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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED MARCH 31, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 0-17136
BMC SOFTWARE, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 74-2126120
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
BMC SOFTWARE, INC.
2101 CITYWEST BOULEVARD
HOUSTON, TEXAS
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
77042-2827
(ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (713) 918-8800
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
COMMON STOCK, PAR VALUE $.01 PER SHARE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
NONE
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
The aggregate market value of the registrant's voting stock held by
non-affiliates of the registrant, based upon the last reported sale price of the
registrant's Common Stock on June 4, 2001 was $6,182,625,425.
As of June 4, 2001, there were outstanding 247,739,204 shares of Common
Stock, par value $.01, of the registrant.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the following documents are incorporated by reference in this
report:
Definitive Proxy Statement filed in connection with the registrant's Annual
Meeting of Stockholders currently scheduled to be held on August 27, 2001 (Part
III of this Report).
Such Proxy Statement shall be deemed to have been "filed" only to the
extent portions thereof are expressly incorporated by reference.
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This Annual Report on Form 10-K contains certain forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended, which are
identified by the use of the words "believe," "expect," "anticipate," "will,"
"contemplate," "would" and similar expressions that contemplate future events.
Numerous important factors, risks and uncertainties affect our operating
results, including, without limitation, those contained in this report, and
could cause our actual results to differ materially from the results implied by
these or any other forward-looking statements made by us or on our behalf. There
can be no assurance that future results will meet expectations. You should pay
particular attention to the important risk factors and cautionary statements
described in the section of this Report entitled "Management's Discussion and
Analysis of Results of Operations and Financial Condition -- Certain Risks and
Uncertainties That Could Affect Future Operating Results." You should also
carefully review the cautionary statements described in the other documents we
file from time to time with the Securities and Exchange Commission, specifically
all Quarterly Reports on Form 10-Q and Current Reports on Form 8-K.
PART I
ITEM 1. BUSINESS
OVERVIEW
BMC Software is one of the world's largest independent systems software
vendors, delivering comprehensive enterprise management. We are focused on
Assuring Business Availability(TM) by providing software solutions that enhance
the availability, performance and recoverability of our customers'
business-critical applications to help them better manage their businesses. Our
portfolio of systems management solutions allows our customers to manage the
various components and technologies within their information technology ("IT")
systems from end to end, from legacy databases and applications on large
mainframes to customer-facing web portals and exchanges.
Our integrated software solutions address the numerous technology layers
within the IT enterprise: operating systems, databases, middleware, web
application servers, transaction servers and the applications themselves. We
address all of the predominant operating environments of enterprise computing,
including:
- the IBM OS/390 and z/OS mainframe operating systems;
- the predominant Unix operating system variants, including Sun Solaris,
HPUX, IBM's AIX, Linux and Compaq's Tru64;
- Microsoft's Windows NT and Windows 2000 operating systems; and
- E-business platforms such as IBM's WebSphere, Microsoft's Site Server
Commerce Edition and BEA Systems' WebLogic.
We also manage all the major enterprise applications, including those from
Oracle, SAP, Seibel, Commerce One and Ariba. We have also extended our
management of the enterprise beyond the firewall with our SiteAngel(TM) web
transactions monitoring service. Combined with our services professionals who
provide consulting, implementation and integration services, our broad portfolio
of software solutions allows us to offer our customers integrated,
cross-platform enterprise management.
We were organized as a Texas corporation in 1980 and were reincorporated in
Delaware in July 1988. Since March 1998, we have completed several strategic
acquisitions. We acquired BGS Systems, Inc. ("BGS") in March 1998, Boole &
Babbage, Inc. ("Boole") in March 1999, New Dimension Software Ltd. ("New
Dimension") in April 1999, Evity, Inc. ("Evity") in April 2000, OptiSystems
Solutions, Ltd. ("OptiSystems") in August 2000 and Perform SA ("Perform") in
February 2001. Our principal corporate offices are located at 2101 CityWest
Blvd., Houston, TX 77042-2827. Our telephone number is (713) 918-8800.
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STRATEGY
Our strategy is Assuring Business Availability(TM). The underlying premise
of this strategy is that the success of any enterprise today depends on its IT
systems. Business-critical applications typically consist of numerous components
from multiple vendors, such as packaged, custom and legacy e-business,
manufacturing, billing, supply chain, management information and payroll
applications. Even routine or baseline applications such as e-mail and
calendaring applications become business critical when an organization depends
on them for its day-to-day operations. Application downtime or performance
degradation can halt or greatly impede an enterprise's daily operations. In
addition, the explosive growth of the Internet as a platform for commerce has
placed tremendous pressure on IT operations to make these applications available
on an uninterrupted, full time basis. Our focus is on the operation and
performance of applications and their underlying components in high stress
deployments. Our strategy is to provide end-to-end enterprise management
solutions designed to ensure the availability, performance and recoverability of
critical application services with rapid deployment of the management solution.
Examples of the capabilities and benefits of our solutions include:
- Providing usage, performance and availability information about a system
that allows the user to monitor, report, manage and achieve service
levels;
- Improving the availability and responsiveness of customers' applications
so they can establish and perform under service level agreements;
- Minimizing or eliminating system outages, whether planned due to system
upgrades or maintenance, or unplanned due to failures;
- Automating many tedious, error prone and costly administrative tasks in
production environments;
- Helping to ensure that storage systems are operating most effectively and
are able to recover from failures quickly, accurately and efficiently;
- Keeping data current and consistent across data stores;
- Helping to ensure data availability, integrity and recoverability;
- Monitoring and event management of many different types of mainframe and
distributed systems applications;
- Maximizing the efficiency of hardware and software investments by
providing capacity planning;
- Automated discovery of network devices, visualization of the network and
reporting of network performance; and
- Business integrated scheduling, output management and security
administration.
We believe that major trends such as Internet computing, e-business and
continued reductions in processing, storage and telecommunications costs will
drive further gains in productivity and growing investment in existing and new
software applications and their supporting infrastructure. The current trend
toward business-to-business and business-to-customer e-business adds additional
complexity to our customers' environments. Not only are our customers now
responsible for managing their internal IT systems, but they must ensure that
their business partners' IT systems are available, performing and remain
compatible with their own systems. Our strength is that while our solutions can
monitor and manage a customer's specific e-business applications, we also
provide solutions that ensure all of the technology required to generate a
transaction is available and performing as planned, and if it fails, can be
recovered quickly. As an example, if you choose to order a compact disc from a
popular web site, you enter via a web server that is pulling data via middleware
from a legacy OS/390 server. Each server is running a unique operating system,
database and an ERP or legacy application. Our strength is that we provide tools
to monitor, manage, control and optimize the performance of the entire
transaction lifecycle. In doing so, we ensure that our customers' business
critical applications provide the level of service that both their external and
internal customers demand.
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PRODUCTS
Our products empower our customers in this global economic environment
where speed, time to value, and value over time are critical. Today, it is not
simply how quickly a company can get into a market, but how quickly they can
respond to end-user requirements and customer requests. Our solutions are
positioned to move at Internet speed and aggressively build customer value. Our
solutions fall into the following broad categories: Enterprise Server
Management, Business Integrated Scheduling, Application & Database Performance
Management, Recovery & Storage Management and other software solutions.
Enterprise Server Management
Our Enterprise Server Management solutions optimize the availability and
performance of critical S/390 and z/OS online and batch applications. Our
solutions provide the ability to manage and optimize customers' S/390 and z/OS
operating environments, including the S/390 and z/OS operating systems, Linux,
CICS, IMS/TM, USS and WebSphere, as well as the network and middleware
components, including VTAM, IP and MQ. Our performance solutions also include
components that balance workloads across multiple images and optimize input and
output to minimize elapsed times and maximize throughput. These solutions
provide performance management and control, predictive analysis and capacity
planning across the S/390 and z/OS platforms. Our Enterprise Server Management
solutions also offer tools to monitor, manage and dynamically optimize the
performance of IMS and DB2 business applications to provide our customers their
desired service levels. These tools address all management and
performance-related issues in the associated subsystem, application, resource or
object. We also provide tools that administer and maintain IMS and DB2 databases
while ensuring their integrity. The coordinated, high-performance utilities
deliver intelligent automation that allows for optimal performance and
availability for business critical applications using IMS and DB2 databases.
Our Enterprise Server Management solutions contributed approximately 52%,
43% and 39% of our license revenues in fiscal 1999, 2000 and 2001, respectively.
Business Integrated Scheduling
Our Business Integrated Scheduling solutions provide comprehensive
business-integrated scheduling over a multitude of platforms and applications
from a central point of control. They offer enhanced exception detection
capabilities that indicate location and severity efficiently and take corrective
action. This centralized solution is capable of managing applications regardless
of hardware configuration, integrates with numerous third-party products and
applications and supports over 20 platforms including Unix, OS/390, z/OS,
Windows NT, Windows 2000, and ERP applications.
Business processes span multiple applications and require solutions focused
on the business processes that comprise the complete flow, rather than the
technologies that are underlying the applications. A typical example of an
application that requires a Business Integrated Scheduling approach is the
purchase of shares in a mutual fund. What was formerly a process of the investor
receiving a telephone call from a buyer, completing a paper bid order and
sending the "stamped" acceptance through a series of manual steps, such as
valuation, account updates, receipt notification, etc., has become a dynamic and
rapid process. The initial request may now come from multiple sources, such as
telephone, e-mail, web or fax, and require cross-application data transfers from
different trading and investment systems and ad-hoc batch transactions needing
variable application input. Each process is not as independent as it once was
and our Business Integrated Scheduling solutions ensure that the entire
transaction handling is integrated across applications and managed effectively
so that funds are valued, accounts are updated, clients and brokers are notified
and service level expectations are met.
Our Business Integrated Scheduling solutions contributed approximately 2%,
5% and 9% of our license revenues in fiscal 1999, 2000 and 2001.
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Application & Database Performance Management
Our Application & Database Performance Management solutions monitor and
improve all aspects of application service across the distributed IT enterprise.
The autonomous, intelligent PATROL(R) Agent, which resides on the database
management system, web or application server, is equipped to take corrective
action and can communicate these actions to a centralized console on an
as-needed basis, as defined by the user. The various products within our PATROL
family provide service level management, enhanced availability, performance
monitoring and management for the entire distributed enterprise, including
applications, databases, middleware, operating systems and network devices.
PATROL solutions provide management for e-business applications, including
business-to-business supply chain and value chain applications, web application
servers and Internet devices. PATROL solutions also include platform support for
Windows, Linux, Solaris, Unix and other services residing on those operating
systems.
Also included in this product category is our DataOne(TM) solution family,
which includes distributed database products supporting the following databases:
Oracle, Microsoft SQL Server, DB2, Universal Database, Sybase and Informix.
These products are aimed at improving the efficiency of database administration
and address the areas of: SQL development, change management, performance
monitoring and tuning, maintenance optimization and business information
delivery.
Our Application & Database Performance Management solutions contributed
approximately 24%, 26% and 26% of our license revenues in fiscal 1999, 2000 and
2001, respectively.
Recovery & Storage Management
Our Recovery & Storage Management product group provides solutions across
the entire enterprise environment, including support for new technology such as
intelligent storage and storage area networks, and provides database application
recovery solutions, leveraging the underlying storage management to help
customers achieve business availability goals. The solutions in this group are
facilitated through PATROL Storage Resource Manager and backup and recovery
products across all major database platforms. During fiscal 2001, we introduced
our Application-Centric Storage Management(TM) ("ACSM") initiative that allows
customers to manage their enterprise storage assets in a way that optimizes
application availability, performance and recoverability. By focusing on the
application itself to direct storage policies and procedures, ACSM directly
relates storage management to business processes.
Our Recovery & Storage Management solutions contributed approximately 18%,
18% and 16% of our license revenues in fiscal 1999, 2000 and 2001, respectively.
Other Software Solutions
Our other software solutions primarily include our security, enterprise
resource planning ("ERP"), network performance management, business information
integration, output management and service provider solutions. Our security
administration solutions facilitate user registration and password
administration and thereby enhance and strengthen the overall security of
e-business involvement. Our ERP solutions include a comprehensive set of tools
and utilities for SAP R/3 as well as other ERP applications. Our network
performance management solutions enable network managers to predict network
requirements and proactively manage network performance in a cost-effective and
timely manner. Our service provider solutions, which are built on the foundation
of our SiteAngel web transaction monitoring technology, provide comprehensive
service solutions to customers on a subscription basis for the remote
application of their web infrastructure.
Our other software solutions contributed approximately 4%, 8% and 10% of
our license revenues in fiscal 1999, 2000 and 2001, respectively.
SALES AND MARKETING
We market and sell our products principally through our direct sales force.
We supplement the efforts of our direct sales force with an indirect sales
channel. We have established channels operations groups worldwide to promote,
negotiate and support such distribution arrangements and are continuing to
invest in
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our channels infrastructure. We are also represented by local distributors in
geographical territories in which we have not established a direct sales
presence.
INTERNATIONAL OPERATIONS
Approximately 39%, 36% and 43% of our total revenues in fiscal 1999, 2000
and 2001, respectively, were derived from business outside North America. Our
international operations provide sales, sales support, product support,
marketing and product distribution services for our customers located outside of
North America. We also conduct development activities in Tel Aviv, Israel for
our INCONTROL and ERP products and in Aix en Provence, France for our network
management products. Our development operations in Singapore and Frankfurt,
Germany provide local language support, product internationalization and
integration with local-market hardware and software.
We believe that our operations outside the United States are located in
countries that are politically stable and that such operations are not exposed
to any special or unusual risks, except for the product development operations
in Israel, discussed below. Our growth prospects are highly dependent upon the
continued growth of our international license and software maintenance revenues,
and such revenues and expenses have been somewhat unpredictable in the past.
Revenues from our foreign subsidiaries are denominated in local currencies,
as are operating expenses incurred in these locales. To date, we have not had
any material foreign currency exchange losses. For a discussion of our currency
hedging program and the impact of currency fluctuations on international license
revenues in fiscal 2000 and 2001, see "Management's Discussion and Analysis of
Results of Operations and Financial Condition" and Note 1(f) to the Consolidated
Financial Statements contained herein. We have not previously experienced any
difficulties in exporting our products, but no assurances can be given that such
difficulties will not occur in the future.
We have a significant presence in the State of Israel where our INCONTROL
and ERP product development operations are located. We believe that Israel is
home to highly talented and experienced software developers and other personnel
and we intend to continue to invest in our Israeli operations. For a discussion
of various unusual risks associated with Israeli operations and investments, see
"Management's Discussion and Analysis of Results of Operations and Financial
Condition -- Certain Risks and Uncertainties That Could Affect Future Operating
Results -- Conditions in Israel."
RESEARCH AND PRODUCT DEVELOPMENT
In fiscal 2001, research and development spending, net of capitalized
amounts, represented 16% of total revenues and 18% of total operating expenses
(excluding acquired research and development, amortization of acquired
technology, goodwill and intangibles, and merger-related costs and compensation
charges). These costs related primarily to the compensation of research and
development personnel. Although we develop many of our products internally, we
may acquire technology from third parties when appropriate and may incur royalty
and other payment obligations in connection with such acquisitions.
Traditionally, we have acquired rights from third parties to use certain
technologies that we believed would accelerate development of new products. Our
expenditures on research and development and on product maintenance and support,
including amounts capitalized, in the last three fiscal years are discussed
below under the headings, "Management's Discussion and Analysis of Results of
Operations and Financial Condition -- Expenses -- Research and Development" and
"-- Expenses -- Cost of Maintenance Services and Product Licenses."
Our primary research and development activities are based in Houston and
Austin, Texas, Waltham, Massachusetts, San Jose, California, Tel Aviv, Israel
and Aix en Provence, France. We internally create and produce all user manuals,
sales materials and other documentation related to our products. Product
manufacturing and distribution is based in Houston, Texas, with European
manufacturing and distribution based in Dublin, Ireland, and Asia Pacific
manufacturing and distribution based in Singapore.
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MAINTENANCE, ENHANCEMENT AND SUPPORT SERVICES
Revenues from providing maintenance, enhancement and support services
comprised 29%, 28% and 35% of our total revenues in fiscal 1999, 2000 and 2001,
respectively. Payment of maintenance, enhancement and support fees entitles a
customer to telephone and Internet support and problem resolution services,
including proactive notification, electronic support requests and a resolution
database, and enhanced versions of a product released during the maintenance
period, including new versions necessary to run with the most current release of
the operating systems, databases and other software supported by the product.
Such maintenance fees are an important source of recurring revenue to us, and we
invest significant resources in providing maintenance services and new product
versions. These services are important to our customers who require immediate
problem resolution because of their use of our products to manage their
business-critical IT systems. The services are also necessary because customers
require forward compatibility when they install new versions of the software
systems supported by a BMC product.
PROFESSIONAL SERVICES
Our professional services group consists of a worldwide team of experienced
software consultants. During fiscal 2000 and 2001, we rapidly grew the
professional services group from less than 200 software consultants at the
beginning of fiscal 2000 to over 400 software consultants today, achieving a
critical mass in North America and Europe. Professional services contributed
approximately 2%, 3% and 6% of our revenues for fiscal 1999, 2000 and 2001,
respectively.
PRODUCT PRICING AND LICENSING
Our software solutions are generally licensed under either a tiered
computer license or under an enterprise license. Under a tiered computer
license, a customer is licensed to use the product on a single computer and the
license fee for a product increases in relation to the processing capacity of
the computer on which the product is installed. Under an enterprise license, the
customer is licensed to use the products across its enterprise, subject to
capacity limits such as the aggregate processing power of all the computers in
the case of products running on mainframe systems or the number of servers in
the case of products running on a distributed network. Under tiered pricing,
computers are classified according to their processing power with more powerful
computers falling into higher tiers and carrying higher license fees. In a
tiered computer license, a license upgrade fee is owed if a product is installed
on a more powerful computer that falls into a higher tier. In an enterprise
license, additional license fees are owed when the licensed capacity is
exceeded. Most of our largest customers have entered into enterprise license
agreements. Under both tiered and enterprise licenses, we negotiate discounts
from our list prices for our software solutions, primarily discounts for
multiple copies of a product and volume discounts for enterprise license
transactions.
We also have pricing and licensing models to address the management and
application service provider markets. We license our products to service
providers on a term basis and charge both a fixed price during the term and a
variable cost based on the number of end users the service provider services. We
recognize this revenue ratably over the term of the license. Also, our SiteAngel
subscription service is provided for a term fee based on the agreed number of
transaction types monitored and monitoring frequencies a customer utilizes. This
revenue is recognized ratably over the term of the service contract. We
anticipate that we will continue to introduce additional pricing and licensing
models to meet the needs of the marketplace, some of which may require us to
recognize revenue over time.
We recognize revenues from licenses and upgrade fees when both parties are
legally obligated under the terms of the respective agreement, the underlying
software products have been delivered, collection is deemed probable and there
are no remaining material obligations on our part. In certain agreements, we
have negotiated flexible terms and conditions to address specific customer
needs. Because the inclusion of such terms prevents upfront revenue recognition,
the license fees are either deferred to future periods when any contingencies
are satisfied or recognized ratably over the term of the contract. In addition
to our service provider solutions, from which 100% of the revenue is recognized
ratably over the term of the contract, we expect an increased amount of our
license revenue in fiscal 2002 to be either deferred or recognized ratably as
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compared with fiscal 2001 due to certain flexible terms and conditions included
in agreements. We recognize maintenance revenues, including maintenance bundled
with perpetual license fees, ratably over the maintenance period, and we
recognize professional services revenues as the services are provided.
We make extended payment terms for our products and services available to
qualifying customers for qualifying transactions. By providing such financing,
we allow our customers to better manage their IT expenditures and cash flows.
Our products are generally marketed on a trial basis. When a customer
desires to license a trial product, a permanent product copy or a coded password
to convert the trial tape to a permanent tape is provided. Consequently, we do
not have any material backlog of undelivered products. We license our software
products primarily on a perpetual basis.
COMPETITION
The enterprise management software business is highly competitive with
competition continually increasing, as discussed below and in the "Management's
Discussion and Analysis of Results of Operations and Financial Condition"
section of this report under the heading "Certain Risks and Uncertainties That
Could Affect Future Operating Results." There are several companies, including
IBM, Computer Associates and Microsoft, as well as large computer manufacturers
such as Sun and HP, which have substantially greater resources than we have, as
well as the ability to develop and market enterprise management solutions
similar to and competitive with the solutions offered by us. In addition, there
are numerous independent software companies that compete with one or more of our
software solutions. Although no company competes with us across our entire
software solution line, we consider at least 50 firms to be directly competitive
with one or more of our enterprise software solutions. In enterprise management,
database management, network management, application management, security, and
storage for the desktop, distributed and mainframe environments, there are
hundreds of companies whose primary business focus is on at least one but not
all of these solutions. Certain of these companies have substantially larger
operations than ours in these specific niches.
Our Enterprise Server Management unit competes directly with IBM. Certain
of our solutions operate primarily with IBM's IMS and DB2 database management
systems, IMS/TM and CICS transaction managers. Some of our solutions, including
our core IMS and DB2 database tools and utilities, are essentially improved
versions of system software utilities that are provided as part of these
integrated IBM system software products. IBM also markets separately priced
competing utilities in addition to its base utilities. Although we believe that
our solutions provide customers with greater functionally and added value,
product pricing is a key competitive factor in the market for third-party tools
and utilities for IMS and DB2.
We believe that the key criteria considered by potential purchasers of our
products are as follows: the operational advantages and cost savings provided by
a product; product quality and capability; product price and the terms on which
the product is licensed; ease of integration of the products with the
purchaser's existing systems; ease of product installation and use; quality of
support and product documentation; and the experience and financial stability of
the vendor.
CUSTOMERS
No single customer accounted for a material portion of our revenues during
any of the past three fiscal years. Our software products are generally used in
a broad range of industries, businesses and applications. Our customers include
manufacturers, telecommunications companies, financial service providers, banks,
insurance companies, educational institutions, retailers, distributors,
hospitals, government agencies and value-added resellers.
INTELLECTUAL PROPERTY
We distribute our products in object code form and rely upon contract,
trade secret, copyright and patent laws to protect our intellectual property.
The license agreements under which customers use our products
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restrict the customer's use to its own operations and prohibit disclosure to
third persons. We now distribute certain of our products on a shrink-wrap basis,
and the enforceability of such restrictions in a shrink-wrap license is unproven
in certain jurisdictions. Also, notwithstanding those restrictions, it is
possible for other persons to obtain copies of our products in object code form.
We believe that obtaining such copies would have limited value without access to
the product's source code, which we keep highly confidential. In addition, we
employ protective measures such as CPU dependent passwords, expiring passwords
and time-based trials.
EMPLOYEES
As of March 31, 2001, we had 7,330 full-time employees. We believe that our
continued success will depend in part on our ability to attract and retain
highly skilled technical, sales, marketing and management personnel. Competition
continues to increase for well-qualified software sales, development and
consulting personnel. We consider our employee relations to be excellent.
ITEM 2. PROPERTIES
Our headquarters and principal marketing and product development operations
are located in Houston, Texas, where we own and occupy four office buildings
totaling approximately 1,483,000 square feet. We also maintain development
organizations in various locations around the world where we lease the necessary
facilities, none of which are significant individually or in the aggregate.
ITEM 3. LEGAL PROCEEDINGS
On February 4, 2000, an action styled Dov Klein v. BMC Software, Inc.,
Richard P. Gardner, Stephen B. Solcher, Roy J. Wilson, Kevin M. Weiss, Kevin M.
Klausmeyer, Max P. Watson, Jr., William M. Austin, Wayne S. Morris, M. Brinkley
Morse, Robert E. Beauchamp, and Theodore W. Van Duyn, No. 00-CV-359, was filed
in the United States District Court for the Southern District of Texas, Houston
Division. The plaintiff alleges that BMC Software and eleven current and former
senior executives violated Sections 10(b) and 20(a) of the Securities Exchange
Act and Rule 10b-5. The plaintiff contends that BMC Software and the individual
defendants artificially inflated our stock price by extending unusual payment
terms to purchasers of our products, failing to disclose softening demand and
increasing competition for our products, and failing to disclose difficulties in
managing our sales force. The plaintiff seeks unspecified compensatory damages,
interest and costs, including legal fees. The action is subject to the Private
Securities Litigation Reform Act of 1995. On March 9, 2000, the court
consolidated four similar actions, ordered that all subsequently filed similar
actions be consolidated, and set out a briefing schedule. Subsequently, six
additional cases were filed that made similar allegations. These cases were also
consolidated into the main action. On August 14, 2000, the plaintiff filed a
consolidated amended complaint. This complaint alleges a class of all persons
who purchased BMC stock between July 29, 1999 and July 5, 2000. We have filed a
motion to dismiss the complaints and we intend to defend the consolidated action
vigorously. Briefing on the motion to dismiss is complete. At this early stage
of the litigation, it is not possible to estimate potential damages, but it
appears that if liability were established, an unfavorable judgment or
settlement could have a material adverse effect on our financial position and
results of operations.
