels are 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-cancelable 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.
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.
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 solution,
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 manufacturers 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 solution 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.
21
Our future success depends in part on our ability to continue to attract,
identify, hire and retain key personnel and qualified employees.
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, 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.
As of March 31, 2001, we had 111 employees. Our success depends upon our
ability to attract and retain highly qualified senior management and technical,
sales and marketing personnel to support growing operations. 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. In addition,
there is intense competition for qualified personnel in the software platform
and development industry. Competition is especially intense in the San Francisco
Bay Area, where our corporate headquarters is located. The loss of key personnel
or our inability to attract qualified personnel to supplement or replace
existing personnel, could have a material adverse effect on our business and
results of operations.
On April 2, 2001, we announced our decision to eliminate 27 positions,
primarily in the Company's sales, marketing and general and administrative
departments. If we are unable to secure sufficient funding or raise additional
capital to fund our present level of operations, we will have to continue to
scale back our business which could include a further reduction in our work
force and the loss of employees. As a result of any material reduction in our
workforce and loss of employees, we may not be able to further develop our
product offerings, conduct our business comparable with past practice or take
advantage of future opportunities, which could have a material adverse effect on
our business.
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.
22
We may be unable to expand our sales and support organization to increase sales
and market awareness for our products.
If we cannot raise additional capital to continue, and expand our present
level of operations, we may be unable to expand our sales and marketing efforts
aimed at computer and consumer electronic companies, systems and hardware
manufacturers, and Internet service and content providers. Without an increase
we may be unable to increase sales and market acceptance of our software
solution. 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 may be unable 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.
23
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 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 solution 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.
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.
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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 applied for only one patent 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
solution 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.
Our stock price is highly volatile.
The trading price of our common stock has fluctuated significantly and has
ranged from $0.531 to $39.563 over the past 21 months since our initial public
offering in July 1999. 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.
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.
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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 some of our
officers and other key employees. These agreements provide that, among other
things, if such 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.
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 March 31, 2001.
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. It is
expected that the closing of our French subsidiary will be completed by the end
of June and that, 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.
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PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
As previously disclosed in Form 10K for the fiscal year ended December 31,
2000, in November 2000, our stock transfer agent, Wells Fargo Bank Minnesota,
N.A., received a demand letter from a stockholder alleging damages resulting
from the transfer agent's failure to timely issue its stock certificates. While
Be was not a party named in such demand letter, and no claim has yet been filed
with any court of competent jurisdiction, Be is named as a party on the
stockholder's draft claim attached to the demand letter. We have been
participating in communications with the parties in an effort to resolve the
matter prior to a lawsuit being filed. Be management believes that the
allegations as they relate to Be in the potential and draft claim are without
merit and intends to vigorously defend Be against any potential future related
legal action. However, there can be no assurance this threatened claim will be
resolved without costly litigation, or require Be's participation in the
settlement of such claim, in a manner that is not adverse to our financial
position, results of operations or cash flows. No estimate can be made of the
possible loss or possible range of loss associated with the resolution of this
contingency. If Be were held liable, it is our intent to seek reimbursement
under our D&O insurance policy.
There have not been any developments regarding this matter since it was
disclosed in Form 10K for the fiscal year ended December 31, 2000.
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 March 31 2001, we issued an aggregate of
179,291 shares of our common stock to three accredited investors pursuant
to exercises of warrants originally isued in April of 1996 for an aggregate
purchase price of $179,291. The sale and issuance of these securities was
deemed to be exempt from registration under Section 4(2) of the Securities
Act of 1933, as amended, (the "Act") and Regulation D promulgated under the
Act.
ITEM 3. DEFAULT UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
3.1* Amended and Restated Certificate of Incorporation
3.2* Bylaws
* 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, 1999, incorporated herein by
reference.
(b) Reports on Form 8-K
None
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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 : May 14, 2001
Jean-Louis F. Gassee
President, Chief Executive Officer and Director
By: /s/ P.C. BERNDT Date : May 14, 2001
P.C. Berndt
Chief Financial Officer
29