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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED DECEMBER 31, 2003
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 001-16393
BMC SOFTWARE, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 74-2126120
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
2101 CITYWEST BOULEVARD
HOUSTON, TEXAS 77042-2827
(Address of principal executive offices) (Zip Code)
Registrant's telephone number including area code: (713) 918-8800
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 whether the registrant is an accelerated filer
(as defined in Rule 12b-2 of the Exchange Act). Yes [X] No [ ]
As of February 10, 2004, there were outstanding 225,136,225 shares of
Common Stock, par value $.01, of the registrant.
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BMC SOFTWARE, INC. AND SUBSIDIARIES
QUARTER ENDED DECEMBER 31, 2003
INDEX
PAGE
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of March 31, 2003 and
December 31, 2003 (Unaudited)........................................... 3
Condensed Consolidated Statements of Operations and Comprehensive
Income (Loss) for the three months and nine months ended December 31,
2002 and 2003 (Unaudited)............................................... 4
Condensed Consolidated Statements of Cash Flows for the nine
months ended December 31, 2002 and 2003 (Unaudited)..................... 5
Notes to Condensed Consolidated Financial Statements (Unaudited).......... 6
Item 2. Management's Discussion and Analysis of Results of Operations and
Financial Condition....................................................... 11
Item 3. Quantitative and Qualitative Disclosures about Market Risk................... 27
Item 4. Controls and Procedures...................................................... 27
PART II. OTHER INFORMATION
Item 1. Legal Proceedings............................................................ 27
Item 6. Exhibits and Reports on Form 8-K............................................. 28
Signatures................................................................... 29
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
BMC SOFTWARE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN MILLIONS)
MARCH 31, DECEMBER 31,
2003 2003
---- ----
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents.................................. $ 500.1 $ 444.2
Marketable securities...................................... 151.7 319.0
Trade accounts receivable, net............................. 186.4 152.8
Current trade finance receivables, net..................... 154.4 136.8
Other current assets....................................... 105.6 111.7
----------- -----------
Total current assets................................ 1,098.2 1,164.5
Property and equipment, net.................................. 408.4 385.2
Software development costs and related assets, net........... 192.7 152.7
Long-term marketable securities.............................. 363.5 301.7
Long-term trade finance receivables, net..................... 175.9 189.9
Acquired technology, net..................................... 117.1 83.4
Goodwill, net................................................ 353.4 356.6
Intangible assets, net....................................... 57.4 47.8
Other long-term assets....................................... 78.9 104.2
----------- -----------
$ 2,845.5 $ 2,786.0
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Trade accounts payable..................................... $ 52.2 $ 33.0
Accrued liabilities........................................ 225.0 238.0
Current portion of deferred revenue........................ 561.6 596.5
----------- -----------
Total current liabilities........................... 838.8 867.5
Long-term deferred revenue................................... 607.1 630.2
Other long-term liabilities.................................. 16.2 72.6
----------- -----------
Total liabilities................................... 1,462.1 1,570.3
Commitments and contingencies
Stockholders' equity:
Preferred stock............................................ -- --
Common stock............................................... 2.5 2.5
Additional paid-in capital................................. 537.0 537.2
Retained earnings.......................................... 1,143.9 1,075.6
Accumulated other comprehensive income (loss).............. (7.7) (6.2)
----------- -----------
1,675.7 1,609.1
Less treasury stock, at cost............................... (290.1) (392.7)
Less unearned portion of restricted stock compensation..... (2.2) (0.7)
----------- -----------
Total stockholders' equity.......................... 1,383.4 1,215.7
----------- -----------
$ 2,845.5 $ 2,786.0
=========== ===========
The accompanying notes are an integral part of these condensed
consolidated financial statements.
3
BMC SOFTWARE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE INCOME (LOSS)
(IN MILLIONS, EXCEPT PER SHARE DATA)
(UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
DECEMBER 31, DECEMBER 31,
-------------------- ----------------------
2002 2003 2002 2003
--------- --------- ---------- ----------
Revenues:
License.................................................... $ 168.5 $ 162.6 $ 424.9 $ 394.9
Maintenance................................................ 159.1 190.4 459.7 562.1
Professional services...................................... 22.0 21.8 61.4 61.6
-------- -------- --------- ---------
Total revenues....................................... 349.6 374.8 946.0 1,018.6
-------- -------- --------- ---------
Operating expenses:
Selling and marketing expenses............................... 129.4 177.4 361.6 455.5
Research, development and support expenses................... 120.5 177.5 351.1 451.9
Cost of professional services................................ 22.3 19.9 64.6 58.9
General and administrative expenses.......................... 41.1 46.9 112.5 132.2
Acquired research and development............................ 12.0 -- 12.0 --
Amortization of acquired technology and intangibles.......... 17.8 14.5 42.6 45.4
Merger-related costs and compensation charges and other...... (0.3) -- 0.5 --
-------- -------- --------- ---------
Total operating expenses............................. 342.8 436.2 944.9 1,143.9
-------- -------- --------- ---------
Operating income (loss).............................. 6.8 (61.4) 1.1 (125.3)
Interest and other income, net................................. 16.1 16.3 49.0 54.7
Gain (loss) on marketable securities and other investments..... (4.4) 0.7 (10.7) 0.9
-------- -------- --------- ---------
Other income, net.................................... 11.7 17.0 38.3 55.6
-------- -------- --------- ---------
Earnings (loss) before income taxes.................. 18.5 (44.4) 39.4 (69.7)
Income tax provision (benefit)................................. 6.4 -- 12.0 (6.0)
-------- -------- --------- ---------
Net earnings (loss).................................. $ 12.1 $ (44.4) $ 27.4 $ (63.7)
======== ======== ========= =========
Basic earnings (loss) per share................................ $ 0.05 $ (0.20) $ 0.12 $ (0.28)
======== ======== ========= =========
Diluted earnings (loss) per share.............................. $ 0.05 $ (0.20) $ 0.11 $ (0.28)
======== ======== ========= =========
Shares used in computing basic earnings (loss) per share....... 234.6 225.5 238.2 227.4
======== ======== ========= =========
Shares used in computing diluted earnings (loss) per share..... 235.5 225.5 239.3 227.4
======== ======== ========= =========
Comprehensive income (loss):
Net earnings (loss).......................................... $ 12.1 $ (44.4) $ 27.4 $ (63.7)
Foreign currency translation adjustment...................... 2.7 -- (7.5) 7.4
Unrealized gain (loss) on securities available for sale:
Unrealized gain (loss), net of taxes of $6.5, $1.5, $7.2
and $2.4................................................ 12.0 (2.8) 13.3 (4.5)
Realized (gain) loss included in net earnings (loss), net
of taxes of $0, $0.1, $0.5 and $0.2..................... -- (0.1) 1.0 (0.2)
-------- -------- --------- ---------
12.0 (2.9) 14.3 (4.7)
Unrealized gain (loss) on derivative instruments:
Unrealized loss, net of taxes of $0.4, $0.8, $2.4 and $1.9 (0.8) (1.4) (4.5) (3.5)
Realized loss included in net earnings (loss), net of
taxes of $0.6, $0.6, $1.3 and $1.3...................... 1.1 1.1 2.5 2.4
-------- -------- --------- ---------
0.3 (0.3) (2.0) (1.1)
-------- -------- --------- ---------
Comprehensive income (loss).......................... $ 27.1 $ (47.6) $ 32.2 $ (62.1)
======== ======== ========= =========
The accompanying notes are an integral part of these condensed
consolidated financial statements.
4
BMC SOFTWARE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN MILLIONS)
(UNAUDITED)
NINE MONTHS ENDED
DECEMBER 31,
-------------------
2002 2003
-------- --------
Cash flows from operating activities:
Net earnings (loss)............................................... $ 27.4 $ (63.7)
Adjustments to reconcile net earnings (loss) to net cash provided
by operating activities:
Accrued exit costs............................................. (1.3) 78.0
Acquired research & development and merger-related costs
& compensation charges........................................ 12.6 --
Depreciation and amortization.................................. 171.6 198.9
Impairment of technology assets and investments................ 4.5 --
(Gain) loss on marketable securities and other investments..... 6.2 (0.9)
Earned portion of restricted stock compensation................ 2.0 1.5
(Decrease) increase in finance receivables..................... (101.1) 3.1
Increase (decrease) in payables to third-party financing
institutions for finance receivables.......................... 28.8 (28.1)
Net change in income taxes receivable.......................... 53.0 0.7
Net change in trade receivables, payables, deferred revenue and
other components of working capital........................... 176.4 42.9
------- -------
Net cash provided by operating activities................. 380.1 232.4
------- -------
Cash flows from investing activities:
Debtor-in-possession financing provided to Peregrine Systems,
Inc............................................................. (53.8) --
Proceeds from debtor-in-possession financing provided to
Peregrine Systems, Inc......................................... 53.8 --
Cash paid for technology acquisitions and other investments,
net of cash acquired............................................ (366.1) (9.0)
Adjustment of cash paid for Remedy acquisition.................... -- 7.2
Return of capital for cost-basis investments...................... 0.7 0.1
Proceeds from sale of technology.................................. -- 2.0
Purchases of marketable securities................................ (123.6) (273.9)
Maturities of/proceeds from sales of marketable securities........ 297.3 160.3
Purchases of property and equipment............................... (16.1) (31.8)
Capitalization of software development costs and related assets... (66.3) (38.3)
------- -------
Net cash used in investing activities..................... (274.1) (183.4)
------- -------
Cash flows from financing activities:
Payments on capital leases........................................ -- (2.2)
Stock options exercised and other................................. 19.6 13.1
Treasury stock acquired........................................... (158.8) (120.1)
------- -------
Net cash used in financing activities..................... (139.2) (109.2)
------- -------
Effect of exchange rate changes on cash............................. (9.6) 4.3
------- -------
Net change in cash and cash equivalents............................. (42.8) (55.9)
Cash and cash equivalents, beginning of period...................... 330.0 500.1
------- -------
Cash and cash equivalents, end of period............................ $ 287.2 $ 444.2
======= =======
Supplemental disclosure of cash flow information:
Cash paid (refunded) for income taxes............................. $ (48.2) $ 2.6
Liabilities assumed in acquisitions............................... $ 69.3 $ --
Capital lease obligation for computer hardware.................... $ -- $ 16.7
The accompanying notes are an integral part of these condensed
consolidated financial statements.
5
BMC SOFTWARE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(1) BASIS OF PRESENTATION
The accompanying condensed consolidated financial statements include
the accounts of BMC Software, Inc. and its majority-owned subsidiaries
(collectively, the Company or BMC). All significant intercompany balances and
transactions have been eliminated in consolidation. Certain amounts previously
reported have been reclassified to provide comparability among the periods
presented.
The accompanying unaudited interim condensed consolidated financial
statements reflect all normal recurring adjustments which, in the opinion of
management, are necessary for a fair presentation of the results for the periods
presented. These financial statements have been prepared in accordance with
generally accepted accounting principles for interim financial information and
with the instructions to Form 10-Q and Article 10 of Regulation S-X.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for complete financial statements.
These financial statements should be read in conjunction with the
Company's audited financial statements for the year ended March 31, 2003, as
filed with the Securities and Exchange Commission on Form 10-K.