We are subject to various other legal proceedings and claims, either
asserted or unasserted, which arise in the ordinary course of business.
Management does not believe that the outcome of any of these legal matters will
have a material adverse effect on our financial position or results of
operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not Applicable.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
From August 12, 1988 to March 12, 2001, our common stock was traded in the
NASDAQ National Market System under the symbol "BMCS." Since March 13, 2001, our
common stock has been traded on the New York Stock Exchange under the symbol
"BMC." At June 4, 2001, there were 1,671 holders of record of common stock.
The following table sets forth the high and low bid quotations per share of
common stock for the periods indicated.
PRICE RANGE OF
COMMON STOCK
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HIGH LOW
------ ------
FISCAL 2000
First Quarter............................................. $54.50 $30.00
Second Quarter............................................ 71.88 47.50
Third Quarter............................................. 84.06 50.25
Fourth Quarter............................................ 86.63 36.00
FISCAL 2001
First Quarter............................................. $51.38 $35.38
Second Quarter............................................ 36.81 16.13
Third Quarter............................................. 22.53 13.00
Fourth Quarter............................................ 33.00 13.50
The only dividends declared or paid since 1988 relate to BGS prior to our
acquisition of the company. We do not intend to pay any cash dividends in the
foreseeable future. We currently intend to retain any future earnings otherwise
available for cash dividends on the common stock for use in our operations, for
expansion and for stock repurchases. See "Management's Discussion and Analysis
of Results of Operations and Financial Condition -- Liquidity and Capital
Resources."
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ITEM 6. SELECTED FINANCIAL DATA
The following selected consolidated financial data presented under the
captions "Statement of Earnings Data" and "Balance Sheet Data" for, and as of
the end of, each of the years in the five-year period ended March 31, 2001, are
derived from the Consolidated Financial Statements of BMC Software, Inc. and its
subsidiaries. Our historical financial data has been restated to include the
historical financial results of Boole and BGS for each of the periods presented.
As BMC, Boole and BGS had different fiscal year ends, necessary adjustments have
been made to conform fiscal year ends for certain periods. As a result of the
adjustments made to conform the fiscal year ends for only the year ended March
31, 1999, in accordance with SEC regulations, the selected consolidated
statement of earnings data excludes the results of operations of Boole for the
six months ended March 31, 1998, which included total revenues of $106.5 million
and net earnings of $17.8 million and of BGS for the two months ended March 26,
1998, which included total revenues of $6.5 million and net loss of $8.0
million. The financial statements of BMC for all fiscal years presented have
been audited by Arthur Andersen LLP, independent public accountants, except for
the consolidated financial statements of Boole which were audited by Ernst &
Young LLP, independent public accountants. The selected consolidated financial
data should be read in conjunction with the Consolidated Financial Statements as
of March 31, 2000 and 2001, and for each of the three years in the period ended
March 31, 2001, the accompanying notes and the report of independent public
accountants thereon, which are included elsewhere in this Form 10-K.
YEARS ENDED MARCH 31,
----------------------------------------------------
1997 1998 1999 2000 2001
------ ------ -------- -------- --------
(IN MILLIONS, EXCEPT PER SHARE DATA)
STATEMENT OF EARNINGS DATA:
Total revenues............................ $791.9 $985.3 $1,303.9 $1,719.2 $1,504.0
Operating income (loss)................... 242.8 253.6 415.3 270.5 (8.5)
Net earnings.............................. $184.4 $188.5 $ 362.6 $ 242.5 $ 42.4
====== ====== ======== ======== ========
Basic earnings per share.................. $ 0.81 $ 0.82 $ 1.55 $ 1.01 $ 0.17
====== ====== ======== ======== ========
Diluted earnings per share................ $ 0.76 $ 0.77 $ 1.46 $ 0.96 $ 0.17
====== ====== ======== ======== ========
Shares used in computing basic earnings
per share............................... 226.5 229.8 234.3 241.0 245.4
====== ====== ======== ======== ========
Shares used in computing diluted earnings
per share............................... 241.5 244.5 248.6 253.0 252.5
====== ====== ======== ======== ========
AS OF MARCH 31,
--------------------------------------------------------
1997 1998 1999 2000 2001
-------- -------- -------- -------- --------
(IN MILLIONS, EXCEPT PER SHARE DATA)
BALANCE SHEET DATA:
Cash and cash equivalents.............. $ 127.1 $ 106.0 $ 347.9 $ 152.4 $ 146.0
Working capital........................ 114.5 96.4 222.6 12.3 73.7
Total assets........................... 1,104.8 1,498.1 2,282.7 2,962.1 3,033.9
Stockholders' equity................... 659.5 877.7 1,334.4 1,780.9 1,815.3
Dividends declared..................... 5.8 7.6 -- -- --
Dividends declared per share........... $ 0.03 $ 0.03 $ -- $ -- $ --
In April 1998, we announced that the board of directors approved a
two-for-one stock split (in the form of a dividend) that was payable to
stockholders of record on May 1, 1998 and was effective May 15, 1998. Share and
per share data presented here and throughout the Consolidated Financial
Statements, have been adjusted to give effect to this two-for-one split.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
INTRODUCTION
This section includes historical information, certain forward looking
information and the information provided below under the heading "Certain Risks
and Uncertainties That Could Affect Future Operating Results" about certain
risks and uncertainties that could cause our future operating results to differ
materially from the results indicated by any forward looking statements made by
us or others. It is important that the business discussion in Item 1 of this
report and the historical discussion below be read together with the discussion
of risks and uncertainties, and that these discussions be read in conjunction
with the accompanying Consolidated Financial Statements and notes thereto.
HISTORICAL INFORMATION
Historical performance should not be viewed as indicative of future
performance, as there can be no assurance that operating income (loss) or net
earnings as a percentage of revenues will be sustained at these levels. For a
discussion of factors affecting operating margins, see the discussions below
under the heading "Certain Risks and Uncertainties That Could Affect Future
Operating Results."
Acquisitions
In March 1999, we acquired Boole in a stock-for-stock merger. We issued
19.1 million shares of common stock in the transaction. The transaction was
accounted for using the pooling-of-interests method, and we have restated the
prior period financial results to include those of Boole for the periods
presented.
In April 1999, we acquired New Dimension in a cash tender offer. This
transaction was accounted for using the purchase accounting method and
accordingly, New Dimension's financial results have been included in our fiscal
2000 financial results since the acquisition date.
In April 2000, we acquired Evity for 1.6 million shares of common stock and
cash of $10 million. Stock options to purchase 0.4 million common shares were
issued to replace outstanding Evity stock options. In August 2000, we acquired
OptiSystems for cash. These transactions, along with various other immaterial
technology acquisitions, were accounted for using the purchase accounting method
and accordingly, the financial results for these entities have been included in
our fiscal 2001 financial results since the applicable acquisition dates.
Results of Operations
The following table sets forth, for the fiscal years indicated, the
percentages that selected items in the Consolidated Statements of Earnings and
Comprehensive Income bear to total revenues.
PERCENTAGE OF
TOTAL REVENUES
YEARS ENDED MARCH 31,
-----------------------
1999 2000 2001
----- ----- -----
Revenues:
License................................................... 69.6% 68.6% 59.3%
Maintenance............................................... 28.5 28.3 34.9
Professional services..................................... 1.9 3.1 5.8
----- ----- -----
Total revenues.................................... 100.0 100.0 100.0
Selling and marketing expenses.............................. 32.0 32.6 40.0
Research and development expenses........................... 12.6 12.4 15.6
Cost of maintenance services and product licenses........... 11.7 10.3 13.8
Cost of professional services............................... -- 4.3 6.3
General and administrative expenses......................... 7.3 7.9 11.0
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PERCENTAGE OF
TOTAL REVENUES
YEARS ENDED MARCH 31,
-----------------------
1999 2000 2001
----- ----- -----
Acquired research and development........................... 1.3 4.7 1.4
Amortization of acquired technology, goodwill and
intangibles............................................... 0.3 8.1 11.9
Legal settlement............................................ -- 3.2 --
Merger-related costs and compensation charges............... 3.0 0.8 0.6
----- ----- -----
Operating income (loss)................................... 31.8 15.7 (0.6)
Interest expense............................................ -- (1.3) (0.7)
Interest and other income, net.............................. 4.8 3.7 5.3
----- ----- -----
Other income, net......................................... 4.8 2.4 4.6
----- ----- -----
Earnings before income taxes.............................. 36.6 18.1 4.0
Income taxes................................................ 8.7 4.0 1.2
----- ----- -----
Net earnings before cumulative effect of accounting
change................................................. 27.9 14.1 2.8
Cumulative effect of accounting change, net of taxes........ (0.1) -- --
----- ----- -----
Net earnings.............................................. 27.8% 14.1% 2.8%
===== ===== =====
Revenues
PERCENTAGE CHANGE
--------------------------
YEARS ENDED MARCH 31, 2000 2001
-------------------------------- COMPARED TO COMPARED TO
1999 2000 2001 1999 2000
-------- -------- -------- ----------- -----------
(IN MILLIONS)
License:
North America.................... $ 557.1 $ 777.7 $ 483.5 39.6% (37.8)%
International.................... 349.8 402.5 408.7 15.1% 1.5%
-------- -------- --------
Total license revenues... 906.9 1,180.2 892.2 30.1% (24.4)%
-------- -------- --------
Maintenance:
North America.................... 218.5 294.5 330.8 34.8% 12.3%
International.................... 153.8 191.2 193.3 24.3% 1.1%
-------- -------- --------
Total maintenance
revenues............... 372.3 485.7 524.1 30.5% 7.9%
-------- -------- --------
Professional services:
North America.................... 17.3 32.3 47.7 86.7% 47.7%
International.................... 7.4 21.0 40.0 183.8% 90.5%
-------- -------- --------
Total professional
services revenues...... 24.7 53.3 87.7 115.8% 64.5%
-------- -------- --------
Total revenues........... $1,303.9 $1,719.2 $1,504.0 31.9% (12.5)%
======== ======== ========
We generate revenues from product license fees for our computer software
solutions, product maintenance and support fees for the associated maintenance,
enhancement and support of these solutions and professional services fees. We
generally recognize revenue from license fees upon the execution of a software
license agreement signed by both parties, the delivery of the underlying
products to the customer and the acceptance of such products by the customer,
determination that the software license fees are fixed and determinable and
determination that collection of the fees is probable. In instances when any one
of the four revenue recognition criteria are not met, license revenue is either
deferred until the criteria are met or is deferred and recognized on a ratable
basis. Maintenance and support fees are recognized ratably over the maintenance
term as defined in the applicable software license agreement and professional
services fees are
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recognized as the services are provided. For further discussion of our revenue
recognition policies, refer to the discussion below and to Note 1(h) to the
Consolidated Financial Statements contained herein.
Total revenue growth of 32% in fiscal 2000 resulted from revenues generated
by our Enterprise Server Management solutions, particularly those for DB2, our
Application & Database Performance Management product lines, the addition of the
New Dimension INCONTROL products in a purchase accounting transaction and, to a
lesser extent, growth of product maintenance and services fees. Excluding
incremental revenues associated with New Dimension, total revenue growth was
approximately 23% for fiscal 2000. The total revenue decline of 13% in fiscal
2001 resulted primarily from a decrease in enterprise license transactions
during the year and a reduction in license upgrade fees as discussed under
Product License Revenues below. Demand weakness was experienced across the board
during fiscal 2001 by independent software vendors with mainframe product
portfolios. We believe that this indicates that external market factors
contributed significantly to this weakness. While it is impossible to assign
weights to any individual factors, market factors that may have contributed to
this weakness and the resultant negative effect on license revenues experienced
by us and our competitors included uncertainties associated with the roll-out of
IBM's Z-series mainframe product family and workload-based pricing model and
continued customer absorption of capacity purchased in association with Year
2000 compliance programs. These factors also impacted revenues for our other
products because many of our mainframe customers are also customers of our other
products and sometimes purchase these other products together with mainframe
products in enterprise solutions. Revenues from companies we acquired in
purchase accounting transactions during fiscal 2001 did not provide a
significant offset to the revenue declines discussed above. Though fiscal 2001
revenues were down in all quarters compared to the prior year, revenues in the
third and fourth quarters of fiscal 2001 showed sequential growth over the
immediately preceding quarters. Product revenue growth was only nominally
impacted by price increases and inflation in fiscal 2000 and 2001.
Product Line Revenues
PERCENTAGE CHANGE
--------------------------
YEARS ENDED MARCH 31, 2000 2001
-------------------------------- COMPARED TO COMPARED TO
1999 2000 2001 1999 2000
-------- -------- -------- ----------- -----------
(IN MILLIONS)
Enterprise Server Management....... $ 702.2 $ 770.3 $ 603.0 9.7% (21.7)%
Business Integrated Scheduling..... 23.7 92.8 112.1 291.6% 20.8%
Application & Database Performance
Management....................... 284.4 394.1 338.6 38.6% (14.1)%
Recovery & Storage Management...... 223.4 297.8 242.2 33.3% (18.7)%
Other Software..................... 45.5 110.9 120.4 143.7% 8.6%
-------- -------- --------
Total license &
maintenance revenues... $1,279.2 $1,665.9 $1,416.3 30.2% (15.0)%
======== ======== ========
We market over 450 software solutions designed to improve the availability,
performance and recoverability of enterprise applications, databases and other
IT systems components operating in mainframe, distributed computing and Internet
environments. These solutions fall into the five broad categories above. In
managing our investment in these product categories we consider each to be
included in one of three strategic groups. The first group includes our
Enterprise Server Management and Business Integrated Scheduling solutions. Our
objective for this group is to extend our core strengths in these markets. The
second strategic group includes our Application & Database Performance
Management and Recovery & Storage Management solutions. Our objective for this
group is to build our business in fast-growing markets. The last group includes
our other software products, such as our security, ERP, network management,
business information integration, output management and service provider
solutions. The objective for this group is to make strategic investments in what
we anticipate will be sources of future growth.
Our Enterprise Server Management and Business Integrated Scheduling
solutions combined represented 57%, 52% and 51% of total software revenues for
fiscal 1999, 2000 and 2001, respectively. Total software
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revenues for this group grew 19% from fiscal 1999 to fiscal 2000 and declined
17% from fiscal 2000 to fiscal 2001. Revenue growth in fiscal 2000 included the
9% impact of the acquisition of New Dimension and its scheduling products.
Because this group includes a high proportion of mainframe solutions, the
external market factors discussed above were the primary cause of the revenue
decline in fiscal 2001, more than offsetting the revenue growth for our Business
Integrated Scheduling solutions.
Our Application & Database Performance Management and Recovery & Storage
Management solutions combined contributed 40%, 41% and 41% of total software
revenues for fiscal 1999, 2000 and 2001, respectively. Total software revenues
for this group grew 36% from fiscal 1999 to fiscal 2000 and declined 16% from
fiscal 2000 to fiscal 2001. Revenue growth in fiscal 2000 primarily related to
Recovery & Storage Management and PATROL products. Though this group does not
include a significant proportion of mainframe products, fiscal 2001 revenues for
these solutions were negatively impacted by the reduction in enterprise license
transactions as discussed above.
Our other software solutions contributed 3%, 7% and 8% of total software
revenues for fiscal 1999, 2000 and 2001, respectively. Total software revenues
for this group grew 144% from fiscal 1999 to fiscal 2000 and 9% from fiscal 2000
to fiscal 2001. Fiscal 2000 growth included the 81% impact of the acquisition of
New Dimension and its security and output management products. Fiscal 2001
growth includes increases in revenue from our security solutions and from our
acquisitions of Evity in April 2000 and OptiSystems in August 2000.
Product License Revenues
Our product license revenues consist of product license fees and license
upgrade fees. Product license fees are all fees associated with a customer's
licensing of a given software product for the first time. License upgrade fees
are all fees associated with a customer's purchase of the right to run a
previously licensed product on a larger computer or computers. License upgrade
fees are primarily generated by our mainframe products and include fees
associated both with current and future additional processing capacity.
Our North American operations generated 61%, 66% and 54% of total license
revenues in fiscal 1999, 2000 and 2001, respectively. North American license
revenues increased 40% from fiscal 1999 to 2000 and decreased 38% from fiscal
2000 to fiscal 2001. Application & Database Performance Management product
license fees were the largest contributor of growth from fiscal 1999 to fiscal
2000, followed by increased capacity-based license upgrade fees. The largest
revenue decline in fiscal 2001 related to decreased capacity-based license
upgrade fees.
International license revenues represented 39%, 34% and 46% of total
license revenues in fiscal 1999, 2000 and 2001, respectively. International
license revenues increased 15% from fiscal 1999 to 2000 and 2% from fiscal 2000
to fiscal 2001. Increased licensing of our Application & Database Performance
Management solutions was the largest contributor of growth from fiscal 1999 to
fiscal 2000, followed by capacity-based license upgrade fees. Fiscal 2001 growth
in Application & Database Performance Management license fees was partially
offset by decreases in Enterprise Server Management license and upgrade fees.
International license revenues were decreased by 4% due to foreign currency
exchange rate changes from fiscal 1999 to fiscal 2000 and by 2% from fiscal 2000
to fiscal 2001, after giving effect to our foreign currency hedging program.
Maintenance and Support Revenues
Maintenance and support revenues represent the ratable recognition of fees
to enroll licensed products in our software maintenance, enhancement and support
program. Maintenance and support enrollment entitles customers to product
enhancements, technical support services and ongoing compatibility with
third-party operating systems, database management systems and applications.
These fees are generally charged annually and equal 15% to 20% of the discounted
price of the product. In addition, customers are entitled to reduced maintenance
percentages for prepayment of annual maintenance fees. Maintenance revenues also
include the ratable recognition of the bundled fees for any first-year
maintenance services covered by the related perpetual license agreement.
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Maintenance revenues have increased over the last three fiscal years as a
result of the continuing growth in the base of installed products and the
processing capacity on which they run. Maintenance fees increase in proportion
to the aggregate processing capacity on which the products are installed;
consequently, we receive higher absolute maintenance fees as customers install
our products on additional processing capacity. Due to the increased discounting
for higher levels of additional processing capacity, the maintenance fees on a
per MIPS basis are typically reduced in enterprise license agreements for
mainframe products. Historically, we have enjoyed high maintenance renewal rates
for our mainframe-based products. Should customers migrate from their mainframe
applications or find alternatives to our products, increased cancellations could
adversely impact the sustainability and growth of our maintenance revenues. To
date, we have been successful in extending our traditional maintenance and
support pricing model to the distributed systems market.
Professional Services Revenues
Professional services revenues, representing fees from implementation,
integration and education services, performed during the period, have increased
over the last three fiscal years, more than doubling from fiscal 1999 to fiscal
2000 and increasing 65% from fiscal 2000 to fiscal 2001. Our professional
services headcount has increased significantly throughout these years to meet
the increasing demand for our expanding service offerings.
Expenses
PERCENTAGE CHANGE
--------------------------
YEARS ENDED MARCH 31, 2000 2001
------------------------------ COMPARED TO COMPARED TO
1999 2000 2001 1999 2000
------ -------- -------- ----------- -----------
(IN MILLIONS)
Selling and marketing............... $417.7 $ 559.7 $ 600.7 34.0% 7.3%
Research and development............ 163.9 213.2 234.7 30.1% 10.1%
Cost of maintenance services and
product licenses.................. 152.0 177.2 207.9 16.6% 17.3%
Cost of professional services....... -- 74.1 95.5 n/a 28.9%
General and administrative.......... 95.1 135.1 165.5 42.1% 22.5%
Acquired research and development... 17.3 80.8 21.4 367.1% (73.5)%
Amortization of acquired technology,
goodwill and intangibles.......... 4.3 139.1 178.2 n/a 28.1%
Legal settlement.................... -- 55.4 -- n/a (100.0)%
Merger-related costs and
compensation charges.............. 38.3 14.1 8.6 (63.2)% (39.0)%
------ -------- --------
Total operating
expenses................ $888.6 $1,448.7 $1,512.5
====== ======== ========
Selling and Marketing
Our selling and marketing expenses include personnel and related costs,
sales commissions and costs associated with advertising, industry trade shows
and sales seminars, and represented 32%, 33% and 40% of total revenues in fiscal
1999, 2000 and 2001, respectively. In fiscal 1999, the cost of our professional
services business is included in selling and marketing expenses as such costs
were not accounted for separately that year. Personnel costs and sales
commissions were the largest single contributor to the expense growth in fiscal
2000 and 2001. Selling and marketing year-end headcount increased 53% from the
end of fiscal 1999 to the end of fiscal 2000 and 5% from the end of fiscal 2000
to the end of fiscal 2001. These increases for both years were primarily
attributable to increases in our distributed systems sales representatives,
technical sales support consultants and administrative support personnel. The
fiscal 2000 increase also included the addition of New Dimension personnel.
Sales commissions increased in fiscal 2000 as a result of the 30% increase in
license revenues and commission plan adjustments during the year. Sales
commissions also increased from fiscal 2000 to fiscal 2001 even though fiscal
2001 license revenues declined. Sales commissions were impacted by sales
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incentives implemented in the last half of the year. Marketing costs have
continued to increase to meet the requirements of marketing a greater number of
increasingly complex distributed systems solutions and to support a growing
indirect distribution channel. Selling and marketing expenses were further
impacted in fiscal 2000 by a major re-branding effort and higher levels of
expenses for travel and office rent that year, and in fiscal 2001 by the costs
associated with our first global users conference and increased consulting fees
for implementation of a customer relationship management system.
Research and Development
Research and development expenses mainly comprise personnel costs related
to software developers and development support personnel, including software
programmers, testing and quality assurance personnel and writers of technical
documentation such as product manuals and installation guides. These expenses
also include computer hardware/software costs and telecommunications expenses
necessary to maintain our data processing center. Increases in our research and
development expenses for fiscal 2000 and 2001 were primarily the result of
increased compensation costs associated with both software developers and
development support personnel, as well as associated benefits and facilities
costs. We increased our headcount in the research and development organization
25% from the end of fiscal 1999 to the end of fiscal 2000, including the
addition of New Dimension personnel, and 11% from the end of fiscal 2000 to the
end of fiscal 2001, including the addition of personnel from acquired companies.
Research and development costs were reduced in all three fiscal years by amounts
capitalized in accordance with Statement of Financial Accounting Standards
(SFAS) No. 86, "Accounting for the Costs of Computer Software to Be Sold,
Leased, or Otherwise Marketed." We capitalize our software development and
purchased software costs when the projects under development reach technological
feasibility as defined by SFAS No. 86. During fiscal 1999, 2000 and 2001, we
capitalized approximately $76.0 million, $102.7 million and $112.2 million,
respectively, of software development and purchased software costs. The growth
in capitalized costs is primarily due to increases in distributed systems
product development and platform compatibility efforts.
Cost of Maintenance Services and Product Licenses
Cost of maintenance services and product licenses consists of amortization
of purchased and internally developed software, costs associated with the
maintenance, enhancement and support of our products and royalty fees.
Maintenance, enhancement and support costs have increased as a percentage of
maintenance fees as our product revenue mix shifts to distributed systems, which
require a higher level of support. We amortized $40.8 million, $40.2 million and
$60.2 million in fiscal 1999, 2000 and 2001, respectively, of capitalized
software development and purchased software costs pursuant to SFAS No. 86. In
these periods, we expensed $15.9 million, $8.2 million and $16.5 million,
respectively, of capitalized software costs to accelerate the amortization of
certain software products. These software products were not expected to generate
sufficient future revenues which would be necessary for us to realize the
carrying value of the assets. We expect our cost of maintenance services and
product licenses will continue to increase as we capitalize a higher level of
software development costs and as we build our distributed systems product
support organization, which is less cost-effective than our mainframe support
organization because of the complexity and variability of the environments in
which the products operate. The distributed systems products operate in a high
number of operating environments, including operating systems, database
management systems and ERP applications, and require greater ongoing platform
support development activity relative to our mainframe products.
