-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, C2CdpHqUJq+N1yHA3onugWw8gRs7jFDEyLHZhjTyRZ7yeFcjFg4AS+SR5KUrxFC4 GoLbFCCLLIlTtlWZITBxTw== 0000950129-01-502468.txt : 20010813 0000950129-01-502468.hdr.sgml : 20010813 ACCESSION NUMBER: 0000950129-01-502468 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20010630 FILED AS OF DATE: 20010810 FILER: COMPANY DATA: COMPANY CONFORMED NAME: BMC SOFTWARE INC CENTRAL INDEX KEY: 0000835729 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-PREPACKAGED SOFTWARE [7372] IRS NUMBER: 742126120 STATE OF INCORPORATION: DE FISCAL YEAR END: 0331 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-16393 FILM NUMBER: 1704292 BUSINESS ADDRESS: STREET 1: 2101 CITYWEST BLVD CITY: HOUSTON STATE: TX ZIP: 77042-2827 BUSINESS PHONE: 7139188800 MAIL ADDRESS: STREET 1: 2101 CITYWEST BLVD CITY: HOUSTON STATE: TX ZIP: 77042-2827 10-Q 1 h89749e10-q.txt BMC SOFTWARE, INC. - DATED JUNE 30, 2001 1 ================================================================================ 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 JUNE 30, 2001 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM TO COMMISSION FILE NUMBER 0-17136 BMC SOFTWARE, INC. (Exact name of registrant as specified in its charter) DELAWARE 74-2126120 (State or other jurisdiction of (IRS Employer incorporation or organization) Identification No.) BMC SOFTWARE, INC. 2101 CITYWEST BOULEVARD HOUSTON, TEXAS 77042-2827 (Address of principal (Zip Code) executive offices) 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 [v] No [ ] As of August 8, 2001, there were outstanding 247,195,164 shares of Common Stock, par value $.01, of the registrant. ================================================================================ 2 BMC SOFTWARE, INC. AND SUBSIDIARIES QUARTER ENDED JUNE 30, 2001 INDEX
PAGE ---- PART I. FINANCIAL INFORMATION Item 1. Financial Statements Condensed Consolidated Balance Sheets as of March 31, 2001 and June 30, 2001 (Unaudited)............................................... 3 Condensed Consolidated Statements of Earnings and Comprehensive Income for the three months ended June 30, 2000 and 2001 (Unaudited).... 4 Condensed Consolidated Statements of Cash Flows for the three months ended June 30, 2000 and 2001 (Unaudited)......................... 5 Notes to Condensed Consolidated Financial Statements (Unaudited).......... 6 Item 2. Management's Discussion and Analysis of Results of Operations and Financial Condition....................................................... 8 Item 3. Quantitative and Qualitative Disclosures about Market Risk................... 18 PART II. OTHER INFORMATION Item 1. Legal Proceedings............................................................ 18 Item 6. Exhibits and Reports on Form 8-K............................................. 18 Signatures................................................................... 19
2 3 PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS BMC SOFTWARE, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (IN MILLIONS)
MARCH 31, JUNE 30, 2001 2001 -------- -------- (UNAUDITED) ASSETS Current assets: Cash and cash equivalents ............................ $ 146.0 $ 129.0 Marketable securities ................................ 144.7 162.7 Trade accounts receivable, net ....................... 292.6 259.3 Trade finance receivables, current ................... 213.5 151.9 Other current assets ................................. 105.9 142.3 -------- -------- Total current assets .......................... 902.7 845.2 Property and equipment, net ............................ 456.5 461.1 Software development costs and related assets, net ..... 242.7 255.6 Marketable securities .................................. 713.3 707.0 Long-term finance receivables .......................... 236.3 166.1 Acquired technology, net ............................... 95.3 84.3 Goodwill and other intangibles, net .................... 317.6 282.4 Other long-term assets ................................. 69.5 70.9 -------- -------- $3,033.9 $2,872.6 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Trade accounts payable ............................... $ 22.1 $ 15.7 Accrued liabilities .................................. 182.3 160.5 Short-term borrowings ................................ 150.0 -- Current portion of deferred revenue .................. 474.6 528.2 -------- -------- Total current liabilities ..................... 829.0 704.4 Deferred revenue ....................................... 382.8 390.7 Other long-term liabilities ............................ 6.8 11.3 -------- -------- Total liabilities ............................. 1,218.6 1,106.4 Commitments and contingencies Stockholders' equity: Preferred stock ...................................... -- -- Common stock ......................................... 2.5 2.5 Additional paid-in capital ........................... 530.9 536.0 Retained earnings .................................... 1,336.2 1,295.8 Accumulated other comprehensive income ............... (9.8) (3.2) -------- -------- 1,859.8 1,831.1 Less treasury stock, at cost ......................... (20.9) (46.1) Less unearned portion of restricted stock compensation (23.6) (18.8) -------- -------- Total stockholders' equity .................... 1,815.3 1,766.2 -------- -------- $3,033.9 $2,872.6 ======== ========
