ITEM 1.
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Legal Proceedings
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The Company and its subsidiary Plumtree Software, Inc. (Plumtree) are involved in a patent infringement lawsuit against Datamize, LLC (Datamize) in the U.S. District Court for the Northern
District of California. In July 2004, Plumtree sued Datamize for declaratory judgment that certain U.S. patents are invalid and not infringed. In January 2007, Datamize answered Plumtrees complaint and counterclaimed for infringement. In July
2007 the parties were realigned so that Datamize is the plaintiff, and BEA was added to the case as a defendant. The Court issued its claim construction order on August 7, 2007. Trial is set for August 18, 2008. Plumtree and the Company
intend to vigorously pursue their claim for declaratory relief and vigorously defend against Datamizes allegations of infringement. It is not known when or on what basis the action will be resolved.
On August 23, 2005, a class action lawsuit titled Globis Partners, L.P. v. Plumtree Software, Inc. et al. was filed in the Court of Chancery in the
State of Delaware in and for New Castle County (the Globis Action). The complaint named Plumtree, all members of Plumtrees board of directors and the Company as defendants. The suit alleged, among other claims, that the
consideration to be paid in the proposed acquisition of Plumtree by the Company was unfair and inadequate. The complaint sought an injunction barring consummation of the merger and, in the event that the merger was consummated, a rescission of the
merger and an unspecified amount of damages. On November 30, 2007, the Court dismissed the complaint with prejudice. The deadline for plaintiff to appeal the judgment is approximately December 30, 2007. Currently, no appeal has been
docketed. If there is an appeal, there can be no assurance that we will be able to achieve a favorable resolution. An unfavorable resolution of the pending litigation could result in the payment of substantial damages which could have a
material adverse effect on our business, financial condition and results of operations. In addition, as a result of the merger, we have assumed all liabilities of Plumtree resulting from the litigation.
In addition, on August 24, 2005, a class action lawsuit titled Keitel v. Plumtree Software, Inc., et al. was filed in the Superior Court of the
State of California for the County of San Francisco (the Keitel Action). The complaint named Plumtree and all members of Plumtrees board of directors as defendants alleging similar claims and seeking similar damages as the class
action brought by Globis Partners, L.P. The Keitel Action has been stayed pending the outcome of the Globis Action. The Company is defending the case vigorously. There can be no assurance, however, that we will be successful in our defense of this
action. It is not known when or on what basis the action will be resolved.
On July 20, 2006, the first of several derivative lawsuits
was filed by a purported Company shareholder in the United States District Court for the Northern District of California. The cases were subsequently consolidated and plaintiffs current complaint names certain of the Companys present and
former officers and directors as defendants and names the Company as a nominal defendant. The complaint alleges that the individual defendants violated the federal securities laws and breached their duties to the Company in connection with our
historical stock option grant activities. In addition, the current complaint includes a claim purportedly on behalf of a class of BEA shareholders arising out of Oracles unsolicited acquisition proposal, claiming that members of our Board of
Directors breached their fiduciary duties in response to the proposal. It is not known when or on what basis the action will be resolved.
In addition, on August 25, 2006, another shareholder derivative action was filed in the Superior Court for the County of Santa Clara. The court granted a motion to stay that action in deference to the actions filed previously in
federal court. It is not known when or on what basis the action will be resolved.
Beginning on October 12, 2007, several class action
lawsuits were filed in the Court of Chancery in the State of Delaware in and for New Castle County (Freedman v. BEA Systems, Inc. et al and Blaz v. BEA Systems, Inc. et al) and the Superior Court of the State of California for the County of Santa
Clara (Gross v. BEA Systems, Inc. et al, Ellman v. Chuang et al and Zwick v. BEA Systems, Inc. et al). The complaints name the Company and its directors as defendants, asserting that the directors breached their fiduciary duties by failing to give
proper consideration to Oracles unsolicited proposal to acquire us for $17.00 per share. The complaints generally seek injunctive relief, including the implementation of a process or procedure to obtain the highest possible price for the
Companys shareholders through negotiations with Oracle or other means. The Company is defending these cases vigorously. There can be no assurance, however, that we will be successful in our defense of these actions. It is not known when or on
what basis the action will be resolved.
On October 26, 2007, a lawsuit entitled High River Ltd. PShip et al. v. BEA Systems,
Inc. et al. was filed in the Court of Chancery in the State of Delaware in and for New Castle County. The action was brought by High River Ltd. Partnership and certain affiliated parties who purport to collectively beneficially own almost 14 percent
of the Companys stock. The
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complaint seeks, pursuant to Del. C. § 211, to compel the Company to hold an annual meeting on or before November 30, 2007, and to enjoin the
Company from taking certain actions pending the next annual meeting. The Company is defending the case vigorously. There can be no assurance, however, that we will be successful in our defense of this action. It is not known when or on what basis
the action will be resolved.
The Company is subject to legal proceedings and other claims that arise in the ordinary course of business,
such as those arising from domestic and foreign tax authorities, intellectual property matters and employee related matters, in the ordinary course of its business. While management currently believes the amount of ultimate liability, if any, with
respect to these actions will not materially affect the Companys financial position, results of operations or liquidity, the ultimate outcome could be material to the Company.
We operate in a rapidly changing
environment that involves numerous risks and uncertainties. Set forth below are some, but not all, of these risks and uncertainties, which may have a material adverse effect on our business, financial condition or results of operations, and which
could cause our actual results to differ materially from the results contemplated by the forward-looking statements contained in this report. Prospective and existing investors should carefully consider the following risk factors, and other risks
and cautionary statements set forth in this report, in evaluating an investment in our common stock.
Risks that May Impact Future Operating Results
We have experienced in the past, and may experience in the future, significant fluctuations in our actual or anticipated revenues and operating
results, which has prevented us in the past, and may prevent us in the future from meeting securities analysts or investors expectations and result in a decline in our stock price.
Our revenues have fluctuated significantly in the past and are likely to fluctuate significantly in the future, which may include declines in quarterly
revenues as compared to the previous fiscal quarter and as compared to the same quarterly period in the prior fiscal year, as well as declines in annual revenues as compared to the previous fiscal year. If our revenues, operating results, earnings
or future projections are below the levels expected by investors or securities analysts, our stock price is likely to decline. Moreover, even if our total revenues meet investors and securities analysts expectations, if a component of
our total revenues does not meet these expectations, our stock price may decline. Our stock price is also subject to many factors outside of our control, including the substantial volatility generally associated with Internet, software and
technology stocks, and broader market trends unrelated to our performance, such as the substantial declines in the prices of many such stocks from 2000 through 2003, as well as market declines related to terrorist activities and military actions.