Cost of Professional Services
Cost of professional services consists primarily of personnel costs
associated with implementation, integration and education services that we
perform for our customers, and the related infrastructure to support this
business. The cost of professional services for fiscal 1999 is included in
selling and marketing expenses as such costs were not accounted for separately
during that year. The increase in these costs from fiscal 2000 to fiscal 2001
resulted from increased headcount to support the 65% growth in professional
services revenues during that period.
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General and Administrative
General and administrative expenses are comprised primarily of compensation
and personnel costs within executive management, finance and accounting,
facilities management and human resources. Other costs included in general and
administrative expenses are fees paid for legal and accounting services,
consulting projects, insurance, costs of managing our foreign currency exposure
and bad debt expense related to maintenance billings. Growth in general and
administrative expenses for fiscal 2000 was primarily attributable to increased
personnel costs, increased contracted services fees and higher costs associated
with the infrastructure to support our growth through that year. The expense
growth in fiscal 2001 primarily related to increased personnel costs, including
$5.1 million of severance costs for management personnel who terminated their
employment during the fourth quarter of that year. This severance amount
included cash and restricted stock expense. Fiscal 2001 expense growth also
included higher bad debt expense in the fourth quarter related to maintenance
billings. Fiscal year end headcount within the general and administrative
organizations grew 20% from fiscal 1999 to fiscal 2000 and 13% from fiscal 2000
to fiscal 2001.
Acquired Research and Development
In executing our product strategies, we employ both internal research and
development and the acquisition of emerging technologies and, in the case of
Boole, BGS and New Dimension, established software companies. We believe that
time-to-market is critical to our success in the rapidly evolving distributed
systems software market, where we must compete with well-established companies
such as IBM, and where our products must integrate with the predominate database
management systems, operating systems, network protocols and applications within
the enterprise computing environment. Accordingly, we must continuously evaluate
whether it is more efficient and effective to develop a given solution
internally or acquire a technology that must be completed and then integrated
into our existing product architecture. The acquired technology companies are
often small, early stage software companies with minimal to no revenues, quality
and documentation standards and name recognition in the marketplace. This
strategy involves a high degree of risk and is costly in that a premium is
typically paid for software code that is incomplete and only partially
contributes to our overall development plans. Over the last several years, some
of the acquired technologies were successfully completed and integrated, while
others were not.
The following table presents information concerning the purchase price
allocations for the acquisitions accounted for under the purchase method for
fiscal 1999, 2000 and 2001.
ACQUIRED ACQUIRED GOODWILL TOTAL
TECHNOLOGY IPR&D AND OTHER PRICE
---------- -------- --------- ------
(IN MILLIONS)
Fiscal 1999:
Nastel and Envive................................ $ 3.8 $17.3 $ 2.6 $ 23.7
------ ----- ------ ------
$ 3.8 $17.3 $ 2.6 $ 23.7
====== ===== ====== ======
Fiscal 2000:
New Dimension.................................... $126.3 $80.8 $465.9 $673.0
------ ----- ------ ------
$126.3 $80.8 $465.9 $673.0
====== ===== ====== ======
Fiscal 2001:
Evity............................................ $ 2.5 $ 7.0 $ 57.8 $ 67.3
OptiSystems...................................... 6.3 6.0 59.2 71.5
Others........................................... 14.5 3.7 18.2 36.4
------ ----- ------ ------
$ 23.3 $16.7 $135.2 $175.2
====== ===== ====== ======
In April 1999, we acquired through a public tender offer in excess of 95%
of the outstanding ordinary shares of New Dimension. Total consideration paid
approximated $673.0 million, including the cost of the remaining 5% of
outstanding shares acquired during fiscal 2000 and the historical cost of
approximately $2.0 million for shares of New Dimension previously owned by
Boole. We allocated $126.3 million to software
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assets, $435.9 million to goodwill and other intangibles and $30.0 million to
equipment, receivables and other non-software assets, net of liabilities
assumed. We allocated $80.8 million, or 12% of the purchase price, to in-
process research and development ("IPR&D"), which represents the present value
of the estimated after-tax cash flows expected to be generated by the purchased
technology, which, at the acquisition date, had not yet reached technological
feasibility nor had an alternative future use.
At the acquisition date, New Dimension was conducting design, development,
engineering and testing activities in the following areas:
- Integrated Operations Architecture(R) for the Enterprise, which was to be
the supporting infrastructure for all of the distributed systems products
from New Dimension. This project, as originally intended, was cancelled
as we determined it was more appropriate to gradually extend the existing
distributed systems infrastructure rather than replace it.
- Expansion of the Output Management product family to include products for
distributed systems.
- E-business enablement, the development of the infrastructure necessary to
"Internet-ize" the entire New Dimension product family.
- Security, including additional features and add-on applications for
existing security applications.
- Enhancements to the CONTROL-M(R), CONTROL-D(R), CONTROL-SA(R) and
Enterprise Controlstation(R) products.
As of the date of the New Dimension acquisition, we concluded that the
in-process technology had no alternative future use after taking into
consideration the potential use of the technology in different products, the
stage of development and life cycle of each project, resale of the software and
internal use. As such, the value of the purchased IPR&D was expensed at the time
of the acquisition. As of March 31, 2001, the Integrated Operations Architecture
for the Enterprise project has been cancelled; of the remaining projects,
certain have been completed and the related products are generally available,
others have been released as beta versions for customer testing and evaluation,
and the remainder are still in process. We intend to continue devoting effort to
developing commercially viable products from the purchased IPR&D, although we
may not develop such commercially viable products. All of the foregoing
estimates and projections were based on assumptions we believed to be reasonable
at the time, but which were inherently uncertain and unpredictable.
On April 25, 2000, we acquired all of the outstanding shares of Evity in a
transaction accounted for as a purchase. The aggregate purchase price totaled
$67.3 million, including cash consideration of $10.0 million, 1.0 million shares
of common stock, 0.4 million common stock options and transaction costs, and was
allocated as follows: $2.5 million to acquired technology, $57.8 million to
goodwill and other intangibles and $7.0 million (10% of the purchase price) to
purchased in-process research and development. Net tangible assets acquired were
insignificant. The amount allocated to purchased IPR&D represents the estimated
fair value, based on risk-adjusted cash flows, related to Evity's research and
development projects not yet completed. At the date of acquisition, the
development of these projects had not yet reached technological feasibility, and
the research and development in progress had no alternative future uses.
Accordingly, these costs were expensed as of the acquisition date, during the
quarter ended June 30, 2000.
At the acquisition date, Evity was conducting design, development,
engineering and testing activities associated with the completion of SiteAngel
2.0, an enhanced version of Evity's SiteAngel website performance monitoring
product, as well as new technologies in the areas of load testing and network
infrastructure. The projects under development at the valuation date represented
next-generation technologies that are expected to address emerging market
demands for the Web performance market.
At the acquisition date, the technologies under development were
approximately 45% complete based on engineering man-month data and technological
progress. Evity had incurred nearly $1.0 million on the in-process projects and
expected to spend approximately $1.3 million to complete all phases of the
research and development. Anticipated completion dates ranged from 4 to 18
months, at which times we expected to begin benefiting from the developed
technologies. We completed SiteAngel 2.0 during fiscal 2001 and project costs
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were materially consistent with management's estimates at the acquisition date.
Also during fiscal 2001, the remaining projects in-process at the acquisition
date were suspended indefinitely.
On August 8, 2000, we acquired all of the outstanding shares of OptiSystems
in a transaction accounted for as a purchase. The aggregate purchase price
totaled $71.5 million in cash, including transaction costs, and was allocated as
follows: $6.3 million to acquired technology, $55.2 million to goodwill and
other intangibles, $4.0 million to equipment, receivables and other non-software
assets, net of liabilities assumed, and $6.0 million (8% of the purchase price)
to purchased in-process research and development. The amount allocated to
purchased IPR&D represents the estimated fair value, based on risk-adjusted cash
flows, related to OptiSystems' incomplete research and development projects. At
the date of acquisition, the development of these projects had not yet reached
technological feasibility, and the research and development in progress had no
alternative future uses. Accordingly, these costs were expensed as of the
acquisition date, during the quarter ended September 30, 2000.
At the acquisition date, OptiSystems was conducting design, development,
engineering and testing activities associated with the completion of several
components of its Energizer(R) for R/3 product. The projects under development
at the valuation date represent next-generation technologies that are expected
to address emerging market demands for the enterprise application performance
market.
At the acquisition date, the technologies under development were
approximately 50% complete based on engineering man-month data and technological
progress. OptiSystems had incurred approximately $1.0 million on the in-process
projects, and expected to spend approximately $1.2 million to complete all
phases of the research and development. Anticipated completion dates ranged from
2 to 11 months, at which times we expected to begin benefiting from the
developed technologies. Certain of the projects have been completed and the
remainder are still in process and project costs have been materially consistent
with management's estimates at the acquisition date. We intend to continue
devoting effort to developing commercially viable products from the IPR&D,
although we may not develop such commercially viable products.
The Company completed other immaterial acquisitions during the year ended
March 31, 2001, which were accounted for under the purchase method. The
aggregate purchase price for these transactions totaled $36.1 million in cash
and $0.3 million in common stock options, and was allocated as follows: $14.5
million to acquired technology, $18.2 million to goodwill and other intangibles
and $3.7 million (10% of the aggregate purchase price) to purchased in-process
research and development. Net tangible assets acquired were insignificant.
In making our purchase price allocations, we considered present value
calculations of income, analyses of project accomplishments and remaining
outstanding items, assessments of overall contributions, as well as project
risks. The values assigned to purchased in-process technology were determined by
estimating the costs to develop the acquired technology into commercially viable
products, estimating the resulting net cash flows from the projects, and
discounting the net cash flows to their present value. The revenue projections
used to value the in-process research and development were based on estimates of
relevant market sizes and growth factors, expected trends in technology, and the
nature and expected timing of new product introductions by us and our
competitors. The resulting net cash flows from such projects are based on our
estimates of cost of sales, operating expenses, and income taxes from such
projects.
In the present value calculations, aggregate revenues for the New
Dimension, Evity and OptiSystems developed, in-process and future products were
estimated to grow at compounded annual growth rates of approximately 38%, 155%
and 43%, respectively, for the four years, five years and five years following
acquisition, respectively, assuming the successful completion and market
acceptance of the major current and future research and development programs.
The estimated revenues for the in-process projects were expected to peak within
three years of acquisition and then decline sharply as other new products and
technologies are expected to enter the market.
The rates utilized to discount the net cash flows to their present value
were based on cost of capital calculations and venture capital rates of return.
Due to the nature of the forecasts and risks associated with the projected
growth and profitability of the developmental projects, discount rates of 20% to
30% were used to
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value the acquired IPR&D for the various acquisitions during fiscal 2000 and
fiscal 2001. Specifically, discount rates of 20%, 30% and 25% were used to value
the acquired IPR&D for New Dimension, Evity and OptiSystems, respectively. Rates
of 15%, 20% and 20% were used in discounting the cash flows associated with the
respective developed technologies. These discount rates were commensurate with
the respective stage of development and the uncertainties in the economic
estimates described above.
If the acquired IPR&D projects are not successfully completed, our
business, operating results and financial condition may be materially adversely
affected in future periods. In addition, the value of other intangible assets
acquired may become impaired. We are continuously monitoring our development
projects. We believe that the assumptions used in the valuation of purchased
in-process technology represent a reasonably reliable estimate of the future
benefits attributable to the purchased in-process technology. No assurance can
be given that actual results will not deviate from those assumptions in future
periods.
The IPR&D charge for fiscal 2001 also includes the write-off of assets
totaling $4.7 million related to a technology agreement with Envive Corporation
that was terminated during the first quarter of fiscal 2001.
Amortization of Acquired Technology, Goodwill and Intangibles
Under the purchase accounting method for certain of our acquisitions,
portions of the purchase prices were allocated to goodwill, workforce, customer
base, software and other intangible assets. We are amortizing these intangibles
over three to five-year periods, which reflect the estimated useful lives of the
respective assets. The increase in amortization expense from fiscal 1999 to
fiscal 2000 is related to the acquisition of New Dimension in April 1999, and
the increase from fiscal 2000 to fiscal 2001 is related to the Evity,
OptiSystems and other acquisitions completed during fiscal 2001.
Legal Settlement
In October 1999, we settled all claims in a lawsuit styled BMC Software,
Inc., plaintiff, vs. Peregrine/ Bridge Transfer Corp., Skunkware, Inc., Neon
Systems, Inc., Peregrine Systems, Inc., Wayne E. Fisher and John J. Moores,
defendants, vs. BMC Software, Inc. and Max P. Watson, counter-defendants. See
Note 10 to the Consolidated Financial Statements contained herein.
Merger-Related Costs and Compensation Charges
Pursuant to the close of our merger with Boole in March, 1999, management
approved a formal plan of restructuring (the Plan) which included steps to be
taken to fully integrate the operations of the two companies, consolidate
duplicate facilities, and eliminate redundant positions to achieve reductions in
overhead expenses in future periods. In connection with the merger and the Plan,
at March 31, 1999 we accrued approximately $38.3 million in merger-related
costs. This accrual included direct transaction costs, such as investment
banking, legal and accounting fees, and approximately $5 million for settlement
of a suit brought against Boole for allegedly breaching a standstill and
exclusive negotiating agreement with Platinum Technology International, Inc. The
remainder of the accrual represented management's best estimate, based on
available information as of March 31, 1999, of identifiable and quantifiable
charges we would incur as a result of the actions to be taken under the Plan.
The accrued restructuring charges at March 31, 1999 included estimates of
involuntary termination benefits for 50 domestic employees and 30 international
employees, located primarily in Europe, including the executive management of
Boole and various redundant administrative and support personnel. The accrual
also included charges for incremental costs to exit certain office lease
arrangements, for idle facilities and for asset writedowns of office furniture
and fixtures and computer hardware. During fiscal 2000, we made certain
revisions to the Plan including the following: the termination of approximately
240 additional employees, primarily in the United States and Europe; the accrual
of other termination benefits which were contingent upon certain performance
criteria; revisions to the original exit strategy for certain operating leases
for office space in the United States and Europe; and the accrual of termination
costs for certain operating leases for computer hardware and equipment.
Additionally, in conjunction with the New Dimension acquisition, we accrued
estimated costs to terminate certain operating
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leases for duplicate office space. The activity in the accrual for
merger-related costs for the year ended March 31, 2000, was as follows:
BALANCE AT PAID OUT OR BALANCE AT
MARCH 31, REVISION OF CHARGED AGAINST MARCH 31,
1999 THE ACCRUAL THE RELATED ASSETS 2000
---------- ----------- ------------------ ----------
(IN MILLIONS)
Direct transaction costs................... $20.6 $ 2.5 $(23.1) $ --
Facility costs and write-down of fixed
assets to be disposed of................. 10.2 (1.5) (5.3) 3.4
Employee termination benefits.............. 7.0 10.5 (14.3) 3.2
Other merger-related costs................. 0.5 2.6 (3.1) --
----- ----- ------ ----
Total accrual.................... $38.3 $14.1 $(45.8) $6.6
===== ===== ====== ====
The restructuring plan was substantially complete as of March 31, 2000.
During the year ended March 31, 2001, the Company paid certain termination and
facility costs and revised the estimate of remaining obligations as follows:
BALANCE AT BALANCE AT
MARCH 31, REVISION OF MARCH 31,
2000 THE ACCRUAL PAID OUT 2001
---------- ----------- -------- ----------
(IN MILLIONS)
Facility costs................................... $3.4 $(0.8) $(2.6) $ --
Employee termination benefits.................... 3.2 (2.0) (0.1) 1.1
---- ----- ----- ----
Total accrual.......................... $6.6 $(2.8) $(2.7) $1.1
==== ===== ===== ====
The remaining accrual relates to severance payments to be made in future
periods.
Other Income, net
Other income, net consists primarily of interest earned on cash and cash
equivalents, investment securities and to a lesser degree, financed receivables
and interest expense on short-term borrowings. Other income, net decreased 35%
from fiscal 1999 to 2000 and increased 68% from fiscal 2000 to 2001. The
decrease in fiscal 2000 is primarily due to interest expense of $23.4 million
incurred on short-term borrowings to fund the New Dimension acquisition. Other
income for fiscal 2001 includes a $2.9 million one-time gain related to the sale
of a financial instrument and a one-time $6.3 million gain related to a real
estate transaction. The remaining increases in other income, net for fiscal 2001
are primarily due to decreased interest expense on short-term borrowings.
Income Taxes
We recorded income tax expense of $113.8 million, $68.9 million and $18.0
million in fiscal 1999, 2000 and 2001, respectively. Our effective tax rates
were 24%, 22% and 30% for fiscal years 1999, 2000 and 2001, respectively. During
fiscal 1999, we recorded a non-recurring benefit to our provision for income
taxes to reflect a settlement with the Internal Revenue Service. During fiscal
2000, the decreased effective income tax rate is the result of lower taxes
associated with our European operations and the effect of tax exempt interest on
certain investments. The increase in the effective tax rate for fiscal 2001 is
primarily the result of acquisition-related charges during the year that are not
deductible for tax purposes. For further discussion of the non-recurring benefit
in fiscal 1999 and an analysis of the differences between the statutory and
effective income tax rates, see Note 7 to the Consolidated Financial Statements
contained herein.
Earnings per Share
Basic earnings per share was $1.55, $1.01 and $0.17 in fiscal 1999, 2000
and 2001, respectively. Diluted earnings per share was $1.46, $0.96 and $0.17,
respectively. The changes in earnings per share over the three years primarily
resulted from the factors discussed above. Earnings per share in fiscal 2000
were also impacted
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by an increase in weighted average shares outstanding, while weighted average
shares outstanding remained flat from fiscal 2000 to fiscal 2001.
Workforce Reduction Subsequent to Yearend
Subsequent to March 31, 2001, we reduced our workforce by approximately 6%
worldwide. The action was across all divisions and geographies and affected
employees received separation packages. As a result of this action, we will
incur a one-time restructuring charge estimated to be approximately $14 million
in the first quarter of fiscal 2002.
Recently Issued Accounting Pronouncements
In September 2000, the Financial Accounting Standards Board issued SFAS No.
140, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities -- A Replacement of FASB Statement No. 125." This
Statement revises the standards for accounting for securitizations and other
transfers of financial assets and collateral and requires certain disclosures,
but it carries over most of SFAS No. 125's provisions without reconsideration.
SFAS No. 140 is effective for transfers and servicing of financial assets and
extinguishments of liabilities occurring after March 31, 2001. It is effective
for recognition and reclassification of collateral and for disclosures relating
to securitization transactions and collateral for fiscal years ending after
December 15, 2000. Such disclosures are included in Note 4 to the Consolidated
Financial Statements contained herein. We believe that adoption of SFAS No. 140
will not have a material effect on our financial position or results of
operations.
Quarterly Results
The following table sets forth certain unaudited quarterly financial data
for the fiscal years ended March 31, 2000 and 2001. This information has been
prepared on the same basis as the Consolidated Financial Statements and all
necessary adjustments have been included in the amounts stated below to present
fairly the selected quarterly information when read in conjunction with the
Consolidated Financial Statements and Notes thereto.
Our quarterly results are subject to seasonality and can be volatile and
difficult to predict accurately prior to a quarter's end as discussed under
"Certain Risks and Uncertainties That Could Affect Future Operating Results."
Historical quarterly financial results and trends may not be indicative of
future results.
QUARTERS ENDED
----------------------------------------------------------------------------------------------
JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31,
1999 1999 1999 2000 2000 2000 2000 2001
-------- --------- -------- -------- -------- --------- -------- --------
(IN MILLIONS, EXCEPT PER SHARE DATA)
Total revenues............ $400.7 $415.7 $426.4 $476.4 $372.7 $323.0 $385.5 $422.8
Selling and marketing
expenses................ 127.0 136.4 139.5 156.8 152.2 132.8 154.4 161.3
Research and development
expenses................ 57.5 49.3 54.6 51.8 57.5 59.1 56.6 61.5
Cost of maintenance
services and product
licenses................ 37.2 40.9 43.7 55.4 49.1 51.1 54.6 53.1
Cost of professional
services................ 13.4 20.0 19.1 21.6 20.6 23.5 24.0 27.4
General and administrative
expenses................ 34.3 29.7 37.4 33.7 38.3 38.2 36.4 52.6
Acquired research and
development............. 80.8 -- -- -- 11.7 6.0 0.4 3.3
Amortization of acquired
technology, goodwill and
intangibles............. 30.3 36.3 36.2 36.3 39.6 44.8 46.7 47.1
Legal settlement.......... -- 38.8 16.6 -- -- -- -- --
Merger-related costs and
compensation charges.... 12.5 1.4 0.4 (0.2) 2.1 3.3 2.4 0.8
------ ------ ------ ------ ------ ------ ------ ------
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QUARTERS ENDED
----------------------------------------------------------------------------------------------
JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31,
1999 1999 1999 2000 2000 2000 2000 2001
-------- --------- -------- -------- -------- --------- -------- --------
(IN MILLIONS, EXCEPT PER SHARE DATA)
Operating income (loss)... 7.7 62.9 78.9 121.0 1.6 (35.8) 10.0 15.7
------ ------ ------ ------ ------ ------ ------ ------
Net earnings (loss)....... $ 16.4 $ 58.9 $ 69.2 $ 98.0 $ 10.0 $(12.5) $ 21.9 $ 23.0
====== ====== ====== ====== ====== ====== ====== ======
Basic EPS................. $ 0.07 $ 0.25 $ 0.28 $ 0.40 $ 0.04 $(0.05) $ 0.09 $ 0.09
====== ====== ====== ====== ====== ====== ====== ======
Diluted EPS............... $ 0.07 $ 0.23 $ 0.27 $ 0.39 $ 0.04 $(0.05) $ 0.09 $ 0.09
====== ====== ====== ====== ====== ====== ====== ======
Shares used in computing
basic EPS............... 237.6 239.5 242.7 244.1 245.5 246.1 244.7 245.5
====== ====== ====== ====== ====== ====== ====== ======
Shares used in computing
diluted EPS............. 249.8 253.1 255.4 253.8 254.4 246.1 249.3 251.6
====== ====== ====== ====== ====== ====== ====== ======
Liquidity and Capital Resources
At March 31, 2001, our cash, cash equivalents and investment securities
were $1.0 billion, approximately even with the March 31, 2000 balance. Our
working capital as of March 31, 2001, was $73.7 million, reflecting an increase
from the March 31, 2000 balance of $12.3 million due primarily to the decrease
of $113.0 million in short-term borrowings. We continue to invest cash in
securities with maturities beyond one year. While typically yielding greater
returns, this reduces reported working capital. Our securities are investment
grade and highly liquid. Stockholders' equity as of March 31, 2001, was $1.8
billion.
We continue to primarily finance our growth through funds generated from
operations. For the year ended March 31, 2001, net cash provided by operating
activities was $579.1 million. Our primary source of cash is the sale of our
software licenses, software maintenance and professional services. We provide
financing on a portion of these sales transactions, to customers that meet our
specified standards of creditworthiness. We participate in established programs
with third-party financing institutions that allow us to transfer a significant
portion of our finance receivables on a non-recourse basis for cash, as
discussed in Note 4 to the Consolidated Financial Statements contained herein.
During fiscal 2001, we transferred $261.4 million of such receivables through
these programs. The high credit quality of our finance receivables and the
existence of these third-party facilities extend our ability to offer financing
to qualifying customers on an ongoing basis without a negative cash flow impact.
Net cash used in investing activities in fiscal 2001 was $374.6 million,
primarily related to the purchase of investment securities, construction of an
expansion to our corporate headquarters, and various technology acquisitions, as
previously discussed. Net cash used in financing activities in fiscal 2001 was
$209.0 million, which derived primarily from treasury stock purchases. On April
24, 2000, the board of directors authorized us to purchase up to $500 million in
common stock. During fiscal 2001 we purchased 7.2 million shares for $155.1
million. We plan to continue to buy stock on the open market from time to time,
depending on market conditions.
As part of our acquisition of New Dimension in the first quarter of fiscal
2000, we entered into a $500.0 million 364-day credit facility with a consortium
of U.S. banks. During fiscal 2001, we exercised our option to convert the
balance of the revolving loans outstanding under the facility into a one-year
$115.0 million term loan with an interest rate of 5.9%. As of March 31, 2001,
the term loan remained outstanding and we had $35.0 million of other short-term
borrowings. The weighted average annual interest rate of all short-term
borrowings was 5.9%. The short-term facilities include, among others, covenants
regarding our maintaining at least $300.0 million in cash and marketable
securities and certain financial ratios. We had no other debt as of March 31,
2001, other than normal trade payables, accrued liabilities and deferred tax
liabilities.
