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, 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 July 31, 2001 was 36,639,953. BE INCORPORATED FORM 10-Q TABLE OF CONTENTS PAGE PART I. FINANCIAL INFORMATION Item 1. Condensed Financial Statements: Consolidated Balance Sheets at June 30, 2001 and December 31, 2000 2 Consolidated Statements of Operations for the three and six month periods ended June 30, 2001 and June 30, 2000 3 Consolidated Statements of Cash Flows for the six months ended June 30, 2001 and June 30, 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 28 PART II. OTHER INFORMATION Item 1. Legal Proceedings 29 Item 2. Changes in Securities and Use of Proceeds 29 Item 3. Defaults upon Senior Securities 29 Item 4. Submission of Matters to a Vote of Security Holders 29 Item 5. Other Information 30 Item 6. Exhibits and Reports on Form 8-K 30 Signatures 31 1 PART I - FINANCIAL INFORMATION ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS BE INCORPORATED AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (in thousands; unaudited) June 30, December 31, 2001 2000 --------- --------- ASSETS Current assets: Cash and cash equivalents ......................... $ 3,148 $ 9,463 Short-term investments ............................ 1,754 4,594 Accounts receivable ............................... 276 26 Prepaid and other current assets .................. 356 549 --------- --------- Total current assets .......................... 5,534 14,632 Property and equipment, net .......................... 311 391 Other assets, net of accumulated amortization ........ 713 1,048 --------- --------- Total assets ................................. $ 6,558 $ 16,071 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable .................................. $ 25 $ 362 Accrued expenses .................................. 1,085 1,502 Technology license obligations, current portion ... 425 454 Deferred revenue .................................. 64 109 --------- --------- Total current liabilities ..................... 1,599 2,427 Technology license obligations, net of current portion 238 320 --------- --------- Total liabilities ............................. 1,837 2,747 --------- --------- Stockholders' Equity: Common stock ...................................... 36 36 Additional paid-in capital ........................ 109,062 108,880 Accumulated other comprehensive income ............ 2 1 Deferred stock compensation ....................... (551) (1,218) Accumulated deficit ............................... (103,828) (94,375) --------- --------- Total stockholders' equity .................... 4,721 13,324 --------- --------- Total liabilities and stockholders' equity ... $ 6,558 $ 16,071 ========= ========= The accompanying notes are an integral part of these unaudited condensed consolidated financial statements. 2 BE INCORPORATED AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except per share amounts; unaudited) Three Months Six Months Ended June 30, Ended June 30, 2001 2000 2001 2000 ------ ------ ------ ------- Net revenues .................................................... $ 715 $ 142 $ 815 $ 396 Cost of revenues ................................................ 320 261 571 554 Gross profit (loss) ............................................. 395 (119) 244 (158) Operating expenses: Research and development, including amortization of deferred . 2,326 2,039 4,807 4,500 stock compensation of $50, $196, $152 and $509 Sales and marketing, including amortization of deferred ...... 456 2,072 2,074 4,400 stock compensation of $(101), $189, $(37) and $426 General and administrative, including amortization of deferred 1,450 1,211 2,596 2,724 stock compensation of $80, $272, $216 and $755 Restructuring charge ......................................... 143 -- 450 -- ------ ------ ------ ------- Total operating expenses ................................. 4,375 5,322 9,927 11,624 ------ ------ ------ ------- Loss from operations ............................................ (3,980) (5,441) (9,683) (11,782) Interest expense ................................................ (13) (29) (28) (63) Other income and expenses, net .................................. 97 351 258 726 ------ ------ ------ ------- Net loss ........................................................ $ (3,896) $ (5,119) $ (9,453) $(11,119) ======== ======== ======== ======== Net loss per common share--basic and diluted .................... $ (.11) $ (.14) $ (.26) $ (.32) ======== ======== ======== ======== Shares used in per common share calculation--basic and diluted ............................... 36,466 35,496 36,330 35,247 ======== ======== ======== ======== The accompanying notes are an integral part of these unaudited condensed consolidated financial statements. 3 BE INCORPORATED AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands; unaudited) Six Months Ended June 30, 2001 2000 ----- ----- Cash flows from operating activities: Net loss .......................................... $ (9,453) $(11,119) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization ................. 516 580 Amortization of discount on technology license obligations ............... 29 63 Loss on disposal of fixed assets .............. 6 Compensation expense incurred on issuance of stock ..................................... -- 33 Amortization of deferred stock compensation.... 331 1,690 Changes in assets and liabilities Accounts receivable ........................ (250) 38 Prepaid and other current assets ........... 193 174 Accounts payable ........................... (337) (621) Accrued expenses ........................... (417) (167) Deferred revenue ........................... (45) (19) ----- ----- Net cash used in operating activities .... (9,427) (9,348) ----- ----- Cash flow provided by investing activities: Acquisition of property and equipment ............. (72) (89) Acquisition of licensed technology ................ (175) (389) Purchases of short-term investments ............... (1,728) (37,546) Sales of short-term investments ................... 