We expect to experience significant fluctuations in our future revenues and operating results as a result of many factors, including:
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difficulty predicting the size and timing of customer orders, including the rate of conversion of our forecasted sales pipeline into contracts,
particularly as we have become more reliant on larger transactions;
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our ability to develop, introduce and market, on a timely basis, new products and initiatives, such as our WebLogic Server and WebLogic Platform products, WebLogic
Communications Platform products, WebLogic Time & Event Driven, Real-Time and Virtualization products, and our BEA AquaLogic, business process management (BPM) and service oriented architecture (SOA) products;
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the rate of customer acceptance of our new products and products to be introduced in the future, and any order delays caused by customer evaluations of these new
products;
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periodic difficulties or changes in the domestic or international economic, business or political environment, particularly affecting the technology industry or
industries from which we derive a significant portion of our revenues, such as the telecommunications industry, including but not limited to corporate or consumer confidence in the economy, uncertainties arising out of possible future terrorist
activities, military and security actions in Iraq and the Middle East in general, and geopolitical instability such as in parts of Asia, all of which have increased the likelihood that customers will unexpectedly delay, cancel or reduce the size of
orders;
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the structure, timing and integration of acquisitions of businesses, products and technologies and the related disruption of our current business;
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costs associated with acquisitions, including expenses charged for any impaired acquired intangible assets and goodwill;
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fluctuations in foreign currency exchange rates, which could have an adverse impact on our international revenue, particularly in EMEA, if the Euro or British Pound
were to weaken significantly against the U.S. dollar;
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the performance of our international business, which accounts for approximately one-half of our consolidated revenues;
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changes in the mix of products and services that we sell or the channels through which they are distributed;
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changes in our competitors product offerings, marketing programs and pricing policies, and customer order deferrals in anticipation of new products and
product enhancements from us or our competitors;
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any increased price sensitivity by our customers, particularly in the face of periodic uneven economic conditions and increased competition, including open source
or free competitive software;
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the lengthy sales cycle for our products, particularly with regard to WebLogic Communications Platform, WebLogic Platform, and Aqualogic sales, which typically
involve more comprehensive solutions that may require us to provide a significant level of education to prospective customers regarding the use and benefits of our products and may result in more detailed customer evaluations, and the discretionary
nature of our customers purchase and budget cycles;
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our ability to control costs and expenses, particularly in the face of periodic difficult economic conditions;
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loss of key personnel or inability to recruit and hire qualified additional or replacement key personnel;
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the degree of success, if any, of our strategy to further establish and expand our relationships with distributors;
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the terms and timing of financing activities;
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potential fluctuations in demand or prices of our products and services;
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technological changes in computer systems and environments;
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our ability to meet our customers service requirements;
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the seasonality of our sales, particularly license orders, which typically significantly adversely affects our revenue in our first quarter; and
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takeover speculation related specifically to us or to consolidation in the software industry generally.
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Our quarterly revenues, expenses and operating results are difficult to forecast because of the volatility of our license revenues.
A substantial portion of our license revenues have been derived from large orders. Reliance on large license transactions increases
the risk of fluctuation in quarterly results because the unexpected loss of a small number of larger orders can create a significant revenue shortfall. If we cannot generate a sufficient number of large customer orders, convert a sufficient number
of development orders into orders for large deployments, or if customers delay or cancel such orders in a particular quarter, it may have a material adverse effect on our revenues and, more significantly on a percentage basis, our net income or loss
in that quarter.
We use a pipeline system, a common industry practice, to forecast sales and trends in our business. Our sales
personnel monitor the status of all potential transactions, including the estimated closing date and estimated dollar amount of each transaction. We aggregate these estimates periodically to generate a sales pipeline and then evaluate the pipeline
to forecast sales and identify trends in our business. This pipeline analysis and related estimates of revenue has in recent periods and may in future periods differ significantly from actual revenues in a particular reporting period.
A slowdown in the global economy, among other factors, has caused and may continue to cause customer purchasing decisions to be delayed, reduced in
amount or cancelled, all of which have reduced and could in the future reduce the rate of conversion of the pipeline into contracts.
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Moreover, we typically receive and fulfill most of our orders within the quarter, and a substantial
portion of our orders, particularly our larger transactions, are typically received in the last month of each quarter, with a concentration of such orders at the end of the quarter. As a result, even though we may have substantial backlog at the end
of a prior quarter and positive business indicators such as sales pipeline reports about customer demand during a quarter, we may not learn of revenue shortfalls until very late in the quarter, and possibly not until the final day or
days of the quarter. Not only could such shortfalls significantly adversely affect our revenues, they could substantially adversely affect our earnings because we may not become aware of such shortfalls in time to adjust our cost structure to
respond to a variation in the conversion of the pipeline into contracts. Our inability to respond to a variation in the pipeline or in the conversion of the pipeline into contracts in a timely manner, or at all, could cause us to plan or budget
inaccurately and thereby adversely affect our business, financial condition or results of operations.
Further, periodic adverse economic
conditions, particularly those related to the technology industry and the economic and political uncertainties arising out of the ongoing U.S. military activity in Iraq, recent and possible future terrorist activities, other potential military and
security actions in the Middle East, and instability in markets in other parts of the world, have increased the likelihood that customers will unexpectedly delay, cancel or reduce orders, resulting in revenue shortfalls.
Because of such factors and our operating history and on-going expenses associated with our prior acquisitions, the possibility of future impairment
charges and the possibility of future charges related to any future facilities consolidation or work force reductions, we may again experience net losses in future periods. In addition, as we have expensed stock option grants under FAS 123R for
fiscal periods commencing February 1, 2006, we will continue to have significant accounting charges that will make it substantially more likely we could experience net losses. Any revenue shortfall below our expectations or increase in expenses
could have an immediate and significant adverse effect on our results of operations and lead to a net loss.
The seasonality of our sales typically
has a significant adverse effect on our revenues in our first fiscal quarter.
Our first quarter revenues, particularly our license
revenues, are typically lower than revenues in the immediately preceding fourth quarter. We believe this is because our commission plans and other sales incentives are structured for annual performance and contain bonus provisions based on annual
quotas that typically are triggered in the later quarters in a year. In addition, most of our customers begin a new fiscal year on January 1 and it is common for capital expenditures to be lower in an organizations first quarter than in
its fourth quarter. We anticipate that the negative impact of seasonality on our first quarter will continue. Moreover, because of this seasonality, even if we have a very strong fourth quarter in a particular year, the initial quarter in the next
year could nevertheless still be weak on a year-over-year comparative basis, as well as on a sequential basis. This risk remains even if the amount of our deferred revenue and backlog is substantial at the close of the immediately preceding fourth
quarter. This seasonality may harm our revenues and other operating results in our first quarter and possibly subsequent quarters as well, particularly if the seasonal impact is more pronounced than we expect.
The lengthy sales cycle for our products makes our revenues susceptible to substantial fluctuations.