Subsequent to March 31, 2001, the term loan matured and we paid the balance
outstanding. We entered a new 364-day $100.0 million revolving credit facility,
which is secured by certain of our financial assets whose market value must
equal or exceed 115% of the commitment under the facility. Interest on the
borrowings under this facility is payable monthly and is accrued at a margin
above LIBOR.
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We believe that our existing cash balances and funds generated from
operations will be sufficient to meet our liquidity requirements for the
foreseeable future.
CERTAIN RISKS AND UNCERTAINTIES THAT COULD AFFECT FUTURE OPERATING RESULTS
Our Stock Price is Volatile.
Our stock price has been and is highly volatile. Our stock price is highly
influenced by current expectations of future revenue and earnings growth rates.
Any failure to meet anticipated revenue and earnings levels in a period or any
negative change in our perceived long-term growth prospects would likely have a
significant adverse effect on our stock price. Our historical financial results
should not be seen as indicative of future results.
The Timing and Size of License Contracts Could Cause Our Quarterly Revenues
and Earnings to Fluctuate.
Our revenues and results of operations are difficult to predict and may
fluctuate substantially quarter to quarter. The timing and amount of our license
revenues are subject to a number of factors that make estimation of operating
results prior to the end of a quarter extremely uncertain. We generally operate
with little or no sales backlog and, as a result, license revenues in any
quarter are dependent upon contracts entered into or orders booked and shipped
in that quarter. Most of our sales are closed at the end of each quarter. Our
business remains dependent on closing large enterprise license transactions,
which can have sales cycles of up to a year or more and require approval by a
customer's upper management or board of directors. These transactions are
typically difficult to manage and predict. Failure to close an expected
individually significant transaction or multiple expected transactions could
cause our revenues and earnings in a period to fall short of expectations. We
generally do not know whether revenues and earnings will meet expectations until
the final days or day of a quarter.
We have a High Degree of Operating Leverage.
Our business model is characterized by a very high degree of operating
leverage. A substantial portion of our operating costs and expenses consists of
employee and facility related costs, which are relatively fixed over the short
term. In addition, our expense levels and hiring plans are based substantially
on our projections of future revenues. If near term demand weakens in a given
quarter, there would likely be a material adverse effect on operating results
and a resultant drop in our stock price.
Our Operating Margins May Decline Further.
There is a risk that our historically high operating margins may not be
sustainable and may continue to decline, which would adversely affect our
earnings. Our operating margins, excluding amortization of acquired technology,
goodwill and intangibles, merger-related costs and compensation charges and
one-time charges, declined during fiscal 2000 and declined further during fiscal
2001 as compared to fiscal 1999 and prior periods. Operating expenses as a
percentage of revenues associated with our distributed systems products are
higher than those associated with our traditional mainframe products. Since our
mix of business continues to shift to distributed systems, operating margins
will experience more pressure. In addition, we are not currently profitable in
our growing professional services business. We may be unable to increase or even
maintain our current level of profitability on a quarterly or annual basis in
the future. Additionally, we have acquired businesses experiencing lower
operating margins than us.
We May Not be Able to Attract and Retain Qualified Personnel.
Our future success depends on the continued service of our executive
officers and other key administrative, sales and marketing, development and
support personnel. There is currently a shortage of individuals possessing the
technical background necessary to sell, support and develop our products
effectively. Competition for skilled personnel is intense, and we may not be
able to attract, assimilate or retain highly qualified personnel in the future.
Hiring qualified sales, marketing, administrative, research and development and
customer support personnel is very competitive in our industry, particularly in
some of the markets where our
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development teams are located, such as San Jose, California, Austin, Texas and
Waltham, Massachusetts. Consequently, our growth rates may be limited by our
ability to attract qualified personnel.
Decreasing Demand for Mainframe Processing Capacity and Decreased IT Spending
Could Adversely Affect Revenues.
Fees from enterprise license transactions have historically been a
fundamental component of our revenues and the primary source of mainframe
license revenues. These revenues depend on our customers planning to grow their
mainframe capacity and continuing to perceive an increasing need to use our
existing software products on substantially greater mainframe processing
capacity in future periods. The continued growth of distributed database
management systems may have an adverse effect on growth rates for mainframe
computing systems. Although we believe that businesses will continue to demand
greater mainframe computing capacity and that e-business will be a driver of
this demand, there can be no assurance as to whether future demand for mainframe
capacity will continue to grow or not. Slower growth in our customers' mainframe
processing capacity will adversely affect our revenues. In addition, many
industry analysts and economists are predicting slower growth and even declines
in overall IT spending by businesses during the next fiscal year. Any
significant decline in overall IT spending could adversely affect our revenues.
Increased Competition and Pricing Pressures Could Adversely Affect Our
Earnings.
The market for systems management software has been increasingly
competitive for the past number of years. We compete with a variety of software
vendors including IBM and CA. We derived over half of our total revenues in
fiscal 2001 from software products for IBM and IBM-compatible mainframe
computers. IBM continues, directly and through third parties, to enhance and
market its utilities for IMS and DB2 as lower cost alternatives to the solutions
provided by us and other independent software vendors. Although such utilities
are currently less functional than our solutions, IBM has begun to invest more
heavily in the IMS and DB2 utility market and appears to be committed to
competing in these markets. If IBM is successful with its efforts to achieve
performance and functional equivalence with our IMS, DB2 and other products at a
lower cost, our business may be materially adversely affected. CA is also
competing with us in these markets. Microsoft entered the distributed systems
monitoring and management market through its relationship with Net IQ and is now
competing with us in the market for management tools for the Windows operating
system.
In connection with the introduction of its Z-series server, IBM has
announced changes to its mainframe software pricing, including a new
workload-based pricing model. These actions continue to increase pricing
pressures within the mainframe systems software markets. We continue to reduce
the cost of our mainframe tools and utilities in response to these and other
competitive pressures. We have also announced that we will support the new
workload-based pricing structure for the Z-series, but the effect of this change
on our future mainframe license revenues cannot be determined.
Maintenance Revenue Growth Could Slow.
Maintenance revenues have increased over the last three fiscal years as a
result of the continuing growth in the base of installed products and the
processing capacity on which they run. Maintenance fees increase as the
processing capacity on which the products are installed increases; consequently,
we receive higher absolute maintenance fees as customers install our products on
additional processing capacity. Due to increased discounting for higher levels
of additional processing capacity, the maintenance fees on a per unit of
capacity basis are typically reduced in enterprise license agreements for our
mainframe products. Historically, we have enjoyed high maintenance renewal rates
for our mainframe products. Should customers migrate from their mainframe
applications or find alternatives to our products, increased cancellations could
adversely impact the sustainability and growth of our maintenance revenues. To
date, we have been successful in extending our traditional maintenance and
support pricing model to the distributed systems market. Renewal rates for
maintenance on our distributed systems products are lower than on our mainframe
products.
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Failure to Adapt to Technological Change Could Adversely Affect Our Earnings.
If we fail to keep pace with technological change in our industry, such
failure would have an adverse effect on our revenues and earnings. We operate in
a highly competitive industry characterized by rapid technological change,
evolving industry standards, changes in customer requirements and frequent new
product introductions and enhancements. During the past two years, funding for
new ventures and start-ups in our industry has been at an all-time high with
many new technological advancements and competing products entering the
marketplace. The distributed systems and application management markets in which
we operate are far more crowded and competitive than our traditional mainframe
systems management markets. Our ability to compete effectively and our growth
prospects depend upon many factors, including the success of our existing
distributed systems products, the timely introduction and success of future
software products, and the ability of our products to interoperate and perform
well with existing and future leading databases and other platforms supported by
our products. We have experienced long development cycles and product delays in
the past, particularly with some of our distributed systems products, and expect
to have delays in the future. Delays in new mainframe or distributed systems
product introductions or less-than-anticipated market acceptance of these new
products are possible and would have an adverse effect on our revenues and
earnings. New products or new versions of existing products may, despite
testing, contain undetected errors or bugs that could delay the introduction or
adversely affect commercial acceptance of such products.
Changes in Pricing Practices Could Adversely Affect Revenues and Earnings.
We may choose in fiscal 2002 or a future fiscal year to make changes to our
product packaging, pricing or licensing programs. If made, such changes may have
a material adverse impact on revenues or earnings.
Our Customers May Not Accept our Product Strategies.
Historically, we have focused on selling software products to address
specific customer problems associated with their applications. We are now
integrating multiple software products and offering packaged solutions for
customers' systems. There can be no assurance that customers will perceive a
need for such solutions. In addition, there may be technical difficulties in
integrating individual products into a combined solution that may delay the
introduction of such solutions to the market or adversely affect the demand for
such solutions.
Risks Related to Business Combinations.
As part of our overall strategy, we have acquired or invested in, and plan
to continue to acquire or invest in, complementary companies, products, and
technologies and to enter into joint ventures and strategic alliances with other
companies. Risks commonly encountered in such transactions include: the
difficulty of assimilating the operations and personnel of the combined
companies; the risk that we may not be able to integrate the acquired
technologies or products with our current products and technologies; the
potential disruption of our ongoing business; the inability to retain key
technical and managerial personnel; the inability of management to maximize our
financial and strategic position through the successful integration of acquired
businesses; and decreases in reported earnings as a result of charges for
in-process research and development and amortization of goodwill and acquired
intangible assets.
In order for us to maximize the return on our investments in acquired
companies, the products of these entities must be integrated with our existing
products. These integrations can be difficult and unpredictable, especially
given the complexity of software and that acquired technology is typically
developed independently and designed with no regard to integration. The
difficulties are compounded when the products involved are well established
because compatibility with the existing base of installed products must be
preserved. Successful integration also requires coordination of different
development and engineering teams. This too can be difficult and unpredictable
because of possible cultural conflicts and different opinions on technical
decisions and product roadmaps. There can be no assurance that we will be
successful in our product integration efforts or that we will realize the
expected benefits.
26
28
With each of our acquisitions, we have initiated efforts to integrate the
disparate cultures, employees, systems and products of these companies.
Retention of key employees is critical to ensure the continued advancement,
development, support, sales and marketing efforts pertaining to the acquired
products. We have implemented retention programs to keep many of the key
technical, sales and marketing employees; nonetheless, we have lost some key
employees and may lose others in the future.
Enforcement of Our Intellectual Property Rights.
We rely on a combination of copyright, patent, trademark, trade secrets,
confidentiality procedures and contractual procedures to protect our
intellectual property rights. Despite our efforts to protect our intellectual
property rights, it may be possible for unauthorized third parties to copy
certain portions of our products or to reverse engineer or obtain and use
technology or other information that we regard as proprietary. There can also be
no assurance that our intellectual property rights would survive a legal
challenge to their validity or provide significant protection for us. In
addition, the laws of certain countries do not protect our proprietary rights to
the same extent as do the laws of the United States. Accordingly, there can be
no assurance that we will be able to protect our proprietary technology against
unauthorized third party copying or use, which could adversely affect our
competitive position.
Possibility of Infringement Claims.
From time to time, we receive notices from third parties claiming
infringement by our products of third party patent and other intellectual
property rights. We expect that software products will increasingly be subject
to such claims as the number of products and competitors in our industry
segments grow and the functionality of products overlap. In addition, we expect
to receive more patent infringement claims as companies increasingly seek to
patent their software and business methods, especially in light of recent
developments in the law that extend the ability to patent software and business
methods. Regardless of its merit, responding to any such claim could be
time-consuming, result in costly litigation and require us to enter into royalty
and licensing agreements which may not be offered or available on terms
acceptable to us. If a successful claim is made against us and we fail to
develop or license a substitute technology, our business, results of operations
or financial position could be materially adversely affected.
Risks Related to International Operations and the Euro Currency.
We have committed, and expect to continue to commit, substantial resources
and funding to build our international service and support infrastructure.
Operating costs in many countries, including many of those in which we operate,
are higher than in the United States. In order to increase international sales
in fiscal 2002 and subsequent periods, we must continue to globalize our
software product lines; expand existing and establish additional foreign
operations; hire additional personnel; identify suitable locations for sales,
marketing, customer service and development; and recruit international
distributors and resellers in selected territories. Future operating results are
dependent on sustained performance improvement by our international offices,
particularly our European operations. Our operations and financial results
internationally could be significantly adversely affected by several risks such
as changes in foreign currency exchange rates, sluggish regional economic
conditions and difficulties in staffing and managing international operations.
Generally, our foreign sales are denominated in our foreign subsidiaries' local
currencies. If these foreign currency exchange rates change unexpectedly, we
could have significant gains or losses. Many systems and applications software
vendors are experiencing difficulties internationally.
The European Union's adoption of the Euro single currency raises a variety
of issues associated with our European operations. Although the transition will
be phased in over several years, the Euro became Europe's single currency on
January 1, 1999. Our foreign exchange exposures to legacy sovereign currencies
of the participating countries in the Euro became foreign exchange exposures to
the Euro upon its introduction. Although we are not aware of any material
adverse financial risk consequences of the change from legacy sovereign
currencies to the Euro, conversion may result in problems, which may have an
adverse impact on our business since we may be required to incur unanticipated
expenses to remedy these problems.
27
29
Conditions in Israel.
Our INCONTROL and ERP development operations are conducted primarily in
Israel and, accordingly, we are directly affected by economic, political and
military conditions in Israel. Any major hostilities involving Israel or the
interruption or curtailment of trade between Israel and its present trading
partners could materially adversely affect our business, operating results and
financial condition.
Israel's economy has been subject to numerous destabilizing factors,
including a period of rampant inflation in the early to mid-1980's, low foreign
exchange reserves, fluctuations in world commodity prices, military conflicts
and civil unrest. Since the establishment of the State of Israel in 1948, a
state of hostility has existed, varying in degree and intensity, between Israel
and the Palestinian people and the Arab countries. In addition, Israel and
companies doing business with Israel have been the subject of an economic
boycott by the Arab countries since Israel's establishment. Although Israel has
entered into various agreements with certain Arab countries and the Palestinian
Authority, and various declarations have been signed in connection with efforts
to resolve some of the economic and political problems in the Middle East, we
cannot predict whether or in what manner these problems will be resolved. To
date, the current unrest in the region and hostilities within Israel associated
with the ongoing peace process have not caused disruption of our operations
located in Israel.
In addition, certain of our INCONTROL and ERP employees are currently
obligated to perform annual reserve duty in the Israel Defense Forces and are
subject to being called for active military duty at any time. Although our
businesses located in Israel have historically operated effectively under these
requirements, we cannot predict the effect of these obligations on our
operations in the future.
Possible Adverse Impact Of Recent Accounting Pronouncements.
On April 1, 1998 and 1999 we adopted American Institute of Certified Public
Accountants Statement of Position ("SOP") 97-2, "Software Revenue Recognition,"
and SOP 98-9 "Modification of SOP 97-2, Software Revenue Recognition, With
Respect to Certain Transactions," respectively. The adoption of these standards
did not have a material impact on the Company's financial position or results of
operations. Based on our reading and interpretation of these SOPs, we believe
that our current sales contract terms and business arrangements have been
properly reported. However, the American Institute of Certified Public
Accountants and its Software Revenue Recognition Task Force continue to issue
interpretations and guidance for applying the relevant standards to a wide range
of sales contract terms and business arrangements that are prevalent in the
software industry. Also, the Securities and Exchange Commission ("SEC") has
issued Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial
Statements," which provides guidance related to revenue recognition based on
interpretations and practices followed by the SEC. Future interpretations of
existing accounting standards or changes in our business practices could result
in future changes in our revenue accounting policies that could have a material
adverse effect on our business, financial condition and results of operations.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to a variety of risks, including foreign currency exchange
rate fluctuations and changes in the market value of our investments. In the
normal course of business, we employ established policies and procedures to
manage these risks including the use of derivative instruments.
Foreign Currency Exchange Rate Risk
We operate globally and the functional currency for most of our non-U.S.
enterprises is the local currency. For the fiscal years 1999, 2000 and 2001,
approximately 39%, 36% and 43% of our total revenues were derived from customers
outside of North America, substantially all of which were billed and collected
in foreign currencies. Similarly, substantially all of the expenses of operating
our foreign subsidiaries are incurred in foreign currencies. As a result, our
U.S. dollar earnings and net cash flows from international operations may be
adversely affected by changes in foreign currency exchange rates. To minimize
our risk from changes in foreign currency exchange rates, we utilize certain
derivative financial instruments.
28
30
We primarily utilize two types of derivative financial instruments in
managing our foreign currency exchange risk: forward exchange contracts and
purchased option contracts. Forward exchange contracts are used to achieve
hedges of firm commitments that subject us to transaction risk. The terms of
these forward exchange contracts are generally one month or less and are entered
into at the prevailing market rate at the end of the month. Forward exchange
contracts and net purchased option contracts, with terms generally less than one
year, are used to hedge anticipated, but not firmly committed, sales
transactions. Principal currencies hedged are the Euro and British pound, in
Europe, and the Japanese yen and Australian dollar in the Asia Pacific region.
We perform comparisons, on a monthly basis, of the purchased option contracts
and the forecasted sales revenues to determine hedge effectiveness. While we
actively manage our foreign currency risks on an ongoing basis, there can be no
assurance our foreign currency hedging activities will offset the full impact of
fluctuations in currency exchange rates on our results of operations, cash flows
and financial position. Foreign currency fluctuations did not have a material
impact on our results of operations and financial position during fiscal 1999,
2000 or 2001.
Based on our foreign currency exchange instruments outstanding at March 31,
2001, and our financial position, results of operations and net cash flows for
the year ended March 31, 2001, we estimate that a near-term change in foreign
currency rates would not have a material effect. We used a value-at-risk ("VAR")
model to measure potential fair value losses due to foreign currency exchange
rate fluctuations. The VAR model estimates were made assuming normal market
conditions and a 95% confidence level. The VAR model is a risk estimation tool,
and as such, is not intended to represent actual losses in fair value that could
be incurred.
Interest Rate Risk -- Investments
We adhere to a conservative investment policy, whereby our principle
concern is the preservation of liquid funds while maximizing our yield on such
assets. Cash, cash equivalents and investment securities approximated $1.0
billion at March 31, 2001, and were invested in different types of
investment-grade securities with the intent of holding these securities to
maturity. Although our portfolio is subject to fluctuations in interest rates
and market conditions, no gain or loss on any security would actually be
recognized in earnings unless the instrument was sold.
Based on our financial position, results of operations and net cash flows
for the year ended March 31, 2001, we estimate that a near-term change in
interest rates would not have a material effect. We used a VAR model to measure
potential market risk on our investment securities due to interest rate
fluctuations. The VAR model estimates were made assuming normal market
conditions and a 95% confidence level. The VAR model is a risk estimation tool,
and as such, is not intended to represent actual losses in fair value that could
be incurred.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The response to this item is submitted as a separate section of this Form
10-K. See Item 14.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
29
31
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information relating to our directors and executive officers is included in
our definitive Proxy Statement in connection with our 2001 Annual Meeting of
Stockholders (the "2001 Proxy Statement"), which will be filed with the
Securities and Exchange Commission within 120 days after the end of the fiscal
year ended March 31, 2001, under the captions "ELECTION OF
DIRECTORS -- Nominees" and "OTHER INFORMATION -- Directors and Executive
Officers" and is incorporated herein by reference in response to this Item 10.
ITEM 11. EXECUTIVE COMPENSATION
Information relating to executive compensation is set forth in the 2001
Proxy Statement under the captions "ELECTION OF DIRECTORS -- Compensation of
Directors" and "EXECUTIVE COMPENSATION" and is incorporated herein by reference
in response to this Item 11.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information relating to ownership of Registrant's Common Stock by
management and certain other beneficial owners is set forth in the 2001 Proxy
Statement under the caption "OTHER INFORMATION -- Certain Stockholders" and is
incorporated herein by reference in response to this Item 12.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information relating to certain relationships and related transactions is
set forth in the 2001 Proxy Statement under the caption "OTHER
INFORMATION -- Related Transactions" and is incorporated herein by reference in
response to this Item 13.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Documents filed as a part of this Report.
1. The following financial statements of the Company and the related report
of independent public accountants are filed herewith:
PAGE
NUMBER
--------
Report of Independent Public Accountants.................... 33
Consolidated Financial Statements:
Balance Sheets as of March 31, 2000 and 2001.............. 34
Statements of Earnings and Comprehensive Income for the
years ended March 31, 1999, 2000 and 2001.............. 35
Statements of Stockholders' Equity for the years ended
March 31, 1999, 2000 and 2001.......................... 36
Statements of Cash Flows for the years ended March 31,
1999, 2000 and 2001.................................... 37
Notes to Consolidated Financial Statements................ 38
2. The following financial statement schedule of the Company and the
related report of independent public accountants are filed herewith:
Report of Independent Public Accountants.................... 63
Schedule II -- Valuation Account............................ 64
30
32
All other financial statement schedules are omitted because (i) such
schedules are not required or (ii) the information required has been presented
in the aforementioned financial statements.
3. The following Exhibits are filed with this Report or incorporated by
reference as set forth below.
EXHIBIT
NUMBER
- -------
3.1 -- Restated Certificate of Incorporation of the Company;
incorporated by reference to Exhibit 3.1 to the Company's
Registration Statement on Form S-1 (Registration No. 33-
22892) (the "S-1 Registration Statement").
3.2 -- Certificate of Amendment of Restated Certificate of
Incorporation; incorporated by reference to Exhibit 3.2 to
the Company's Annual Report for the fiscal year ended March
31, 1997 (the "1997 10-K").
3.3 -- Bylaws of the Company; incorporated by reference to Exhibit
3.2 to the S-1 Registration Statement.
4.1 -- Specimen Stock Certificate for the Common Stock of the
Company; incorporated by reference to Exhibit 4.1 to the S-1
Registration Statement.
4.2 -- Rights Agreement, dated as of May 8, 1995, between the
Company and The First National Bank of Boston, as Rights
Agent (the "Rights Agreement"), specifying the terms of the
Rights, which includes the form of Certificate of
Designation of Series A Junior Participating Preferred Stock
as Exhibit A, the form of Right Certificate as Exhibit B and
the form of the Summary of Rights as Exhibit C (incorporated
by reference to Exhibit 1 to the registrant's Registration
Statement on Form 8-A dated May 10, 1995).
4.3 -- Amendment to the Rights Agreement; incorporated by reference
to Exhibit 4.3 to the 1997 10-K.
10.1(a) -- Form of BMC Software, Inc. 1994 Employee Incentive Plan;
incorporated by reference to Exhibit 10.7(a) to the
Company's Annual Report on Form 10-K for the fiscal year
ended March 31, 1995 (the "1995 10-K").
10.1(b) -- Form of Stock Option Agreement employed under BMC Software,
Inc. 1994 Employee Incentive Plan; incorporated by reference
to Exhibit 10.7(b) to the 1995 10-K.
10.2(a) -- Form of BMC Software, Inc. 1994 Non-employee Directors'
Stock Option Plan; incorporated by reference to Exhibit
10.8(a) to the 1995 10-K.
10.2(b) -- Form of Stock Option Agreement employed under BMC Software,
Inc. 1994 Non-employee Directors' Stock Option Plan;
incorporated by reference to Exhibit 10.8(b) to the 1995
10-K.
10.3 -- Description of BMC Software, Inc. Executive Officer Annual
Incentive Plan; incorporated by reference to Exhibit 10.6 to
the Company's Annual Report on Form 10-K for the fiscal year
ended March 31, 1994.
10.4 -- Form of Indemnification Agreement among the Company and its
directors and executive officers; incorporated by reference
to Exhibit 10.11 to the 1995 10-K.
10.5 -- BMC Software, Inc. 2000 Employee Stock Incentive Plan;
incorporated by reference to Exhibit 10.1 to the Company's
Quarterly Report on Form 10-Q for the quarter ended June 30,
2000.
10.6(a) -- BMC Software, Inc. 1994 Deferred Compensation Plan;
incorporated by reference to Exhibit 4.1 to the Company's
Current Report on Form 8-K dated April 2, 1999.
10.6(b) -- First Amendment to BMC Software, Inc. 1994 Deferred
Compensation Plan; incorporated by reference to Exhibit 4.2
to the Company's Current Report on Form 8-K dated April 2,
1999.