The accompanying notes are an integral part of these condensed consolidated financial statements. 3 4 BMC SOFTWARE, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS AND COMPREHENSIVE INCOME (IN MILLIONS, EXCEPT PER SHARE DATA) (UNAUDITED)
THREE MONTHS ENDED JUNE 30, ----------------------------- 2000 2001 -------- -------- Revenues: License ..................................................... $ 229.7 $ 180.0 Maintenance ................................................. 125.7 139.3 Professional services ....................................... 17.3 19.9 -------- -------- Total revenues ...................................... 372.7 339.2 -------- -------- Operating expenses: Selling and marketing expenses .............................. 152.2 152.8 Research and development expenses ........................... 106.6 113.0 Cost of professional services ............................... 20.6 25.1 General and administrative expenses ......................... 38.3 41.9 Acquired research and development ........................... 11.7 -- Amortization of acquired technology, goodwill and intangibles 39.6 48.2 Severance and related expenses .............................. -- 12.0 Merger-related costs and compensation charges ............... 2.1 2.7 -------- -------- Total operating expenses ............................ 371.1 395.7 -------- -------- Operating income (loss) ............................. 1.6 (56.5) Interest and other income, net ................................ 15.6 16.4 Interest expense .............................................. (3.2) (0.4) Loss on marketable securities ................................. -- (7.4) -------- -------- Other income, net ................................... 12.4 8.6 -------- -------- Earnings (loss) before income taxes ................. 14.0 (47.9) Income taxes .................................................. 4.0 (13.4) -------- -------- Net earnings (loss) ................................. $ 10.0 $ (34.5) ======== ======== Basic earnings (loss) per share ............................... $ 0.04 $ (0.14) ======== ======== Diluted earnings (loss) per share ............................. $ 0.04 $ (0.14) ======== ======== Shares used in computing basic earnings (loss) per share ...... 245.5 247.3 ======== ======== Shares used in computing diluted earnings (loss) per share .... 254.4 247.3 ======== ======== Comprehensive Income (Loss): Net earnings (loss) ......................................... $ 10.0 $ (34.5) Foreign currency translation adjustment ..................... (5.6) 0.2 Unrealized gain on securities available for sale: Unrealized gain (loss), net of taxes of $0.5 and $0.1 .... (1.0) 0.2 Realized loss included in net earnings, net of taxes of $ -- and $2.6 ......................................... -- 4.8 -------- -------- (1.0) 5.0 Unrealized gain on derivative instruments: Unrealized gain, net of taxes of $ -- and $1.5 .......... 0.1 2.8 Realized (gain) included in net earnings, net of taxes of $1.6 and $0.8 ......................................... (3.0) (1.4) -------- -------- (2.9) 1.4 -------- -------- Comprehensive income (loss) ......................... $ 0.5 $ (27.9) ======== ========
The accompanying notes are an integral part of these condensed consolidated financial statements. 4 5 BMC SOFTWARE, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (IN MILLIONS) (UNAUDITED)
THREE MONTHS ENDED JUNE 30, --------------------------- 2000 2001 ------- ------- Cash flows from operating activities: Net earnings (loss) ............................................. $ 10.0 $ (34.5) Adjustments to reconcile net earnings (loss) to net cash provided by operating activities: Acquired research and development and merger-related costs and compensation charges ............................. 13.8 2.5 Depreciation and amortization ................................ 64.1 91.0 Loss on marketable securities ................................ -- 7.4 Earned portion of restricted stock compensation .............. 2.0 0.6 Net change in receivables, payables, deferred revenue and other components of working capital ......................... 138.7 94.4 ------- ------- Net cash provided by operating activities ............... 228.6 161.4 ------- ------- Cash flows from investing activities: Cash paid for technology acquisitions and other investments, net of cash acquired .......................................... (17.3) (3.2) Purchases of marketable securities .............................. (111.7) (54.3) Maturities of/proceeds from sales of marketable securities ...... 