(2) EARNINGS (LOSS) PER SHARE
Basic earnings per share (EPS) is computed by dividing net earnings
(loss) 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 three-month periods ended December 31, 2002 and
2003, the treasury stock method effect of 29.5 million and 27.8 million weighted
options, respectively, has been excluded from the calculation of diluted EPS as
they are anti-dilutive. For the nine-month periods ended December 31, 2002 and
2003, the treasury stock method effect of 30.3 million and 28.9 million weighted
options, respectively, has been excluded from the calculation of diluted EPS as
they are anti-dilutive. The following table summarizes the basic and diluted EPS
computations for the three months and nine months ended December 31, 2002 and
2003:
THREE MONTHS ENDED NINE MONTHS ENDED
DECEMBER 31, DECEMBER 31,
------------------ ------------------
2002 2003 2002 2003
------- -------- ------- --------
(IN MILLIONS, EXCEPT PER SHARE DATA)
Basic earnings (loss) per share:
Net earnings (loss)................................. $ 12.1 $ (44.4) $ 27.4 $ (63.7)
------- ------- ------- -------
Weighted average number of common shares............ 234.6 225.5 238.2 227.4
------- ------- ------- -------
Basic earnings (loss) per share..................... $ 0.05 $ (0.20) $ 0.12 $ (0.28)
======= ======= ======= =======
Diluted earnings (loss) per share:
Net earnings (loss)................................. $ 12.1 $ (44.4) $ 27.4 $ (63.7)
------- ------- ------- -------
Weighted average number of common shares............ 234.6 225.5 238.2 227.4
Incremental shares from assumed conversions of stock
options and other............................. 0.9 -- 1.1 --
------- ------- ------- -------
Adjusted weighted average number of common shares... 235.5 225.5 239.3 227.4
------- ------- ------- -------
Diluted earnings (loss) per share................... $ 0.05 $ (0.20) $ 0.11 $ (0.28)
======= ======= ======= =======
6
(3) SEGMENT REPORTING
In the quarter ended June 30, 2003, BMC's management changed the way it
was reviewing the results of the Company's software business and began reviewing
those results by the following product categories: Enterprise Data Management
(EDM) Software, including the Mainframe Data Management and Distributed Systems
Data Management product lines; Enterprise Systems Management (ESM) Software,
which includes the PATROL(R), MAINVIEW(R) and Scheduling & Output Management
product lines; Security; Other Software and Remedy(R). Though the EDM and ESM
product categories include the various product lines above, profitability is
measured at the product category level. In addition to these software segments,
the BMC professional services business is also considered a separate segment.
Remedy's professional services business is included in the Remedy results.
Through March 31, 2003, BMC's management reviewed the results of the Company's
software business by different product categories. The amounts reported below
for the three months and nine months ended December 31, 2002 and 2003, reflect
this change in the composition of the Company's business segments.
For the EDM, ESM and BMC professional services segments, segment
performance is measured based on contribution margin, reflecting only the direct
controllable expenses of the segments. Segment performance for the Security
segment is measured based on its direct controllable research and development
(R&D) costs and the costs of the dedicated Security sales and services team in
North America. As such, management's measure of profitability for these segments
does not include allocation of indirect research and development and support
expenses, the effect of software development cost capitalization and
amortization, selling and marketing expenses other than for North America
Security, general and administrative expenses, amortization of acquired
technology and intangibles, one-time charges, other income, net, and income
taxes. For the three months and nine months ended December 31, 2003, the
indirect portion of R&D and support expenses, cost of professional services and
selling and marketing expenses includes costs associated with the exit
activities described in footnote (6), as these exit costs are not included in
the measurement of segment performance. Effective with the Company's acquisition
of Remedy on November 20, 2002, Remedy is operated as a separate business unit
and therefore its performance is measured based on operating margin and does not
include amortization of acquired technology and intangibles, other income, net,
and income taxes. Remedy's costs represent the direct controllable costs of the
business unit and do not include the costs of services performed by BMC on
Remedy's behalf or allocations of corporate expenses. Assets and liabilities are
not accounted for by segment.
SOFTWARE, EXCLUDING REMEDY
-------------------------------- BMC
PROFESSIONAL INDIRECT
EDM ESM SECURITY OTHER SERVICES COSTS BMC REMEDY CONSOLIDATED
--- --- -------- ----- -------- ----- --- ------ ------------
(IN MILLIONS)
QUARTER ENDED DECEMBER 31, 2002
Revenues:
License............................ $ 77.1 $ 71.5 $ 4.7 $ 0.1 $ -- $ -- $153.4 $ 15.1 $168.5
Maintenance........................ 72.8 73.9 3.5 0.1 -- -- 150.3 8.8 159.1
Professional services.............. -- -- -- -- 20.9 -- 20.9 1.1 22.0
------ ------ ------ ------ ------ ------- ------ ------ ------
Total revenues........................ 149.9 145.4 8.2 0.2 20.9 -- 324.6 25.0 349.6
R&D and support expenses.............. 28.0 53.5 7.5 -- -- 26.5 115.5 5.0 120.5
Cost of services...................... -- -- 1.5 -- 19.9 -- 21.4 0.9 22.3
------ ------ ------ ------ ------ ------- ------ ------ ------
121.9 91.9 (0.8) 0.2 1.0 (26.5) 187.7 19.1 206.8
Selling and marketing expenses........ -- -- 2.5 -- -- 121.3 123.8 5.6 129.4
------ ------ ------ ------ ------ ------- ------ ------ ------
Contribution margin................ $121.9 $ 91.9 $ (3.3) $ 0.2 $ 1.0 $(147.8) 63.9 13.5 77.4
====== ====== ====== ====== ====== =======
General and administrative expenses............................................................... 37.3 3.8 41.1
------ ------ ------
Operating margin............................................................................... $ 26.6 $ 9.7 36.3
====== ======
Amortization of acquired technology and intangibles................................................................ 17.8
Merger-related costs and compensation charges and other............................................................ (0.3)
Acquired research and development.................................................................................. 12.0
Other income, net.................................................................................................. 11.7
------
Consolidated earnings before taxes................................................................................. $ 18.5
======
7
SOFTWARE, EXCLUDING REMEDY
-------------------------------- BMC
PROFESSIONAL INDIRECT
EDM ESM SECURITY OTHER SERVICES COSTS BMC REMEDY CONSOLIDATED
--- --- -------- ----- -------- ----- --- ------ ------------
(IN MILLIONS)
QUARTER ENDED DECEMBER 31, 2003
Revenues:
License............................ $ 61.0 $ 67.1 $ 4.7 $ 0.3 $ -- $ -- $133.1 $ 29.5 $162.6
Maintenance........................ 72.3 76.2 4.5 0.5 -- -- 153.5 36.9 190.4
Professional services.............. -- -- -- -- 18.4 -- 18.4 3.4 21.8
------ ------ ------ ------ ------ ------- ------ ------ ------
Total revenues........................ 133.3 143.3 9.2 0.8 18.4 -- 305.0 69.8 374.8
R&D and support expenses.............. 25.6 42.0 7.4 -- -- 89.8 164.8 12.7 177.5
Cost of services...................... -- -- 1.1 -- 15.9 0.3 17.3 2.6 19.9
------ ------ ------ ------ ------ ------- ------ ------ ------
107.7 101.3 0.7 0.8 2.5 (90.1) 122.9 54.5 177.4
Selling and marketing expenses........ -- -- 2.8 -- -- 150.6 153.4 24.0 177.4
------ ------ ------ ------ ------ ------- ------ ------ ------
Contribution margin................ $107.7 $101.3 $ (2.1) $ 0.8 $ 2.5 $(240.7) (30.5) 30.5 0.0
====== ====== ====== ====== ====== =======
General and administrative expenses............................................................... 41.1 5.8 46.9
------ ------ ------
Operating margin............................................................................... $(71.6) $ 24.7 (46.9)
====== ======
Amortization of acquired technology and intangibles................................................................. 14.5
Merger-related costs and compensation charges and other............................................................. --
Acquired research and development................................................................................... --
Other income, net................................................................................................... 17.0
------
Consolidated loss before taxes...................................................................................... $(44.4)
======
SOFTWARE, EXCLUDING REMEDY
-------------------------------- BMC
PROFESSIONAL INDIRECT
EDM ESM SECURITY OTHER SERVICES COSTS BMC REMEDY CONSOLIDATED
--- --- -------- ----- -------- ----- --- ------ ------------
(IN MILLIONS)
NINE MONTHS ENDED DECEMBER 31, 2002
Revenues:
License............................ $194.1 $200.3 $ 15.2 $ 0.2 $ -- $ -- $409.8 $ 15.1 $424.9
Maintenance........................ 219.5 220.0 10.0 1.4 -- -- 450.9 8.8 459.7
Professional services.............. -- -- -- -- 60.3 -- 60.3 1.1 61.4
------ ------ ------ ------ ------ ------- ------ ------ ------
Total revenues........................ 413.6 420.3 25.2 1.6 60.3 -- 921.0 25.0 946.0
R&D and support expenses.............. 86.0 162.2 20.2 -- -- 77.7 346.1 5.0 351.1
Cost of services...................... -- -- 3.6 -- 60.1 -- 63.7 0.9 64.6
------ ------ ------ ------ ------ ------- ------ ------ ------
327.6 258.1 1.4 1.6 0.2 (77.7) 511.2 19.1 530.3
Selling and marketing expenses........ -- -- 7.0 -- -- 349.0 356.0 5.6 361.6
------ ------ ------ ------ ------ ------- ------ ------ ------
Contribution margin................ $327.6 $258.1 $ (5.6) $ 1.6 $ 0.2 $(426.7) 155.2 13.5 168.7
====== ====== ====== ====== ====== =======
General and administrative expenses............................................................... 108.7 3.8 112.5
------ ------ ------
Operating margin............................................................................... $ 46.5 $ 9.7 56.2
====== ======
Amortization of acquired technology and intangibles................................................................ 42.6
Merger-related costs and compensation charges and other............................................................ 0.5
Acquired research and development.................................................................................. 12.0
Other income, net.................................................................................................. 38.3
------
Consolidated earnings before taxes................................................................................. $ 39.4
======
SOFTWARE, EXCLUDING REMEDY
----------------------------------- BMC
PROFESSIONAL INDIRECT
EDM ESM SECURITY OTHER SERVICES COSTS BMC REMEDY CONSOLIDATED
--- --- -------- ----- -------- ----- --- ------ ------------
(IN MILLIONS)
NINE MONTHS ENDED DECEMBER 31, 2003
Revenues:
License.................... $ 142.1 $ 168.8 $ 10.0 $ 0.6 $ -- $ -- $ 321.5 $ 73.4 $ 394.9
Maintenance................ 218.7 228.1 13.0 1.2 -- -- 461.0 101.1 562.1
Professional services...... -- -- -- -- 51.6 -- 51.6 10.0 61.6
------- ------- ------- ------- ------- ------- ------- ------- -------
Total revenues................ 360.8 396.9 23.0 1.8 51.6 -- 834.1 184.5 1,018.6
R&D and support expenses...... 77.1 132.4 21.9 -- -- 180.5 411.9 40.0 451.9
Cost of services.............. -- -- 2.9 -- 45.7 2.5 51.1 7.8 58.9
------- ------- ------- ------- ------- ------- ------- ------- -------
283.7 264.5 (1.8) 1.8 5.9 (183.0) 371.1 136.7 507.8
Selling and marketing expenses -- -- 8.3 -- -- 386.5 394.8 60.7 455.5
------- ------- ------- ------- ------- ------- ------- ------- -------
Contribution margin........ $ 283.7 $ 264.5 $ (10.1) $ 1.8 $ 5.9 $(569.5) (23.7) 76.0 52.3
======= ======= ======= ======= ======= =======
General and administrative expenses................................................................ 117.7 14.5 132.2
------- ------- -------
Operating margin................................................................................ $(141.4) $ 61.5 (79.9)
======= =======
Amortization of acquired technology and intangibles................................................................... 45.4
Merger-related costs and compensation charges and other............................................................... --
Acquired research and development..................................................................................... --
Other income, net..................................................................................................... 55.6
-------
Consolidated loss before taxes........................................................................................ $ (69.7)
=======
8
(4) STOCK INCENTIVE PLANS
The Company has adopted numerous stock-based compensation plans that
provide for the grant of options and restricted stock to employees and directors
of the Company. All options under these plans vest over terms of one to five
years. The restricted stock is subject to transfer restrictions that lapse over
time, typically two to four years. The Company also has adopted an employee
stock purchase plan (ESPP) under which rights to purchase the Company's common
stock are granted at 85% of the lesser of the market value of the common stock
at the offering date or on the exercise date.