10.6(c) -- Form of BMC Software, Inc. 1994 Deferred Compensation Plan
Trust Agreement; incorporated by reference to Exhibit 4.3 to
the Company's Current Report on Form 8-K dated April 2,
1999.
*10.7 -- Executive Employment Agreement between BMC Software, Inc.
and Robert Beauchamp.
31
33
EXHIBIT
NUMBER
- -------
10.8 -- Form of Executive Employment Agreement between BMC Software,
Inc. and Dan Barnea, Darroll Buytenhuys, Jeffrey Hawn and
Deborah Tummins; incorporated by reference to Exhibit 10.2
to the Company's Quarterly Report on Form 10-Q for the
quarter ended June 30, 2000.
*10.9 -- Schedule to Form of Executive Employment Agreement.
31.1
34
EXHIBIT
NUMBER
- -------
*21.1 -- Subsidiaries of the Company.
*23.1 -- Consent of Arthur Andersen LLP.
- ---------------
* Filed herewith.
(b) Reports on Form 8-K
None
32
35
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To BMC Software, Inc.
We have audited the accompanying consolidated balance sheets of BMC
Software, Inc. (a Delaware corporation) and subsidiaries as of March 31, 2000
and 2001, and the related consolidated statements of earnings and comprehensive
income, stockholders' equity and cash flows for each of the three years in the
period ended March 31, 2001. These financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of BMC Software, Inc. and
subsidiaries as of March 31, 2000 and 2001, and the results of their operations
and their cash flows for each of the three years in the period ended March 31,
2001, in conformity with accounting principles generally accepted in the United
States.
ARTHUR ANDERSEN LLP
Houston, Texas
June 8, 2001
33
36
BMC SOFTWARE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
MARCH 31,
----------------------
2000 2001
--------- ---------
(IN MILLIONS,
EXCEPT PER SHARE DATA)
ASSETS
Current assets:
Cash and cash equivalents................................. $ 152.4 $ 146.0
Investment securities..................................... 102.8 144.7
Accounts receivable:
Trade, net of allowance for doubtful accounts of $31.5
and $25.6.............................................. 374.1 292.6
Trade finance receivables, current...................... 158.1 213.5
-------- --------
Total accounts receivable.......................... 532.2 506.1
Other current assets.................................... 108.8 105.9
-------- --------
Total current assets............................... 896.2 902.7
Property and equipment, net of accumulated depreciation and
amortization of $179.9 and $201.2......................... 337.5 456.5
Software development costs and related assets, net of
accumulated amortization of $178.3 and $230.0............. 193.4 242.7
Investment securities....................................... 820.3 713.3
Long-term finance receivables............................... 222.6 236.3
Acquired technology, net of accumulated amortization of
$35.2 and $75.9........................................... 109.7 95.3
Goodwill and other intangibles, net of accumulated
amortization of $111.1 and $250.8......................... 329.1 317.6
Other long-term assets...................................... 53.3 69.5
-------- --------
$2,962.1 $3,033.9
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Trade accounts payable.................................... $ 29.3 $ 22.1
Accrued liabilities....................................... 185.0 182.3
Short-term borrowings..................................... 263.0 150.0
Current portion of deferred revenue....................... 406.6 474.6
-------- --------
Total current liabilities.......................... 883.9 829.0
Deferred revenue............................................ 288.6 382.8
Other long-term liabilities................................. 8.7 6.8
-------- --------
Total liabilities.................................. 1,181.2 1,218.6
Commitments and contingencies
Stockholders' equity:
Preferred stock, $.01 par value, 1.0 shares authorized,
none issued and outstanding............................. -- --
Common stock, $.01 par value, 600.0 shares authorized,
244.6 and 248.1 shares issued........................... 2.4 2.5
Additional paid-in capital................................ 401.1 530.9
Retained earnings......................................... 1,385.6 1,336.2
Accumulated other comprehensive income.................... (3.4) (9.8)
-------- --------
1,785.7 1,859.8
Less treasury stock, at cost, -- and 0.8 shares........... -- (20.9)
Less unearned portion of restricted stock compensation.... (4.8) (23.6)
-------- --------
Total stockholders' equity......................... 1,780.9 1,815.3
-------- --------
$2,962.1 $3,033.9
======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
34
37
BMC SOFTWARE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS AND COMPREHENSIVE INCOME
YEARS ENDED MARCH 31,
--------------------------------------
1999 2000 2001
---------- ---------- ----------
(IN MILLIONS, EXCEPT PER SHARE DATA)
Revenues:
License................................................... $ 906.9 $1,180.2 $ 892.2
Maintenance............................................... 372.3 485.7 524.1
Professional services..................................... 24.7 53.3 87.7
-------- -------- --------
Total revenues.................................... 1,303.9 1,719.2 1,504.0
Selling and marketing expenses.............................. 417.7 559.7 600.7
Research and development expenses........................... 163.9 213.2 234.7
Cost of maintenance services and product licenses........... 152.0 177.2 207.9
Cost of professional services............................... -- 74.1 95.5
General and administrative expenses......................... 95.1 135.1 165.5
Acquired research and development........................... 17.3 80.8 21.4
Amortization of acquired technology, goodwill and
intangibles............................................... 4.3 139.1 178.2
Legal settlement............................................ -- 55.4 --
Merger-related costs and compensation charges............... 38.3 14.1 8.6
-------- -------- --------
Operating income (loss)........................... 415.3 270.5 (8.5)
Interest expense............................................ -- (23.4) (11.3)
Interest and other income, net.............................. 62.6 64.3 80.2
-------- -------- --------
Other income, net................................. 62.6 40.9 68.9
-------- -------- --------
Earnings before income taxes...................... 477.9 311.4 60.4
Income taxes................................................ 113.8 68.9 18.0
-------- -------- --------
Net earnings before cumulative effect of accounting
change................................................. 364.1 242.5 42.4
Cumulative effect of accounting change, net of taxes of
$0.9...................................................... (1.5) -- --
-------- -------- --------
Net earnings.............................................. $ 362.6 $ 242.5 $ 42.4
======== ======== ========
Basic earnings per share.................................... $ 1.55 $ 1.01 $ 0.17
======== ======== ========
Diluted earnings per share.................................. $ 1.46 $ 0.96 $ 0.17
======== ======== ========
Shares used in computing basic earnings per share........... 234.3 241.0 245.4
======== ======== ========
Shares used in computing diluted earnings per share......... 248.6 253.0 252.5
======== ======== ========
Comprehensive income:
Net earnings.............................................. $ 362.6 $ 242.5 $ 42.4
Foreign currency translation adjustment, net of taxes of
$0.6, $--and $--....................................... (2.0) 5.1 (1.9)
Unrealized gain (loss) on securities available for
sale:
Unrealized gain (loss), net of taxes of $8.5, $0.5 and
$1.0................................................. 13.3 (7.7) (1.9)
Realized (gain) included in net earnings, net of taxes
of $0.3, $0.4 and $0.3............................... (0.8) (1.3) (0.5)
Elimination of unrealized gain on New Dimension shares
in purchase accounting, net of taxes of $--, $8.5 and
$--.................................................. -- (12.7) --
-------- -------- --------
Net unrealized gain on securities available for sale... 12.5 (21.7) (2.4)
Unrealized gain on derivative instruments:
Unrealized gain, net of taxes of $0.2, $7.8 and $6.3... 0.8 14.5 11.6
Realized gain included in net earnings, net of taxes of
$--, $5.4 and $7.4................................... (0.2) (10.1) (13.7)
-------- -------- --------
Net unrealized gain on derivative instruments.......... 0.6 4.4 (2.1)
-------- -------- --------
Comprehensive income.............................. $ 373.7 $ 230.3 $ 36.0
======== ======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
35
38
BMC SOFTWARE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED MARCH 31, 1999, 2000 AND 2001
(IN MILLIONS)
UNREALIZED
GAIN (LOSS) UNREALIZED
FOREIGN ON SECURITIES GAIN ON
COMMON STOCK ADDITIONAL CURRENCY AVAILABLE DERIVATIVE
--------------- PAID-IN RETAINED TRANSLATION FOR SALE, INSTRUMENTS,
SHARES AMOUNT CAPITAL EARNINGS ADJUSTMENT NET OF TAXES NET OF TAXES
------ ------ ---------- -------- ----------- ------------- ------------
Balance, March 31, 1998............ 225.3 $2.3 $212.4 $ 762.7 $ (5.0) $ 8.9 $ --
Net earnings..................... -- -- -- 362.6 -- -- --
Foreign currency translation
adjustment..................... -- -- -- -- (2.7) -- --
Common stock and options issued
in connection with
acquisitions................... 7.2 0.1 -- -- -- -- --
Adjustment to conform fiscal year
end of Boole................... 0.1 -- (4.3) 17.8 (3.4) 1.9 --
Shares issued for stock-based
compensation................... 4.0 -- (71.7) -- -- -- --
Tax benefit of stock-based
compensation................... -- -- 49.4 -- -- -- --
Earned portion of restricted
stock compensation............. -- -- -- -- -- -- --
Unrealized gain on securities
available for sale............. -- -- -- -- -- 8.3 --
Unrealized gain on derivative
instruments.................... -- -- -- -- -- -- 0.8
----- ---- ------ -------- ------ ------ ------
Balance, March 31, 1999............ 236.6 2.4 185.8 1,143.1 (11.1) 19.1 0.8
Net earnings..................... -- -- -- 242.5 -- -- --
Foreign currency translation
adjustment..................... -- -- -- -- 5.1 -- --
Options issued in connection with
acquisitions................... -- -- 1.0 -- -- -- --
Shares issued for stock-based
compensation................... 8.0 -- 104.2 -- -- -- --
Tax benefit of stock-based
compensation................... -- -- 110.1 -- -- -- --
Earned portion of restricted
stock compensation............. -- -- -- -- -- -- --
Unrealized loss on securities
available for sale............. -- -- -- -- -- (7.7) --
Realized gain on securities
available for sale............. -- -- -- -- -- (1.3) --
Elimination of unrealized gain on
New Dimension shares in
purchase accounting............ -- -- -- -- -- (12.7) --
Unrealized gain on derivative
instruments.................... -- -- -- -- -- -- 14.5
Realized gain on derivative
instruments.................... -- -- -- -- -- -- (10.1)
----- ---- ------ -------- ------ ------ ------
Balance, March 31, 2000............ 244.6 2.4 401.1 1,385.6 (6.0) (2.6) 5.2
Net earnings..................... -- -- -- 42.4 -- -- --
Foreign currency translation
adjustment..................... -- -- -- -- (1.9) -- --
Common stock and options issued
in connection with
acquisitions................... 1.6 0.1 79.3 -- -- -- --
Treasury stock purchases......... -- -- -- -- -- -- --
Shares issued for stock-based
compensation................... 1.9 -- 33.1 (91.8) -- -- --
Tax benefit of stock-based
compensation................... -- -- 17.4 -- -- -- --
Earned portion of restricted
stock compensation............. -- -- -- -- -- -- --
Unrealized loss on securities
available for sale............. -- -- -- -- -- (1.9) --
Realized gain on securities
available for sale............. -- -- -- -- -- (0.5) --
Unrealized gain on derivative
instruments.................... -- -- -- -- -- -- 11.6
Realized gain on derivative
instruments.................... -- -- -- -- -- -- (13.7)
----- ---- ------ -------- ------ ------ ------
Balance, March 31, 2001............ 248.1 $2.5 $530.9 $1,336.2 $ (7.9) $ (5.0) $ 3.1
===== ==== ====== ======== ====== ====== ======
UNEARNED
PORTION OF
TREASURY RESTRICTED TOTAL
STOCK, STOCK STOCKHOLDERS'
AT COST COMPENSATION EQUITY
-------- ------------ -------------
Balance, March 31, 1998............ $ (99.5) $ (4.1) $ 877.7
Net earnings..................... -- -- 362.6
Foreign currency translation
adjustment..................... -- -- (2.7)
Common stock and options issued
in connection with
acquisitions................... -- -- 0.1
Adjustment to conform fiscal year
end of Boole................... -- -- 12.0
Shares issued for stock-based
compensation................... 99.5 (3.9) 23.9
Tax benefit of stock-based
compensation................... -- -- 49.4
Earned portion of restricted
stock compensation............. -- 2.3 2.3
Unrealized gain on securities
available for sale............. -- -- 8.3
Unrealized gain on derivative
instruments.................... -- -- 0.8
------- ------ --------
Balance, March 31, 1999............ -- (5.7) 1,334.4
Net earnings..................... -- -- 242.5
Foreign currency translation
adjustment..................... -- -- 5.1
Options issued in connection with
acquisitions................... -- -- 1.0
Shares issued for stock-based
compensation................... -- (1.8) 102.4
Tax benefit of stock-based
compensation................... -- -- 110.1
Earned portion of restricted
stock compensation............. -- 2.7 2.7
Unrealized loss on securities
available for sale............. -- -- (7.7)
Realized gain on securities
available for sale............. -- -- (1.3)
Elimination of unrealized gain on
New Dimension shares in
purchase accounting............ -- -- (12.7)
Unrealized gain on derivative
instruments.................... -- -- 14.5
Realized gain on derivative
instruments.................... -- -- (10.1)
------- ------ --------
Balance, March 31, 2000............ -- (4.8) 1,780.9
Net earnings..................... -- -- 42.4
Foreign currency translation
adjustment..................... -- -- (1.9)
Common stock and options issued
in connection with
acquisitions................... -- (25.1) 54.3
Treasury stock purchases......... (155.1) -- (155.1)
Shares issued for stock-based
compensation................... 134.2 (13.5) 62.0
Tax benefit of stock-based
compensation................... -- -- 17.4
Earned portion of restricted
stock compensation............. -- 19.8 19.8
Unrealized loss on securities
available for sale............. -- -- (1.9)
Realized gain on securities
available for sale............. -- -- (0.5)
Unrealized gain on derivative
instruments.................... -- -- 11.6
Realized gain on derivative
instruments.................... -- -- (13.7)
------- ------ --------
Balance, March 31, 2001............ $ (20.9) $(23.6) $1,815.3
======= ====== ========
The accompanying notes are an integral part of these consolidated financial
statements.
36
39
BMC SOFTWARE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED MARCH 31,
-----------------------------
1999 2000 2001
------- ------- -------
(IN MILLIONS)
Cash flows from operating activities:
Net earnings.............................................. $ 362.6 $ 242.5 $ 42.4
Adjustments to reconcile net earnings to net cash provided
by operating activities:
Adjustment to conform fiscal year end of Boole.......... 12.1 -- --
Acquired research and development and merger-related
costs and compensation charges....................... 55.6 80.8 29.7
Depreciation and amortization........................... 76.8 235.6 314.9
Loss on sale/disposal of property and equipment......... 11.3 7.7 0.9
Gain on sale of investment securities................... (3.1) (1.7) (0.8)
Gain on sale of financial instrument.................... -- -- (2.9)
Gain from real estate transaction....................... -- -- (6.3)
Change in allowance for doubtful accounts............... 4.1 11.3 (5.9)
Deferred income tax benefit............................. (41.6) (3.4) (20.2)
Earned portion of restricted stock compensation and
other compensatory stock issuances................... 1.4 2.7 10.8
Changes in operating assets and liabilities, net of
acquisitions:
(Increase) decrease in accounts receivable........... (180.2) (143.7) 36.3
Increase (decrease) in current and long-term deferred
revenue............................................ 254.2 (51.7) 161.8
Change in other operating assets and liabilities..... 107.1 (13.4) 18.4
------- ------- -------
Net cash provided by operating activities............ 660.3 366.7 579.1
------- ------- -------
Cash flows from investing activities:
Cash paid for technology acquisitions and other
investments, net of cash acquired....................... (6.7) (649.1) (133.8)
Purchases of investment securities........................ (313.8) (139.5) (187.1)
Maturities of/proceeds from sales of investment
securities.............................................. 162.3 80.0 238.6
Purchases of property and equipment....................... (115.8) (148.0) (182.5)
Proceeds from sales of property and equipment............. 0.8 -- 0.2
Capitalization of software development costs and related
assets.................................................. (76.0) (102.7) (112.2)
(Increase) decrease in long-term finance receivables...... (97.5) 26.6 (13.7)
Proceeds from sale of financial instrument................ -- -- 9.4
Proceeds from real estate transaction..................... -- -- 6.5
Adjustment to conform fiscal year end of Boole............ (32.5) -- --
------- ------- -------
Net cash used in investing activities................ (479.2) (932.7) (374.6)
------- ------- -------
Cash flows from financing activities:
Treasury stock purchased.................................. -- -- (155.1)
Stock options exercised and other......................... 33.3 103.6 59.6
Proceeds from borrowings.................................. -- 498.8 35.0
Payments on borrowings.................................... (1.3) (237.0) (148.5)
Boole treasury stock purchased............................ (25.0) -- --
Proceeds from issuance of Boole common stock.............. 28.5 -- --
Adjustment to conform fiscal year end of Boole............ 30.2 -- --
------- ------- -------
Net cash provided by (used in) financing
activities......................................... 65.7 365.4 (209.0)
Effect of exchange rate changes on cash................... (2.5) 5.1 (1.9)
Adjustment to conform fiscal year end of Boole............ (2.4) -- --
------- ------- -------
Net change in cash and cash equivalents.............. 241.9 (195.5) (6.4)
Cash and cash equivalents, beginning of year................ 106.0 347.9 152.4
------- ------- -------
Cash and cash equivalents, end of year...................... $ 347.9 $ 152.4 $ 146.0
======= ======= =======
Supplemental disclosure of cash flow information:
Cash paid for interest, net of amounts capitalized........ $ 3.4 $ 22.6 $ 9.6
Cash paid for income taxes................................ $ 15.5 $ 15.0 $ 20.9
Common stock and options issued and liabilities assumed in
acquisitions............................................ $ -- $ 93.0 $ 59.8
Receivable for sale of fixed assets....................... $ -- $ -- $ 3.1
The accompanying notes are an integral part of these consolidated financial
statements.
37
40
BMC SOFTWARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Nature of Operations
BMC Software, Inc. and its wholly-owned subsidiaries (collectively, the
Company or BMC) develop software that provides systems management solutions for
large enterprises. BMC markets, sells and supports its solutions primarily
through its sales offices around the world, as well as through its relationships
with independent partners. The Company also performs software implementation,
integration and education services for its customers. Numerous factors affect
the Company's operating results, including general economic conditions, market
acceptance and demand for its products, its ability to develop new products,
rapidly changing technologies and competition. For a discussion of certain of
these important factors, see the discussion in Management's Discussion and
Analysis of Results of Operations and Financial Condition under the heading
"Certain Risks and Uncertainties That Could Affect Future Operating Results."
(b) Use of Estimates
The Company's management makes estimates and assumptions in the preparation
of its consolidated financial statements in conformity with generally accepted
accounting principles. These estimates and assumptions may affect the reported
amounts of assets and liabilities and the disclosure of contingent assets and
liabilities as of the date of the consolidated financial statements, and the
reported amounts of revenues and expenses during the respective reporting
periods. Actual results could differ from those results implicit in the
estimates and assumptions.
(c) Basis of Presentation
The accompanying consolidated financial statements include the accounts of
BMC Software, Inc. and its majority-owned subsidiaries. All significant
intercompany balances and transactions have been eliminated in consolidation.
Certain amounts previously reported have been reclassified in order to
ensure comparability among the years reported. For the year ended March 31,
1999, cost of professional services is included in selling and marketing
expenses as such costs were not accounted for separately during that year.
(d) Cash Equivalents
The Company considers investments with a maturity of three months or less
when purchased to be cash equivalents. As of March 31, 2000 and 2001, the
Company's cash equivalents were comprised primarily of money market funds. The
Company's cash equivalents are subject to potential credit risk. The Company's
cash management and investment policies restrict investments to investment
quality, highly liquid securities.
(e) Long Lived Assets
Property and Equipment --
Property and equipment are stated at cost. Depreciation on all property and
equipment, with the exception of buildings and leasehold improvements, is
calculated using the straight-line method over the estimated useful lives of the
assets, which range from three to ten years. Depreciation on buildings is
calculated using the straight-line method over the useful lives of the
components of the buildings, which results in a weighted average life of 30
years. Leasehold improvements are amortized using the straight-line method over
the shorter of the lease term or the estimated useful lives of the assets, which
range from two to seven years. Interest is capitalized in connection with the
construction of major facilities. The capitalized interest is recorded as part
of the asset to which it relates and is amortized over the asset's estimated
useful life. In fiscal 2000 and 2001, $0.4 million and $5.6 million of interest
cost was capitalized. No interest was capitalized in fiscal 1999.
38
41
BMC SOFTWARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
A summary of property and equipment is as follows:
MARCH 31,
------------------
2000 2001
------- -------
(IN MILLIONS)
Land........................................................ $ 27.0 $ 27.0
Buildings and leasehold improvements........................ 159.6 180.5
Construction in progress.................................... 38.2 146.0
Computers, furniture and equipment.......................... 292.6 304.2
------- -------
517.4 657.7
Less accumulated depreciation and amortization............ (179.9) (201.2)
------- -------
Net property and equipment.................................. $ 337.5 $ 456.5
======= =======
As of April 1, 1999, the Company adopted the American Institute of
Certified Public Accountants (AICPA) Statement of Position (SOP) 98-1,
"Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use." This standard requires that certain costs related to the
development or purchase of internal-use software be capitalized and amortized
over the estimated useful life of the software. This SOP also requires that
costs related to the preliminary project stage, data conversion and the
post-implementation/operation stage of an internal-use software development
project be expensed as incurred. Adoption of this standard did not have a
material impact on the Company's financial position or results of operations.
Software Development Costs and Related Assets --
Costs of internally developed software for resale are expensed until the
technological feasibility of the software product has been established.
Thereafter, software development costs are capitalized and subsequently reported
at the lower of unamortized cost or net realizable value. Purchased software and
related assets are recorded at cost. The capitalized software costs are
amortized over the products' estimated useful lives, which is typically five
years, beginning upon the declaration of the underlying products as generally
available for sale. Each quarter, the Company analyzes the realizability of its
recorded software assets. This process occasionally results in accelerated
amortization charges which, over the past few years, has resulted in an
effective amortization period of approximately four years. During the years
ended March 31, 1999, 2000 and 2001, $76.0 million, $102.7 million and $112.2
million, respectively, of software costs were capitalized. Amortization for the
years ended March 31, 1999, 2000 and 2001 was $40.8 million, $40.2 million and
$60.2 million, respectively, including $15.9 million, $8.2 million and $16.5
million, respectively, of accelerated amortization for software products that
were not expected to generate sufficient future revenues necessary for the
Company to realize the carrying value of these assets. These expenses were
reported as cost of maintenance services and product licenses in the
accompanying consolidated statements of earnings and comprehensive income.
Acquired Technology --
Acquired technology, representing developed technology of acquired
businesses, is stated at cost and is amortized on a straight line basis over the
products' estimated useful lives, which are typically three to five years. The
portion of a purchase which pertains to in-process research and development is
expensed in the period of the acquisition.
39
42
BMC SOFTWARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Goodwill and Other Intangibles --
Goodwill, representing the excess of the cost over the net tangible and
identifiable intangible assets of acquired businesses, and other intangibles are
stated at cost and are amortized on a straight line basis over the estimated
future periods to be benefited, which is typically three to four years.
Asset Impairment --
The Company assesses asset impairment based on the guidance set forth in
Statement of Financial Accounting Standards (SFAS) No. 121, "Accounting for the
Impairment of Long-lived Assets and for Long-lived Assets to be Disposed Of."
The Company reviews its long-lived assets and certain identifiable intangibles
for impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. If the sum of the expected
future cash flows from the use of the asset and its eventual disposition is less
than the carrying amount of the asset, an impairment loss is recognized based on
the fair value of the asset.
(f) Foreign Currency Translation and Risk Management
The Company operates globally and the functional currency for most of its
non-U.S. enterprises is the local currency. Financial statements of these
foreign operations are translated into U.S. dollars using the current rate
method in accordance with SFAS No. 52, "Foreign Currency Translation." As a
result, the Company's U.S. dollar net cash flows from international operations
may be adversely affected by changes in foreign currency exchange rates. To
minimize the Company's risk from changes in foreign currency exchange rates, the
Company utilizes certain derivative financial instruments.