30.5 39.6 Purchases of property and equipment ............................. (47.0) (21.7) Proceeds from sales of property and equipment ................... -- 3.1 Capitalization of software development costs and related assets . (19.0) (35.3) Decrease in long-term finance receivables ....................... 41.4 70.2 ------- ------- Net cash used in investing activities ................... (123.1) (1.6) ------- ------- Cash flows from financing activities: Payments on borrowings .......................................... (103.0) (150.0) Stock options exercised and other ............................... 10.5 6.1 Treasury stock acquired ......................................... (20.1) (34.0) ------- ------- Net cash used in financing activities ................... (112.6) (177.9) ------- ------- Effect of exchange rate changes on cash ........................... (5.6) 1.1 ------- ------- Net change in cash and cash equivalents ........................... (12.7) (17.0) Cash and cash equivalents, beginning of period .................... 152.4 146.0 ------- ------- Cash and cash equivalents, end of period .......................... $ 139.7 $ 129.0 ======= ======= Supplemental disclosure of cash flow information: Cash paid for interest, net of amounts capitalized .............. $ 1.5 $ 1.7 Cash paid for income taxes ...................................... $ 9.6 $ 4.8 Common stock and options issued and liabilities assumed in acquisitions .............................................. $ 55.3 $ --
The accompanying notes are an integral part of these condensed consolidated financial statements. 5 6 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 wholly 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, 2001, as filed with the Securities and Exchange Commission on Form 10-K. (2) EARNINGS (LOSS) PER SHARE Statement of Financial Accounting Standards (SFAS) No. 128, "Earnings Per Share," requires dual presentation of basic and diluted earnings per share (EPS). Basic EPS is computed by dividing net income by the weighted average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock. For purposes of this calculation, outstanding stock options and unearned restricted stock are considered potential common shares using the treasury stock method. For the three months ended June 30, 2000 and 2001, the treasury stock method effect of 12.1 million and 37.2 million weighted options, respectively, has been excluded from the calculation of diluted EPS as they are antidilutive. For the three months ended June 30, 2001, the treasury stock method effect of 0.7 million weighted unearned restricted shares has also been excluded as they are antidilutive. The following table summarizes the basic and diluted EPS computations for the three months ended June 30, 2000 and 2001:
THREE MONTHS ENDED JUNE 30, --------------------------- 2000 2001 ------- ------- (IN MILLIONS, EXCEPT PER SHARE DATA) Basic earnings (loss) per share: Net earnings (loss) ................................ $ 10.0 $ (34.5) ------- ------- Weighted average number of common shares ........... 245.5 247.3 ------- ------- Basic earnings (loss) per share .................... $ 0.04 $ (0.14) ======= ======= Diluted earnings (loss) per share: Net earnings (loss) ................................ $ 10.0 $ (34.5) ------- ------- Weighted average number of common shares ........... 245.5 247.3 Incremental shares from assumed conversions of stock options and other ............................... 8.9 -- ------- ------- Adjusted weighted average number of common shares .. 254.4 247.3 ------- ------- Diluted earnings (loss) per share .................... $ 0.04 $ (0.14) ======= =======
(3) SEGMENT REPORTING BMC's management reviews the results of the Company's software business by the following product categories: Enterprise Server Management, Business Integrated Scheduling, Application & Database Performance Management, Recovery & Storage Management and Other Software. In addition to these software segments, the professional services business is also considered a separate segment. Through June 30, 2001, the results of the business information integration product group were included as part of the Other Software segment. Subsequent to June 30, 2001, management began including a portion of this product group in the Application & Database Performance Management segment and the remainder in the Recovery & Storage Management segment. The amounts reported below for the quarters ended June 30, 2000 and 2001 reflect this change in the composition of the segments. 6 7 Segment performance is measured based on operating margins, which reflect only the direct controllable expenses of the segments and do not include allocation of indirect research and development (R&D) expenses, the effect of software development cost capitalization and amortization, selling and marketing expenses, general and administrative expenses, amortization of acquired technology, goodwill and intangibles, one-time charges, other income, net, and income taxes. Assets and liabilities are not accounted for by segment.