4,569 51,588 ----- ----- Net cash provided by investing activities 2,594 13,564 ----- ----- Cash flows provided by financing activities: Proceeds from issuance of common stock: pursuant to common stock options ................ 14 2,181 pursuant to common stock warrants ............... 180 455 under Employee Stock Purchase Plan .............. 324 368 Repurchase of common stock ........................ -- (3) ----- ----- Net cash provided by financing activities 518 3,001 ----- ----- Net increase (decrease) in cash and cash equivalents . (6,315) 7,217 ----- ----- Cash and cash equivalents, beginning of period ....... 9,463 6,500 ----- ----- Cash and cash equivalents, end of period ............. $ 3,148 $ 13,717 ======== ======== The accompanying notes are an integral part of these unaudited condensed 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 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. 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. On July 31, 2001, the Company announced the elimination of its sales and marketing departments in order to conserve resources. The Company expects sales and marketing functions to be greatly limited in the 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 its 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, and the further reduction in workforce and elimination of the Company's sales and marketing departments at the beginning of the third quarter, the Company anticipates that existing capital will be insufficient to fund its operations at the currently anticipated levels beyond the third quarter of 2001. The Company has engaged an investment banking firm to assist in securing various strategic and funding alternatives, including the sale of the Company or portions of its business or assets. The Company has also engaged in discussions and negotiations with third parties involving the potential sale of the Company's business or assets. However, the Company has not secured or entered into any agreements to obtain additional capital or to sell the Company's business or assets. There can be no assurance the Company will be able to obtain additional funds, on acceptable terms or at all, or that any strategic alternatives including the sale of the Company or portions of its business or assets will materialize. Without additional capital prior to the end of the third quarter of 2001, the Company will most likely cease its operations and will commence a plan of liquidation. In anticipation of these events, the Company has scaled back its operations including recent layoffs of significant portions of its workforce and elimination of the sales and marketing functions. The Company believes the cash proceeds from the sale of its business or assets and any subsequent liquidation following such sale may be insignificant due to, among other things, the current market value of the Company's assets and payments to be made to creditors and to employees pursuant to change in control or severance arrangements. The Company cannot assure its stockholders that they will receive any consideration or value following liquidation or the sale of the business or assets of the Company or that the per share value of common stock as a result of liquidation or the proceeds per share from a sale of the Compan's assets will equal or exceed the price or prices at which the common stock traded prior to effecting any liquidation, dissolution or sale of the Company. 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 June 2001, the FSAB unanimously approved the issuance of two statements, Statement of Financial Accounting Standards No. 141, or SFAS 141, "Business Combinations," and Statement of Financial Accounting Standards No. 142, or SFAS 142, "Goodwill and Other Intangible Assets." SFAS 141 addresses financial accounting and reporting for business combinations and amends APB No.16 "Business Combinations." It requires the purchase method of accounting for business combinations initiated after June 30, 2001. SFAS 142 addresses financial accounting and reporting for acquired goodwill and other intangible assets and supersedes APB No.17, "Intangible Assets." It changes the accounting for goodwill from an amortization method to an impairment only approach. It is effective for fiscal year beginning after March 15, 2001. The adoption of these statements is not expected to have a significant impact on the Company's financial position and results of 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 Six Months Ended June 30, June 30, 2001 2000 2001 2000 -------- -------- ------ ------- (unaudited) (unaudited) Historical net loss per common share, basic and diluted: Numerator for net loss, basic and diluted .............. $ (3,896) $ (5,119) (9,453) (11,119) Denominator for basic and diluted loss per common share: Weighted average common shares outstanding ........................................ 36,466 35,496 36,330 35,247 ======== ======== ====== ======= Net loss per common share basic and diluted ............ $ (.11) $ (.14) $ (.26) $ (.32) ======== ======== ====== ======= Antidilutive securities: Options to purchase common stock ..................... 6,114 6,672 6,114 6,672 Common stock not yet vested .......................... 129 332 129 332 Warrants ............................................. -- 2,130 -- 2,130 -------- -------- ------ ------- 6,243 9,134 6,243 9,134 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, 2001 2000 2001 2000 -------- -------- -------- -------- Net loss ...................................... $ (3,896) $ (5,119) $ (9,453) $(11,119) Unrealized gain (loss) on marketable securities (6) 5 1 13 -------- -------- -------- -------- Comprehensive loss ............................ $ (3,902) $ (5,114) $ (9,452) $(11,106) ======== ======== ======== ======== The components of accumulated other comprehensive income, net of related tax are as follows (in thousands): June 30, December 31, 2001 2000 ----- ----- Unrealized gain on marketable securities....... $ 2 $ 1 ----- ----- 2 1 ===== ===== 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 eliminating positions principally in the Company's sales, marketing and general administration departments in the United States. As a result, 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. The Company recorded a restructuring charge of approximately $143,000 in the second quarter for the involuntary termination benefits related to the elimination of 22 positions in the U.S. At June 30, 2001, this restructuring plan was substantially completed with a remaining $22,000 accrual for social charges due in Europe on termination benefits. 7. Legal Proceedings As previously disclosed in the Company's filings with the Securities and Exchange Commission, in November 2000, the Company's stock transfer agent, Wells Fargo Bank Minnesota, N.A., received a demand letter from Financial Square Partners, a Be 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, Be was named as a party on the stockholder's draft claim attached to the demand letter. On May 9, 2001, the claim was in fact filed, naming Be and Wells Fargo Bank Minnesota, N.A. as defendants, and is currently active in the Superior Court of California. The stockholder is seeking damages in the amount of approximately $2.0 million. Prior to this filing, the Company had been participating in communications with the parties in an effort to resolve the matter prior to a lawsuit being filed. Be management continues to believe that the allegations as they relate to Be in the filed claim are without merit and intends to defend Be against this legal action. However, there can be no assurance this 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 its intent to seek reimbursement under its D&O insurance policy. 8 8. Subsequent Events Subsequent to June 30, 2001, the Company announced the elimination of 28 positions. In addition to the elimination of the sales and marketing departments, positions in administration and engineering were also affected. The eliminated positions represent approximately 33% of the Company's existing workforce. The Company's remaining positions are primarily engaged in product development. The Company does not expect to record any associated restructuring charge. 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, if any, to continue to be primarily generated through royalty payments, maintenance and support fees, and professional services and integration fees from our existing contracts with 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 through such existing contracts with 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. 10 Our sales and marketing expenses consisted 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. As announced on July 31, 2001, we have eliminated the Compan's sales and marketing departments to conserve existing resources. We expect our sales and marketing functions to be greatly limited in the future and carried out by the executive management team. Re-establishment of a formal sales and marketing function 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 additional 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. 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 sell our products in the United States and internationally. International sales of products accounted for less than 1% for the three and six month periods ended June 30, 2001 and approximately 19% and 9% for the three and six month periods ended June 30, 2000. 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 of June 30, 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 million, $2.6 million and $331,000, being amortized in 1999, 2000 and the six month period ended June 30, 2001, respectively. Future amortization of expense arising out of options granted through June 30, 2001 is estimated to be $320,000 for the remaining six months of 2001, $226,000 in 2002 and $5,000 in 2003. We amortize the deferred compensation charge monthly over the vesting period of the underlying option. 11 Comparison Certain prior year 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: Three Months Six Months Ended June 30, Ended June 30, ---------------- ---------------- 2001 2000 2001 2000 ------ ------ ------ ------ (in thousands) (in thousands) Amortization of deferred compensation included in: Research and development ........................... $ 50 $ 196 $ 152 $ 509 Sales and marketing ................................ (101) 189 (37) 426 General and administrative ......................... 80 272 216 755 ------ ------ ------ ------ Total amortization of deferred stock compensation $ 29 $ 657 $ 331 $1,690 ====== ====== ====== ====== Excluding the amortization of deferred compensation, operating expenses are as follows: Three Months Six Months Ended June 30, Ended June 30, ----------------- ----------------- 2001 2000 2001 2000 ------- ------- ------- ------- (in thousands) (in thousands) Operating expenses: Research and development .................. $ 2,276 $ 1,843 $ 4,655 $ 3,991 Sales and marketing ....................... 557 1,883 2,111 3,974 General and administrative ................ 1,370 939 2,380 1,969 Amortization of deferred stock compensation 29 657 331 1,690 ------- ------- ------- ------- Total operating expenses ............... $ 4,232 $ 5,322 $ 9,477 $11,624 ======= ======= ======= ======= Comparison of the Three Month Period ended June 30, 2001 to the Three Month Period ended June 30, 2000 Net Revenues. Net revenues increased $573,000 to $715,000 for the three month period ended June 30, 2001 from $142,000 for the three month period ended June 30, 2000. Revenues are not directly comparable as they were mainly attributable to shipments of BeOS in 2000 and to BeIA integration services in 2001. Cost of Revenues. Cost of revenues increased $59,000, or 23%, to $320,000, for the three month period ended June 30, 2001 from $261,000 for the three month period ended June 30, 2000. A majority of such costs continue to result from the continuing amortization of technology license agreements. Research and Development. Research and development expenses, exclusive of stock compensation, increased $433,000, or 23%, to $2.3 million for the three month period ended June 30, 2001 from $1.8 million for the three month period ended June 30, 2000. The increase results primarily from increases of approximately $400,000 in personnel expenses, primarily attributable to the hiring of additional research and development personnel. Sales and Marketing. Sales and marketing expenses, exclusive of stock compensation, decreased $1.3 million, or 70%, to $557,000 for the three month period ended June 30, 2001 from $1.9 million for the three month period ended June 30, 2000. This decrease is primarily attributable to the restructuring of our operations, implemented early in the quarter to reflect current market and financial conditions, following which we closed our European office in Paris and eliminated positions principally in the sales and marketing departments in the United States. 