Many of our customers use our products to implement large, sophisticated applications that are critical to their business, and their purchases are often
part of their implementation of a Web-based computing environment, or SOA. Customers evaluating our software products face complex decisions regarding alternative approaches to the integration of enterprise applications, competitive product
offerings, implementation of SOA, rapidly changing software technologies and standards, and limited internal resources due to other information systems demands. For these and other reasons, the sales cycle for our products is lengthy and
unpredictable, and potential orders are subject to delays or cancellation for reasons over which we have little or no control. In addition, we continue to rely on a significant number of million and multimillion dollar license transactions. In some
cases, the larger size of the transactions has resulted in more extended customer evaluation and procurement processes, which in turn have lengthened the overall sales cycle for our products. Periodic economic difficulties in our key markets have
also contributed to increasing the length of our sales cycle.
Finally, the introduction of AquaLogic and other products and implementation
of our products for SOA have contributed to a longer sales cycle due to the fact that it offers a more comprehensive solution that may require us to provide a significant level of education to prospective customers regarding the use and benefits of
our products, and may result in more detailed customer evaluations. Delays or failures to complete large orders and sales in a particular quarter could significantly reduce revenue that quarter, as well as subsequent quarters over which revenue for
the sale would likely be recognized.
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We have restructured, and may in the future restructure, our sales force, which can be disruptive.
We continue to rely heavily on our direct sales force. In recent years, we have restructured or made other adjustments to our sales
force in response to factors such as conditions in the information technology industry, our expenses related to revenues, management changes, product changes and other external and internal considerations. Changes in the structure of the sales force
and sales force management have resulted in a temporary lack of focus and reduced productivity that may have affected revenues in one or more quarters. If we continue to restructure our sales force, then the transition issues associated with
restructuring the sales force may recur. Such restructuring or associated transition issues can be disruptive and adversely impact our business and operating results.
Any failure to maintain on-going sales through distribution channels could result in lower revenues, and increasing sales through distribution channels could result in lower margins on our license revenues.
To date, we have sold our products principally through our direct sales force, as well as through indirect sales channels, such as
computer hardware companies, packaged application software developers, independent software vendors (ISVs), systems integrators (SIs), original equipment manufacturers (OEMs), consultants, software tool vendors
and distributors. Our ability to achieve revenue growth in the future will depend in large part on our success in maintaining existing relationships and further establishing and expanding relationships with our indirect sales channels. In
particular, we have an ongoing initiative to further establish and expand relationships with our distributors, especially ISVs and SIs. A significant part of this initiative is to recruit and train a large number of consultants employed by SIs and
induce these SIs to more broadly use our products in their consulting practices, as well as to embed our technology in products that our ISV customers offer. We intend to continue this initiative and to seek distribution arrangements with additional
ISVs to embed our WebLogic Server and other products in their products. It is possible that we will not be able to successfully expand our distribution channels, secure agreements with additional SIs and ISVs on commercially reasonable terms or at
all, and otherwise adequately continue to develop and maintain our relationships with indirect sales channels. Moreover, even if we succeed in these endeavors, it still may not increase our revenues. In particular, we need to carefully monitor the
development and scope of our indirect sales channels and create appropriate pricing, sales force compensation and other distribution parameters to help ensure these indirect channels do not conflict with or curtail our direct sales. If we invest
resources in these types of expansion and our overall revenues do not correspondingly increase, our business, results of operations and financial condition will be materially and adversely affected. In addition, we already rely on formal and
informal relationships with a number of SIs and consulting firms to enhance our sales, support, service and marketing efforts, particularly with respect to implementation and support of our products as well as lead generation and assistance in the
sales process. Many such firms have similar, and often more established, relationships with our principal competitors. It is possible that these and other third parties will not provide the level and quality of service required to meet the needs of
our customers, or that we will not be able to maintain an effective, long-term relationship with these third parties. However, because we achieve lower margins on license revenue sales through distribution channels, an increase in our sales through
distribution channels could result in lower margins on our license revenues.
If we do not compete effectively with new and existing competitors, our
revenues and operating margins will decline.
The market for application server, integration and SOA software, and related software
infrastructure, and specialty applications in communications, time and event driven, real-time and virtualization products and services is highly competitive. Our competitors are diverse and offer a variety of solutions directed at various segments
of this marketplace.
Our competitors include several companies, such as IBM, Oracle Corporation, SAP AG and Microsoft, which compete in a
number of our product lines. All of these competitors have longer operating histories; significantly greater financial, technical, marketing and other resources; significantly greater name recognition; a broader product offering; a larger installed
base of customers than we do; and are able to bundle competing products with their other software offerings at a discounted price. In addition, many competitors have well-established relationships with our current and potential customers. As a
result, these competitors may be able to respond more quickly to new or emerging technologies and changes in customer requirements or to devote greater resources to the development, promotion and sale of their products than we can.
In addition, current and potential competitors may make strategic acquisitions or establish cooperative relationships among themselves or with third
parties, thereby increasing the ability of their products to address the needs of their current and prospective customers. Further, new competitors, or alliances among current and new competitors, may emerge and rapidly gain significant market
share. Such competition could materially adversely affect our ability to sell additional software licenses and maintenance, consulting and support services on terms favorable to us.
Further, competitive pressures and open source availability of functionally competitive software could require us to reduce the price of our products and
related services, which could harm our business. We may not be able to compete successfully against current and future competitors, and any failure to do so would harm our business.
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Because the technological, market and industry conditions in our business can change very rapidly, if we do not
successfully adapt our products to these changes, our revenue and profits will be harmed.
The market for our products and services
is highly fragmented, competitive with alternative computing architectures, and characterized by continuing technological developments, evolving and competing industry standards, and changing customer requirements. The introduction of products
embodying new technologies, the emergence of new industry standards, or changes in customer requirements could result in a decline in the markets for our existing products or render them obsolete and unmarketable. As a result, our success depends
upon our ability to timely and effectively enhance existing products, respond to changing customer requirements, and develop and introduce in a timely manner new products and initiatives that keep pace with technological and market developments and
emerging industry standards, as well as our ability to educate and train our sales force and indirect sales channels on our new or enhanced products, initiatives and technologies. It is possible that our products will not adequately address the
changing needs of the marketplace and that we will not be successful in developing and marketing enhancements to our existing products or new products on a timely basis. Failure to develop, acquire and introduce new products, or enhancements to
existing products, in a timely manner in response to changing market conditions or customer requirements, or lack of customer acceptance of our products, will materially and adversely affect our business, results of operations and financial
condition. In addition, our success is increasingly dependent on our strategic partners ability to successfully develop and integrate their software with those of our products with which their software interoperates or is bundled, integrated
or marketed. If their software performs poorly, contains errors or defects or is otherwise unreliable, or does not provide the features and benefits expected or required, it could lower the demand for our products and services, result in negative
publicity or loss of our reputation, and adversely affect our revenues and other operating results.
If the markets for application servers,
application platforms, application integration, portal, BPM, SOA and related application infrastructure software and Web services decline or do not grow as quickly as we expect, our revenues will be harmed.
We sell our products and services in the application server, application platform, application integration, portal, BPM, SOA and related application and
service infrastructure markets. These markets are characterized by continuing technological developments, evolving industry standards and changing customer requirements.