ENTERPRISE SYSTEMS MANAGEMENT SOFTWARE -------------------------------------------------------- APPLICATION ENTERPRISE BUSINESS & DATABASE RECOVERY & SERVER INTEGRATED PERFORMANCE STORAGE OTHER PROFESSIONAL INDIRECT AS MANAGEMENT SCHEDULING MANAGEMENT MANAGEMENT SOFTWARE SERVICES R&D REPORTED ---------- ---------- ---------- ---------- -------- -------- --- -------- (IN MILLIONS) QUARTER ENDED JUNE 30, 2000 - --------------------------- Revenues: License ................... $103.4 $ 11.0 $ 64.1 $ 43.6 $ 7.6 $ -- $ -- $229.7 Maintenance ............... 63.1 7.9 25.5 24.1 5.1 -- -- 125.7 Professional services ..... -- -- -- -- -- 17.3 -- 17.3 ------ ------ ------ ------ ------ ------ ------ ------ Total revenues ............... $166.5 $ 18.9 $ 89.6 $ 67.7 $ 12.7 $ 17.3 $ -- $372.7 R&D expenses ................. 22.0 4.7 38.8 17.0 9.5 -- 14.6 106.6 Cost of professional services -- -- -- -- -- 20.6 -- 20.6 ------ ------ ------ ------ ------ ------ ------ ------ Operating margin ........... $144.5 $ 14.2 $ 50.8 $ 50.7 $ 3.2 $ (3.3) $(14.6) 245.5 ====== ====== ====== ====== ====== ====== ====== Selling and marketing expenses......................................................................................... 152.2 General and administrative expenses.................................................................................... 38.3 Acquired research and development...................................................................................... 11.7 Amortization of acquired technology, goodwill and intangibles.......................................................... 39.6 Merger-related costs and compensation charges.......................................................................... 2.1 Other income, net...................................................................................................... 12.4 ------ Consolidated earnings before taxes..................................................................................... $ 14.0 ======
ENTERPRISE SYSTEMS MANAGEMENT SOFTWARE -------------------------------------------------------- APPLICATION ENTERPRISE BUSINESS & DATABASE RECOVERY & SERVER INTEGRATED PERFORMANCE STORAGE OTHER PROFESSIONAL INDIRECT AS MANAGEMENT SCHEDULING MANAGEMENT MANAGEMENT SOFTWARE SERVICES R&D REPORTED ---------- ---------- ---------- ---------- -------- -------- --- -------- (IN MILLIONS) QUARTER ENDED JUNE 30, 2001 - --------------------------- Revenues: License ................... $ 68.5 $ 13.7 $ 50.8 $ 33.6 $ 13.4 $ -- $ -- $180.0 Maintenance ............... 67.1 9.0 30.8 25.3 7.1 -- -- 139.3 Professional services ..... -- -- -- -- -- 19.9 -- 19.9 ------ ------ ------ ------ ------ ------ ------ ------ Total revenues ............... $135.6 $ 22.7 $ 81.6 $ 58.9 $ 20.5 $ 19.9 $ -- $339.2 R&D expenses ................. 27.8 5.6 41.6 20.6 14.7 -- 2.7 113.0 Cost of professional services -- -- -- -- -- 25.1 -- 25.1 ------ ------ ------ ------ ------ ------ ------ ------ Operating margin ........... $107.8 $ 17.1 $ 40.0 $ 38.3 $ 5.8 $ (5.2) $ (2.7) 201.1 ====== ====== ====== ====== ====== ====== ====== Selling and marketing expenses........................................................................................ 152.8 General and administrative expenses................................................................................... 41.9 Amortization of acquired technology, goodwill and intangibles......................................................... 48.2 Severance and related expenses........................................................................................ 12.0 Merger-related costs and compensation charges......................................................................... 2.7 Other income, net..................................................................................................... 8.6 ------ Consolidated loss before taxes........................................................................................ $(47.9) ======
(4) SEVERANCE AND RELATED EXPENSES During the quarter ended June 30, 2001, the Company terminated approximately 6% of its workforce worldwide. The action was across all divisions and geographies and affected employees received cash severance packages, the vast majority of which were paid during the quarter. The affected employees were also given the option to receive outplacement services and continued health benefits for a specified period after termination. A charge of $12.0 million was recorded during the quarter ended June 30, 2001 for such severance and related expenses, and as of June 30, 2001, $2.5 million of these termination benefits remain accrued for payment in future periods. (5) MERGER-RELATED COSTS During the quarter ended June 30, 2001, the Company made no payments under its plan of restructuring initiated in March 1999 in connection with the merger with Boole & Babbage, Inc. (Boole). See the discussion of this plan in the Company's Annual Report on Form 10-K for the year ended March 31, 2001. An accrual of $1.1 million remains at June 30, 2001, for severance payments to be made in future periods. 7 8 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION This section of the Form 10-Q 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 That Could Affect Future Operating Results." 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 Form 10-K for fiscal 2001. 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 Earnings and Comprehensive Income bear to total revenues. These comparisons of financial results are not necessarily indicative of future results.