12 General and Administrative. General and administrative expenses, exclusive of stock compensation, increased $431,000, or 46%, to $1.4 million for the three month period ended June 30, 2001 from $939,000 for the three month period ended June 30, 2000. This increase is primarily attributable to the payment of fees, on a retainer basis, to an investment banking firm, hired during the second quarter of 2001, to assist us in exploring various strategic and financial alternatives for maximizing shareholder value on a near-term basis. 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 eliminating 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. As anticipated, we recorded a restructuring charge of approximately $143,000 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 $628,000, or 96%, to $29,000 for the three month period ended June 30, 2001, from $657,000 for the three month period ended June 30, 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 $238,000, or 74%, to $84,000 for the three month period ended June 30, 2001 from $322,000 for the three month period ended June 30, 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. Comparison of the Six Month Period ended June 30, 2001 to the Six Month Period Ended June 30, 2000 Net Revenues. Net revenues increased $419,000 to $815,000 for the six month period ended June 30, 2001 from $396,000 for the six month period ended June 30, 2000. Revenues are not directly comparable as they were mainly attributable to shipments of BeOS in 2000 and to BeIA royalties and integration services in 2001. Cost of Revenues. Cost of revenues increased $17,000, or 3%, to $571,000 for the six month period ended June 30, 2001 from $554,000 for the six month period ended June 30, 2000. A majority of such costs continue to result from the continuing amortization of technology license agreements. Research and Development. Research and Development expenses, exclusive of stock compensation, increased $664,000, or 17%, to $4.7 million for the six month period ended June 30, 2001 from $4.0 million for the six month period ended June 30, 2000. The increase results primarily from an increase of approximately $700,000 in personnel expenses following the hiring of additional staff, net of savings of approximately $80,000 on outside consulting expenses. 13 Sales and Marketing. Sales and Marketing expenses, exclusive of stock compensation, decreased $1.9 million, or 47%, to $2.1 million for the six month period ended June 30, 2001 from $4.0 million for the six month period ended June 30, 2000. This decrease is primarily attributable to the impact of refocusing of marketing activities initiated in the first quarter of 2000 and to the restructuring of our operations, implemented early in the second quarter of 2001. The refocusing of marketing activities in 2000 resulted in decreased public relations activities, outside consulting and third party developer programs for a net decrease of approximately $1.1 million. As part of the restructuring of our operations in 2001 to reflect current market and financial conditions, we closed our European office in Paris and eliminated positions principally in the sales and marketing departments in the United States, for a net impact of approximately $800,000. General and Administrative. General and administrative expenses, exclusive of stock compensation, increased $411,000, or 21%, to $2.4 million for the six month period ended June 30, 2001 from $2.0 million for the six month period ended June 30, 2000. This increase is primarily attributable to the payment of fees, on a retainer basis, to an investment banking firm, hired during the second quarter of 2001, to assist us in exploring various strategic and financial alternatives for maximizing shareholder value on a near-term basis. Amortization of Deferred Stock Compensation. Amortization of deferred stock compensation decreased $1.4 million, or 80%, to $331,000 for the six month period ended June 30, 2001, from $1.7 million for the six month period ended June 30, 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 $433,000, or 65%, to $230,000 for the six month period ended June 30, 2001 from $663,000 for the six month period ended June 30, 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 $82.5 million as of June 30, 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 $9.2 million to $4.9 million at June 30, 2001 from $14.1 million at December 31, 2000. This decrease is primarily attributable to the amounts used to fund operations. 14 Cash used in operating activities was level at $9.4 million for the six month periods ended June 30, 2001 and June 30, 2000. Cash provided by investing activities decreased approximately $11.0 million to $2.6 million for the six month period ended June 30, 2001 as compared to $13.6 million for the six month period ended June 30, 2000. This decrease is primarily attributable to lower net sales of short-term investments in the six month period ended June 30, 2001. Cash provided by financing activities for the six month period ended June 30, 2001 was approximately $518,000, which represents a $2.5 million decrease from the six month period ended June 30, 2000 of $3.0 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. 