Our success is dependent in large part on acceptance of our products by large customers with substantial legacy mainframe systems, customers establishing or building out their presence on the Web for commerce, and
developers of Web-based commerce applications and SOA. Our future financial performance will depend in large part on the continued growth in the use of the Web to run software applications and continued growth in the number of companies extending
their mainframe-based, mission-critical applications to an enterprise-wide distributed computing environment and to the Internet through the use of application server and integration technology and SOA. The markets for application server,
application platform, portal, application integration, web services, BPM and SOA and related services and technologies may not grow and could decline. Even if they do grow, they may grow more slowly than we anticipate, particularly in view of
periodic economic difficulties affecting the technology sector in the United States, Asia and Europe. If these markets fail to grow, grow more slowly than we currently anticipate, or decline, our business, results of operations and financial
condition will be adversely affected.
Our revenues are derived primarily from a single group of similar and related products and related services,
and a decline in demand or prices for these products or services could substantially adversely affect our operating results.
We
currently derive the majority of our license and service revenues from BEA WebLogic Server, Tuxedo and our AquaLogic products, and from related products and services. We expect these products and services to continue to account for the majority of
our revenues in the immediate future. As a result, factors adversely affecting the pricing of or demand for BEA WebLogic Server, Tuxedo, AquaLogic products or related services, such as periodic difficult economic conditions, future terrorist
activities or military actions, any decline in overall market demand, competition, product performance or technological change, could have a material adverse effect on our business and consolidated results of operations and financial condition. In
particular, with regard to Tuxedo, we have recently experienced a decline in the percentage of our license revenue generated by Tuxedo, as well as a decline in the absolute dollar amount of revenue generated by Tuxedo. If this trend were to continue
or worsen, it would have an adverse impact on our revenue, profit and other operating results.
Our future growth, if any, is expected to
be achieved through the implementation and introduction of our new product initiatives in SOA, AquaLogic, time and event-driven architectures, real-time applications, virtualization, and WebLogic Communications Platform. Many of these new product
initiatives have substantial, entrenched competitors with greater resources and experience in these product areas. Other product initiatives are in nascent markets, and it is unclear when or if these markets will develop into substantial markets or
whether we will serve those markets well. There can be no assurances that all or any of these new products will be successful and contribute to profitability or growth.
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If our WebLogic Communications Platform, AquaLogic and other recently introduced products do not achieve
significant market acceptance, or market acceptance is delayed, our revenues will be substantially adversely affected.
In January
2006 we released the first product of our WebLogic Communications Platform. In June 2006, we introduced the BEA AquaLogic group of products and enhanced them with products from the Plumtree acquisition for our SOA offerings. We have invested
substantial resources to develop, acquire and market these products, and anticipate that this will continue. If these products and our other products currently in development do not achieve substantial market acceptance among new and existing
customers, whether due to factors such as any technological problems, competition, pricing, sales execution, market shifts or otherwise, it will have a material adverse effect on our revenues and other operating results. Moreover, because our new
products generally offer broader solutions and other improvements over our prior products, potential customers may take additional time to evaluate their purchases, which can delay customer acceptance of our new products. If these delays continue or
worsen, it will adversely affect our revenues and other operating results.
If we fail to adequately protect our intellectual property rights,
competitors may use our technology and trademarks, which could weaken our competitive position, reduce our revenues and increase our costs.
Our success depends upon our proprietary technology. We rely on a combination of patent, copyright, trademark and trade secret rights, confidentiality procedures and licensing arrangements to establish and protect our proprietary rights. It
is possible that other companies could successfully challenge the validity or scope of our patents and that our patents may not provide a competitive advantage to us.
As part of our confidentiality procedures, we generally enter into non-disclosure agreements with our employees, distributors and corporate partners and into license agreements with respect to our software,
documentation and other proprietary information. Despite these precautions, third parties could copy or otherwise obtain and use our products or technology without authorization, or develop similar technology independently. In particular, we have in
the past provided certain hardware OEMs with access to our source code, and any unauthorized publication or proliferation of our source code could materially adversely affect our business, operating results and financial condition. It is difficult
for us to police unauthorized use of our products, and although we are unable to determine the extent to which piracy of our software products exists, software piracy is a persistent problem. In addition, effective protection of intellectual
property rights is unavailable or limited in certain foreign countries. The protection of our proprietary rights may not be adequate, and our competitors could independently develop similar technology, duplicate our products, or design around
patents and other intellectual property rights that we hold.
Third parties could assert that our software products and services infringe their
intellectual property rights, which could expose us to increased costs and litigation.
We have been and continue to be subject to
legal proceedings and claims that arise in the ordinary course of our business, including claims currently being asserted that our products infringe certain patent rights. It is possible that third parties, including competitors, technology partners
and other technology companies, could successfully claim that our current or future products, whether developed internally or acquired, infringe their rights, including their trade secret, copyright and patent rights. These types of claims, with or
without merit, can cause costly litigation that requires significant management time, as well as impede our sales efforts due to any uncertainty as to the outcome, all of which could materially adversely affect our business, operating results and
financial condition. These types of claims, with or without merit, could also cause us to pay substantial damages or settlement amounts, cease offering any subject technology or products altogether, require us to enter into royalty or license
agreements, compel us to license software under unfavorable terms, and damage our ability to sell products due to any uncertainty generated as to intellectual property ownership. If required, we may not be able to obtain such royalty or license
agreements, or obtain them on terms acceptable to us, which could have a material adverse effect upon our business, operating results and financial condition, particularly if we are unable to ship key products.
If our products contain software defects, it could harm our revenues and expose us to litigation.
The software products we offer are internally complex and, despite extensive testing and quality control, may contain errors or defects, especially when
we first introduce them. We may need to issue corrective releases of our software products to fix any defects or errors. Any defects or errors could also cause damage to our reputation and result in loss of revenues, product returns or order
cancellations, lack of market acceptance of our products, or increased service and warranty costs. Accordingly, any defects or errors could have a material and adverse effect on our business, results of operations and financial condition.
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Our license agreements with our customers typically contain provisions designed to limit our exposure to
potential product liability claims. It is possible, however, that the limitation of liability provisions contained in our license agreements may not be effective as a result of existing or future federal, state or local laws or ordinances or
unfavorable judicial decisions. Although we have not experienced any product liability claims to date, sale and support of our products entails the risk of such claims, which could be substantial in light of our customers use of such products
in mission-critical applications. If a claimant brings a product liability claim against us, it could have a material adverse effect on our business, results of operations and financial condition. Our products interoperate with many parts of
complicated computer systems, such as mainframes, servers, personal computers, application software, databases, operating systems and data transformation software. Failure of any one of these parts could cause all or large parts of computer systems
to fail. In such circumstances, it may be difficult to determine which part failed, and it is likely that customers will bring a lawsuit against several suppliers. Even if our software is not at fault, we could suffer material expense and material
diversion of management time in defending any such lawsuits.