PERCENTAGE OF TOTAL REVENUES THREE MONTHS ENDED JUNE 30, -------------------- 2000 2001 ------ ------ Revenues: License ......................................... 61.6% 53.1% Maintenance ..................................... 33.7 41.0 Professional services ........................... 4.7 5.9 ------ ------ Total revenues .............................. 100.0 100.0 Operating expenses: Selling and marketing expenses .................. 40.8 45.0 Research and development expenses ............... 28.6 33.3 Cost of professional services ................... 5.5 7.4 General and administrative expenses ............. 10.3 12.4 Acquired research and development ............... 3.1 -- Amortization of goodwill, acquired technology and intangibles .................................... 10.6 14.2 Severance and related expenses .................. -- 3.5 Merger-related costs and compensation charges ... 0.6 0.8 ------ ------ Total operating expenses ..................... 99.5 116.6 ------ ------ Operating income (loss) ...................... 0.5 (16.6) Interest and other income, net .................... 4.2 4.8 Interest expense .................................. (0.9) (0.1) Loss on marketable securities ..................... -- (2.2) ------ ------ Other income, net ............................ 3.3 2.5 Earnings (loss) before income taxes .......... 3.8 (14.1) Income taxes ...................................... 1.1 (3.9) ------ ------ Net earnings (loss) .......................... 2.7% (10.2)% ====== ======
8 9 REVENUES
THREE MONTHS ENDED JUNE 30, -------------------- 2000 2001 CHANGE -------- -------- ------ (IN MILLIONS) License: North America .................. $ 156.6 $ 113.0 (27.8)% International .................. 73.1 67.0 (8.3)% -------- -------- Total license revenues ... 229.7 180.0 (21.6)% Maintenance: North America .................. 78.7 91.0 15.6% International .................. 47.0 48.3 2.8% -------- -------- Total maintenance revenues 125.7 139.3 10.8% Professional Services: North America .................. 10.1 10.7 5.9% International .................. 7.2 9.2 27.8% -------- -------- Total professional services 17.3 19.9 15.0% -------- -------- Total revenues ........... $ 372.7 $ 339.2 (9.0)% ======== ========
Product License Revenues Our product license revenues consist of product license fees and license upgrade fees. Product license fees are all fees associated with a customer's licensing of a given software product for the first time. License upgrade fees are all fees associated with a customer's purchase of the right to run a previously licensed product on a larger computer or additional computers. License upgrade fees are primarily generated by our mainframe products and include fees associated with both current and future additional processing capacity. License revenues decreased 22% in the first quarter of fiscal 2002 as compared to the same period in fiscal 2001, primarily due to a decrease in enterprise license transactions during the period and a reduction in license upgrade fees as discussed below. Difficult economic conditions in domestic and international markets have resulted in reduced IT spending by many of our customers. Though the number of license transaction closed during the quarter increased from the prior year, tighter budgets and higher required approval levels caused many customers to choose smaller transactions in terms of dollar value. Our North American operations generated 68% and 63% of license revenues in the three months ended June 30, 2000 and 2001, respectively. A decrease in Enterprise Server Management license revenues was the largest contributor to the 28% decline in North American license revenues in the first quarter of fiscal 2002, primarily due to a decrease in capacity-based license upgrade fees. International license revenues represented 32% and 37% of total license revenues for the quarters ended June 30, 2000 and 2001, respectively. International license revenues declined 8% from the first quarter of fiscal 2001, principally due to foreign currency impact and decreased license upgrade fees associated with Enterprise Server Management products. International license revenues decreased by 4% due to foreign currency exchange rate changes from fiscal 2001 to fiscal 2002, after giving effect to our foreign currency hedging program. In both regions, new product license fees decreased only slightly from the first quarter of fiscal 2001. Maintenance and Support Revenues Maintenance and support revenues represent the ratable recognition of fees to enroll licensed products in our software maintenance, enhancement and support program. Maintenance and support enrollment entitles customers to product enhancements, technical support services and ongoing compatibility with third-party operating systems, database management systems and applications. These fees are generally charged annually and equal 15% to 20% of the discounted price of the product. In addition, customers are entitled to reduced maintenance percentages for prepayment of annual maintenance fees. Maintenance revenues also include the ratable recognition of the bundled fees for any initial maintenance services covered by the related perpetual license agreement. 9 10 Maintenance revenues have increased for the three months ended June 30, 2001 over the comparable prior year period as a result of the continuing growth in the base of installed products and the processing capacity on which they run. Maintenance fees increase in proportion to the aggregate processing capacity on which the products are installed; consequently, we receive higher absolute maintenance fees as customers install our products on additional processing capacity. Due to the increased discounting for higher levels of additional processing capacity, the maintenance fees on a per unit of capacity basis are typically reduced in enterprise license agreements for mainframe products. Historically, we have enjoyed high maintenance renewal rates for our mainframe-based products. Should customers migrate from their mainframe applications or find alternatives to our products, increased cancellations could adversely impact the sustainability and growth of our maintenance revenues. To date, we have been successful in extending our traditional maintenance and support pricing model to the distributed systems market. Product Line Revenues