The Company accounts for stock-based employee compensation using the
intrinsic value method in accordance with Accounting Principles Board (APB)
Opinion No. 25 and related interpretations, which generally requires that the
amount of compensation cost that must be recognized, if any, is the quoted
market price of the stock at the measurement date, which is generally the grant
date, less the amount the grantee is required to pay to acquire the stock.
Alternatively, Statement of Financial Accounting Standards (SFAS) No. 123,
"Accounting for Stock-Based Compensation," employs fair value-based measurement
and generally results in the recognition of compensation expense for all
stock-based awards to employees. SFAS No. 123 does not require an entity to
adopt those provisions, but rather, permits continued application of APB Opinion
No. 25. The Company has elected not to adopt the recognition and measurement
provisions of SFAS No. 123 and continues to account for its stock-based employee
compensation plans under APB Opinion No. 25 and related interpretations. In
accordance with APB Opinion No. 25, deferred compensation is generally recorded
for stock-based employee 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 employee compensation granted. If the exercise price of the
stock-based compensation is equal to or exceeds the market price of the
Company's common stock on the date of grant, no compensation expense is
recorded.
For the three months ended December 31, 2002 and 2003, the Company
recorded compensation expense of $0.7 million and $0.5 million, respectively,
for restricted stock grants. For the nine months ended December 31, 2002 and
2003, the Company recorded compensation expense of $2.6 million and $1.5
million, respectively, for restricted stock grants. The expense for the nine
months ended December 31, 2002 includes $0.6 million of merger-related
compensation charges related to restricted shares issued as part of the Evity,
Inc. acquisition. The Company was not required to record compensation expense
for stock option grants and stock issued under the ESPP during the same periods.
The compensation expense recorded for restricted stock grants under the
intrinsic value method is consistent with the expense that would be recorded
under the fair value-based method. Had the compensation cost for the Company's
employee stock option grants and stock issued under the ESPP been determined
based on the grant date fair values of awards estimated using the Black-Scholes
option pricing model, which is consistent with the method described in SFAS No.
123, the Company's reported net earnings (loss) and earnings (loss) per share
would have been reduced to the following pro forma amounts:
THREE MONTHS ENDED NINE MONTHS ENDED
DECEMBER 31, DECEMBER 31,
------------ ------------
2002 2003 2002 2003
-------- -------- -------- --------
(IN MILLIONS, EXCEPT PER SHARE DATA)
Net earnings (loss): As Reported.. $ 12.1 $ (44.4) $ 27.4 $ (63.7)
Add stock-based employee compensation expense
included in net earnings (loss) as reported of
$0.7, $0.5, $2.6 and $1.5, net of related tax
effects 0.5 0.5 2.0 1.2
Deduct stock-based employee compensation expense
determined under the fair value-based method for
all awards, net of related tax effects (17.3) (24.8) (56.7) (93.0)
--------- -------- -------- --------
Pro Forma.... $ (4.7) $ (68.7) $ (27.3) $(155.5)
Basic earnings (loss) per share: As Reported.. $ 0.05 $ (0.20) $ 0.12 $ (0.28)
Pro Forma.... $ (0.02) $ (0.30) $ (0.11) $ (0.68)
Diluted earnings (loss) per share: As Reported.. $ 0.05 $ (0.20) $ 0.11 $ (0.28)
Pro Forma.... $ (0.02) $ (0.30) $ (0.11) $ (0.68)
9
(5) GUARANTEES
In November 2002, the Financial Accounting Standards Board (FASB)
issued Interpretation No. 45, "Guarantor's Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of
Others" (FIN 45). FIN 45 requires certain guarantees to be recorded at fair
value and requires a guarantor to make disclosures, even when the likelihood of
making any payments under the guarantee is remote. For those guarantees and
indemnifications that do not fall within the initial recognition and measurement
requirements of FIN 45, the Company must continue to monitor the conditions that
are subject to the guarantees and indemnifications, as required under existing
generally accepted accounting principles, to identify if a loss has been
incurred. If the Company determines that it is probable that a loss has been
incurred, any such estimable loss would be recognized. The initial recognition
and measurement requirements do not apply to the Company's product warranties or
to the provisions contained in the majority of the Company's software license
agreements that indemnify licensees of the Company's software from damages and
costs resulting from claims alleging that the Company's software infringes the
intellectual property rights of a third party. The Company has historically
received only a limited number of requests for payment under these provisions
and has not been required to make material payments pursuant to these
provisions. The Company has not identified any losses that are probable under
these provisions and, accordingly, the Company has not recorded a liability
related to these indemnification provisions.
(6) EXIT ACTIVITIES AND RELATED COSTS
During the quarter ended September 30, 2003, the Company implemented a
plan to better align its cost structure with existing market conditions. This
plan included the involuntary termination of approximately 785 employees during
the six months ended December 31, 2003. The workforce reduction was across all
functions and geographies and affected employees were provided cash separation
packages. As a global enterprise, the Company has been expanding its operations
for a number of years in attractive labor markets, including in the Company's
offices in India and Israel. The Company's plan to better align its cost
structure with existing market conditions has, to an extent, accelerated its
existing global expansion plans. The plan also included exiting leases in
certain locations around the world, reducing the square footage required to
operate those locations and relocating those operations to lower cost
facilities. These relocation efforts were completed in the quarter ended
December 31, 2003. Charges for exit costs of $82.1 million and $109.7 million
were recorded for the quarter and nine months ended December 31, 2003,
respectively, for employee severance and related costs and exited leases.
Additionally, $7.5 million and $14.3 million of incremental depreciation expense
was recorded during the quarter and nine months ended December 31, 2003,
respectively, related to the changes in estimated depreciable lives for
leasehold improvements in locations to be exited and for certain information
technology assets that will be eliminated as a result of the plan. These changes
in estimated lives reduced basic and diluted earnings per share by $0.03 and
$0.05 for the quarter and nine months ended December 31, 2003, respectively. The
expenses related to the exit activities are reflected in the accompanying
condensed consolidated statements of operations as follows:
SEVERANCE
& RELATED INCREMENTAL
COSTS FACILITIES DEPRECIATION TOTAL
----- ---------- ------------ -----
(IN MILLIONS)
THREE MONTHS ENDED DECEMBER 31, 2003
Selling and marketing expenses....................... $ 3.4 $ 32.1 $ 1.7 $ 37.2
Research, development and support expenses........... 2.1 42.6 5.6 50.3
Cost of professional services........................ 0.3 -- -- 0.3
General and administrative expenses.................. 1.3 0.3 0.2 1.8
---------- ---------- ---------- ----------
Total included in operating expenses....... $ 7.1 $ 75.0 $ 7.5 $ 89.6
========== ========== ========== ==========
SEVERANCE
& RELATED INCREMENTAL
COSTS FACILITIES DEPRECIATION TOTAL
----- ---------- ------------ -----
(IN MILLIONS)
NINE MONTHS ENDED DECEMBER 31, 2003
Selling and marketing expenses....................... $ 17.6 $ 32.8 $ 5.1 $ 55.5
Research, development and support expenses........... 10.8 42.6 8.4 61.8
Cost of professional services........................ 2.5 -- -- 2.5
General and administrative expenses.................. 3.1 0.3 0.8 4.2
---------- ---------- ---------- ----------
Total included in operating expenses....... $ 34.0 $ 75.7 $ 14.3 $ 124.0
========== ========== ========== ==========
10
As of December 31, 2003, $78.0 million of severance and facilities
costs related to actions completed under the plan remained accrued for payment
in future periods, as follows:
BALANCE AT BALANCE AT BALANCE AT
JUNE 30, CHARGED TO SEPT. 30, CHARGED TO DEC. 31,
2003 EXPENSE PAID OUT 2003 EXPENSE PAID OUT 2003
---------- ---------- -------- ---------- ---------- -------- ----------
(IN MILLIONS)
Severance and related costs.... $ -- $ 26.9 $ (18.5) $ 8.4 $ 7.1 $ (8.4) $ 7.1
Facilities costs............... -- 0.7 -- 0.7 75.0 (4.8) 70.9
------ ------ ------- ------ ------ ------- ------
Total accrual........ $ -- $ 27.6 $ (18.5) $ 9.1 $ 82.1 $ (13.2) $ 78.0
====== ====== ======= ====== ====== ======= ======
The amounts accrued at December 31, 2003 related to facilities costs represent
the fair value of lease obligations related to exited locations, net of
estimated sublease income that could be reasonably obtained in the future. Other
than potential adjustments to these lease accruals based on actual subleases
entered in the future, the Company does not expect any significant additional
severance or facilities charges subsequent to December 31, 2003. Accretion of
the facilities accrual balance for the period ended December 31, 2003 was not
significant. Accretion in future periods will be included in operating expenses.
(7) INCOME TAXES
During the quarter ended December 31, 2003, the Company evaluated
whether it should record an income tax benefit for the reported loss in
accordance with SFAS 109, "Accounting for Income Taxes". After considering all
positive and negative evidence as required by SFAS 109, the Company has decided
to record a valuation allowance for the entire tax benefit of the reported loss
for the quarter ended December 31, 2003.
(8) SUBSEQUENT EVENT
During the quarter ended December 31, 2003, the Company entered into an
asset purchase agreement with Networks Associates, Inc., and certain of its
subsidiaries, to acquire certain assets and liabilities related to its Magic
Solutions business. We closed this transaction on January 30, 2004 and paid cash
of $48.9 million for the acquisition. The results related to this acquisition
will be included in the Remedy business unit.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
This section of the Report 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 "Certain Risks and
Uncertainties." It is important that the historical discussion below be read
together with the attached condensed consolidated financial statements and notes
thereto, with the discussion of such risks and uncertainties and with the
audited financial statements and notes thereto, and Management's Discussion and
Analysis of Results of Operations and Financial Condition contained in our
Annual Report on Form 10-K for fiscal 2003.
CRITICAL ACCOUNTING POLICIES
The preparation of condensed consolidated financial statements requires us
to make estimates and judgments that affect the reported amounts of assets,
liabilities, revenues and expenses. On an on-going basis, we make and evaluate
estimates and judgments, including those related to revenue recognition,
capitalized software development costs, in-process research and development of
acquired businesses, acquired technology, goodwill and intangible assets,
deferred tax assets, marketable securities and facilities accruals related to
exit activities. We base our estimates on historical experience and on various
other assumptions that are believed to be reasonable under the circumstances,
the results of which form the basis for making judgments about amounts and
timing of revenues and expenses, the carrying values of assets and the recorded
amounts of liabilities that are not readily apparent from other sources. Actual
results may differ from these estimates and such estimates may change if the
underlying conditions or assumptions change. The critical accounting policies
related to the estimates and judgments listed above, except facilities accruals
related to exit activities, are discussed further throughout our Annual Report
on Form 10-K for fiscal 2003 under Management's Discussion and
11
Analysis of Results of Operations and Financial Condition where such policies
affect our reported and expected financial results. Estimates involved in
facilities accruals related to exit activities are discussed below under Exit
Activities and Related Costs.