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 its Annual Report on Form 10-K that we believed existing cash and cash equivalents would not be sufficient to meet our 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, and the further reduction in workforce and elimination of the Company's sales and marketing departments at the beginning of the third quarter, we anticipate that existing capital will be insufficient to fund our operations at the currently anticipated levels beyond the third quarter of 2001. The Company has engaged an investment banking firm to assist in securing various strategic and funding alternatives, including the sale of the Company or portions of its business or assets. We have also engaged in discussions and negotiations with third parties involving the potential sale of the Company's business or assets. However, we have not secured or entered into any agreements to obtain additional capital or to sell the Company's business or assets. There can be no assurance the we will be able to obtain additional funds, on acceptable terms or at all, or that any strategic alternatives including the sale of the Company or portions of its business or assets will materialize. Without additional capital prior to the end of the third quarter of 2001, the Company will most likely cease its operations and will commence a plan of liquidation. In anticipation of these events, we have scaled back our operations including recent layoffs of significant portions of our workforce and elimination of the sales and marketing functions. We believe the cash proceeds from the sale of the Compan's business or assets and any subsequent liquidation following such sale may be insignificant due to, among other things, the current market value of our assets and payments to be made to creditors and to employees pursuant to change in control or severance arrangements. We cannot assure our stockholders that they will receive any consideration or value following liquidation or the sale of the business or assets of the Company or that the per share value of common stock as a result of liquidation or the proceeds per share from a sale of the Compan's assets will equal or exceed the price or prices at which the common stock traded prior to effecting any liquidation, dissolution or sale of the Company. 15 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. In the event that we do not enter into any arrangements to secure additional capital, including the sale of the Company or of any of its business or assets, we will have to move forward with contingency plans, which may include the liquidation, winding down or dissolution of the Company. At the end of the first quarter of 2001, we stated in its Annual Report on Form 10-K that we believed existing cash and cash equivalents would not be sufficient to meet our 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, and the further reduction in workforce and elimination of the Company's sales and marketing departments at the beginning of the third quarter, we anticipate that existing capital will be insufficient to fund our operations at the currently anticipated levels beyond the third quarter of 2001. The Company has engaged an investment banking firm to assist in securing various strategic and funding alternatives, including the sale of the Company or portions of its business or assets. We have also engaged in discussions and negotiations with third parties involving the potential sale of the Company's business or assets. However, we have not secured or entered into any agreements to obtain additional capital or to sell the Company's business or assets. There can be no assurance the we will be able to obtain additional funds, on acceptable terms or at all, or that any strategic alternatives including the sale of the Company or portions of its business or assets will materialize. Without additional capital prior to the end of the third quarter of 2001, the Company will most likely cease its operations and will commence a plan of liquidation. In anticipation of these events, we have scaled back our operations including recent layoffs of significant portions of our workforce and elimination of the sales and marketing functions. We believe the cash proceeds from the sale of the Compan's business or assets and any subsequent liquidation following such sale may be insignificant due to, among other things, the current market value of our assets and payments to be made to creditors and to employees pursuant to change in control or severance arrangements. We cannot assure our stockholders that they will receive any consideration or value following liquidation or the sale of the business or assets of the Company or that the per share value of common stock as a result of liquidation or the proceeds per share from a sale of the Compan's assets will equal or exceed the price or prices at which the common stock traded prior to effecting any liquidation, dissolution or sale of the Company. 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. On June 5, 2001, we received a notice from Nasdaq that Be's common stock had failed to maintain a minimum bid price of one dollar over the preceding 30 consecutive trading days as required for continued listing on the Nasdaq National Market. The notice stated that if at any time prior to September 3, 2001, the closing bid price of Be's common stock does not sustain at one dollar or more for at least 10 consecutive trading days, Be's common stock could be delisted from the exchange. If Be's common stock fails to sustain the minimum closing bid price for the requisite number of days, the Nasdaq staff will issue a determination that the common stock will be delisted. Thereafter, and prior to any actual delisting, Be will have an opportunity to request a hearing. From the date of the letter through August 10, 2001 the Company's stock has not traded above one dollar for 10 consecutive trading days. 16 We are currently not in compliance with all of the Nasdaq's criteria for continued listing and our common stock may be delisted at any time upon written notice from The Nasdaq National Market if we continue to 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. 