THREE MONTHS ENDED JUNE 30, -------------------- 2000 2001 CHANGE -------- -------- ------ (IN MILLIONS) Enterprise Server Management ................ $ 166.5 $ 135.6 (18.6)% Business Integrated Scheduling .............. 18.9 22.7 20.1% Application & Database Performance Management................................. 89.6 81.6 (8.9)% Recovery & Storage Management ............... 67.7 58.9 (13.0)% Other Software .............................. 12.7 20.5 61.4% -------- -------- Total license & maintenance revenues $ 355.4 $ 319.3 (10.2)% ======== ========
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. These solutions fall into the five broad categories above. In managing our investment in these product categories we consider each to be included in one of three strategic groups. The first group includes our Enterprise Server Management and Business Integrated Scheduling solutions. Our objective for this group is to extend our core strengths in these markets. The second strategic group includes our Application & Database Performance Management and Recovery & Storage Management solutions. Our objective for this group is to build our business in fast-growing markets. The last group includes our other software products, such as our security, ERP, network management, output management and service provider solutions. The objective for this group is to make strategic investments in what we anticipate will be sources of future growth. Our Enterprise Server Management and Business Integrated Scheduling solutions combined represented 52% and 50% of total software revenues for the quarters ended June 30, 2000 and 2001, respectively. Total software revenues for this group declined 15% in the first quarter of fiscal 2002 from the same period in fiscal 2001. Because the Enterprise Server Management group includes a high proportion of mainframe solutions, decreased capacity-based upgrade fees were the primary cause of the revenue decline in the fiscal 2002 quarter, more than offsetting the revenue growth for our Business Integrated Scheduling solutions. Our Application & Database Performance Management and Recovery & Storage Management solutions combined contributed 44% of total software revenues for each of the quarters ended June 30, 2000 and 2001. Total software revenues for this group declined 11% in the first quarter of fiscal 2002 from the same period in fiscal 2001 primarily due to the economic conditions discussed above. Our other software solutions contributed 4% and 6% of total software revenues for the quarters ended June 30, 2000 and 2001, respectively. Total software revenues for this group grew 61% in the first quarter of fiscal 2002 from the same period in fiscal 2001. This growth includes increases in revenue from our security solutions and from our acquisition of OptiSystems Solutions, Ltd. (OptiSystems) in the second quarter of fiscal 2001. Professional Services Revenues Professional services revenues, representing fees from implementation, integration and education services performed during the period, increased 15% during the three months ended June 30, 2001, over the comparable prior year period. Our professional services headcount has continued to increase to meet the increasing demand for our expanding service offerings. 10 11 EXPENSES
THREE MONTHS ENDED JUNE 30, ------------------ 2000 2001 CHANGE ------ ------ ------ (IN MILLIONS) Selling and marketing ........................... $152.2 $152.8 0.4% Research and development ........................ 106.6 113.0 6.0% Cost of professional services ................... 20.6 25.1 21.8% General and administrative ...................... 38.3 41.9 9.4% Acquired research and development ............... 11.7 -- (100.0)% Amortization of acquired technology, goodwill and intangibles ..................................... 39.6 48.2 21.7% Severance and related expenses .................. -- 12.0 n/m Merger-related costs and compensation charges ... 2.1 2.7 28.6% ------ ------ Total operating expenses .............. $371.1 $395.7 6.6% ====== ======
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. Selling and marketing expenses increased slightly in the first quarter of fiscal 2002 over the same period in fiscal 2001. An increase in personnel costs in the three months ended June 30, 2001, due in part to increased headcount over the comparable prior year quarter, was mostly offset by a decrease in sales commissions as a result of the 22% decrease in license revenues and a decrease in bad debt expense related to license billings. Research and Development Research and development expenses mainly comprise personnel costs related to software developers and development support personnel, including software programmers, testing and quality assurance personnel and writers of technical documentation such as product manuals and installation guides. These expenses also include costs associated with the maintenance, enhancement and 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 and development costs are reduced 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 useful lives. During the first quarters of fiscal 2001 and 2002, we capitalized approximately $19.0 million and $35.3 million, respectively, of software development and purchased software costs. The growth in capitalized costs is primarily due to increases in distributed systems product development and platform compatibility efforts. We amortized $8.0 million and $22.4 million in the first quarters of fiscal 2001 and 