A. RESULTS OF OPERATIONS AND FINANCIAL CONDITION
The following table sets forth, for the periods indicated, the
percentages that selected items in the condensed consolidated statements of
operations and comprehensive income (loss) bear to total revenues. These
comparisons of financial results are not necessarily indicative of future
results.
PERCENTAGE OF TOTAL REVENUES
THREE MONTHS ENDED NINE MONTHS ENDED
DECEMBER 31, DECEMBER 31,
------------ ------------
2002 2003 2002 2003
------- ------- ------- -------
Revenues:
License................................................ 48.2% 43.4% 44.9% 38.8%
Maintenance............................................ 45.5 50.8 48.6 55.2
Professional services.................................. 6.3 5.8 6.5 6.0
------ ------ ------ ------
Total revenues..................................... 100.0 100.0 100.0 100.0
------ ------ ------ ------
Selling and marketing expenses........................... 37.0 47.3 38.2 44.7
Research, development and support expenses............... 34.5 47.3 37.1 44.4
Cost of professional services............................ 6.4 5.3 6.8 5.8
General and administrative expenses...................... 11.8 12.5 11.9 13.0
Acquired research and development........................ 3.4 -- 1.3 --
Amortization of acquired technology and intangibles...... 5.1 3.9 4.5 4.4
Merger-related costs and compensation charges and other.. (0.1) -- -- --
------ ------ ------ ------
Total operating expenses............................ 98.1 116.3 99.8 112.3
------ ------ ------ ------
Operating income (loss)............................. 1.9 (16.3) 0.2 (12.3)
Interest and other income, net........................... 4.6 4.3 5.1 5.4
Gain (loss) on marketable securities and other...........
investments............................................ (1.2) 0.2 (1.1) 0.1
------ ------ ------ ------
Other income, net................................... 3.4 4.5 4.0 5.5
Earnings (loss) before income taxes................. 5.3 (11.8) 4.2 (6.8)
Income tax provision (benefit)........................... 1.8 -- 1.3 (0.6)
------ ------ ------ ------
Net earnings (loss)............................ 3.5% (11.8)% 2.9% (6.2)%
====== ====== ====== ======
REVENUES
We generate revenues from licensing software, providing maintenance,
enhancement and support for previously licensed products and providing
professional services.
THREE MONTHS ENDED NINE MONTHS ENDED
DECEMBER 31, DECEMBER 31,
-------------------- -------------------
2002 2003 CHANGE 2002 2003 CHANGE
-------- -------- ------ -------- -------- ------
(IN MILLIONS) (IN MILLIONS)
License:
North America.............................. $ 81.1 $ 66.3 (18.2)% $ 233.6 $ 169.9 (27.3)%
International.............................. 87.4 96.3 10.2% 191.3 225.0 17.6%
-------- -------- -------- --------
Total license revenues............... 168.5 162.6 (3.5)% 424.9 394.9 (7.1)%
Maintenance:
North America.............................. 96.2 113.8 18.3% 279.5 333.9 19.5%
International.............................. 62.9 76.6 21.8% 180.2 228.2 26.6%
-------- -------- -------- --------
Total maintenance revenues............ 159.1 190.4 19.7% 459.7 562.1 22.3%
Professional services:
North America.............................. 8.8 10.1 14.8% 26.9 30.9 14.9%
International.............................. 13.2 11.7 (11.4)% 34.5 30.7 (11.0)%
-------- -------- -------- --------
Total professional services revenues... 22.0 21.8 (0.9)% 61.4 61.6 0.3%
-------- -------- -------- --------
Total revenues....................... $ 349.6 $ 374.8 7.2% $ 946.0 $1,018.6 7.7%
======== ======== ======== ========
12
Product License Revenues
Our product license revenues primarily consist of fees related to
products licensed to customers on a perpetual basis. Product license fees can be
associated with a customer's licensing of a given software product for the first
time or with a customer's purchase of the right to run a previously licensed
product on additional computing capacity or by additional users. In addition to
perpetual-based product license fees, our license revenues also include, to a
lesser extent, term license fees which are generated when customers are granted
license rights to a given software product for a defined period of time.
License revenues for the quarter and nine months ended December 31,
2003, decreased 4% and 7%, respectively, compared to the same periods last year.
Excluding the impact of Remedy revenues during the quarter and nine months ended
December 31, 2003, license revenues declined 13% and 22%, respectively. During
the quarter ended December 31, 2003, license revenues were reduced due to a
record increase in the amount of transactions requiring deferral of the related
license revenue as shown in the table below. This contributed to the decline in
license revenues in both the three- and nine-month periods ended December 31,
2003. Though license revenues during the first six months of the fiscal year
were negatively impacted by reduced information technology (IT) spending by many
of our customers, we believe that the global IT spending environment is
beginning to improve, as customers were more willing to consider new IT projects
and to commit to larger transactions during the quarter ended December 31, 2003,
but remains challenging. The number of license transactions over $1 million
during the quarter increased 38% over the prior year, including four license
transactions over $5 million, each of which will be recognized over the life of
the contract. These four transactions represented approximately two-thirds of
the $96.2 million addition to deferred license revenue in the quarter ended
December 31, 2003. Though license revenues excluding Remedy for the quarter
ended December 31, 2003 are down compared to the prior year, such revenues
increased sequentially 31% over the quarter ended September 30, 2003.
For the periods ended December 31, 2002 and 2003, our recognized
revenues were impacted by the changes in our deferred license revenue balance as
follows:
THREE MONTHS ENDED NINE MONTHS ENDED
DECEMBER 31, DECEMBER 31,
------------ ------------
2002 2003 2002 2003
--------- --------- ---------- ----------
(IN MILLIONS)
Deferrals of license revenue........................... $ (31.9) $ (96.2) $ (113.5) $ (146.0)
Recognition from deferred license revenue.............. 19.1 22.5 57.7 66.3
-------- -------- --------- ---------
Net impact on recognized license revenue........... $ (12.8) $ (73.7) $ (55.8) $ (79.7)
======== ======== ========= =========
Deferred license revenue balance at end of quarter..... $ 224.8 $ 298.0
Based on licensing trends, increased customer requests for contractual terms
that result in deferral of revenue and our recent initiative to ensure we
clearly articulate to customers the flexibility that we offer in these areas, we
expect that our base of deferred license revenue will continue to grow. Also,
because of differing maintenance pricing methodologies for legacy BMC products
and Remedy products, license revenues in transactions that include both types of
products typically must be deferred under the residual method of accounting for
multiple element arrangements. We expect the volume of such joint transactions
to increase and accordingly, expect the deferred license revenue related to them
to increase.
Our North American operations generated 48% and 41% of license revenues
in the quarters ended December 31, 2002 and 2003, respectively, and 55% and 43%
in the nine months ended December 31, 2002 and 2003, respectively. North
American license revenues for the quarter and nine months ended December 31,
2003 declined 18% and 27%, respectively, compared to the comparable periods in
the prior fiscal year. Excluding the impact of Remedy revenues during the
quarter and nine months ended December 31, 2003, North American license revenues
declined 30% and 43%, respectively. For the quarter ended December 31, 2003, the
decline from the prior year is primarily due to the impact of deferred license
revenue as discussed above, as well as an overall decrease in license bookings,
which was comprised of recognized revenues and the net change in deferred
license revenue, in this region. While overall economic conditions are
improving, the IT spending environment in North America remains challenging,
resulting in the decline in license revenues for the nine month period ended
December 31, 2003 compared to the comparable prior year period. Though down from
the prior year, North American license revenues increased sequentially 14%
compared to the quarter ended September 30, 2003. International license revenues
represented 52% and 59% of license revenues for the quarters ended December 31,
2002 and 2003, respectively, and 45% and 57% in the nine months ended December
31, 2002 and 2003, respectively. International license revenues for the quarter
and nine months ended December 31, 2003 increased 10% and 18% compared to the
same periods last year. Excluding the impact of Remedy revenues during the
quarter and nine months ended December 31, 2003, international license revenues
increased 1% and 5%, respectively. Foreign currency exchange rate changes
resulted in international license revenue increases of 10% and 9% for the
quarter and nine months ended December 31, 2003, respectively, after giving
effect
13
to our foreign currency hedging program. Excluding this currency impact,
international license revenues excluding Remedy declined 10% and 5% for the
quarter and nine months ended December 31, 2003, respectively, primarily due to
record increases in deferred license revenue in both periods. International
license revenues including Remedy increased sequentially 47% compared to the
quarter ended September 30, 2003.
Maintenance, Enhancement and Support Revenues
Maintenance, enhancement and support revenues represent the ratable
recognition of fees to enroll licensed products in our software maintenance,
enhancement and support programs. Maintenance, enhancement and support
enrollment generally entitles customers to product enhancements, technical
support services and ongoing compatibility with third-party operating systems,
database management systems, networks, storage systems and applications.
Excluding Remedy, these fees are generally charged annually and equal 20% of the
discounted price of the product. Maintenance revenues also include the ratable
recognition of the bundled fees for any initial maintenance services covered by
the related perpetual license agreement. Remedy's maintenance fees are generally
charged annually and equal 15% to 22% of the list price of the product. In
addition, many customers are entitled to reduced maintenance percentages because
they have entered into long-term maintenance contracts that include prepayment
of the maintenance fees or that are supported by a formal financing arrangement.
Maintenance revenues increased 20% and 22% for the quarter and nine
months ended December 31, 2003, respectively, over the comparable prior year
periods primarily as a result of the additional maintenance revenue associated
with Remedy and the continuing growth in the base of installed products and the
processing capacity on which they run. Excluding the impact of Remedy revenues
during the quarter and nine months ended December 31, 2003, maintenance revenues
increased 2% in each period over the comparable prior year periods. 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 unit of capacity basis are typically reduced in
enterprise license agreements. These discounts, combined with the reduced
maintenance percentages for long-term contracts discussed above and the decline
in our license revenues, have led to lower growth rates for our maintenance
revenue excluding Remedy. Further declines in our license revenue and/or
increased discounting could lead to declines in our maintenance revenues
excluding Remedy.
Product Line Revenues
THREE MONTHS ENDED NINE MONTHS ENDED
DECEMBER 31, DECEMBER 31,
------------ ------------
2002 2003 CHANGE 2002 2003 CHANGE
-------- --------- ------ --------- --------- ------
(IN MILLIONS) (IN MILLIONS)
Enterprise Data Management:
Mainframe Data Management................. $ 114.1 $ 104.4 (8.5)% $ 315.7 $ 277.9 (12.0)%
Distributed Systems Data Management....... 35.8 28.9 (19.3)% 97.9 82.9 (15.3)%
-------- -------- -------- --------
149.9 133.3 (11.1)% 413.6 360.8 (12.8)%
Enterprise Systems Management:
PATROL.................................... 71.4 72.7 1.8% 196.4 201.6 2.6%
MAINVIEW.................................. 38.5 36.1 (6.2)% 123.9 98.3 (20.7)%
Scheduling & Output Management............ 35.5 34.5 (2.8)% 100.0 97.0 (3.0)%
-------- -------- -------- --------
145.4 143.3 (1.4)% 420.3 396.9 (5.6)%
Security.................................. 8.2 9.2 12.2% 25.2 23.0 (8.7)%
Other..................................... 0.2 0.8 nm 1.6 1.8 12.5%
-------- -------- -------- --------
Remedy.................................... 23.9 66.4 nm 23.9 174.5 nm
-------- -------- -------- --------
Total license & maintenance revenues $ 327.6 $ 353.0 7.8% $ 884.6 $ 957.0 8.2%
======== ======== ======== ========
We market 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. Our acquisition of Remedy, in November 2002, extends our solutions
to include products that automate service-related business processes through a
complete suite of service management applications. In April 2003, we introduced
a new strategic direction focused on Business Service Management (BSM), the
direct linkage of IT resources, management and solutions with the goals of the
overall business. The objective of our BSM strategy is to enable companies to
move beyond traditional IT management and manage their business-critical
services from both an IT and business perspective. Our solutions are broadly
divided into four core business units.