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 $9.5 million for the six month period ended June 30, 2001. As of June 30, 2001, we had an accumulated deficit of approximately $103.8 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 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. 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. 17 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. Change of control agreements with each of our officers and key employees contain provisions that could discourage a third party from acquiring us and consequently decrease the market value of our common stock or any potential distribution to stockholders upon sale of the Company or any of its business or assets. We have entered into a Change of Control Agreement with each 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 lump sum severance payment, and the acceleration and immediate exercisability of all unvested options. These provisions may discourage a third party from acquiring us or reduce the amount of any distribution to our stockholders from the purchase price in the event of a sale of the Company or any of its business or assets. 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. 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 18 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. 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. The elimination of our sales and marketing team at the beginning of the third quarter of 2001 has greatly limited our ability to secure new agreements or, in some cases, maintain existing relationships. 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. 19 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. 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. 20 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. 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. 21 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. 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. 22 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. 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. 23 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 June 30, 2001, we had 86 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 July 31, 2001, we announced the elimination of 28 positions. In addition to the elimination of the sales and marketing departments, positions in administration and engineering were also affected. The eliminated positions represent approximately 33% of our existing workforce. Remaining positions are primarily engaged in product development. 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, among other things, significant further reductions 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. 24 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. 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. 25 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. 26 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 $0.41 to $39.563 over the past 24 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. 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. Delaware law and our Amended and Restated Certificate of Incorporation and bylaws could discourage a third party from acquiring us and could 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. 27 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, 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. Since the closing of our French subsidiary was substantially completed at the end of June, 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. 28 PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS As previously disclosed in the Company's filings with the Securities and Exchange Commission, in November 2000, our stock transfer agent, Wells Fargo Bank Minnesota, N.A., received a demand letter from Financial Square Partners, a Be 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, Be was named as a party on the stockholder's draft claim attached to the demand letter. On May 9, 2001, the claim was in fact filed, naming Be and Wells Fargo Bank Minnesota, N.A. as defendants, and is currently active in the Superior Court of California. The stockholder is seeking damages in the amount of approximately $2.0 million. Prior to this filing, the Company had been participating in communications with the parties in an effort to resolve the matter prior to a lawsuit being filed. Be management continues to believe that the allegations as they relate to Be in the filed claim are without merit and intends to defend Be against this legal action. However, there can be no assurance this 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. ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS Sales of Registered Securities and Use of Proceeds None. Sales of Unregistered Securities None. ITEM 3. DEFAULT UPON SENIOR SECURITIES None. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS At the Company's 2001 Annual Meeting of Stockholders held on May 30, 2001, stockholders voted on the following: Proposal I - Election of Directors - The following directors were each elected for a three-year term expiring at the 2004 Annual Meeting of Stockholders: Nominee For Abstain ------- --- ------- Barry M. Weinman 26,576,695 322,132 Andrei M. Manoliu 26,682,857 215,970 Garrett P. Gruener 26,572,431 326,396 The following directors will continue to serve as members of the Company's board of directors until their term is expired: Jean-Louis F. Gassee, Stewart Alsop, William F. Zuendt, Steve M. Sakoman. Proposal II - Ratification of selection of PricewaterhouseCoopers LLP as the Company's Independent Auditors for the fiscal year ended December 31, 2001. For Against Abstain Broker Non-Vote --- -------- ------- --------------- 26,858,572 31,421 8,834 0 29 ITEM 5. OTHER INFORMATION None. 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 30 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 14, 2001 Jean-Louis F. Gassee President, Chief Executive Officer and Director By: /s/ P.C. BERNDT Date : August 14, 2001 P.C. Berndt Chief Financial Officer 31