2002, respectively, of capitalized software development and purchased software costs pursuant to SFAS No. 86, including $8.5 million in the first quarter of fiscal 2002 to accelerate the amortization of certain software products. We accelerated the amortization of these software products as they were not expected to generate sufficient future revenues which would be required for us to realize the carrying value of the assets. Research and development expenses increased 6% during the first quarter of fiscal 2002 compared to the same period in fiscal 2001. Though headcount at the end of the quarter remained flat compared to the same period in fiscal 2001, growth in personnel costs due to annual base pay increases was the primary contributor to the increase, along with additional software costs. These increases were partially offset by a reduction in contract labor expense and the net effect of software development cost capitalization and amortization. Cost of Professional Services Cost of professional services consists primarily of personnel costs associated with implementation, integration and education services that we perform for our customers, and the related infrastructure to support this business. The increase in these costs in the three months ended June 30, 2001, over the comparable prior year period, resulted from increased headcount to support growth in our professional services revenues. 11 12 General and Administrative General and administrative expenses are comprised primarily of compensation and personnel costs within executive management, finance and accounting, facilities management and human resources. Other costs included in general and administrative expenses are fees paid for legal and accounting services, consulting projects, insurance, costs of managing our foreign currency exposure and bad debt expense related to maintenance billings. Growth in general and administrative expenses for the three months ended June 30, 2001 over the same period in the prior year was primarily attributable to increases in property and other taxes, professional fees and costs of our currency hedging program, which more than offset reduced management bonuses for the quarter. Acquired Research and Development Acquired research and development costs for the three months ended June 30, 2000 include $7.0 million related to the acquisition of Evity, Inc. (Evity) in the first quarter of fiscal 2001, and the write-off of assets totaling $4.7 million, related to a technology agreement with Envive Corporation that was terminated during that quarter. See the discussion of the Evity acquisition in the fiscal 2001 Annual Report on Form 10-K. There was no charge for acquired research and development during the three months ended June 30, 2001. Amortization of Acquired Technology, Goodwill and Intangibles Under the purchase accounting method for certain of our acquisitions, portions of the purchase prices were allocated to goodwill, workforce, customer base, software and other intangible assets. We are amortizing these intangibles over three to five-year periods, which reflect the estimated useful lives of the respective assets. The increase in the quarterly amortization expense is related to the Evity, OptiSystems and other acquisitions completed during fiscal 2001. Severance and Related Expenses During the quarter ended June 30, 2001, we terminated approximately 6% of our workforce worldwide. The action was across all divisions and geographies and affected employees received cash severance packages, the vast majority of which were paid during the quarter. The affected employees were also given the option to receive outplacement services and continued health benefits for a specified period after termination. A charge of $12.0 million was recorded during the quarter ended June 30, 2001 for such severance and related expenses, and as of June 30, 2001, $2.5 million of these termination benefits remain accrued for payment in future periods. Merger-Related Costs and Compensation Charges In conjunction with our merger with Boole & Babbage, Inc. in March 1999, management approved a formal plan of restructuring which included steps to be taken to integrate the operations of the two companies, consolidate duplicate facilities and streamline operations to achieve reductions in overhead expenses in future periods. No charges related to this restructuring plan were recorded during the quarters ended June 30, 2000 and 2001, and as of June 30, 2001, we have remaining accrued termination benefits of approximately $1.1 million. During the quarters ended June 30, 2000 and 2001, we recorded compensation charges of $2.1 million and $2.7 million, respectively, primarily related to the vesting of common stock issued as part of the Evity acquisition to certain Evity employee shareholders who we employed after the acquisition. OTHER INCOME, NET For the first quarter of fiscal 2002, other income, net was $8.6 million, reflecting a decrease of 31% from $12.4 million in the same quarter of fiscal 2001. Other income, net consists primarily of interest earned on cash, cash equivalents and marketable securities, gains and losses on marketable securities and interest expense on short-term borrowings. The decrease in other income, net is primarily due to a $7.4 million loss on a marketable security, which was partially offset by a decrease in interest expense as a result of reduced borrowings outstanding during the first quarter of fiscal 2002 and an increase in interest income. INCOME TAXES For the three months ended June 30, 2001, the income tax benefit was $13.4 million, compared to expense of $4.0 million for the same period in fiscal 2001. Our effective tax rate was 28% for the three months ended June 30, 2001 and 29% for the comparable prior year period. The reduction in income tax expense is attributable to the decline in pre-tax earnings discussed above. 