14
The Enterprise Data Management group includes products designed for managing
database management systems on mainframe and distributed computing platforms.
The Enterprise Systems Management group includes our systems management and
monitoring, scheduling and output management solutions. The Security group
includes products that facilitate user registration and password administration.
The Remedy group includes our service, change and asset management solutions.
As noted above, during the quarter ended December 31, 2003, we
experienced a record increase in the amount of deferred license revenue, which
affected all product lines. For the quarters and nine months ended December 31,
2002 and 2003, our product line revenues were affected by the following net
changes in the related deferred license revenue balances:
THREE MONTHS ENDED NINE MONTHS ENDED
DECEMBER 31, DECEMBER 31,
--------------------- ---------------------
2002 2003 CHANGE 2002 2003 CHANGE
--------- --------- --------- --------- --------- ---------
(IN MILLIONS) (IN MILLIONS)
Enterprise Data Management:
Mainframe Data Management.................. $ 5.8 $ 40.2 $ 34.4 $ 31.7 $ 39.5 $ 7.8
Distributed Systems Data Management........ 0.6 1.5 0.9 7.4 1.1 (6.3)
-------- -------- -------- -------- -------- --------
6.4 41.7 35.3 39.1 40.6 1.5
Enterprise Systems Management:
PATROL..................................... 0.7 12.3 11.6 16.7 12.7 (4.0)
MAINVIEW................................... 2.8 8.0 5.2 9.2 8.7 (0.5)
Scheduling & Output Management............. 1.7 9.8 8.1 1.5 12.4 10.9
-------- -------- -------- -------- -------- --------
5.2 30.1 24.9 27.4 33.8 6.4
Security................................... 1.3 0.4 (0.9) (6.0) (1.3) 4.7
Other...................................... (0.2) (0.3) (0.1) (4.8) (0.3) 4.5
-------- -------- -------- -------- -------- --------
Remedy..................................... 0.1 1.8 1.7 0.1 6.9 6.8
-------- -------- -------- -------- -------- --------
Net change in deferred license revenues.. $ 12.8 $ 73.7 $ 60.9 $ 55.8 $ 79.7 $ 23.9
======== ======== ======== ======== ======== ========
Our Enterprise Data Management solutions combined represented 46% and
38% of our total software revenues for the quarters ended December 31, 2002 and
2003, respectively, and 47% and 38% for the nine months ended December 31, 2002
and 2003, respectively. Total software revenues for this group declined 11% and
13%, respectively, in the quarter and nine months ended December 31, 2003, from
the same periods in the prior year. The overall decrease for the quarter ended
December 31, 2003 was primarily due to the large increase in the net change in
deferred license revenue along with decreased license bookings for the
distributed systems products, which was partially offset by increased license
bookings for the mainframe data management products. The decrease for the nine
months ended December 31, 2003 is due to a decrease in license revenues for both
the mainframe data management products and the distributed systems products.
Maintenance revenues for this group remained relatively flat in both periods.
Total revenues for the Enterprise Data Management solutions increased
sequentially 12% compared to the quarter ended September 30, 2003.
Our Enterprise Systems Management solutions combined contributed 44%
and 41% of our total software revenues for the quarters ended December 31, 2002
and 2003, respectively, and 48% and 41% for the nine months ended December 31,
2002 and 2003, respectively. Total software revenues for this group decreased 1%
and 6%, respectively, in the quarter and nine months ended December 31, 2003,
from the same periods in the prior year. For the quarter ended December 31,
2003, the slight decline was due to increases in the net change in the deferred
license revenue balance for all products in this group, as noted in the table
above, which more than offset increased license bookings. The growth in license
bookings is primarily the result of increased acceptance of the new version of
PATROL and transactions generated as a result of our BSM strategy discussed
above. The increase in maintenance revenues for PATROL and Scheduling & Output
Management more than offset the decline in MAINVIEW maintenance revenue for the
quarter ended December 31, 2003. The primary contributor to the decline for the
nine months ended December 31, 2003 was the decrease in MAINVIEW license and
maintenance revenues. For the nine months ended December 31, 2003, the decline
in PATROL license revenues, together with the large increase in the net change
in deferred license revenue for the Scheduling & Output Management products,
more than offset the increases in maintenance revenues for these two product
lines. Total revenues for the Enterprise Systems Management solutions increased
sequentially 10% compared to the quarter ended September 30, 2003.
Our Security solutions contributed 3% of total software revenues for
the quarters ended December 31, 2002 and 2003, and contributed 3% and 2% for the
nine months ended December 31, 2002 and 2003, respectively. Total software
revenues for this group
15
increased 12% and decreased 9% in the quarter and nine months ended December 31,
2003, respectively, from the same periods in the prior year. Security license
revenues were flat for the quarter ended December 31, 2003, but declined for the
nine months ended December 31, 2003, as compared to the comparable prior year
periods. Maintenance revenues for Security increased for both periods. Total
revenues for the Security solutions increased sequentially 54% compared to the
quarter ended September 30, 2003. We continue to make changes to improve the
performance of this business. Our Remedy solutions contributed 7% and 19% of our
total software revenues for the quarters ended December 31, 2002 and 2003,
respectively, and 3% and 18% for the nine months ended December 31, 2002 and
2003, respectively. As the acquisition of Remedy was completed during the
quarter ended December 31, 2002, prior year periods are not comparable. Total
software revenues for Remedy increased 16% sequentially compared to the quarter
ended September 30, 2003.
Professional Services Revenues
Professional services revenues, representing fees from implementation,
integration and education services performed during the periods remained flat
for the quarter and nine months ended December 31, 2003, compared to the prior
year periods. Excluding the impact of Remedy revenues during the quarter and
nine months ended December 31, 2003, professional services revenues declined 12%
and 15%, respectively. This decline is the result of our decreased license
revenues, as this results in less demand for our implementation and integration
services.
EXPENSES
THREE MONTHS ENDED NINE MONTHS ENDED
DECEMBER 31, DECEMBER 31,
---------------------- ---------------------
2002 2003 CHANGE 2002 2003 CHANGE
---------- ---------- -------- --------- --------- --------
(IN MILLIONS) (IN MILLIONS)
Selling and marketing................................ $ 129.4 $ 177.4 37.1% $ 361.6 $ 455.5 26.0%
Research, development and support.................... 120.5 177.5 47.3% 351.1 451.9 28.7%
Cost of professional services........................ 22.3 19.9 (10.8)% 64.6 58.9 (8.8)%
General and administrative........................... 41.1 46.9 14.1% 112.5 132.2 17.5%
Acquired research and development.................... 12.0 -- (100.0)% 12.0 -- (100.0)%
Amortization of acquired technology and intangibles.. 17.8 14.5 (18.5)% 42.6 45.4 6.6%
Merger-related costs and compensation charges and other (0.3) -- -- 0.5 -- --
--------- ---------- --------- ---------
Total operating expenses................... $ 342.8 $ 436.2 27.2% $ 944.9 $ 1,143.9 21.1%
========= ========== ========= =========
Exit Activities and Related Costs
During the quarter ended September 30, 2003, we implemented a plan to
better align our cost structure with existing market conditions. This plan
included the involuntary termination of approximately 785 employees during the
six months ended December 31, 2003. The workforce reduction was across all
functions and geographies and affected employees were provided cash separation
packages. As a global enterprise, we have been expanding our operations for a
number of years in attractive labor markets, including in our offices in India
and Israel. Our plan to better align our cost structure with existing market
conditions has, to an extent, accelerated our existing global expansion plans.
The plan also included exiting leases in certain locations around the world,
reducing the square footage required to operate those locations and relocating
those operations to lower cost facilities. These relocation efforts were
completed in the quarter ended December 31, 2003. Charges for exit costs of
$82.1 million and $109.7 million were recorded for the quarter and nine months
ended December 31, 2003, respectively, for employee severance and related costs
and exited leases. Additionally, $7.5 million and $14.3 million of incremental
depreciation expense was recorded during the quarter and nine months ended
December 31, 2003, respectively, related to the changes in estimated depreciable
lives for leasehold improvements in locations exited and for certain information
technology assets that will be eliminated as a result of the plan. These changes
in estimated lives reduced basic and diluted earnings per share by $0.03 and
$0.05 for the quarter and nine months ended December 31, 2003, respectively.
16
The expenses related to the exit activities are reflected in the
accompanying condensed consolidated statements of operations as follows:
SEVERANCE
& RELATED INCREMENTAL
COSTS FACILITIES DEPRECIATION TOTAL
----- ---------- ------------ -----
(IN MILLIONS)
THREE MONTHS ENDED DECEMBER 31, 2003
Selling and marketing expenses....................... $ 3.4 $ 32.1 $ 1.7 $ 37.2
Research, development and support expenses........... 2.1 42.6 5.6 50.3
Cost of professional services........................ 0.3 -- -- 0.3
General and administrative expenses.................. 1.3 0.3 0.2 1.8
---------- ---------- ---------- ----------
Total included in operating expenses....... $ 7.1 $ 75.0 $ 7.5 $ 89.6
========== ========== ========== ==========
SEVERANCE
& RELATED INCREMENTAL
COSTS FACILITIES DEPRECIATION TOTAL
----- ---------- ------------ -----
(IN MILLIONS)
NINE MONTHS ENDED DECEMBER 31, 2003
Selling and marketing expenses....................... $ 17.6 $ 32.8 $ 5.1 $ 55.5
Research, development and support expenses........... 10.8 42.6 8.4 61.8
Cost of professional services........................ 2.5 -- -- 2.5
General and administrative expenses.................. 3.1 0.3 0.8 4.2
---------- ---------- ---------- ----------
Total included in operating expenses....... $ 34.0 $ 75.7 $ 14.3 $ 124.0
========== ========== ========== ==========
As of December 31, 2003, $78.0 million of severance and facilities
costs related to actions completed under the plan remained accrued for payment
in future periods, as follows:
BALANCE AT BALANCE AT BALANCE AT
JUNE 30, CHARGED TO SEPT. 30, CHARGED TO DEC. 31,
2003 EXPENSE PAID OUT 2003 EXPENSE PAID OUT 2003
---------- ---------- -------- ---------- ---------- -------- ----------
(IN MILLIONS)
Severance and related costs $ -- $ 26.9 $(18.5) $ 8.4 $ 7.1 $ (8.4) $ 7.1
Facilities costs........... -- 0.7 -- 0.7 75.0 (4.8) 70.9
----- ------ ------ ------ ------ ------ ------
Total accrual.... $ -- $ 27.6 $(18.5) $ 9.1 $ 82.1 $(13.2) $ 78.0
===== ====== ====== ====== ====== ====== ======
The amounts accrued at December 31, 2003 related to facilities costs represent
the fair value of lease obligations after the respective facilities' cease-use
dates, net of estimated sublease income that could be reasonably obtained in the
future. Actual sublease income could differ from our estimates. Other than
potential adjustments to these lease accruals based on actual subleases entered
in the future, we do not expect any significant additional severance or
facilities charges subsequent to December 31, 2003. Accretion of the facilities
accruals balance for the period ended December 31, 2003 was not significant.
Accretion in future periods will be included in operating expenses. We expect
annual operating expense savings of approximately $100 million to $120 million
relative to our projected personnel and facilities expenses before our
restructuring actions. We began to realize such savings in the quarter ended
December 31, 2003 primarily related to personnel costs.