If we do not maintain our relationships with third-party vendors, interruptions in the
supply of our products may result.
Portions of our products incorporate software that was developed and is maintained by
third-party software vendors. We may not be able to replace the functionality provided by the third-party software currently offered with our products if that software becomes obsolete or incompatible with future versions of our products or is not
adequately maintained or updated. Any significant interruption in the supply of these products could adversely impact our sales unless and until we can secure another source at costs which are acceptable to us. We depend in part on these third
parties abilities to enhance their current products, to develop new products on a timely and cost-effective basis and to respond to emerging industry standards and other technological changes. The inability to replace, or any significant delay
in the replacement of, functionality provided by third-party software in our products could materially and adversely affect our business, financial condition or results of operations.
Our international operations expose us to greater management, collections, currency, export licensing, intellectual property, tax, regulatory and other risks.
Revenues from markets outside of the Americas has accounted for approximately one-half of our total revenues over the past several years, and we expect
these markets to continue to account for a significant portion of our total revenues. We sell our products and services through a network of branches and subsidiaries located in 37 countries worldwide. In addition, we also market our products
through distributors. We believe that our success depends upon continued expansion of our international operations. Our international business is subject to a number of risks, including greater difficulties in maintaining and enforcing U.S.
accounting and public reporting standards, greater difficulties in staffing and managing foreign operations with personnel sufficiently experienced in U.S. accounting and public reporting standards, unexpected changes in regulatory practices and
tariffs, longer collection cycles, seasonality, potential changes in export licensing and tax laws, and greater difficulty in protecting intellectual property rights. Also, the impact of fluctuating exchange rates between the U.S. dollar and foreign
currencies in markets where we do business can significantly impact our revenues. The EMEA region has historically accounted for, and we expect in the future will continue to account for, a significant portion of our revenues. If the value of the
U.S. dollar relative to European currencies were to significantly increase, it would have an adverse impact on our revenues, profits and other operating results. Also, we are periodically subject to tax audits by government agencies in foreign
jurisdictions. To date, the outcomes of these audits have not had a material impact on us. It is possible, however, that future audits could result in significant assessments against us or our employees for transfer taxes, payroll taxes, income
taxes, or other taxes as well as related employee and other claims which could adversely effect our operating results. General economic and political conditions in these foreign markets, including the military action in the Middle East, geopolitical
instabilities in other parts of the world and a backlash against U.S. based companies may also impact our international revenues, as such conditions may cause decreases in demand or impact our ability to collect payment from our customers. There can
be no assurances that these factors and other factors will not have a material adverse effect on our future international revenues and consequently on our business and consolidated financial condition and results of operations.
Changes in accounting regulations and related interpretations and policies, particularly those related to accounting for stock options and revenue recognition,
could cause us recognize lower revenue and profits or to defer recognition of revenue.
The methods, estimates, and judgments we use
in applying our accounting policies have a significant impact on our results of operations. Such methods, estimates, and judgments are, by their nature, subject to substantial risks, uncertainties, and assumptions, and factors may arise over time
that lead us to change our methods, estimates, and judgments. Changes in those methods, estimates, and judgments could significantly affect our results of operations. For example, the FASB has
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adopted Financial Accounting Standards Board Statement No. 123R (FAS 123R),
Share-Based Payment
, replacing FAS 123, which
eliminates the ability to account for compensation transactions using Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees,
and requires that such transactions be accounted for using the fair value based
method.
Similarly, although we use standardized license agreements designed to meet current revenue recognition criteria under generally
accepted accounting principles, we must often negotiate and revise terms and conditions of these standardized agreements, particularly in larger license transactions. Negotiation of mutually acceptable terms and conditions can extend the sales cycle
and, in certain situations, may require us to defer recognition of revenue on the license. While we believe that we are in compliance with Statement of Position 97-2,
Software Revenue Recognition
, as amended, the American Institute of
Certified Public Accountants continues to issue implementation guidelines for these standards and the accounting profession continues to discuss a wide range of potential interpretations. Additional implementation guidelines, and changes in
interpretations of such guidelines, could lead to unanticipated changes in our current revenue accounting practices that could cause us to defer the recognition of revenue to future periods or to recognize lower revenue and profits.
Moreover, policies, guidelines and interpretations related to revenue recognition, accounting for acquisitions, income taxes, facilities consolidation
charges, allowances for doubtful accounts and other financial reporting matters require us to make difficult judgments on complex matters that are often subject to multiple sources of authoritative guidance. To the extent that our judgment is
incorrect, it could result in an adverse impact on the Companys financial statements. Some of these matters are also among topics currently under re-examination by accounting standard setters and regulators. These standard setters and
regulators could promulgate interpretations and guidance that could result in material and potentially adverse changes to our accounting policies.
Unanticipated changes in our effective tax rates or exposure to additional income tax liabilities could affect our profitability.
We are a U.S. based multinational company subject to tax in multiple U.S. and foreign tax jurisdictions. Our provision for income taxes is based on jurisdictional mix of earnings, statutory rates, and enacted tax
rules, including transfer pricing. Significant judgment is required in determining our provision for income taxes and in evaluating our tax positions on a worldwide basis. It is possible that these positions may be challenged which may have a
significant impact on our effective tax rate.
If we are unable to manage our growth, our business will suffer.
We have experienced substantial growth since our inception in 1994. Overall, we have increased the number of our employees from 120 employees in three
offices in the United States at January 31, 1996 to approximately 4,119 employees in 90 offices in 38 countries at October 31, 2007. Our ability to manage our staff and growth effectively requires us to continue to improve our operational,
financial, disclosure and management controls, reporting systems and procedures, and information technology infrastructure, particularly in light of the enactment of the Sarbanes-Oxley Act of 2002 and related regulations.
In this regard, we are continuing to update our management information systems to integrate financial and other reporting among our multiple domestic and
foreign offices. In addition, we may continue to increase our staff worldwide and continue to improve the financial reporting and controls for our global operations. We are also continuing to develop and roll out information technology initiatives.
It is possible that we will not be able to successfully implement improvements to our management information, control systems, reporting systems and information technology infrastructure in an efficient or timely manner and that, during the course
of this implementation, we could discover deficiencies in existing systems and controls, as well as past errors resulting there from. If we are unable to manage growth effectively, our business, results of operations and financial condition will be
materially adversely affected.
The majority of our expenses are personnel-related costs such as employee compensation and benefits, along
with the cost of the infrastructure (occupancy and equipment) to support our employee base. The failure to adjust our employee base to the appropriate level to support our revenues could materially and adversely affect our business, operating
results and financial condition.
We may lose key personnel or may not be able to hire enough qualified personnel, which would adversely affect our
ability to manage our business, develop and acquire new products and increase revenue.