Effective January 1, 1999, the Company adopted SFAS No. 133, "Accounting
for Derivative Instruments and Hedging Activities." SFAS No. 133 establishes
accounting and reporting standards requiring that every derivative instrument be
recorded in the balance sheet as either an asset or liability, depending on the
rights or obligations under the contracts, at its fair value. SFAS No. 133 also
requires that changes in a derivative's fair value be recognized currently in
earnings unless specific hedge accounting criteria are met. For a qualifying
cash flow hedge, the changes in fair value of the derivative instrument are
initially recognized in other comprehensive income and then are reclassified
into earnings in the period that the hedged transaction affects earnings. For a
qualifying fair value hedge, the changes in fair value of the derivative
instrument are offset against the corresponding changes for the hedged item
through earnings. Such accounting for qualifying hedges allows a derivative's
gains and losses to offset related results of the hedged item in the statement
of earnings, and requires the Company to formally document, designate and
continuously assess the effectiveness of transactions that receive hedge
accounting. SFAS No. 138, "Accounting for Certain Derivative Instruments and
Certain Hedging Activities," was issued in June 2000 and amends certain
provisions of SFAS No. 133. Adoption of SFAS No. 138 did not have a material
effect on the Company's financial position or results of operations.
The Company primarily utilizes two types of derivative financial
instruments in managing its foreign currency exchange risk: forward exchange
contracts and purchased option contracts. Forward exchange contracts are used to
achieve hedges of firm commitments that subject the Company to transaction risk.
Such commitments include accounts receivable, intercompany receivables/payables,
cash balances, and certain liabilities of foreign operations. The terms of these
forward exchange contracts are generally one month or less and are entered into
at the prevailing market rate at the end of the month. As such, there is no fair
value associated with these forward exchange contracts at March 31, 2000 and
2001.
Forward exchange contracts and net purchased option contracts are used by
the Company to hedge anticipated, but not firmly committed, sales transactions,
and generally qualify as cash flow hedges under SFAS No. 133. The Company
believes that the anticipated sales transactions are probable and highly
40
43
BMC SOFTWARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
correlated with the derivative instruments. Probability weightings are applied
to the forecasted quarterly sales amounts up to one year into the future and
contracts are purchased to hedge the foreign currency exchange risk on these
weighted amounts with specified revenues being designated as the hedged item.
The Company performs comparisons, on a monthly basis, of the contracts and the
forecasted sales revenues to determine hedge effectiveness. The Company excludes
the change in the time value of the contracts from its assessment of hedge
effectiveness. In the event a hedge ceases to be highly effective, the
derivative is subsequently sold, or the Company discontinues hedging operations,
any unrecognized premium costs or deferred gains will be recognized in earnings
in that period. During fiscal 1999, 2000 and 2001, the Company did not recognize
any amounts in earnings due to hedge ineffectiveness, as defined in SFAS No.
133, nor did the Company discontinue its hedging activities. The terms of the
Company's forward exchange contracts and purchased option contracts are
typically one year or less. The fair value, estimated using the Black-Scholes
option pricing model, of these forward exchange contracts and purchased option
contracts at March 31, 2000 and 2001 was $6.2 million and $5.6 million,
respectively, and is included in other current assets in the consolidated
balance sheets. Changes in the intrinsic value of forward exchange contracts and
purchased option contracts are reported as a component of other comprehensive
income.
The balances in other current assets and other comprehensive income related
to derivative instruments as of March 31, 2001 are expected to be recognized in
earnings over the next twelve months. During the years ended March 31, 1999,
2000 and 2001, general and administrative expenses included $1.5 million, $0.3
million and $0.1 million, respectively, related to premium, discount and time
value realization from derivative financial instruments and unhedged immaterial
foreign exchange exposures. The gains and losses from the Company's foreign
exchange financial instruments are netted with the currency gains and losses of
the hedged item in the Company's consolidated statements of earnings and
comprehensive income.
Upon adoption of SFAS No. 133 during fiscal 1999, the Company recognized a
cumulative adjustment of $2.4 million ($1.5 million, net of taxes) related
primarily to unrecognized premium costs on the purchased option contracts. Under
the previous accounting method, the Company deferred recognition of these
premiums until the settlement date of the option contracts.
The table below summarizes the contractual amounts of the Company's
derivative financial instruments in U.S. dollars. The Company's foreign exchange
financial instruments are primarily denominated in the major European
currencies, particularly the Euro and the British pound, as well as Asia Pacific
currencies, particularly the Japanese yen and Australian dollar. The "Buy"
amounts in the table below represent the U.S. dollar equivalent of commitments
to purchase foreign currencies and the "Sell" amounts represent the U.S. dollar
equivalent of the Company's right (with respect to purchased option contracts)
and its commitment (with respect to forward exchange contracts) to sell foreign
currencies.
MARCH 31,
--------------------------------
2000 2001
-------------- --------------
BUY SELL BUY SELL
---- ------ ---- ------
(IN MILLIONS)
Purchased options................................... $ -- $ 46.7 $ -- $ 45.9
Forward exchange contracts (Europe)................. -- 321.8 -- 449.1
Forward exchange contracts (Other).................. 1.9 66.9 1.2 58.8
---- ------ ---- ------
$1.9 $435.4 $1.2 $553.8
==== ====== ==== ======
Credit-related losses from the Company's forward exchange contracts could
occur if the Company's foreign customers default on their trade payable
obligations with the Company. The Company has not experienced and does not
expect to experience any significant defaults by its foreign customers. Exposure
from the Company's purchased option contracts is limited to the premium costs
associated with purchasing the instruments as the Company is not obligated to
exercise these options. The Company is also exposed to credit-
41
44
BMC SOFTWARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
related losses in the event of non-performance by counterparties to financial
instruments, but it does not expect any counterparties to fail to meet their
obligations, given their high credit ratings. In addition, the Company
diversifies this risk across several counterparties.
(g) Deferred Revenue
Deferred revenue is comprised of deferred maintenance, license,
professional services and other revenues. Deferred maintenance revenue is not
recorded until it has been collected or is supported by a formal, financing
arrangement, and is recognized in the statement of earnings over the term of the
arrangement, which terms primarily range from one to five years. The principal
components of deferred revenue as of March 31, 2000 and 2001 are as follows:
MARCH 31,
----------------
2000 2001
------ ------
(IN MILLIONS)
Current:
Maintenance............................................... $332.0 $332.3
License................................................... 27.9 70.2
Professional Services..................................... 19.1 35.2
Other..................................................... 27.6 36.9
------ ------
Total current deferred revenue.................... 406.6 474.6
Long-Term:
Maintenance............................................... 278.3 344.0
License................................................... 2.2 36.5
Other..................................................... 8.1 2.3
------ ------
Total long-term deferred revenue.................. 288.6 382.8
------ ------
Total deferred revenue............................ $695.2 $857.4
====== ======
(h) Revenue Recognition
The Company generates revenues from licensing software, providing
maintenance and support for previously licensed products and providing
professional services. The Company generally utilizes written contracts as the
means to establish the terms and conditions by which the Company's products,
support and services are sold to its customers.
The Company recognizes revenue in accordance with the American Institute of
Certified Public Accountants SOP 97-2, "Software Revenue Recognition" and SOP
98-9, "Modification of SOP 97-2, Software Revenue Recognition, With Respect to
Certain Transactions." These statements provide guidance on applying generally
accepted accounting principles in recognizing revenue on software transactions.
In applying these statements, the Company recognizes software license fees upon
meeting the following four criteria: execution of the signed contract, delivery
of the underlying products to the customer and the acceptance of such products
by the customer, determination that the software license fees are fixed and
determinable, and determination that collection of the software license fees is
probable. In instances when any one of the four criteria are not met, the
Company will either defer recognition of the software license revenue until the
criteria are met or will recognize the software license revenue on a ratable
basis, as required by SOPs 97-2 and 98-9. Maintenance and support revenues are
recognized ratably over the term of the arrangement on a straight-line basis.
Revenues from license and maintenance transactions that are financed are
generally recognized in the same manner as those requiring current payment. The
Company has an established business practice of offering installment contracts
to customers and has a history of successfully enforcing original payment terms
42
45
BMC SOFTWARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
without making concessions. Further, the payment obligations are unrelated to
product implementation or any other post-transaction activity. Revenues from
sales through agents, distributors and resellers are recorded either at the
gross amount charged the customer or net of commissions paid, based on the
economic risks and ongoing product support responsibilities assumed by the
Company. Revenues from professional services are typically recognized as the
services are performed for time and materials contracts or on a percentage-of-
completion basis.
When several elements, including software licenses, maintenance and support
and professional services, are sold to a customer through a single contract, the
revenues from such multiple-element arrangements are allocated to each element
based upon the residual method, whereby the fair value of the undelivered
elements of the contract is deferred. The Company has established
vendor-specific objective evidence of fair value for maintenance and support and
professional services. Accordingly, software license fees are recognized under
the residual method for arrangements in which the software is licensed with
maintenance and support and/or professional services, and where the maintenance
and support and/or professional services are not essential to the functionality
of the delivered software. In those instances where professional services are
essential to the functionality of the software licenses, contract accounting is
applied to both the software license and services elements of the arrangement.
In the event a contract contains terms which are inconsistent with the Company's
vendor-specific objective evidence, all revenues from the contract are deferred.
(i) Earnings Per Share
SFAS No. 128, "Earnings Per Share," requires dual presentation of basic and
diluted earnings per share (EPS). Basic EPS is computed by dividing net income
by the weighted average number of common shares outstanding for the period.
Diluted EPS reflects the potential dilution that could occur if securities or
other contracts to issue common stock were exercised or converted into common
stock. For purposes of this calculation, outstanding stock options and unearned
restricted stock are considered potential common shares using the treasury stock
method. For the years ended March 31, 1999, 2000 and 2001, the treasury stock
method effect of 0.3 million, 1.5 million and 19.1 million weighted options,
respectively, have been excluded from the calculation of diluted EPS as they are
anti-dilutive. For the year ended March 31, 2001, the treasury stock method
effect of 0.9 million weighted unearned restricted shares has also been excluded
as they are anti-dilutive. The following table summarizes the basic and diluted
EPS computations for the years ended March 31, 1999, 2000 and 2001:
YEARS ENDED MARCH 31,
--------------------------
1999 2000 2001
------ ------ ------
(IN MILLIONS, EXCEPT PER
SHARE AMOUNTS)
Basic earnings per share:
Net earnings........................................... $362.6 $242.5 $ 42.4
------ ------ ------
Weighted average number of common shares............... 234.3 241.0 245.4
------ ------ ------
Basic earnings per share............................... $ 1.55 $ 1.01 $ 0.17
====== ====== ======
Diluted earnings per share:
Net earnings........................................... $362.6 $242.5 $ 42.4
------ ------ ------
Weighted average number of common shares............... 234.3 241.0 245.4
Incremental shares from assumed conversions of stock
options and other dilutive securities............... 14.3 12.0 7.1
------ ------ ------
Adjusted weighted average number of common shares...... 248.6 253.0 252.5
------ ------ ------
Diluted earnings per share............................... $ 1.46 $ 0.96 $ 0.17
====== ====== ======
43
46
BMC SOFTWARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(j) Stock Splits
On April 20, 1998, the Company's board of directors declared a two-for-one
stock split. This stock split was effected in the form of a stock dividend
whereby stockholders of record received one share of common stock for each share
held. All stock related data in the consolidated financial statements and
related notes reflects this stock split for all periods presented.
(k) Treasury Stock
On April 24, 2000, the Company's board of directors authorized the Company
to repurchase up to $500.0 million in common stock. During fiscal 2001, 7.2
million shares were purchased for $155.1 million under this authorization. No
shares were repurchased in fiscal 1999 and 2000.
(l) Comprehensive Income
SFAS No. 130, "Reporting Comprehensive Income," establishes standards for
reporting and displaying comprehensive income and its components. Comprehensive
income is the total of net earnings and all other non-owner changes in equity,
which for the Company include foreign currency translation adjustments and
unrealized gains and losses on securities available for sale and derivative
instruments. A reconciliation of reported net earnings to comprehensive income
is included in the consolidated statements of earnings and comprehensive income.
(2) TECHNOLOGY ACQUISITIONS
In March, 1999, the Company completed its merger with Boole & Babbage, Inc.
("Boole") which was accounted for as a pooling of interests in accordance with
APB Opinion No. 16. The Company recorded charges of $38.3 million and $13.7
million for merger and restructuring costs related to the Boole transaction for
the years ended March 31, 1999 and 2000, respectively. During the year ended
March 31, 2001, $2.8 million of the accrual for merger and restructuring costs
was reversed to income. For further discussion of the components of the merger
and restructuring charge, see Note 12 -- Merger-Related Costs. The Company
exchanged a total of 19.1 million shares of its common stock for all of the
outstanding shares of Boole. The Company also converted Boole employee options
into options to purchase 3.9 million shares of the Company's common stock. The
results of operations for Boole are included for all periods presented herein.
Boole had previously reported on a September 30 year end. As a result of
certain adjustments made to conform the fiscal year ends of the Company and
Boole for only the year ended March 31, 1999, in accordance with SEC
regulations, the consolidated statements of earnings and comprehensive income
exclude the results of Boole for the six months ended March 31, 1998, which
included total revenues of $106.5 million and net earnings of $17.8 million. An
adjustment is included in the consolidated statement of stockholders' equity for
the year ended March 31, 1999 for the net earnings attributed to this six-month
period.
On April 14, 1999, the Company acquired, through a public tender offer, in
excess of 95% of the outstanding ordinary shares of New Dimension Software, Ltd.
(New Dimension). Total consideration paid approximated $673.0 million, including
the cost of the remaining 5% of outstanding shares acquired during fiscal 2000
and the Company's historical cost of approximately $2.0 million for shares of
New Dimension previously owned by Boole. Unrealized gains of approximately $21.2
million related to these New Dimension shares included in long-term investment
securities and accumulated other comprehensive income at March 31, 1999, were
eliminated when the acquisition was recorded. The acquisition was accounted for
as a purchase transaction, and the purchase price was allocated as follows:
$126.3 million to software assets, $435.9 million to goodwill and other
intangibles and $30.0 million to equipment, receivables and other non-software
assets, net of liabilities assumed. All intangible assets are being amortized on
a straight-line basis over four years, which represents the estimated future
periods to be benefited. Additionally, the Company allocated
44
47
BMC SOFTWARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
$80.8 million, or 12% of the purchase price, to in-process research and
development ("IPR&D"), which represents the present value of the estimated
after-tax cash flows expected to be generated by the purchased technology,
which, at the acquisition date, had not yet reached technological feasibility
nor had an alternative future use.
At the acquisition date, New Dimension was conducting design, development,
engineering and testing activities in the following areas:
- Integrated Operations Architecture for the Enterprise, which was to be
the supporting infrastructure for all of the distributed systems products
from New Dimension. This project, as originally intended, was cancelled
as the Company determined it was more appropriate to gradually extend the
existing distributed systems infrastructure rather than replace it.
- Expansion of the Output Management product family to include products for
distributed systems.
- E-business enablement, the development of the infrastructure necessary to
"Internet-ize" the entire New Dimension product family.
- Security, including additional features and add-on applications for
existing security applications.
- Enhancements to the CONTROL-M, CONTROL-D, CONTROL-SA and Enterprise
Controlstation products.
As of the date of the New Dimension acquisition, the Company concluded that
the in-process technology had no alternative future use after taking into
consideration the potential use of the technology in different products, the
stage of development and life cycle of each project, resale of the software and
internal use. As such, the value of the purchased IPR&D was expensed at the time
of the acquisition. As of March 31, 2001, the Integrated Operations Architecture
for the Enterprise project has been cancelled; of the remaining projects,
certain have been completed and the related products are generally available,
others have been released as beta versions for customer testing and evaluation,
and the remainder are still in process. All of the foregoing estimates and
projections were based on assumptions the Company believed to be reasonable at
the time, but which were inherently uncertain and unpredictable.
The following unaudited pro forma results of operations for the year ended
March 31, 1999, assume the acquisition of New Dimension occurred at the
beginning of that period. The pro forma information includes New Dimension's
financial results for the year ended December 31, 1998, combined with the
accounts of the Company for the year ended March 31, 1999. As the acquisition
occurred on April 14, 1999, pro forma results for the year ended March 31, 2000,
are not significantly different than the reported results for that year.
YEAR ENDED
MARCH 31, 1999
----------------
(IN MILLIONS,
EXCEPT PER SHARE
AMOUNTS)
Total revenues*............................................. $1,384.0
Net earnings................................................ $ 265.2
Basic earnings per share.................................... $ 1.13
Diluted earnings per share.................................. $ 1.07
- ---------------
* Excludes $13.5 million of royalties paid by the Company to New Dimension for
the year ended March 31, 1999.
On April 25, 2000, the Company acquired all of the outstanding shares of
Evity, Inc. ("Evity") in a transaction accounted for as a purchase. The
aggregate purchase price totaled $67.3 million, including cash consideration of
$10.0 million, 1.0 million shares of common stock, 0.4 million common stock
options and
45
48
BMC SOFTWARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
transaction costs, and was allocated as follows: $2.5 million to acquired
technology, $57.8 million to goodwill and other intangibles and $7.0 million, or
10% of the purchase price, to IPR&D. Net tangible assets acquired were
insignificant. All intangible assets are being amortized on a straight-line
basis over three years, which represents the estimated future periods to be
benefited. The amount allocated to purchased IPR&D represents the estimated fair
value, based on risk-adjusted cash flows, related to Evity's research and
development projects not yet completed. At the date of acquisition, the
development of these projects had not yet reached technological feasibility, and
the research and development in progress had no alternative future uses.
Accordingly, these costs were expensed as of the acquisition date, during the
quarter ended June 30, 2000.
At the acquisition date, Evity was conducting design, development,
engineering and testing activities associated with the completion of SiteAngel
2.0, an enhanced version of Evity's SiteAngel website performance monitoring
product, as well as new technologies in the areas of load testing and network
infrastructure. The projects under development at the valuation date represented
next-generation technologies that are expected to address emerging market
demands for the Web performance market.
At the acquisition date, the technologies under development were
approximately 45% complete based on engineering man-month data and technological
progress. Evity had incurred nearly $1.0 million on the in-process projects and
expected to spend approximately $1.3 million to complete all phases of the
research and development. Anticipated completion dates ranged from 4 to 18
months, at which times the Company expected to begin benefiting from the
developed technologies. The Company completed SiteAngel 2.0 during fiscal 2001
and project costs were materially consistent with management's estimates at the
acquisition date. Also during fiscal 2001, the remaining projects in-process at
the acquisition date were suspended indefinitely.
On August 8, 2000, the Company acquired all of the outstanding shares of
OptiSystems Solutions, Ltd. ("OptiSystems") in a transaction accounted for as a
purchase. The aggregate purchase price totaled $71.5 million in cash, including
transaction costs, and was allocated as follows: $6.3 million to acquired
technology, $55.2 million to goodwill and other intangibles, $4.0 million to
equipment, receivables and other non-software assets, net of liabilities
assumed, and $6.0 million, or 8% of the purchase price, to purchased in-process
research and development. All intangible assets are being amortized on a
straight-line basis over three years, which represents the estimated future
periods to be benefited. The amount allocated to purchased IPR&D represents the
estimated fair value, based on risk-adjusted cash flows, related to OptiSystems'
incomplete research and development projects. At the date of acquisition, the
development of these projects had not yet reached technological feasibility, and
the research and development in progress had no alternative future uses.
Accordingly, these costs were expensed as of the acquisition date, during the
quarter ended September 30, 2000.
At the acquisition date, OptiSystems was conducting design, development,
engineering and testing activities associated with the completion of several
components of its Energizer for R/3 product. The projects under development at
the valuation date represented next-generation technologies that are expected to
address emerging market demands for the enterprise application performance
market.
At the acquisition date, the technologies under development were
approximately 50% complete based on engineering man-month data and technological
progress. OptiSystems had incurred approximately $1.0 million on the in-process
projects, and expected to spend approximately $1.2 million to complete all
phases of the research and development. Anticipated completion dates ranged from
2 to 11 months, at which times the Company expected to begin benefiting from the
developed technologies. Certain of the projects have been completed and the
remainder are still in process, and project costs have been materially
consistent with management's estimates at the acquisition date.
The following unaudited pro forma results of operations for the years ended
March 31, 2000 and 2001, assume the acquisitions of Evity and OptiSystems
occurred at the beginning of each period presented. The pro forma consolidated
results do not purport to be indicative of results that would have occurred had
the
46
49
BMC SOFTWARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
acquisitions been in effect for the periods presented, nor do they purport to be
indicative of the results that will be obtained in the future. The pro forma net
earnings exclude the effect of the $7.0 million and $6.0 million write-offs of
IPR&D associated with the acquisitions, respectively, in accordance with
generally accepted accounting principles.
YEARS ENDED MARCH 31,
------------------------
2000 2001
---------- ----------
(IN MILLIONS, EXCEPT PER
SHARE DATA)
Total revenues.......................................... $1,725.6 $1,505.0
Net earnings............................................ $ 184.9 $ 42.5
Basic earnings per share................................ $ 0.76 $ 0.17
Diluted earnings per share.............................. $ 0.73 $ 0.17
In connection with the Evity acquisition, 0.6 million restricted shares of
common stock were issued to certain employee shareholders of Evity. These shares
vest monthly over a two-year period based on continued employment with the
Company. The $25.1 million fair value of these shares was recorded as unearned
restricted stock compensation, a component of stockholders' equity, at the
acquisition date, and is being charged to expense as merger-related costs and
compensation charges over the service period.
The Company completed other immaterial acquisitions during the year ended
March 31, 2001, which were accounted for under the purchase method. The
aggregate purchase price for these transactions totaled $36.1 million in cash
and $0.3 million in common stock options, and was allocated as follows: $14.5
million to acquired technology, $18.2 million to goodwill and other intangibles
and $3.7 million, or 10% of the aggregate purchase price, to purchased
in-process research and development. Net tangible assets acquired were
insignificant. All intangible assets are being amortized on a straight-line
basis over three years, which represents the estimated future periods to be
benefited.
In making its purchase price allocations for all acquisitions accounted for
under the purchase method, the Company considered present value calculations of
income, analyses of project accomplishments and remaining outstanding items,
assessments of overall contributions, as well as project risks. The values
assigned to purchased in-process technology were determined by estimating the
costs to develop the acquired technology into commercially viable products,
estimating the resulting net cash flows from the projects, and discounting the
net cash flows to their present value. The revenue projections used to value the
in-process research and development were based on estimates of relevant market
sizes and growth factors, expected trends in technology, and the nature and
expected timing of new product introductions by BMC and its competitors. The
resulting net cash flows from such projects are based on the Company's estimates
of cost of sales, operating expenses, and income taxes from such projects.
In the present value calculations, aggregate revenues for the New
Dimension, Evity and OptiSystems developed, in-process and future products were
estimated to grow at compounded annual growth rates of approximately 38%, 155%
and 43%, respectively, for the four years, five years and five years following
acquisition, respectively, assuming the successful completion and market
acceptance of the major current and future research and development programs.
The estimated revenues for the in-process projects were expected to peak within
three years of acquisition and then decline sharply as other new products and
technologies are expected to enter the market.
The rates utilized to discount the net cash flows to their present value
were based on cost of capital calculations and venture capital rates of return.
Due to the nature of the forecasts and risks associated with the projected
growth and profitability of the developmental projects, discount rates of 20% to
30% were used to value the acquired IPR&D for the various acquisitions during
fiscal 2000 and fiscal 2001. Specifically, discount rates of 20%, 30% and 25%
were used to value the acquired IPR&D for New Dimension, Evity and
47
50
BMC SOFTWARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
OptiSystems, respectively. Rates of 15%, 20% and 20% were used in discounting
the cash flows associated with the respective developed technologies. These
discount rates were commensurate with the respective stage of development and
the uncertainties in the economic estimates described above.
The IPR&D charge for fiscal 2001 also includes the write-off of assets
totaling $4.7 million related to a technology agreement with Envive Corporation
that was terminated during the first quarter of fiscal 2001.
(3) INVESTMENT SECURITIES
Management determines the appropriate classification of investments in debt
and equity securities at the time of purchase and re-evaluates such designation
as of each subsequent balance sheet date. The Company has the ability and intent
to hold most of its debt securities to maturity and thus has classified these
securities as "held to maturity" pursuant to SFAS No. 115, "Accounting for
Certain Investments in Debt and Equity Securities." These securities have been
recorded at amortized cost in the Company's consolidated balance sheets.
Securities classified as "available for sale" are recorded at fair value. The
resulting net unrealized gains or losses are recorded as an increase or decrease
to stockholders' equity. The Company holds no securities classified as "trading
securities." Gains and losses, realized and unrealized, are calculated using the
specific identification method. The tables below summarize the Company's total
investment securities portfolio as of March 31, 2000 and 2001.