Selling and Marketing
Our selling and marketing expenses primarily include personnel and
related costs, sales commissions and costs associated with advertising, industry
trade shows and sales seminars. Excluding the impact of costs related to the
exit activities discussed above, selling and marketing expenses represented 37%
of total revenues for the quarters ended December 31, 2002 and 2003, and 38% and
39% of total revenues for the nine months ended December 31, 2002 and 2003,
respectively. Excluding the impact of costs related to exit activities, selling
and marketing expenses increased 8% and 11%, respectively, for the quarter and
nine months ended December 31, 2003, as compared to the prior year. Excluding
the impact of the costs related to exit activities and Remedy expenses during
the quarter and nine months ended December 31, 2003, selling and marketing
expenses decreased 6% and 5%, respectively. The declines in both periods are
primarily related to decreased personnel expenses along with decreased sales
commissions and bonuses, partially due to the revenue performance discussed
above, and reduced bad debt expense related to license billings, partially
offset by the impact of currency.
Research, Development and Support
Research, development and support 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 costs associated with the maintenance,
enhancement and
17
support of our products, computer hardware/software costs and telecommunications
expenses necessary to maintain our data processing center, royalties and the
effect of software development cost capitalization and amortization.
Research, development and support expenses were reduced in the quarters
and nine-month periods ended December 31, 2002 and 2003, by amounts capitalized
in accordance with SFAS No. 86, "Accounting for the Costs of Computer Software
to Be Sold, Leased, or Otherwise Marketed." We capitalize our software
development costs when the projects under development reach technological
feasibility as defined by SFAS No. 86, and amortize these costs over the
products' estimated economic lives, which are typically three years. As
discussed below, we revised the estimated economic lives for certain of our
software products as of January 1, 2003.
The following table summarizes the amounts capitalized and amortized
during the three months and nine months ended December 31, 2002 and 2003.
Amortization for these periods includes amounts accelerated for certain software
products that were not expected to generate sufficient future revenues to
realize the carrying value of the assets.
THREE MONTHS ENDED NINE MONTHS ENDED
DECEMBER 31, DECEMBER 31,
------------ ------------
2002 2003 2002 2003
--------- ---------- --------- ---------
(IN MILLIONS)
Software development and purchased software costs $ (32.4) $ (6.5) $ (66.3) $ (38.3)
capitalized..........................................
Total amortization..................................... 34.6 23.5 74.5 79.1
-------- -------- -------- --------
Net impact on research and development expense..... $ 2.2 $ 17.0 $ 8.2 $ 40.8
======== ======== ======== ========
Accelerated amortization included in total amortization
above................................................ $ 22.3 $ 4.2 $ 40.3 $ 11.8
As a result of the changes in market conditions and research and
development headcount reductions during fiscal 2002 and 2003, we focused more on
our core businesses during those years. As part of this effort, we reviewed our
product portfolio during fiscal 2002 and fiscal 2003 and discontinued certain
products. To the extent that there were any capitalized software development
costs remaining on the balance sheet related to these products, we accelerated
the amortization to write off these balances. The continued need to accelerate
amortization to maintain our capitalized software costs at net realizable value,
the results of the valuation performed for the Remedy acquisition that indicated
a three-year life was appropriate for that acquired technology and changes in
the average life cycles for certain of our software products caused us to
evaluate the estimated economic lives for our internally developed software
products. As a result of this evaluation, we revised the estimated economic
lives of certain products as of January 1, 2003, such that most products will be
amortized over an estimated life of three years. These changes in estimated
economic lives resulted in an additional $7.7 million and $31.2 million of
amortization expense in the quarter and nine months ended December 31, 2003,
respectively, and reduced basic and diluted earnings per share for the quarter
and nine months by $0.03 per share and $0.10 per share, respectively.
Excluding the impact of costs related to the exit activities discussed
above, research, development and support expenses represented 34% of total
revenues for the quarters ended December 31, 2002 and 2003, and 37% and 38% of
total revenues for the nine months ended December 31, 2002 and 2003,
respectively. Excluding the impact of costs related to exit activities,
research, development and support expenses increased 6% and 11% in the three
months and nine months ended December 31, 2003, respectively, over the same
periods in the prior year. Excluding the impact of the costs related to exit
activities and Remedy expenses during the three months and nine months ended
December 31, 2003, research, development and support expenses remained flat for
both periods, as the net effect of the software cost capitalization and
amortization described above was offset by decreased personnel costs. The
primary factor driving the increase in the net impact on research and
development expense for the quarter and nine months ended December 31, 2003 is
the decrease in software development and purchased software costs capitalized.
This decrease primarily is a result of the overall reduction in research and
development headcount as compared to the prior year, expansion of our operations
into different locations and the time involved in getting those operations
running and two significant projects becoming generally available (GA) during
the quarter.
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. Excluding the impact of costs related to the exit activities discussed
above, the cost of professional services represented 6% and 5% of total revenues
for the quarters ended December 31, 2002 and 2003, respectively, and 7% and 6%
of total revenues for the nine months ended December 31, 2002 and 2003,
respectively. Excluding the impact of costs related to exit activities, the cost
of professional services decreased 12% and 13% during the quarter and nine
months ended December 31, 2003, respectively, from the comparable periods in the
prior year. Excluding the impact of the costs related to exit activities and
Remedy expenses during the quarter and nine months ended December 31, 2003,
18
cost of professional services declined 21% and 24%, respectively. The decreases
resulted primarily from headcount reductions as a result of the decline in
professional services revenues and decreases in bad debt expense.
General and Administrative
General and administrative expenses are comprised primarily of
compensation and personnel costs within executive management, finance and
accounting, IT, facilities management, legal and human resources. Other costs
included in general and administrative expenses are fees paid for outside legal
and accounting services, consulting projects, insurance and bad debt expense
related to maintenance billings. Excluding the impact of costs related to the
exit activities discussed above, general and administrative expenses represented
12% of total revenues in the quarters ended December 31, 2002 and 2003,
respectively, and 12% and 13% of total revenues in the nine months ended
December 31, 2002 and 2003, respectively. Excluding the impact of costs related
to exit activities, these expenses increased 10% and 14%, respectively, for the
quarter and nine months ended December 31, 2003, compared to the same periods in
the prior year. Excluding the impact of costs related to exit activities and
Remedy expenses during the quarter and nine months ended December 31, 2003,
general and administrative expenses increased 5% and 4%, respectively. These
increases included higher consulting fees, primarily related to an ongoing
infrastructure software implementation, legal fees, professional fees and
currency losses, which offset decreased personnel costs.
Acquired Research and Development
The acquired research and development charge for the quarter and nine
months ended December 31, 2002 related to the acquisition of Remedy.
Amortization of Acquired Technology and Intangibles
Under the purchase accounting method for certain of our acquisitions,
portions of the purchase prices were allocated to acquired software and other
intangible assets. We are amortizing these intangibles over three-year periods,
which reflect the estimated useful lives of the respective assets. The decrease
in amortization expense for the quarter ended December 31, 2003 is due to
intangibles that have recently become fully amortized. The increase in
amortization expense for the nine months ended December 31, 2003, relates to the
additional intangibles being amortized as a result of the IT Masters acquisition
during the quarter ended March 31, 2003, which more than offset the decrease in
amortization expense related to intangibles that have recently become fully
amortized.
OTHER INCOME, NET
Other income, net consists primarily of interest earned on cash, cash
equivalents, marketable securities and finance receivables, rental income on
owned facilities and gains and losses on marketable securities and other
investments. For the quarter and nine months ended December 31, 2003, other
income, net was $17.0 million and $55.6 million, respectively, reflecting an
increase of $5.3 million and $17.3 million from the same periods of fiscal 2003.
The increase in other income, net for the nine months is primarily due to a $6.3
million write-off of marketable securities and a $4.5 million impairment of a
partnership investment in the prior year, the gain on the licensing of our
PATROL Storage Manager product to EMC Corporation during the quarter ended June
30, 2003 and an increase in rental income over the comparable prior year period.
INCOME TAX PROVISION (BENEFIT)
For the quarter and nine months ended December 31, 2003, our income tax
benefit was $0 and $6.0 million, respectively, compared to income tax expense of
$6.4 million and $12.0 million for the same periods in the prior year. Our
effective tax rate was 0% and 9%, respectively, for the quarter and nine months
ended December 31, 2003 compared to 35% and 30% for the comparable prior year
periods. The effective tax rate for the quarter and nine months ended December
31, 2003 is impacted primarily by the increase in the valuation allowance
related to the current quarter's reported loss. SFAS 109 requires us to assess
whether we should record a tax benefit for the reported loss. After considering
all positive and negative evidence, we have concluded that we should record a
valuation allowance for the entire tax benefit of the reported loss for the
quarter ended December 31, 2003.
As previously disclosed, we have received a Revenue Agent's Report
(RAR) from the Internal Revenue Service (IRS) for the tax years ended March 31,
1998 and 1999. We are working with the IRS Appeals division to resolve disputes
related to this RAR. We believe that we have meritorious defenses to the
proposed adjustments, that adequate provisions for income taxes have been made
and, therefore, that the ultimate resolution of the issues will not have a
material adverse impact on our consolidated financial position or results of
operations.
19
The IRS has completed its examination of our federal income tax returns
filed for the tax years ended March 31, 2000 and 2001, and is in the process of
incorporating its Notices of Proposed Adjustments into a formal RAR. We believe
that we have meritorious defenses to the proposed adjustments, that adequate
provisions for income taxes have been made and, therefore, that the ultimate
resolution of the issues will not have a material adverse impact on our
consolidated financial position or results of operations.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENT
In January 2003, the FASB issued Interpretation No. 46, "Consolidation
of Variable Interest Entities, an interpretation of Accounting Research Bulletin
No. 51" (FIN 46). FIN 46 requires the consolidation of entities in which an
enterprise absorbs a majority of the entity's expected losses, receives a
majority of the entity's expected residual returns, or both, as a result of
ownership, contractual or other interests in the entity. Previously, entities
were generally consolidated by an enterprise when it had a controlling financial
interest through ownership of a majority voting interest in the entity. The
consolidation requirements of FIN 46 apply to variable interest entities created
after January 31, 2003 and to older entities in the first fiscal year or interim
period ending after March 15, 2004. We are in the process of evaluating the
implications of FIN 46 to variable interest entities with which we have
involvement. We believe that adoption of FIN 46 will not have a material impact
on our consolidated financial position or results of operations.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 2003, our cash, cash equivalents and marketable
securities were $1,064.9 million, an increase of $49.6 million from the March
31, 2003 balance primarily as a result of positive operating cash flow. Of the
cash, cash equivalents and marketable securities at December 31, 2003, $778.7
million is held in international locations and was largely generated from our
international operations. U.S. income taxes have not been recorded on the
majority of the earnings generated by our international operations. These
earnings would be subject to U.S. income tax if repatriated to the United
States. The potential related deferred tax liability for these earnings is
approximately $251.0 million; however, we have not provided a deferred tax
liability on this portion of these earnings as we currently plan to utilize this
cash in international locations for foreign investment purposes. As such, we may
choose in the future to borrow funds domestically, as the need arises, rather
than incur U.S. taxes to repatriate international cash.
Our working capital as of December 31, 2003, was $297.0 million,
reflecting an increase from the March 31, 2003 balance of $259.4 million
primarily due to an increase in current marketable securities due to the timing
of the securities' respective maturities. A significant dollar portion of our
marketable securities is invested in securities with maturities beyond one year,
and while typically yielding greater returns, investing in such securities
reduces reported working capital. Our marketable securities are primarily
investment grade and highly liquid. Stockholders' equity as of December 31,
2003, was $1.2 billion.