We believe our future success will depend
upon our ability to attract and retain highly skilled personnel, including members of management and key technical employees. Competition for these types of employees is intense, and it is possible
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that we will not be able to retain our key employees and that we will not be successful in attracting, assimilating and retaining qualified candidates in the
future. In addition, as we seek to expand our global organization, the hiring of qualified sales, technical and support personnel has been, and will continue to be, difficult due to the limited number of qualified professionals. Failure to attract,
assimilate and retain key personnel would have a material adverse effect on our business, results of operations and financial condition.
We have historically used stock options and other forms of equity compensation as key components of our employee compensation program in order to align employees' interests with the interests of our stockholders, encourage employee
recruitment and retention, and provide competitive compensation packages. The changing regulatory landscape, including as a result of FAS 123R, could make it more difficult and expensive for us to grant stock options to employees in the future, and
require us to modify our equity granting strategy, including reducing the level of equity awards we grant. If employees believe that the incentives that they would receive under a modified strategy are less attractive, we may find it difficult to
attract, retain and motivate employees. In addition, the use of alternative equity incentives may increase our compensation expense and may negatively impact our earnings. To the extent that new regulations make it more difficult or expensive to
grant equity instruments to employees, we may incur increased compensation costs, further change our equity compensation strategy or find it increasingly difficult to attract, retain and motivate employees, each of which could materially and
adversely affect our business, financial condition or results of operations.
If we cannot successfully integrate our past and future acquisitions,
our revenues may decline and expenses may increase.
From our inception in January 1994, we have made a substantial number of
strategic acquisitions. From June 2005 to August 2006, we acquired Plumtree Software, Inc., a publicly traded software company, as well as six smaller companies in targeted cash acquisitions, each of which has presented an integration challenge to
our business operations. In addition, integration of acquired companies, divisions and products involves the assimilation of potentially conflicting products and operations, including the maintenance of effective internal controls, which diverts the
attention of our management team and may have a material adverse effect on our operating results in future quarters. It is possible that we may not achieve any of the intended financial or strategic benefits of these transactions. Further, while we
may desire to make additional acquisitions in the future, there may not be suitable companies, divisions or products available for acquisition. Our acquisitions entail numerous risks, including the risk that we will not successfully assimilate the
acquired operations and products, retain key employees of the acquired companies, or execute successfully the strategy driving the acquisition. There are also risks relating to the diversion of our managements attention, and difficulties and
uncertainties in our ability to maintain the key business relationships that we or the acquired companies have established. In addition, we may have product liability or intellectual property liability associated with the sale of the acquired
companys products.
Acquisitions also expose us to the risk of claims by terminated employees, shareholders of the acquired companies
or other third parties related to the transaction. Finally, if we undertake future acquisitions, we may issue dilutive securities, assume or incur additional debt obligations, incur large one-time expenses, utilize substantial portions of our cash,
and acquire intangible assets that would result in significant future amortization expense. Any of these events could have a material adverse effect on our business, operating results and financial condition.
On June 29, 2001, the FASB pronounced under Statement of Financial Accounting Standards No. 142,
Goodwill and Other Intangible
Assets
(FAS 142), that purchased goodwill should not be amortized, but rather, should be periodically reviewed for impairment. Such impairment could be caused by internal factors as well as external factors beyond our
control. The FASB has further determined that at the time goodwill is considered impaired, an amount equal to the impairment loss should be charged as an operating expense in the statement of income. The timing of such an impairment (if any) of
goodwill acquired in past and future transactions is uncertain and difficult to predict. If future events cause additional impairment of any intangible assets acquired in our past or future acquisitions, we may have to record additional charges
relating to such assets sooner than we expect which would cause our profits to decline. We are required to determine whether goodwill and any assets acquired in past acquisitions have been impaired in accordance with FAS 142 and, if so, charge
such impairment as an expense. For example, in the quarter ended October 31, 2001, we took an asset impairment charge of $80.1 million related to past acquisitions. At October 31, 2007, we had remaining net goodwill and net acquired
intangible assets of approximately $275.0 million. In the quarter ended April 30, 2007, we took an additional charge of approximately $3.8 million in connection with impairment of goodwill related to our acquisition of Connectera. If we are
required to take such additional impairment charges, the amounts could have a material adverse effect on our results of operations.
We face risks in
connection with Plumtrees government contracts which may adversely affect our results of operations.
We face risks associated
with the businesses and operations of Plumtree, which we acquired on October 20, 2005. Plumtree derived a significant portion of its software license and service revenue from government customers. We have assumed Plumtrees business
with the United States government and other domestic and international public entities,
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including the risks associated with such business, such as the susceptibility to unpredictable governmental budgetary and policy changes. Sales to government
entities can be adversely affected by budgetary cycles, changes in policy and other political events outside of our control, such as the outbreak of hostilities overseas and domestic terrorism. Governments often retain the ability to cancel
contracts at their convenience in times of emergency or under other circumstances. Some of Plumtrees government customers have experienced budgetary constraints due to decreased federal funding to state and local governments. Additionally, the
government may require special intellectual property rights and other license terms generally more favorable to the customer than those typical in non-government contracts. These requirements involve more licensing cost and increased contract risk
for us. The government procurement process in general can be long and complex and being a government vendor subjects us to additional regulations.
In addition, we have conducted an initial internal investigation into Plumtrees compliance with, and we are subject to an ongoing review in relation to, Plumtrees contract with the U.S. General Services Administration
(GSA) which may adversely impact our financial position, liquidity and results of operations. The U.S. government often retains the right to audit its vendors for compliance. In February 2005, Plumtree became aware that in connection
with certain sales made under its GSA contract, Plumtree may not have complied fully with the terms of the Price Reductions clause of such contract. As a result, Plumtree voluntarily offered the GSA a temporary price reduction. In
response, Plumtree was informed that the matter would be considered further within the GSA. Plumtree commenced an internal investigation into this matter in the second quarter of 2005 and, with the assistance of special legal counsel and forensic
accountants, concluded that a damage payment or future discounts off of the GSA price list might be due to the GSA under the GSA contract pursuant to the Price Reductions clause. In the quarter ended June 30, 2005, Plumtree
established a $1.5 million contingent contract reserve for the potential damage payment or future discounts off the GSA price list related to the GSA contract matter. BEA has reviewed the results of the internal investigation and based on our
assessment we have recorded $1.5 million as the fair value of the contingency as of October 20, 2005. In January 2006, we completed this self-audit, which was consistent with the original assessment, and reported these results to the GSA. The
GSA has indicated that it would like us to perform an additional review of the period from March 31, 2005 through June 30, 2005. We are currently assessing the GSAs desire for this additional period. However we have not commenced
such additional review and have not recorded any additional contingency accruals related to this issue as of October 31, 2007. There has been no communication from the GSA since April 2006. The final amount of the potential contract damages or
future discounts off of the GSA price list is subject to the outcome of final resolution with the GSA. It is possible that the final settlement could exceed the reserve and have a material impact on our financial position, liquidity and results of
operations. It is also possible that the GSA may elect to take other action, such as an audit of Plumtrees compliance with the terms of the applicable GSA contract. Any such audit could prove costly and may distract our management. In
addition, as a result of such audit, the U.S. government may require a further discount on future orders under the GSA contract, or seek other remedies. Any such action may adversely affect our financial position, revenue, liquidity and results of
operations.