HELD-TO-MATURITY SECURITIES
GROSS GROSS
FAIR UNRECOGNIZED UNRECOGNIZED AMORTIZED
VALUE GAINS LOSSES COST
------ ------------ ------------ ---------
(IN MILLIONS)
2000
Maturities within 1 year:
Municipal securities............................... $ 78.4 $ 0.1 $ -- $ 78.3
Corporate bonds.................................... 11.9 -- -- 11.9
Euro bonds and other............................... 5.0 -- -- 5.0
------ ----- ------ ------
Total maturities within 1 year............. $ 95.3 $ 0.1 $ -- $ 95.2
====== ===== ====== ======
Maturities from 1-5 years:
Municipal securities............................... $346.9 $ 0.3 $ (3.4) $350.0
Corporate bonds.................................... 118.9 -- (3.2) 122.1
Euro bonds and other............................... 98.5 -- (4.0) 102.5
Mortgage securities................................ 4.7 -- (0.1) 4.8
------ ----- ------ ------
Total maturities from 1-5 years............ $569.0 $ 0.3 $(10.7) $579.4
====== ===== ====== ======
Maturities from 6-10 years:
Corporate bonds.................................... $ 9.5 $ -- $ (0.1) $ 9.6
------ ----- ------ ------
Total maturities from 6-10 years........... $ 9.5 $ -- $ (0.1) $ 9.6
====== ===== ====== ======
48
51
BMC SOFTWARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
GROSS GROSS
FAIR UNRECOGNIZED UNRECOGNIZED AMORTIZED
VALUE GAINS LOSSES COST
------ ------------ ------------ ---------
(IN MILLIONS)
2001
Maturities within 1 year:
Municipal securities............................... $ 87.7 $ 0.6 $ -- $ 87.1
Corporate bonds.................................... 23.1 0.1 -- 23.0
Euro bonds and other............................... 18.9 -- -- 18.9
Mortgage securities................................ 2.1 -- -- 2.1
------ ----- ------ ------
Total maturities within 1 year............. $131.8 $ 0.7 $ -- $131.1
====== ===== ====== ======
Maturities from 1-5 years:
Municipal securities............................... $275.2 $ 5.1 $ -- $270.1
Corporate bonds.................................... 167.2 4.3 (0.6) 163.5
Euro bonds and other............................... 93.9 1.7 (0.1) 92.3
Mortgage securities................................ 0.9 -- -- 0.9
------ ----- ------ ------
Total maturities from 1-5 years............ $537.2 $11.1 $ (0.7) $526.8
====== ===== ====== ======
AVAILABLE-FOR-SALE SECURITIES
AMORTIZED TOTAL NET TOTAL NET FAIR
COST GAINS LOSSES VALUE
--------- --------- --------- ------
(IN MILLIONS)
2000
Maturities within 1 year:
Municipal securities.................................... $ 4.1 $ -- $ -- $ 4.1
Euro bonds.............................................. 3.5 -- -- 3.5
------ ---- ----- ------
Total maturities within 1 year.................. $ 7.6 $ -- $ -- $ 7.6
====== ==== ===== ======
Maturities from 1-5 years:
Municipal securities.................................... $ 98.2 $ -- $(1.5) $ 96.7
Corporate bonds......................................... 54.1 -- (1.3) 52.8
Euro bonds.............................................. 34.9 -- (1.1) 33.8
Mutual funds and other.................................. 23.3 2.7 -- 26.0
------ ---- ----- ------
Total maturities from 1-5 years................. $210.5 $2.7 $(3.9) $209.3
====== ==== ===== ======
Maturities from 6-10 years:
Municipal securities.................................... $ 16.3 $ -- $(0.3) $ 16.0
Equity securities....................................... 7.5 -- (1.5) 6.0
------ ---- ----- ------
Total maturities from 6-10 years................ $ 23.8 $ -- $(1.8) $ 22.0
====== ==== ===== ======
49
52
BMC SOFTWARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
AMORTIZED TOTAL NET TOTAL NET FAIR
COST GAINS LOSSES VALUE
--------- --------- --------- ------
(IN MILLIONS)
2001
Maturities within 1 year:
Corporate bonds......................................... $ 6.3 $ -- $ -- $ 6.3
Euro bonds.............................................. 7.3 -- -- 7.3
------ ---- ----- ------
Total maturities within 1 year.................. $ 13.6 $ -- $ -- $ 13.6
====== ==== ===== ======
Maturities from 1-5 years:
Municipal securities.................................... $ 2.6 $ -- $ -- $ 2.6
Corporate bonds......................................... 107.1 2.2 (0.3) 109.0
Euro bonds.............................................. 45.9 1.2 -- 47.1
Mortgage securities..................................... 1.1 -- -- 1.1
Mutual funds and other.................................. 24.4 -- (3.6) 20.8
------ ---- ----- ------
Total maturities from 1-5 years................. $181.1 $3.4 $(3.9) $180.6
====== ==== ===== ======
Maturities from 6-10 years:
Corporate bonds......................................... $ 5.7 $ -- $(0.1) $ 5.6
Equity securities....................................... 7.5 -- (7.2) 0.3
------ ---- ----- ------
Total maturities from 6-10 years................ $ 13.2 $ -- $(7.3) $ 5.9
====== ==== ===== ======
The Company's mortgage securities are classified according to the stated
maturities of the securities.
(4) TRADE FINANCE RECEIVABLES AND SECURITIZATIONS
Trade finance receivables arise in the ordinary course of business to
accommodate customers' cash flow objectives. Most of the trade finance
receivables entered into by the Company are transferred to financing
institutions. Such transfers are executed on a non-recourse basis either through
individual transfers or securitizations. The Company records such transfers as
sales of the related accounts receivable when the Company is considered to have
surrendered control of such receivables under the provisions of SFAS No. 125,
"Accounting for Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities." When the Company sells receivables in securitizations of
software installment contracts, it retains subordinated interests and servicing
rights, both of which are retained interests in the securitized receivables.
Gain or loss on sale of the receivables depends in part on the previous carrying
amount of the receivables involved in the transfer, allocated between the assets
sold and the retained interests based on their relative fair value at the date
of transfer. The Company generally estimates fair value based on the present
value of future expected cash flows estimated using management's best estimates
of the key assumptions -- credit losses, forward yield curves and discount rates
commensurate with the risks involved.
During fiscal 2000 and 2001, the Company transferred financed receivables
of $451.2 million and $261.4 million, respectively, which approximated fair
value, to financing institutions on a non-recourse basis. Trade finance
receivables that have been transferred to financing institutions and remained
outstanding as of March 31, 2000 and 2001 totaled approximately $682.7 million
and $733.8 million, respectively.
Of the amounts the Company transferred during fiscal 2001, $142.8 million
of software installment contracts were sold in securitization transactions. In
all those securitizations, the Company retained servicing responsibilities and
subordinated interests. The Company receives servicing fees and rights to future
cash flows arising after the investors in the securitization vehicle have
received the return for which they contracted. The financing institutions have
no recourse to the Company's other assets for failure of debtors to pay when
due.
50
53
BMC SOFTWARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company's retained interests are subordinate to the investors' interests and
the value of the retained interests is subject to credit and interest rate risks
on the transferred financial assets. In fiscal 2001, the Company recognized
pretax gains of $5.5 million on such securitizations. As of March 31, 2001, the
total principal amount outstanding for all securitized receivables was $319.0
million. As of March 31, 2001, the Company had retained interests with a fair
value of $25.0 million, which was determined utilizing the following
assumptions: no prepayments or expected credit losses, weighted average life of
1.7 years and average discount rate of 8.4%.
Trade finance receivables that have not been transferred are classified as
trade finance receivables in the accompanying consolidated balance sheets and
mature as follows:
YEARS
ENDING
MARCH 31,
-------------
(IN MILLIONS)
2002........................................................ $213.5
2003........................................................ 122.1
2004........................................................ 71.6
2005........................................................ 34.6
Thereafter.................................................. 8.0
------
Total finance receivables......................... $449.8
======
In September 2000, the Financial Accounting Standards Board issued SFAS No.
140, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities -- A Replacement of FASB Statement No. 125." This
Statement revises the standards for accounting for securitizations and other
transfers of financial assets and collateral and requires certain disclosures,
but it carries over most of SFAS No. 125's provisions without reconsideration.
SFAS No. 140 is effective for transfers and servicing of financial assets and
extinguishments of liabilities occurring after March 31, 2001. It is effective
for recognition and reclassification of collateral and for disclosures relating
to securitization transactions and collateral for fiscal years ending after
December 15, 2000. Such disclosures are included above. We believe that adoption
of SFAS No. 140 will not have a material effect on our financial position or
results of operations.
(5) COST OF MAINTENANCE SERVICES AND PRODUCT LICENSES
The components of cost of maintenance services and product licenses for the
years ended March 31, 1999, 2000 and 2001 are as follows:
YEARS ENDED MARCH 31,
--------------------------
1999 2000 2001
------ ------ ------
(IN MILLIONS)
Cost of maintenance services............................. $ 84.5 $128.0 $135.6
Amortization of software development costs and related
assets................................................. 40.8 40.2 60.2
Royalties................................................ 26.7 9.0 12.1
------ ------ ------
$152.0 $177.2 $207.9
====== ====== ======
(6) SHORT-TERM BORROWINGS
In April 1999, the Company entered into a $500.0 million credit facility
with a consortium of U.S. banks. The facility consisted of (a) a 364-day
unsecured revolving credit facility for general corporate purposes with renewal
options by the lenders and with a one-year option granted to the Company to
convert the revolving loans into a one-year term loan, and (b) a competitive bid
facility that allowed the Company to request bids
51
54
BMC SOFTWARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
from the lenders for loans on a negotiated basis up to the existing availability
under the credit facility. Interest on the loans under the credit facility was
payable monthly and accrued at a margin above LIBOR, based on certain financial
ratios of the Company, which approximated 6.75% as of March 31, 2000. The
balance outstanding under the credit facility was $263.0 million as of March 31,
2000, at a weighted average interest rate of 6.65%, which approximated fair
value. During the year ended March 31, 2001, the Company exercised the option
and converted the balance of the revolving loans outstanding under the facility
into a $115.0 million one-year term loan with an interest rate of 5.9%. As of
March 31, 2001, the term loan remained outstanding and the Company had other
short-term borrowings of $35.0 million. The Company's total short-term
borrowings of $150.0 million as of March 31, 2001, at a weighted average
interest rate of 5.9%, approximated fair value. The short-term facilities
include, among others, covenants regarding the maintenance of at least $300.0
million in cash and marketable securities and certain financial ratios.
Subsequent to March 31, 2001, the term loan matured and the Company paid
the balance outstanding. The Company entered a new 364-day $100.0 million
revolving credit facility, which is secured by certain of the Company's
financial assets whose market value must equal or exceed 115% of the commitment
under the facility. Interest on the borrowings under this facility is payable
monthly and is accrued at a margin above LIBOR.
(7) INCOME TAXES
Deferred income taxes are recognized for the temporary differences between
the recorded amounts of assets and liabilities for financial reporting purposes
and such amounts for income tax purposes. Research and development tax credits
are accounted for as a reduction of income tax expense in the year realized. The
income tax benefit from nonqualified stock options exercised, wherein the fair
market value at date of issuance is less than that at date of exercise, is
credited to additional paid-in capital. The tax effects of unrealized gains and
losses on available-for-sale securities and derivative financial instruments are
recorded through other comprehensive income within stockholders' equity.
The provision for income taxes for the years ended March 31, 1999, 2000 and
2001, consisted of the following:
YEARS ENDED MARCH 31,
-------------------------
1999 2000 2001
------ ----- ------
(IN MILLIONS)
Current:
Federal................................................. $135.9 $58.7 $ 17.7
State................................................... 1.8 2.0 2.5
Foreign................................................. 17.7 11.6 18.0
------ ----- ------
Total current................................... 155.4 72.3 38.2
Deferred:
Federal................................................. (41.6) (3.4) (13.5)
Foreign................................................. -- -- (6.7)
------ ----- ------
Total deferred.................................. (41.6) (3.4) (20.2)
------ ----- ------
$113.8 $68.9 $ 18.0
====== ===== ======
The foreign provision for income taxes is based on foreign pre-tax earnings
of $131.5 million, $129.8 million and $94.0 million for fiscal 1999, 2000 and
2001, respectively.
52
55
BMC SOFTWARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The income tax provisions for fiscal 1999, 2000 and 2001 differ from the
amounts computed by applying the statutory federal income tax rate of 35% to
consolidated earnings before income taxes as follows:
YEARS ENDED MARCH 31,
--------------------------
1999 2000 2001
------ ------ ------
(IN MILLIONS)
Expense computed at statutory rate....................... $167.3 $109.0 $ 21.1
Increase (reduction) resulting from:
Foreign tax effect, net................................ (17.8) (37.5) (13.3)
Tax benefit from foreign sales corporation............. (1.2) (1.9) (1.1)
Income not subject to tax.............................. (9.9) (8.2) (7.5)
Research and development credit........................ (0.8) (3.0) (4.5)
Non-recurring tax benefit.............................. (20.0) -- --
Net change in valuation allowance...................... (12.2) -- --
Other.................................................. (3.2) 4.7 5.1
------ ------ ------
Subtotal............................................ 102.2 63.1 (0.2)
Non-deductible charge for acquired research and
development............................................ 11.6 5.8 18.2
------ ------ ------
$113.8 $ 68.9 $ 18.0
====== ====== ======
53
56
BMC SOFTWARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Deferred income taxes reflect the impact of temporary differences between
the amounts of assets and liabilities recognized for financial reporting
purposes and such amounts recognized for income tax purposes. The tax effects of
the temporary differences as of March 31, 2000 and 2001 are as follows:
MARCH 31,
----------------
2000 2001
------ ------
(IN MILLIONS)
Deferred tax assets:
Net operating loss carryforwards.......................... $ 12.7 $ 9.5
Deferred revenue.......................................... 5.7 1.0
Acquired research and development......................... 72.2 108.3
Deferred compensation plan................................ 5.9 7.0
Stock compensation plans.................................. -- 2.5
Accruals not currently deductible......................... 1.9 0.2
Other..................................................... 3.3 7.2
------ ------
Total gross deferred tax asset.................... 101.7 135.7
------ ------
Valuation allowance....................................... (0.9) (0.9)
------ ------
Total deferred tax asset.......................... 100.8 134.8
------ ------
Deferred tax liabilities:
Software capitalization, net.............................. (54.1) (72.0)
Book/tax difference on assets............................. (5.0) (6.3)
Stock compensation plans.................................. (1.3) --
Foreign earnings and other................................ (10.1) (5.5)
------ ------
Total deferred tax liability...................... (70.5) (83.8)
------ ------
Net deferred tax asset.................................... $ 30.3 $ 51.0
====== ======
As reported:
Other current assets................................... $ 8.6 $ 9.9
====== ======
Other long-term assets................................. $ 21.7 $ 41.1
====== ======
Aggregate unremitted earnings of foreign subsidiaries for which U.S.
Federal income taxes have not been provided, totaled approximately $434.7
million and $511.1 million at March 31, 2000 and 2001, respectively. Deferred
income taxes have not been provided on these earnings because the Company
considers them to be indefinitely reinvested.
Prior to the combination of BMC and Boole, Boole had recorded a valuation
allowance to reflect the estimated amount of deferred tax assets that they
believed would not be realized due to the expiration of net operating loss
carryforwards. Due to the combination of BMC and Boole, the Company expects to
utilize the net operating loss carryforwards. Therefore, the tax benefits were
recognized and a portion of the valuation allowance was reduced in fiscal 1999.
At March 31, 2001, the Company had federal net operating loss carryforwards of
$35.3 million that will expire between 2003 and 2020.
During fiscal 1999, the Company settled various transfer pricing
adjustments for fiscal years 1993 through 1997 with the Internal Revenue Service
(IRS), for which estimated accruals had been previously established. The Company
recorded a non-recurring benefit to its provision for income taxes for fiscal
1999 to reflect the settlement with the IRS. As of March 31, 2001, the Company
has settled all income tax adjustments with the IRS for all years through fiscal
1996. The Company's fiscal 1997 federal tax return has been examined by the IRS
and certain adjustments to increase taxable income have been proposed. The
Company is attempting to
54
57
BMC SOFTWARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
settle these disputes with the Appeals Division of the IRS. Management believes
that the final resolution of this audit will not have a material adverse effect
on the Company's financial position or results of operations. The Company's
fiscal 1998 and 1999 federal tax returns are currently being examined by the
IRS. No proposed adjustments have been received for these audits.
(8) STOCK INCENTIVE PLANS
The Company has adopted numerous stock plans that provide for the grant of
options and restricted stock to employees and directors of the Company. Under
the option plans, all options granted during fiscal 1999, 2000 and 2001 have
been granted at fair market value as of the date of grant and have a ten-year
term, except for the 0.4 million replacement stock options issued below fair
market value in fiscal 2001 as consideration in the Evity acquisition. The $15.4
million fair value of the Evity replacement options was included in the purchase
price for this acquisition. All options under these plans vest over terms of
three to five years. The restricted stock is subject to transfer restrictions
that lapse over two to five years. Under these plans, the Company was authorized
to grant an additional 7.6 million shares as of March 31, 2001.
The following is a summary of the stock option activity for the years ended
March 31, 1999, 2000 and 2001 (shares in millions):
1999 2000 2001
------------------------ ------------------------ ------------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
------------- -------- ------------- -------- ------------- --------
Options outstanding,
beginning of year........ 28.3 $14 28.3 $21 28.6 $31
Options granted............ 6.1 42 9.8 46 16.1 24
Options exercised.......... (4.9) 9 (7.3) 12 (2.7) 10
Options forfeited or
canceled................. (1.2) 16 (2.2) 31 (4.3) 37
------------- ------------- -------------
Options outstanding, end of
year..................... 28.3 21 28.6 31 37.7 29
============= ============= =============
Option price range per
share.................... $0.48 - 63.44 $0.48 - 80.94 $0.30 - 80.94
============= ============= =============
Options exercisable........ 11.8 11 9.7 16 12.0 23
============= ============= =============
The following is a summary of the restricted stock activity for the years
ended March 31, 1999, 2000 and 2001:
1999 2000 2001
---- ---- -----
(IN THOUSANDS)
Shares granted and unearned, beginning of year.............. 211 204 192
Shares granted.............................................. 66 86 1,151
Shares earned............................................... (73) (93) (394)
Shares forfeited............................................ -- (5) (164)
--- --- -----
Shares granted and unearned, end of year.................... 204 192 785
=== === =====
In fiscal 1997, the Company adopted the BMC Software, Inc. 1996 Employee
Stock Purchase Plan (the Purchase Plan). A total of 3.0 million shares of common
stock may be issued under the Purchase Plan to participating employees,
including 2.0 million additional shares approved by the stockholders during
fiscal 2001. Purchase rights under the Purchase Plan are granted at 85% of the
lesser of the market value of the common stock at the offering date or on the
exercise date. During fiscal 1999, 2000 and 2001, approximately
55
58
BMC SOFTWARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
278,100, 243,300 and 654,400 shares of stock, respectively, were purchased
pursuant to this plan. The Purchase Plan terminates in 2006.
SFAS No. 123, "Accounting for Stock-Based Compensation," allows the Company
to account for its employee stock-based compensation plans under APB Opinion No.
25 and the related interpretations. In accordance with APB Opinion No. 25,
deferred compensation is recorded for stock-based compensation grants based on
the excess of the market value of the common stock on the measurement date over
the exercise price. The deferred compensation is amortized to expense over the
vesting period of each unit of stock-based compensation granted. If the exercise
price of the stock-based compensation is equal to or exceeds the market price of
the Company's stock on the date of grant, no compensation expense is recorded.
For fiscal years ended March 31, 1999, 2000 and 2001, the Company recorded
compensation expense of $2.3 million, $2.7 million and $19.8 million,
respectively, for restricted stock grants. The expense for the fiscal year ended
March 31, 2001, includes $11.4 million of merger-related compensation charges
related to restricted shares issued as part of the Evity acquisition. The
weighted average grant date fair value per share of restricted stock grants was
$47.47, $46.40 and $38.31 for fiscal 1999, 2000 and 2001, respectively. The
Company was not required to record compensation expense for stock option grants
and stock issued under the Purchase Plan during the same periods, except for
fiscal 2001 which included a charge of $3.3 million related to the Purchase
Plan.
Had the compensation cost for these plans been determined pursuant to the
alternative method permitted under SFAS No. 123, the Company's net earnings and
earnings per share would have been reduced to the following pro forma amounts:
YEARS ENDED MARCH 31,
--------------------------
1999 2000 2001
------ ------ ------
(IN MILLIONS, EXCEPT
PER SHARE DATA)
Net earnings: As Reported................................. $362.6 $242.5 $ 42.4
Pro Forma................................... $332.0 $199.6 $(40.6)
Basic EPS: As Reported................................. $ 1.55 $ 1.01 $ 0.17
Pro Forma................................... $ 1.42 $ 0.83 $(0.17)
Diluted EPS: As Reported................................. $ 1.46 $ 0.96 $ 0.17
Pro Forma................................... $ 1.34 $ 0.81 $(0.17)
In computing the above pro forma amounts, the fair values of each option
grant and each purchase right under the Purchase Plan are estimated using the
Black-Scholes option pricing model with the following weighted average
assumptions used for grants in fiscal 1999, 2000 and 2001, respectively:
risk-free interest rate of 6%, 6.7% and 4.75%, expected life of 5 years for
options and 6 months for Purchase Plan shares, expected volatility of 40%, 50%
and 70% and no expected dividend yields. The weighted average grant date fair
value per share of options granted in fiscal 1999, 2000 and 2001 was $21.45,
$23.56 and $15.37, respectively. The weighted average grant date fair value per
share of purchase rights granted under the Purchase Plan in fiscal 1999, 2000
and 2001 was $10.33, $17.55 and $11.50, respectively.
56
59
BMC SOFTWARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company's outstanding options as of March 31, 2001, are segregated into
the following categories in accordance with SFAS No. 123 (shares in millions):
OUTSTANDING OPTIONS EXERCISABLE OPTIONS
---------------------------------------------- --------------------------
WEIGHTED
AVERAGE
RANGE OF WEIGHTED AVERAGE REMAINING WEIGHTED AVERAGE
EXERCISE PRICE SHARES EXERCISE PRICE CONTRACTUAL LIFE SHARES EXERCISE PRICE
- -------------- ------ ---------------- ---------------- ------ ----------------
$0.30-19.75................. 6.4 $ 8 4 5.6 $ 8
$19.78...................... 9.0 $20 9 -- $--
$20.09-31.72................ 7.8 $26 8 3.0 $28
$31.74-46.09................ 13.6 $44 9 3.1 $44
$46.13-80.94................ 0.9 $53 8 0.3 $53
(9) RETIREMENT PLANS
The Company maintains a salary reduction profit sharing plan, or 401(k)
plan, available to all domestic employees. The 401(k) plan is based on a
calendar year end and allows employees to contribute up to 15% of their annual
compensation with a maximum contribution of $10,000 in calendar years 1998 and
1999 and $10,500 in calendar year 2000. In each of the calendar years 1998, 1999
and 2000, the board of directors authorized contributions to the 401(k) plan
that would match each employee's contribution up to a maximum of $5,000. The
costs of these contributions to the Company amounted to $9.8 million, $16.5
million and $16.4 million for the fiscal years ended March 31, 1999, 2000 and
2001, respectively. The Company contributions vest to the employee in increments
of 20% per year beginning with the third year of employment and ending with the
seventh.
In addition to the Company's 401(k) plan, the Company maintains a deferred
compensation plan for certain employees. At March 31, 2000 and 2001, a total of
approximately $24.7 million and $20.8 million, respectively, is included in
long-term investment securities, with a corresponding amount included in accrued
liabilities for the obligations under this plan. Employees participating in this
plan receive their respective balances based on predetermined payout schedules
or upon termination or death.
(10) COMMITMENTS AND CONTINGENCIES
Leases --
The Company has several noncancelable operating leases for office space,
computer equipment and software. Rent is recognized equally over the lease term.
Total expenses incurred under these leases during the years ended March 31,
1999, 2000 and 2001, were approximately $27.3 million, $38.5 million and $48.8
million, respectively.