We continue to finance our operations primarily through funds generated
from operations. For the nine months ended December 31, 2003, net cash provided
by operating activities was $232.4 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. Our practice of
providing financing at reasonable interest rates enhances our competitive
position. We participate in established programs with third-party financial
institutions to securitize or sell a significant portion of our finance
receivables, enabling us to collect cash sooner and reduce credit risk. Such
transfers of qualifying receivables typically occur in the quarter the finance
receivable is generated or the subsequent quarter. For a detailed discussion of
these programs, see the Liquidity and Capital Resources section of our Annual
Report on Form 10-K. During the nine months ended December 31, 2002 and 2003, we
transferred $291.7 million and $162.4 million, respectively, of such receivables
through these programs, of which $97.9 million and $0 was securitized. For the
nine months ended December 31, 2003, these transfers represented approximately
two thirds of our cash flow from operations. 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.
To meet the needs of our customers we have been providing more
licensing options, and this increased focus on flexibility may lead to more
customer transactions where cash payments will be received over time. Recent
shifts in various market factors have made the transfer of certain of our
finance receivables more difficult and/or less cost effective, including changes
in the overall capacity of the market for such receivables, in customers' credit
quality, in the credit risk that third-party financial institutions are willing
to accept and in the documentation requirements of the third-party financial
institutions. These factors may impact our ability to transfer finance
receivables in the future. We considered these shifts in our estimates of annual
cash flow from operations for fiscal 2004.
20
Net cash used in investing activities for the nine months ended
December 31, 2003 was $183.4 million, primarily for the purchase of marketable
securities during the period. Net cash used in financing activities for the nine
months ended December 31, 2003 was $109.2 million, which primarily related to
purchases of our common stock. On April 24, 2000, our board of directors
authorized the purchase of up to $500.0 million in common stock, and on July 30,
2002, they authorized the purchase of an additional $500.0 million. During the
nine months ended December 31, 2003, we purchased 7.5 million shares for $120.1
million. Since the inception of the repurchase plan, we have purchased 37.2
million shares for $641.9 million. We plan to continue to buy our common stock
during fiscal 2004, subject to market conditions and other possible uses of our
cash.
During the nine months ended December 31, 2003, we entered into various
operating leases for facilities around the world, as part of our efforts to
relocate to lower cost facilities as discussed above under Exit Activities and
Related Costs, and a 48-month capital lease for computer hardware. The $4.0
million current portion of the obligation for the capital lease is reflected in
the accompanying condensed consolidated balance sheet as of December 31, 2003 as
an accrued liability, and the $11.0 million long-term portion of the obligation
is reflected as an other long-term liability. Payments due under the operating
leases entered during the period are $0.9 million in fiscal 2004, $6.5 million
in fiscal 2005, $7.3 million in fiscal 2006, $7.5 million in fiscal 2007, $7.3
million in fiscal 2008 and $8.4 million in fiscal 2009 and beyond.
During the quarter ended December 31, 2003, we entered into an asset
purchase agreement with Networks Associates, Inc., and certain of its
subsidiaries, to acquire certain assets and liabilities related to their Magic
Solutions business. We closed this transaction on January 30, 2004 and paid cash
of $48.9 million for the acquisition.
We believe that our existing cash balances and funds generated from
operations will be sufficient to meet our liquidity requirements for the
foreseeable future.
B. CERTAIN RISKS AND UNCERTAINTIES
We operate in a dynamic and rapidly changing environment that involves
numerous risks and uncertainties. The following section describes some, but not
all, of these risks and uncertainties that we believe may adversely affect our
business, financial condition or results of operations.
WE MAY EXPERIENCE A SHORTFALL IN REVENUE IN ANY GIVEN QUARTER OR MAY ANNOUNCE
LOWER FORECASTED REVENUE OR EARNINGS, WHICH COULD CAUSE OUR STOCK PRICE TO
DECLINE.
Our revenue is difficult to forecast and is likely to fluctuate from
quarter to quarter due to many factors. In addition, a significant amount of our
license transactions are completed during the final weeks and days of the
quarter, and therefore we generally do not know whether revenues, earnings, cash
flows and/or changes to the deferred license revenue balances will have met
expectations until shortly after the end of the following quarter. Any
significant revenue shortfall or lowered forecasts could cause our stock price
to decline substantially. Factors that could affect our financial results
include, but are not limited to:
- the unpredictability of the timing and magnitude of our sales
through direct sales channels, value-added resellers and
distributors, which tend to occur late in each quarter;
- the possibility that our customers may defer or limit
purchases as a result of reduced information technology
budgets or reduced data processing capacity demand;
- the possibility that our customers may elect not to license
our products for additional processing capacity until their
actual processing capacity or expected future processing
capacity exceeds the capacity they have already licensed from
us;
- the possibility that our customers may defer purchases of our
products in anticipation of new products or product updates
from us or our competitors;
- the possibility that our customers may demand more contract
terms and conditions that require revenues to be deferred or
recognized ratably over time rather than upfront and that we
may not accurately forecast the mix of license transactions;
- the timing of new product introductions by us and the market
acceptance of new products;
- changes in our pricing and distribution terms or those of our
competitors; and
- the possibility that our business will be adversely affected
as a result of the threat of significant external events that
increase global economic uncertainty.
21
Investors should not rely on the results of prior periods as an
indication of our future performance. Our operating expense levels are based, in
significant part, on our expectations of future revenue. If we have a shortfall
in revenue in any given quarter, we will not be able to reduce our operating
expenses for that quarter proportionally in response. Therefore, any significant
shortfall in revenue will likely have an immediate adverse effect on our
operating results for that quarter.
DECREASING DEMAND FOR ENTERPRISE LICENSE TRANSACTIONS COULD ADVERSELY AFFECT
REVENUES.
Fees from enterprise license transactions have historically been a
fundamental component of our revenues. These revenues depend on our customers
planning to grow their computer processing capacity and continuing to perceive
an increasing need to use our existing software products on substantially
greater processing capacity in future periods. Prior to 2000, we licensed many
of our larger customers to operate our mainframe products on significant levels
of processing capacity in excess of their then current mainframe processing
capacity. During the past several years, we also entered into many enterprise
license agreements with our larger customers to operate our distributed systems
products on significant levels of processing capacity in excess of their then
current distributed processing capacity. These customers may elect not to
license our products for additional processing capacity until their actual
processing capacity or expected future processing capacity exceeds the capacity
they have already licensed from us. In the past, customers tended to renew their
enterprise license agreements prior to their expiration. Recent experience
indicates that some customers renew early while other customers continue to
operate under their existing capacity. These factors make it difficult to
anticipate the size and timing of renewals of enterprise licenses. If our
customers who have entered into multi-year capacity-based licenses for excess
processing capacity do not increase their processing capacity beyond the levels
previously licensed from us or license additional processing capacity in
anticipation of future growth, then our license revenues may not grow and our
earnings could be adversely affected.
WE MAY HAVE DIFFICULTY ACHIEVING OUR CASH FLOW FROM OPERATIONS GOAL.
Our quarterly cash flow is and has been volatile. If our cash generated
from operations proved in some future period to be materially less than the
market expects, the market price of our common stock could decline. To meet the
needs of our customers, we have been providing more licensing options, and this
increased focus on flexibility may lead to more contracts that will be
recognized ratably versus upfront and where cash payments may be received over
time versus upfront. Factors that could adversely affect our cash flow from
operations in the future include: reduced net earnings; increased time required
for the collection of accounts receivable; an increase in uncollectible accounts
receivable; a significant shift from multi-year committed contracts to
short-term contracts; a reduced ability to transfer finance receivables to third
parties and thus increased financing provided by us; an increase in contracts
where expenses such as sales commissions are paid upfront but payments from
customers are collected over time; reduced renewal rates for maintenance; and a
reduced yield from marketable securities and cash and cash equivalents balances.
MAINTENANCE REVENUE COULD DECLINE.
Maintenance revenues have increased in each of 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. In addition, customers may be entitled to reduced
maintenance percentages for entering into long-term maintenance contracts that
include prepayment of the maintenance fees or that are supported by a formal
financing arrangement. These discounts, combined with reduced maintenance
percentages for long-term contracts and the recent decline in our license
revenues, have led to lower growth rates for our maintenance revenue, excluding
the impact of Remedy revenues subsequent to the acquisition date. Further
declines in our license revenue and/or increased discounting would lead to
declines in our maintenance revenues. Although renewal rates remain high, should
customers migrate from their mainframe applications or find alternatives to our
products, increased cancellations could lead to declines in our maintenance
revenue.
OUR RESTRUCTURING INITIATIVES MAY NOT ACHIEVE OUR DESIRED RESULTS AND, IF
UNSUCCESSFUL, COULD ADVERSELY AFFECT OUR BUSINESS.
We have recently completed a restructuring plan and have revised our
fiscal year targets for expenses and cash flow from operations to reflect the
effects of this restructuring. We have reduced our workforce and moved into
lower cost facilities in some of our locations. Although we have made efforts to
minimize the impact on quota-carrying sales representatives, the workforce
reductions have included some employees directly responsible for sales, which
may affect our ability to close future revenue transactions with our customers
and prospects. The failure to retain and effectively manage our remaining
employees and hire and
22
train international employees could impact our development efforts and the
quality of our products, delay the delivery of new products or product updates
and affect customer service. If we are unable to achieve the desired results of
our restructuring plan, we may fall short of our revised financial expectations.
It is also possible that additional restructuring activity may be required for
us to achieve our profitability objectives.
OUR STOCK PRICE IS VOLATILE.
Our stock price has been and is highly volatile. Our stock price is
highly influenced by current expectations of our future revenues, earnings and
cash flows from operations. Any failure to meet anticipated revenue, earnings
and cash flow from operations 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.
INTENSE COMPETITION AND PRICING PRESSURES COULD ADVERSELY AFFECT OUR EARNINGS.
The market for systems management software is highly competitive. We
compete with a variety of software vendors including IBM, Hewlett Packard (HP),
Computer Associates (CA) and a number of smaller software vendors. We derived a
significant portion of our total revenues in fiscal 2003 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 continues to invest in the IMS and DB2 utility market. 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 would be
materially adversely affected. As a large hardware vendor and outsourcer of IT
services, IBM has the ability to bundle its other goods and services with its
software and offer packaged solutions to customers which could result in
increased pricing pressure. To date, our solutions have competed well against
IBM's because we have developed advanced automation and artificial intelligence
features and our utilities have maintained a speed advantage. In addition, we
believe that because we provide enterprise management solutions across multiple
platforms we are better positioned to provide customers with comprehensive
management solutions for their complex multi-vendor IT environments than
integrated hardware and software companies like IBM. CA is also competing with
us in these markets. Competition has led to increased pricing pressures within
the mainframe software markets. We continue to reduce the cost to our customers
of our mainframe tools and utilities in response to such competitive pressures.
Although to date we have not experienced significant competition from Microsoft,
their dominant position in the operating system market makes them capable of
exerting competitive pressure in the systems management market as well. We also
face competition from several niche software vendors, particularly for our
distributed systems product lines. In addition, the software industry is
experiencing continued consolidation. There is a risk that some of our
competitors may combine and consolidate market positions or combine technology,
making them stronger competitors.
OUR PRODUCTS MUST REMAIN COMPATIBLE WITH EVER-CHANGING OPERATING AND DATABASE
ENVIRONMENTS.