Some provisions in our certificate of incorporation and bylaws, as well as a stockholder rights plan, may have anti-takeover effects.
We have a stockholder rights plan providing for one right for each outstanding share of our common stock. Each right, when
exercisable, entitles the registered holder to purchase certain of our securities at a specified purchase price. The rights plan my have the anti-takeover effects of causing substantial dilution to a person or group that attempts to acquire us on
terms not approved by our Board of Directors. The existence of the rights plan could limit the price that certain investors might be willing to pay in the future for shares of our common stock and could discourage, delay or prevent a merger or
acquisition that stockholders may consider favorable. In addition, provisions of our current certificate of incorporation and bylaws, as well as Delaware corporate law, could make it more difficult for a third party to acquire us without the support
of our Board of Directors, even if doing so would be beneficial to our stockholders.
The ongoing U.S. military activity in Iraq and any terrorist
activities could adversely affect our revenues and operations.
The U.S. military activity in Iraq, terrorist activities and related
military and security operations have in the past disrupted economic activity throughout the United States and much of the world. This significantly adversely impacted our operations and our ability to generate revenues in the past and may again in
the future. An unfavorable course of events in the future related to the ongoing U.S. military activity in Iraq; any other military or security operations, particularly with regard to the Middle East; any future terrorist activities; or geopolitical
tension in other parts of the world could have a similar or worse effect on our operating results, particularly if such attacks or operations occur in the last month or weeks of our quarter or are significant enough to further weaken the U.S. or
global economy. In particular, such activities and operations could result in reductions in information technology spending, order deferrals, and reductions or cancellations of customer orders for our products and services.
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An unfavorable government review of our income and payroll tax returns or changes in our effective tax rates could
adversely affect our operating results.
Our operations are subject to income, payroll and indirect taxes in the United States and
in multiple foreign jurisdictions. We exercise judgment in determining our worldwide provision for these taxes, and in the ordinary course of our business there may be transactions and calculations where the ultimate tax determination is uncertain.
Our U.S. federal income tax returns for 2005 through 2006 fiscal years are currently under examination by the IRS. In addition, certain of
our U.S. payroll tax returns (primarily related to taxes associated with stock option exercises), and various state and foreign tax returns are under examination by the applicable taxing authorities. While we believe that we have made adequate
provisions related to the audits of these tax returns, the final determination of our obligations may exceed the amounts provided for by us in the accompanying consolidated financial statements.
Stock Option Review Risk Factors
The Audit
Committees conclusion that certain historical stock option grants were not accounted for correctly has had, and could continue to have, an adverse effect on our financial results.
The Audit Committee has concluded that, primarily from fiscal 1998 through fiscal 2006, a large number of stock options were not accounted for correctly
in our financial statements. As a result, we have restated our financial results for the years ended January 31, 1998 through the quarter ended April 31, 2006, and taken substantial compensation charges in each of those periods. We could
continue to incur substantial charges in future periods in connection with the results of the review that are not compensation charges. Such charges could include, but are not limited to, payments to employees or taxing authorities arising from
potential income tax liabilities pursuant to the U.S. Internal Revenue Code Section 409A
.
The Audit Committees review of
our historical stock option grant practices, together with the preparation of the resulting financial restatements, has consumed considerable amounts of Board member and management time and caused us to incur substantial expenses, which have had and
could continue to have an adverse effect on us.
The Audit Committees review of our historical stock option grants and the
preparation of our restated consolidated financial statements have required us to expend significant Board member and management time, and to incur significant accounting, legal and other expenses. The review and preparation of our financial
statements lasted over a year and required numerous meetings of the Audit Committee, the full Board of Directors and members of our senior management. The review has diverted the attention of our Board and management team from the operation of our
business and proven to be a significant distraction. In addition, we have incurred substantial expenses in connection with the review, which have had and could continue to have a negative effect on our financial results. The period of time necessary
to resolve these ongoing matters is uncertain, and these matters could require significant additional Board and management attention and resources.
The ongoing government inquiries relating to our historical stock option grant practices are time consuming and expensive and could result in injunctions, fines and penalties that may have a material adverse effect on our financial
condition and results of operations.
The inquiries by the United States Securities and Exchange Commission (SEC) into
our historical stock option grant practices are ongoing. We have fully cooperated with the SEC and intend to continue to do so. The period of time necessary to resolve these inquiries is uncertain, and we cannot predict the outcome of these
inquiries or whether we will face additional government inquiries, investigations or other actions related to our historical stock option grant practices. These inquiries will likely require us to continue to expend significant management time and
incur significant legal and other expenses, and could result in actions seeking, among other things, injunctions against the Company and the payment of significant fines and penalties by the Company, which may have a material adverse effect on our
business and earnings.
As a result of the matters identified by the Audit Committees review of our historical stock option grant practices, we
had failed to comply with SEC reporting requirements and Nasdaq listing requirements for some period. We may continue to face compliance issues with both. Any future failure by us to remain in compliance with SEC reporting requirements and Nasdaq
listing requirements would likely have a material adverse effect on the Company and our stockholders.
Due to the Audit
Committees review of our historical stock option grant practices and resulting restatements, we could not file our periodic reports with the SEC on a timely basis and faced the possibility of delisting from Nasdaq. While we
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have filed all of our required periodic reports with the SEC and Nasdaq has notified us that we are in compliance with their applicable listing standards, if
the SEC has comments on these reports (or other reports that we previously filed) that require us to file amended reports, or if we face future compliance issues with applicable Nasdaq listing requirements, we may be unable to maintain the listing
of our stock on Nasdaq. If this happens, the price of our stock and the ability of our stockholders to trade in our stock could be harmed. In addition, we would be subject to a number of restrictions regarding the registration of our stock under
federal securities laws, and we would not be able to issue stock options or other equity awards to our employees or allow them to exercise their outstanding options, which could harm our business.
In addition, if we are not in compliance with our SEC reporting requirements in the future, it could have a negative impact on our reputation, including
our relationships with our investors and our customers, our ability to acquire new customers, including new contracts with U.S. federal and other government entities, and, ultimately, our ability to generate revenue. Such lack of current information
regarding us could also lead to our inability to access the capital markets for debt or loan financings because investors and lenders would not have information in order to evaluate us.
We have been named as a party to a number of shareholder derivative lawsuits relating to our historical stock option grant practices, and we may be named in additional lawsuits in the future. This litigation
could become time consuming and expensive and could have a material adverse effect on our business.
In connection with our
historical stock option grant practices and resulting restatements, a number of derivative actions were filed against certain of our current and former directors and officers purporting to assert claims on the Companys behalf. There may be
additional lawsuits of this nature filed in the future. We cannot predict the outcome of these lawsuits, nor can we predict the amount of time and expense that will be required to resolve these lawsuits. If these lawsuits become time consuming and
expensive, or if there are unfavorable outcomes in any of these cases, there could be a material adverse effect on our business, financial condition and results of operations.