57
60
BMC SOFTWARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Future minimum lease payments under noncancelable operating leases as of
March 31, 2001 are:
YEARS
ENDING
MARCH 31,
-------------
(IN MILLIONS)
2002........................................................ $ 53.2
2003........................................................ 51.3
2004........................................................ 47.7
2005........................................................ 41.6
2006........................................................ 37.4
2007 and thereafter......................................... 69.7
------
Total minimum lease payments...................... $300.9
======
The Company leases certain equipment under long-term capital leases. At
March 31, 2000 and 2001, obligations under these capital leases were not
significant.
Litigation --
On February 4, 2000, an action styled Dov Klein v. BMC Software, Inc.,
Richard P. Gardner, Stephen B. Solcher, Roy J. Wilson, Kevin M. Weiss, Kevin M.
Klausmeyer, Max P. Watson, Jr., William M. Austin, Wayne S. Morris, M. Brinkley
Morse, Robert E. Beauchamp, and Theodore W. Van Duyn, No. 00-CV-359, was filed
in the United States District Court for the Southern District of Texas, Houston
Division. The plaintiff alleges that BMC Software and eleven current and former
senior executives violated Sections 10(b) and 20(a) of the Securities Exchange
Act and Rule 10b-5. The plaintiff contends that BMC Software and the individual
defendants artificially inflated the Company's stock price by extending unusual
payment terms to purchasers of its products, failing to disclose softening
demand and increasing competition for its products, and failing to disclose
difficulties in managing its sales force. The plaintiff seeks unspecified
compensatory damages, interest and costs, including legal fees. The action is
subject to the Private Securities Litigation Reform Act of 1995. On March 9,
2000, the court consolidated four similar actions, ordered that all subsequently
filed similar actions be consolidated, and set out a briefing schedule.
Subsequently, six additional cases were filed that made similar allegations.
These cases were also consolidated into the main action. On August 14, 2000, the
plaintiff filed a consolidated amended complaint. This complaint alleges a class
of all persons who purchased BMC stock between July 29, 1999 and July 5, 2000.
The Company has filed a motion to dismiss the complaints and intends to defend
the consolidated action vigorously. Briefing on the motion to dismiss is
complete. At this early stage of the litigation, it is not possible to estimate
potential damages, but it appears that if liability were established, an
unfavorable judgment or settlement could have a material adverse effect on the
Company's financial position and results of operations.
The Company is subject to various other legal proceedings and claims,
either asserted or unasserted, which arise in the ordinary course of business.
Management does not believe that the outcome of any of these legal matters will
have a material adverse effect on the Company's financial position or results of
operations.
In October 1999, the Company settled all claims in a lawsuit styled BMC
Software, Inc., plaintiff, vs. Peregrine/Bridge Transfer Corp., Skunkware, Inc.,
Neon Systems, Inc., Peregrine Systems, Inc., Wayne E. Fisher and John J. Moores,
defendants, vs. BMC Software, Inc. and Max P. Watson, counter-defendants. The
settlement comprised a $30 million payment by the Company to certain defendants
and an $8.6 million payment to Neon Systems, Inc. under a software distribution
agreement entered into in connection with the settlement. The $55.4 million
charge for legal settlement in the consolidated statements of earnings and
comprehensive income for fiscal 2000 includes the payments above and legal fees
and other litigation expenses of $16.8 million.
58
61
BMC SOFTWARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(11) SEGMENT REPORTING
SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information," requires that a public business enterprise report financial and
descriptive information about its reportable operating segments. Generally,
financial information is required to be reported on the basis used internally
for evaluating segment performance and resource allocation. Prior to fiscal
2001, management considered the operations of the Company to be in a single
segment, distributing enterprise systems management software products, and
therefore separate profit or loss information was not compiled for any portion
of the Company. During the first quarter of fiscal 2001, management began
reviewing the results and assessing the performance of the professional services
operations as a separate segment within the Company. During the fourth quarter
of fiscal 2001, management began reviewing the results of the software business
by the following product categories: Enterprise Server Management, Business
Integrated Scheduling, Application & Database Performance Management, Recovery &
Storage Management and Other Software. As of March 31, 2001, segment performance
is measured based on operating margins, which reflect only the direct
controllable expenses of the segments and do not include allocation of indirect
research and development expenses, the effect of software development cost
capitalization and amortization, selling and marketing expenses, general and
administrative expenses, amortization of acquired technology, goodwill and
intangibles, one-time charges, other income, net, and income taxes. Assets and
liabilities are not accounted for by segment.
ENTERPRISE SYSTEMS MANAGEMENT SOFTWARE
-------------------------------------------------------------
APPLICATION INDIRECT
ENTERPRISE BUSINESS & DATABASE RECOVERY & R&D
SERVER INTEGRATED PERFORMANCE STORAGE OTHER PROFESSIONAL AND AS
MANAGEMENT SCHEDULING MANAGEMENT MANAGEMENT SOFTWARE SERVICES COM REPORTED
---------- ---------- ----------- ---------- -------- ------------ -------- --------
(IN MILLIONS)
2001
License revenues.......... $345.9 $ 77.0 $235.4 $147.6 $ 86.3 -- -- $ 892.2
Maintenance revenues...... 257.1 35.1 103.2 94.6 34.1 -- -- 524.1
Professional services..... -- -- -- -- -- 87.7 -- 87.7
------ ------ ------ ------ ------ ----- ------ --------
Total revenues............ $603.0 $112.1 $338.6 $242.2 $120.4 $87.7 $ -- $1,504.0
Direct research and
development (R&D)
expenses & cost of
maintenance services and
product licenses
(COM)................... 96.4 19.8 142.8 56.5 61.8 -- 65.3 442.6
Cost of professional
services................ -- -- -- -- -- 95.5 -- 95.5
------ ------ ------ ------ ------ ----- ------ --------
Operating margin........ $506.6 $ 92.3 $195.8 $185.7 $ 58.6 $(7.8) $(65.3) 965.9
====== ====== ====== ====== ====== ===== ======
Selling and marketing
expenses................ 600.7
General and administrative
expenses................ 165.5
Acquired research and
development............. 21.4
Amortization of acquired
technology, goodwill and
intangibles............. 178.2
Merger-related costs and
compensation charges.... 8.6
Other income, net......... 68.9
--------
Consolidated earnings
before taxes............ $ 60.4
========
59
62
BMC SOFTWARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
ENTERPRISE SYSTEMS MANAGEMENT SOFTWARE
-------------------------------------------------------------
APPLICATION INDIRECT
ENTERPRISE BUSINESS & DATABASE RECOVERY & R&D
SERVER INTEGRATED PERFORMANCE STORAGE OTHER PROFESSIONAL AND AS
MANAGEMENT SCHEDULING MANAGEMENT MANAGEMENT SOFTWARE SERVICES COM REPORTED
---------- ---------- ----------- ---------- -------- ------------ -------- --------
(IN MILLIONS)
2000
License revenues.......... $508.5 $65.1 $307.4 $209.2 $ 90.0 -- -- $1,180.2
Maintenance revenues...... 261.8 27.7 86.7 88.6 20.9 -- -- 485.7
Professional services..... -- -- -- -- -- 53.3 -- 53.3
------ ----- ------ ------ ------ ------ ------ --------
Total revenues............ $770.3 $92.8 $394.1 $297.8 $110.9 $ 53.3 $ -- $1,719.2
Direct research and
development expenses &
cost of maintenance
services and product
licenses................ 79.8 18.9 120.1 57.1 43.4 -- 71.1 390.4
Cost of professional
services................ -- -- -- -- -- 74.1 -- 74.1
------ ----- ------ ------ ------ ------ ------ --------
Operating margin........ $690.5 $73.9 $274.0 $240.7 $ 67.5 $(20.8) $(71.1) 1,254.7
====== ===== ====== ====== ====== ====== ======
Selling and marketing
expenses................ 559.7
General and administrative
expenses................ 135.1
Acquired research and
development............. 80.8
Amortization of acquired
technology, goodwill and
intangibles............. 139.1
Legal settlement.......... 55.4
Merger-related costs and
compensation charges.... 14.1
Other income, net......... 40.9
--------
Consolidated earnings
before taxes............ $ 311.4
========
Revenue information is available by reportable segment for the year ended
March 31, 1999, but it is impracticable to determine segment direct costs for
that year.
ENTERPRISE SYSTEMS MANAGEMENT SOFTWARE
-------------------------------------------------------------
APPLICATION
ENTERPRISE BUSINESS & DATABASE RECOVERY &
SERVER INTEGRATED PERFORMANCE STORAGE OTHER PROFESSIONAL TOTAL
MANAGEMENT SCHEDULING MANAGEMENT MANAGEMENT SOFTWARE SERVICES REVENUES
---------- ---------- ----------- ---------- -------- ------------ --------
(IN MILLIONS)
1999
License revenues.................. $469.8 $14.6 $222.5 $162.0 $ 38.0 -- $ 906.9
Maintenance revenues.............. 232.4 9.1 61.9 61.4 7.5 -- 372.3
Professional services............. -- -- -- -- -- 24.7 24.7
------ ----- ------ ------ ------ ------ --------
Total revenues.................... $702.2 $23.7 $284.4 $223.4 $ 45.5 $ 24.7 $1,303.9
60
63
BMC SOFTWARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Revenues from external customers and long-lived assets (excluding financial
instruments and deferred tax assets) attributed to the United States, the
Company's country of domicile, and all other countries are as follows.
YEARS ENDED MARCH 31,
--------------------------------
1999 2000 2001
-------- -------- --------
(IN MILLIONS)
Revenues:
United States...................................... $ 761.8 $1,085.9 $ 820.5
International...................................... 542.1 633.3 683.5
-------- -------- --------
$1,303.9 $1,719.2 $1,504.0
======== ======== ========
Long-lived Assets:
United States...................................... $ 945.4 $1,058.9
International...................................... 55.9 81.6
-------- --------
$1,001.3 $1,140.5
======== ========
(12) MERGER-RELATED COSTS
Pursuant to the close of BMC's merger with Boole in March, 1999, BMC's
management approved a formal plan of restructuring (the Plan) which included
steps to be taken to fully integrate the operations of the two companies,
consolidate duplicate facilities, and eliminate redundant positions to achieve
reductions in overhead expenses in future periods. In connection with the merger
and the Plan, at March 31, 1999 the Company accrued approximately $38.3 million
in merger-related costs. This accrual included direct transaction costs, such as
investment banking, legal and accounting fees and approximately $5 million for
settlement of a lawsuit brought against Boole for allegedly breaching a
standstill and exclusive negotiating agreement with Platinum Technology
International, Inc. The remainder of the accrual represented management's best
estimate, based on available information as of March 31, 1999, of identifiable
and quantifiable charges that the Company would incur as a result of the actions
to be taken under the Plan. The accrued restructuring charges at March 31, 1999
included estimates of involuntary termination benefits for 50 domestic employees
and 30 international employees, located primarily in Europe, including the
executive management of Boole and various redundant administrative and support
personnel. The accrual also included charges for incremental costs to exit
certain office lease arrangements, for idle facilities and for asset writedowns
of office furniture and fixtures and computer hardware. During fiscal 2000, the
Company made certain revisions to the Plan including the following: the
termination of approximately 240 additional employees, primarily in the United
States and Europe; the accrual of other termination benefits which were
contingent upon certain performance criteria; revisions to the original exit
strategy for certain operating leases for office space in the United States and
Europe; and the accrual for termination costs for certain operating leases for
computer hardware and equipment. Additionally, in conjunction with the New
Dimension acquisition in fiscal 2000, the Company
61
64
BMC SOFTWARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
accrued $0.4 million for estimated costs to terminate certain operating leases
for duplicate office space. The activity in the accrual for merger-related costs
for the year ended March 31, 2000, was as follows:
PAID OUT OR
BALANCE AT REVISION OF CHARGED AGAINST BALANCE AT
MARCH 31, THE THE RELATED MARCH 31,
1999 ACCRUAL ASSETS 2000
---------- ----------- --------------- ----------
(IN MILLIONS)
Direct transaction costs.................... $20.6 $ 2.5 $(23.1) $ --
Facility costs and write-down of fixed
assets to be disposed of.................. 10.2 (1.5) (5.3) 3.4
Employee termination benefits............... 7.0 10.5 (14.3) 3.2
Other merger-related costs.................. 0.5 2.6 (3.1) --
----- ----- ------ ----
Total accrual..................... $38.3 $14.1 $(45.8) $6.6
===== ===== ====== ====
The restructuring plan was substantially complete as of March 31, 2000.
During the year ended March 31, 2001, the Company paid certain termination and
facility costs and revised the estimate of remaining obligations as follows:
BALANCE AT REVISION OF BALANCE AT
MARCH 31, THE MARCH 31,
2000 ACCRUAL PAID OUT 2001
---------- ----------- -------- ----------
(IN MILLIONS)
Facility costs................................... $ 3.4 $(0.8) $ (2.6) $ --
Employee termination benefits.................... 3.2 (2.0) (0.1) 1.1
----- ----- ------ ----
Total accrual.......................... $ 6.6 $(2.8) $ (2.7) $1.1
===== ===== ====== ====
The remaining accrual relates to severance payments to be made in future
periods.
(13) SUBSEQUENT EVENT (UNAUDITED)
Subsequent to March 31, 2001, the Company reduced its workforce by
approximately 6% worldwide. The action was across all divisions and geographies
and affected employees received separation packages. As a result of this action,
the Company will incur a one-time restructuring charge estimated to be
approximately $14 million in the first quarter of fiscal 2002.
62
65
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
We have audited in accordance with auditing standards generally accepted in
the United States, the consolidated financial statements of BMC Software, Inc.
and subsidiaries included in this Form 10-K and have issued our report thereon
dated April 24, 2001. Our audits were made for the purpose of forming an opinion
on the basic consolidated financial statements taken as a whole. This Schedule
is the responsibility of the Company's management and is presented for purposes
of complying with the Securities and Exchange Commission's rules and is not part
of the basic consolidated financial statements. This Schedule has been subjected
to the auditing procedures applied in the audits of the basic consolidated
financial statements and, in our opinion, fairly states in all material respects
the financial data required to be set forth therein in relation to the basic
consolidated financial statements taken as a whole.
ARTHUR ANDERSEN LLP
Houston, Texas
June 8, 2001
63
66
SCHEDULE II
BMC SOFTWARE, INC. AND SUBSIDIARIES
VALUATION ACCOUNT
YEARS ENDED MARCH 31, 1999, 2000 AND 2001
(IN MILLIONS)
ADJUSTMENT TO
BALANCE AT CHARGED CHARGED CONFORM FISCAL
BEGINNING (CREDIT) TO TO OTHER YEAR END OF BALANCE AT
YEAR DESCRIPTION OF YEAR EXPENSES ACCOUNTS DEDUCTION BOOLE & BABBAGE END OF YEAR
- ---- ------------------------------- ---------- ----------- -------- --------- --------------- -----------
1999 Allowance for doubtful 16.1 5.1 -- (0.9) (0.1) 20.2
accounts.......................
2000 Allowance for doubtful 20.2 21.7 -- (10.4) -- 31.5
accounts.......................
2001 Allowance for doubtful 31.5 17.6 -- (23.5) -- 25.6
accounts.......................
64
67
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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, on June 8, 2001.
BMC SOFTWARE, INC.
By: /s/ ROBERT E. BEAUCHAMP
------------------------------------
Robert E. Beauchamp
President, Chief Executive Officer
and Director
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons on behalf of the Registrant and
in the capacities and on the date indicated.
SIGNATURES TITLE DATE
---------- ----- ----
/s/ B. GARLAND CUPP Chairman of the Board June 8, 2001
- ---------------------------------------------------
B. Garland Cupp
/s/ ROBERT E. BEAUCHAMP President, Chief Executive Officer June 8, 2001
- --------------------------------------------------- and Director
Robert E. Beauchamp
/s/ JOHN W. COX Vice President, Chief Financial June 8, 2001
- --------------------------------------------------- Officer and Chief Accounting Officer
John W. Cox
/s/ JOHN W. BARTER Director June 8, 2001
- ---------------------------------------------------
John W. Barter
/s/ MELDON K. GAFNER Director June 8, 2001
- ---------------------------------------------------
Meldon K. Gafner
/s/ L. W. GRAY Director June 8, 2001
- ---------------------------------------------------
L. W. Gray
/s/ GEORGE F. RAYMOND Director June 8, 2001
- ---------------------------------------------------
George F. Raymond
/s/ TOM C. TINSLEY Director June 8, 2001
- ---------------------------------------------------
Tom C. Tinsley
65
68
EXHIBIT INDEX
EXHIBIT
NUMBER
-------
3.1 -- Restated Certificate of Incorporation of the Company;
incorporated by reference to Exhibit 3.1 to the Company's
Registration Statement on Form S-1 (Registration No. 33-
22892) (the "S-1 Registration Statement").
3.2 -- Certificate of Amendment of Restated Certificate of
Incorporation; incorporated by reference to Exhibit 3.2 to
the Company's Annual Report for the fiscal year ended March
31, 1997 (the "1997 10-K").
3.3 -- Bylaws of the Company; incorporated by reference to Exhibit
3.2 to the S-1 Registration Statement.
4.1 -- Specimen Stock Certificate for the Common Stock of the
Company; incorporated by reference to Exhibit 4.1 to the S-1
Registration Statement.
4.2 -- Rights Agreement, dated as of May 8, 1995, between the
Company and The First National Bank of Boston, as Rights
Agent (the "Rights Agreement"), specifying the terms of the
Rights, which includes the form of Certificate of
Designation of Series A Junior Participating Preferred Stock
as Exhibit A, the form of Right Certificate as Exhibit B and
the form of the Summary of Rights as Exhibit C (incorporated
by reference to Exhibit 1 to the registrant's Registration
Statement on Form 8-A dated May 10, 1995).
4.3 -- Amendment to the Rights Agreement; incorporated by reference
to Exhibit 4.3 to the 1997 10-K.
10.1 (a) -- Form of BMC Software, Inc. 1994 Employee Incentive Plan;
incorporated by reference to Exhibit 10.7(a) to the
Company's Annual Report on Form 10-K for the fiscal year
ended March 31, 1995 (the "1995 10-K").
10.1 (b) -- Form of Stock Option Agreement employed under BMC Software,
Inc. 1994 Employee Incentive Plan; incorporated by reference
to Exhibit 10.7(b) to the 1995 10-K.
10.2 (a) -- Form of BMC Software, Inc. 1994 Non-employee Directors'
Stock Option Plan; incorporated by reference to Exhibit
10.8(a) to the 1995 10-K.
10.2 (b) -- Form of Stock Option Agreement employed under BMC Software,
Inc. 1994 Non-employee Directors' Stock Option Plan;
incorporated by reference to Exhibit 10.8(b) to the 1995
10-K.
10.3 -- Description of BMC Software, Inc. Executive Officer Annual
Incentive Plan; incorporated by reference to Exhibit 10.6 to
the Company's Annual Report on Form 10-K for the fiscal year
ended March 31, 1994.
10.4 -- Form of Indemnification Agreement among the Company and Its
directors and executive officers; incorporated by reference
to Exhibit 10.11 to the 1995 10-K.
10.5 -- BMC Software, Inc. 2000 Employee Stock Incentive Plan;
incorporated by reference to Exhibit 10.1 to the Company's
Quarterly Report on Form 10-Q for the quarter ended June 30,
2000.
10.6 (a) -- BMC Software, Inc. 1994 Deferred Compensation Plan;
incorporated by reference to Exhibit 4.1 to the Company's
Current Report on Form 8-K dated April 2, 1999.
10.6 (b) -- First Amendment to BMC Software, Inc. 1994 Deferred
Compensation Plan; incorporated by reference to Exhibit 4.2
to the Company's Current Report on Form 8-K dated April 2,
1999.
10.6 (c) -- Form of BMC Software, Inc. 1994 Deferred Compensation Plan
Trust Agreement; incorporated by reference to Exhibit 4.3 to
the Company's Current Report on Form 8-K dated April 2,
1999.
*10.7 -- Executive Employment Agreement between BMC Software, Inc.
and Robert Beauchamp.
66
69
EXHIBIT
NUMBER
-------
10.8 -- Form of Executive Employment Agreement between BMC Software,
Inc. and Dan Barnea, Darroll Buytenhuys, Jeffrey Hawn and
Deborah Tummins; incorporated by reference to Exhibit 10.2
to the Company's Quarterly Report on Form 10-Q for the
quarter ended June 30, 2000.
*10.9 -- Schedule to Form of Executive Employment Agreement.
*21.1 -- Subsidiaries of the Company.
*23.1 -- Consent of Arthur Andersen LLP.
- ---------------
* Filed herewith.
67
70
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
3.1 -- Restated Certificate of Incorporation of the Company; incorporated
by reference to Exhibit 3.1 to the Company's Registration Statement
on Form S-1 (Registration No. 33-22892) (the "S-1 Registration
Statement").
3.2 -- Certificate of Amendment of Restated Certificate of Incorporation;
incorporated by reference to Exhibit 3.2 to the Company's Annual
Report for the fiscal year ended March 31, 1997 (the "1997 10-K").
3.3 -- Bylaws of the Company; incorporated by reference to Exhibit 3.2
to the S-1 Registration Statement.
4.1 -- Specimen Stock Certificate for the Common Stock of the Company;
incorporated by reference to Exhibit 4.1 to the S-1 Registration
Statement.
4.2 -- Rights Agreement, dated as of May 8, 1995, between the Company and
The First National Bank of Boston, as Rights Agent (the "Rights
Agreement"), specifying the terms of the Rights, which includes the
form of Certificate of Designation of Series A Junior Participating
Preferred Stock as Exhibit A, the form of Right Certificate as
Exhibit B and the form of the Summary of Rights as Exhibit C
(incorporated by reference to Exhibit 1 to the registrant's
Registration Statement on Form 8-A dated May 10, 1995).
4.3 -- Amendment to the Rights Agreement; incorporated by reference to
Exhibit 4.3 to the 1997 10-K.
10.1(a) -- Form of BMC Software, Inc. 1994 Employee Incentive Plan;
incorporated by reference to Exhibit 10.7(a) to the Company's
Annual Report on Form 10-K for the fiscal year ended March 31, 1995
(the "1995 10-K").
10.1(b) -- Form of Stock Option Agreement employed under BMC Software, Inc.
1994 Employee Incentive Plan; incorporated by reference to
Exhibit 10.7(b) to the 1995 10-K.
10.2(a) -- Form of BMC Software, Inc. 1994 Non-employee Directors' Stock
Option Plan; incorporated by reference to Exhibit 10.8(a) to the
1995 10-K.
10.2(b) -- Form of Stock Option Agreement employed under BMC Software, Inc.
1994 Non-employee Directors' Stock Option Plan; incorporated by
reference to Exhibit 10.8(b) to the 1995 10-K.
10.3 -- Description of BMC Software, Inc. Executive Officer Annual
Incentive Plan; incorporated by reference to Exhibit 10.6 to the
Company's Annual Report on Form 10-K for the fiscal year ended
March 31, 1994.
10.4 -- Form of Indemnification Agreement among the Company and Its
directors and executive officers; incorporated by reference to
Exhibit 10.11 to the 1995 10-K.
10.5 -- BMC Software, Inc. 2000 Employee Stock Incentive Plan; incorporated
by reference to Exhibit 10.1 to the Company's Quarterly Report on
Form 10-Q for the quarter ended June 30, 2000.
10.6(a) -- BMC Software, Inc. 1994 Deferred Compensation Plan; incorporated
by reference to Exhibit 4.1 to the Company's Current Report on
Form 8-K dated April 2, 1999.
10.6(b) -- First Amendment to BMC Software, Inc. 1994 Deferred Compensation
Plan; incorporated by reference to Exhibit 4.2 to the Company's
Current Report on Form 8-K dated April 2, 1999.
10.6(c) -- Form of BMC Software, Inc. 1994 Deferred Compensation Plan Trust
Agreement; incorporated by reference to Exhibit 4.3 to the
Company's Current Report on Form 8-K dated April 2, 1999.
*10.7 -- Executive Employment Agreement between BMC Software, Inc. and
Robert Beauchamp.
10.8 -- Form of Executive Employment Agreement between BMC Software, Inc.
and Dan Barnea, Darroll Buytenhuys, Jeffrey Hawn and Deborah
Tummins.
*10.9 -- Schedule to Form of Executive Employment Agreement.
*21.1 -- Subsidiaries of the Company.
*23.1 -- Consent of Arthur Andersen LLP.
- ----------
* Filed herewith.