IBM, HP, Microsoft and Oracle are by far the largest suppliers of
systems and database software and, in many cases, are the manufacturers of the
computer hardware systems used by most of our customers. Historically, operating
and database system developers have modified or introduced new operating
systems, database systems, systems software and computer hardware. Such new
products could incorporate features which perform functions currently performed
by our products or could require substantial modification of our products to
maintain compatibility with these companies' hardware or software. Although we
have to date been able to adapt our products and our business to changes
introduced by hardware manufacturers and operating and database system software
developers, there can be no assurance that we will be able to do so in the
future. Failure to adapt our products in a timely manner to such changes or
customer decisions to forego the use of our products in favor of those with
comparable functionality contained either in the hardware or operating system
could have a material adverse effect on our business, financial condition and
operating results.
FUTURE PRODUCT DEVELOPMENT IS DEPENDENT UPON ACCESS TO THIRD-PARTY SOURCE CODE.
In the past, licensees using proprietary operating systems were
furnished with "source code," which makes the operating system generally
understandable to programmers, and "object code," which directly controls the
hardware and other technical documentation. Since the availability of source
code facilitated the development of systems and applications software which must
interface with the operating systems, independent software vendors such as BMC
Software were able to develop and market compatible software. IBM and other
hardware vendors have a policy of restricting the use or availability of the
source code for some of their operating systems. To date, this policy has not
had a material effect on us. Some companies, however, may adopt more restrictive
policies in the future or impose unfavorable terms and conditions for such
access. These restrictions may, in the future, result in higher research and
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development costs for us in connection with the enhancement and modification of
our existing products and the development of new products. Although we do not
expect that such restrictions will have this adverse effect, there can be no
assurances that such restrictions or other restrictions will not have a material
adverse effect on our business, financial condition and operating results.
FUTURE PRODUCT DEVELOPMENT IS DEPENDENT UPON EARLY ACCESS TO THIRD-PARTY
OPERATING AND DATABASE SYSTEMS.
Operating and database system software developers have in the past
provided us with early access to pre-generally available (GA) versions of their
software in order to have input into the functionality and to ensure that we can
adapt our software to exploit new functionality in these systems. Some
companies, however, may adopt more restrictive policies in the future or impose
unfavorable terms and conditions for such access. These restrictions may result
in higher research and development costs for us in connection with the
enhancement and modification of our existing products and the development of new
products. Although we do not expect that such restrictions will have this
adverse effect, there can be no assurances that such restrictions or other
restrictions will not have a material adverse effect on our business, financial
condition and operating results.
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 several years, many new
technological advancements and competing products entered 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 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.
FAILURE TO MAINTAIN OUR EXISTING DISTRIBUTION CHANNELS AND DEVELOP ADDITIONAL
CHANNELS IN THE FUTURE COULD ADVERSELY AFFECT REVENUES AND EARNINGS.
With the acquisition of Remedy, the percentage of our revenue from
sales of our products and services through distribution channels such as systems
integrators and value-added resellers is increasing. Conducting business through
indirect distribution channels presents a number of risks, including:
- each of our systems integrators and value-added resellers can
cease marketing our products and services with limited or no
notice and with little or no penalty;
- our existing systems integrators and value-added resellers may
not be able to effectively sell new products and services that
we may introduce;
- we do not have direct control over the business practices
adopted by our systems integrators and value-added resellers;
- our systems integrators and value-added resellers may also
offer competitive products and services and as such, may not
give priority to the marketing of our products and services as
compared to our competitors' products; and
- we may face conflicts between the activities of our indirect
channels and our direct sales and marketing activities.
CHANGES IN PRICING PRACTICES COULD ADVERSELY AFFECT REVENUES AND EARNINGS.
We may choose to make changes to our product packaging, pricing or
licensing programs in response to competition or customer demands or as a means
to differentiate our product offerings. If made, such changes may have a
material adverse impact on revenues or earnings.
24
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. Our BSM strategy
requires us to integrate multiple software products so that they work together
to provide comprehensive systems management solutions. 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. We may also adopt different
sales strategies for marketing our products, and there can be no assurance that
our strategies for selling solutions will be successful.
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, sales and managerial personnel; the inability of management to
maximize our financial and strategic position through the successful integration
of acquired businesses; the risk that revenues from acquired companies, products
and technologies do not meet our expectations; and decreases in reported
earnings as a result of charges for in-process research and development and
amortization of acquired intangible assets.
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.
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 of acquired companies; 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 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 grows and the
functionality of products overlaps. In addition, we may receive more patent
infringement claims as companies increasingly seek to patent their software and
business methods and enforce such patents, especially given the increase in
software and business method patents issued during the past several years.
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.
25
RISKS RELATED TO INTERNATIONAL OPERATIONS.
We have committed, and expect to continue to commit, substantial
resources and funding to our international infrastructure. Operating costs in
many countries, including many of those in which we operate, are higher than in
the United States. To increase international sales in fiscal 2004 and subsequent
periods, we must continue to globalize our software product lines; expand
existing and establish additional foreign operations; strategically 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.
We maintain a software development and information technology
operations office in India which operates as an extension of our primary
development and information technology operations and we contract with
third-party developers in India. As other software companies have done and are
continuing to do, we plan to continue to allocate more development and IT
resources to India with the expectation of achieving significant efficiencies,
including reducing operational costs and permitting an around-the-clock
development cycle. To date, the dispute between India and Pakistan involving the
Kashmir region has not adversely affected our operations in India. Should we be
unable to conduct operations in India in the future, we believe that our
business could be temporarily adversely affected.
We conduct substantial development and marketing operations in multiple
locations 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. We maintain comprehensive contingency
and business continuity plans, and to date, the current conflict in the region
and hostilities within Israel have not caused disruption of our operations
located in Israel.
ACCOUNTING PRONOUNCEMENTS UNDER CONSIDERATION RELATED TO STOCK-BASED
COMPENSATION WOULD REDUCE OUR REPORTED EARNINGS AND COULD ADVERSELY
AFFECT OUR ABILITY TO ATTRACT AND RETAIN KEY PERSONNEL BY REDUCING THE
STOCK-BASED COMPENSATION WE ARE ABLE TO PROVIDE.
We have used stock options and other long-term equity incentives as a
fundamental component of our employee compensation packages. We believe that
stock options and other long-term equity incentives directly motivate our
employees to maximize long-term stockholder value and, through the use of
vesting, encourage employees to remain with BMC Software. In accounting for our
stock option grants using the intrinsic value method under the provisions of
Accounting Principles Board Opinion No. 25, we recognize no compensation cost
because the exercise price of options granted is equal to the market value of
our common stock on the date of grant. The Financial Accounting Standards Board
(FASB) is currently considering changes to US generally accepted accounting
principles that, if implemented, would require us to record charges to earnings
for employee stock option grants, which would negatively impact our earnings.
For example, as disclosed in Note (4) to the accompanying Condensed Consolidated
Financial Statements, recording charges for employee stock options using the
fair value method under SFAS No. 123, "Accounting for Stock-Based Compensation"
would have reduced net earnings by $16.8 million and $15.8 million for the
quarters ended December 31, 2002 and 2003, respectively and by $54.7 million and
$59.4 million for the nine months ended December 31, 2002 and 2003,
respectively. In addition, new regulations adopted by The New York Stock
Exchange requiring stockholder approval for all stock option plans as well as
new regulations prohibiting NYSE member organizations from giving a proxy to
vote on equity-compensation plans unless the beneficial owner of the shares has
given voting instructions could make it more difficult for us to grant options
to employees in the future. To the extent that new regulations make it more
difficult or costly to grant options and/or other stock-based compensation to
employees, we may incur increased cash compensation costs or find it difficult
to attract, retain and motivate employees, either of which could materially
adversely affect our business.
POSSIBLE ADVERSE IMPACT OF INTERPRETATIONS OF EXISTING ACCOUNTING
PRONOUNCEMENTS.
On April 1, 1998 and 1999 we adopted AICPA 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 our 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. Future interpretations of existing
26
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 3. 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
marketable securities. In the normal course of business, we employ established
policies and procedures to manage these risks including the use of derivative
instruments. There have been no material changes in our foreign exchange risk
management strategy or our marketable securities subsequent to March 31, 2003,
therefore our market risk sensitive instruments remain substantially unchanged
from the description in our Annual Report on Form 10-K for the year ended March
31, 2003.
ITEM 4. CONTROLS AND PROCEDURES
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
As of December 31, 2003, the Company's principal executive officer and
principal financial officer evaluated the effectiveness of the Company's
disclosure controls and procedures. There are inherent limitations to the
effectiveness of any system of disclosure controls and procedures, including the
possibility of human error and the circumvention or overriding of the controls
and procedures. Accordingly, even effective disclosure controls and procedures
can only provide reasonable assurance of achieving their control objectives.
Based on the evaluation, the Company's principal executive officer and principal
financial officer believe that:
- the Company's disclosure controls and procedures are designed
to ensure that information required to be disclosed by the
Company in the reports it files or submits under the
Securities Exchange Act of 1934 is recorded, processed,
summarized and reported within the time periods specified in
the SEC's rules and forms; and
- the Company's disclosure controls and procedures were
effective in all material respects in ensuring that such
information was accumulated and communicated to the Company's
management, including the Company's principal executive
officer and the principal financial officer, as appropriate,
to allow timely decisions regarding required disclosure.
CHANGES IN INTERNAL CONTROLS OVER FINANCIAL REPORTING
During the most recent fiscal quarter, there have been no changes in
the Company's internal controls over financial reporting that materially
affected, or are reasonably likely to materially affect, the Company's internal
controls over financial reporting.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On January 29, 2003, we filed a complaint against NetIQ Corporation
(NetIQ) in the United States District Court of the Southern District of Texas,
Houston Division, alleging that one or more of NetIQ's software products and
their use infringe a valid U.S. patent and that Net IQ infringed one or more
trademarks held by us. On August 22, 2003, the Court ordered the case stayed
pending arbitration. On September 18, 2003, we filed a Statement of Claim with
the American Arbitration Association asserting our claims of patent
infringement, subject to our objections to the arbitration proceeding. BMC
Software seeks to enjoin NetIQ's current and future infringement of our patent
and to recover compensatory damages and enhanced damages, interest, costs and
fees. On November 24, 2003, NetIQ filed a counterclaim against BMC alleging
patent infringement.
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
3.2 Amended and Restated Bylaws of BMC Software, Inc.
31.1 Certification of the Chief Executive Officer of BMC Software,
Inc. pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.
31.2 Certification of the Chief Financial Officer of BMC Software,
Inc. pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.
32.1 Certification of the Chief Executive Officer of BMC Software,
Inc. pursuant to 18 U.S.C. Section 1350.
32.2 Certification of the Chief Financial Officer of BMC Software,
Inc. pursuant to 18 U.S.C. Section 1350.
(b) Reports on Form 8-K.
On October 30, 2003, BMC Software filed a Current Report on Form 8-K,
dated October 30, 2003, furnishing under Item 12 its news release to
report its historical financial results for the quarter ended September
30, 2003.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
BMC SOFTWARE, INC.
By: /s/ Robert E. Beauchamp
-------------------------------------------
Robert E. Beauchamp
President and Chief Executive Officer
February 17, 2004
By: /s/ John W. Cox
-------------------------------------------
John W. Cox
Vice President, Chief Financial Officer and
Chief Accounting Officer
February 17, 2004
29
INDEX TO EXHIBITS
EXHIBIT NO. DESCRIPTION
- ----------- -----------
3.2 Amended and Restated Bylaws of BMC Software, Inc.
31.1 Certification of the Chief Executive Officer of BMC Software,
Inc. pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.
31.2 Certification of the Chief Financial Officer of BMC Software,
Inc. pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.
32.1 Certification of the Chief Executive Officer of BMC Software,
Inc. pursuant to 18 U.S.C. Section 1350.
32.2 Certification of the Chief Financial Officer of BMC Software,
Inc. pursuant to 18 U.S.C. Section 1350.