Our insurance coverage will not cover our total liabilities and expenses in these lawsuits, in part because we have a significant deductible on certain
aspects of the coverage. In addition, subject to certain limitations, we are obligated to indemnify our current and former directors, officers and employees in connection with the review of our historical stock option grant practices and the related
litigation and government inquiries. We currently hold insurance policies for the benefit of our directors and officers, although our insurance coverage may not be sufficient in some or all of these matters. Furthermore, the insurers may seek to
deny or limit coverage in some or all of these matters, in which case we may have to self-fund all or a substantial portion of our indemnification obligations.
We are subject to the risks of additional lawsuits in connection with our historical stock option grant practices, the resulting restatements, and the remedial measures we have taken.
In addition to the possibilities that there may be additional governmental actions and shareholder lawsuits against us, we may be sued or taken to
arbitration by former officers and employees in connection with their stock options, employment terminations and other matters. These lawsuits may be time consuming and expensive, and cause further distraction from the operation of our business. The
adverse resolution of any specific lawsuit could have a material adverse effect on our business, financial condition and results of operations.
If
we fail to maintain effective internal controls or remediate any future material weaknesses in our internal control over financial reporting, we may be unable to accurately report our financial results or prevent fraud which could have an adverse
effect on our business and operating results and our stock price.
The SEC, as directed by Section 404 of the Sarbanes-Oxley
Act of 2002, adopted rules requiring public companies to include a report of management on internal control over financial reporting in their annual reports on Form 10-K that contain an assessment by management of the effectiveness of the
Companys internal control over financial reporting. Effective internal control over financial reporting is essential for us to produce reliable financial reports and prevent fraud. As a result of the Audit Committees review into our
historical stock option grant practices and related matters, we identified past material weaknesses in our internal controls and procedures (see Item 9AControls and Procedures in our annual report on Form 10-K). A material weakness is a
control deficiency, or combination of them, that results in more than a remote likelihood that a material misstatement in our financial statements will not be prevented or detected. A failure to implement and maintain effective internal control over
financial reporting could harm our operating results, result in a material misstatement of our financial statements, cause us to fail to meet our financial reporting obligations or prevent us from providing reliable and accurate financial reports or
avoiding or detecting fraud.
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Failure to comply with applicable corporate governance requirements may cause us to delay filing our periodic
reports with the SEC, affect our Nasdaq listing, and adversely affect our stock price.
Federal securities laws, rules and
regulations, as well as Nasdaq rules and regulations, require companies to maintain extensive corporate governance measures, impose comprehensive reporting and disclosure requirements, set strict independence and financial expertise standards for
audit and other committee members and impose civil and criminal penalties for companies and their chief executive officers, chief financial officers and directors for securities law violations. These laws, rules and regulations have increased and
will continue to increase the scope, complexity and cost of our corporate governance, reporting and disclosure practices, which could harm our results of operations and divert managements attention from business operations.
It may become more difficult and costly to obtain director and officer insurance coverage due to the results of our stock option review.
We expect that the issues arising from our review of stock option grant policies will make it more difficult to obtain director and officer insurance
coverage in the future. If we are able to obtain this coverage, it could be significantly more costly than in the past, which would have an adverse effect on our financial results and cash flow. As a result of this and related factors, our
directors and officers could face increased risks of personal liability in connection with the performance of their duties. As a result, we may have difficultly attracting and retaining qualified directors and officers, which could adversely affect
our business.
Risks related to the Recent Acquisition Speculation and Investor Actions
Despite recent acquisition speculation and investor actions, a merger, acquisition or other transaction involving us may not occur or may occur at a price per share
of our common stock that is below the current trading price, which could harm our stock price.
We face uncertainty concerning our
future given certain investors' calls to auction us, the recent unsolicited cash public offer for us by Oracle at $17 per share of our common stock (which offer expired on October 28, 2007), and our board of directors then stated
willingness to negotiate the sale of us at $21 per share. As a result of these developments, our stock price has increased substantially in anticipation of a transaction, particularly after the public announcement of Oracles offer. There can
be no assurance whether a transaction will occur or at what price. If a transaction does not occur, or the market perceives a transaction as unlikely to happen, our stock price may decline.
General customer uncertainty related to acquisition speculation and investor actions could harm our business.
Due to the uncertainty concerning an acquisition of us and the identity of the possible acquiror or its intentions, many of our current and potential
customers may decide not to purchase from us or may defer purchasing decisions indefinitely. If our customers delay or defer purchasing decisions, particularly with respect to the million and multimillion dollar license transactions that we rely on,
our revenues could materially decline or any anticipated increases in revenue could be lower than expected.
Acquisition speculation and investor
actions and could cause us to lose key personnel, prevent us from hiring additional key personnel and distract our management, which could harm our business.
Due to the recent acquisition speculation and investor actions, our current and prospective employees could experience uncertainty about their future roles within BEA as an independent entity or as an acquired
business. This uncertainty may harm our ability to attract and retain key management, sales, marketing and technical personnel and may lead to increased employee attrition.
This acquisition speculation and investor activity also has diverted the attention of our management team from the operation of our business. Any failure
to attract and retain key personnel and the distraction of our management could harm our business.
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We have been named in various stockholder and purported stockholder class action lawsuits for various matters
related to the recent acquisition offer and takeover speculation, and we may be named in additional lawsuits in the future. This litigation could become time consuming and expensive, could prevent or delay any transaction and could harm our
business.
We and members of our board of directors have been named in six purported stockholder class action complaints, two in the
Delaware Chancery court, three in California in the Santa Clara County Superior Court (one of which purports also to be a derivative lawsuit) and one in the federal court for the Northern District of California (which was an amended complaint to the
stock option review derivative action). Generally, these actions allege breach of fiduciary duties by our directors by failing to give proper consideration to the October 12, 2007 publicly announced and unsolicited bid by Oracle for us at
$17.00 per share of our common stock (which offer expired on October 28, 2007), and seek damages and equitable relief. In addition, a group of affiliated stockholders has brought an action against us and members of our board of directors in
Delaware Chancery Court seeking to compel us to hold our annual meeting and to enjoin us from taking certain actions pending the annual meeting. See Item 3. Legal Proceedings. We have obligations under certain circumstances to
indemnify each of the defendant directors against judgments, fines, settlements and expenses related to claims against such directors and otherwise to the fullest extent permitted under Delaware law and our bylaws and certificate of incorporation.
We cannot predict the outcome of these lawsuits, nor can we predict the amount of time and expense that will be required to resolve these lawsuits. If these lawsuits or any future lawsuits become time consuming and expensive, or if there are
unfavorable outcomes in any of these cases, any acquisition transaction could be prevented or delayed or our business could be harmed.