12 13 RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS In June 2001, the Financial Accounting Standards Board issued SFAS No. 141, "Business Combinations," and SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS No. 141 addresses financial accounting and reporting for business combinations and requires that all business combinations be accounted for using one method, the purchase method. The Statement applies to all business combinations initiated after June 30, 2001. SFAS No. 142 addresses financial accounting and reporting at the point of acquisition for intangible assets acquired individually or with a group of other assets, other than those acquired in a business combination, and the financial accounting and reporting for goodwill and other intangible assets subsequent to their acquisition. Under this Statement, all goodwill and those intangible assets with indefinite useful lives will no longer be amortized, but rather will be tested at least annually for impairment. Intangible assets with finite useful lives will continue to be amortized over those useful lives. The provisions of SFAS No. 142 are required to be applied for fiscal years beginning after December 15, 2001, except that goodwill and intangibles that arise from business combinations after June 30, 2001 will not be amortized. As such, we will adopt the Statement in its entirety on April 1, 2002, and will apply the appropriate provisions to any business combinations we may complete between June 30, 2001 and that date. Adoption of these Statements will eliminate a portion of the amortization expense from our Statement of Earnings and Comprehensive Income, which for the quarter ended June 30, 2001, totaled $35.6 million. For acquisitions completed through June 30, 2001, we estimate that a balance of approximately $160 million of goodwill and intangibles will remain at adoption that will no longer be amortized. Impairment charges at adoption or in the future, if any, cannot be estimated. LIQUIDITY AND CAPITAL RESOURCES At June 30, 2001, our cash, cash equivalents and marketable securities were $998.7 million, approximately even with the March 31, 2001 balance. Our working capital as of June 30, 2001, was $140.8 million, reflecting an increase from the March 31, 2001 balance of $73.7 million due primarily to positive operating cash flow and the decrease of $150.0 million in short-term borrowings. We continue to invest cash in securities with maturities beyond one year. While typically yielding greater returns, this reduces reported working capital. Our marketable securities are primarily investment grade and highly liquid. Stockholders' equity as of June 30, 2001, was $1.8 billion. We continue to primarily finance our growth through funds generated from operations. For the quarter ended June 30, 2001, net cash provided by operating activities was $161.4 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. We participate in established programs with third-party financing institutions that allow us to transfer a significant portion of our finance receivables on a non-recourse basis for cash. During the quarter ended June 30, 2001, we transferred $113.1 million of such receivables through these programs. The high credit quality of our finance receivables and the existence of these third-party facilities extend our ability to offer financing to qualifying customers on an ongoing basis without a negative cash flow impact. Net cash used in investing activities in the quarter ended June 30, 2001 was $1.6 million, primarily related to disbursements for the purchase of marketable securities and the construction of an expansion to our corporate headquarters, which were offset by cash receipts from the maturities of marketable securities and sales of finance receivables. Net cash used in financing activities in the quarter ended June 30, 2001 was $177.9 million, which derived primarily from the repayment of all short-term borrowings and treasury stock purchases. On April 24, 2000, the board of directors authorized us to purchase up to $500.0 million in common stock. During the quarter ended June 30, 2001 we purchased 1.4 million shares for $34.0 million. Since the inception of the repurchase plan, we have purchased 8.5 million shares for $189.1 million. We plan to continue to buy stock on the open market from time to time, depending on market conditions. In April 2001, the term loan outstanding at March 31, 2001 matured and we paid the balance outstanding. We entered a new 364-day $100.0 million revolving credit facility, which is secured by certain of our financial assets whose market value must equal or exceed 115% of the commitment under the facility. Interest on the borrowings under this facility is payable monthly and is accrued at a margin above LIBOR. There were no short-term borrowings outstanding as of June 30, 2001. We believe that our existing cash balances and funds generated from operations will be sufficient to meet our liquidity requirements for the foreseeable future. 13 14 B. CERTAIN RISKS AND UNCERTAINTIES THAT COULD AFFECT FUTURE OPERATING RESULTS Our Stock Price is Volatile. Our stock price has been and is highly volatile. Our stock price is highly influenced by current expectations of future revenue and earnings growth rates. Any failure to meet anticipated revenue and earnings levels in a period or any negative change in our perceived long-term growth prospects would likely have a significant adverse effect on our stock price. Our historical financial results should not be seen as indicative of future results. The Timing and Size of License Contracts Could Cause Our Quarterly Revenues and Earnings to Fluctuate. Our revenues and results of operations are difficult to predict and may fluctuate substantially quarter to quarter. The timing and amount of our license revenues are subject to a number of factors that make estimation of operating results prior to the end of a quarter extremely uncertain. We generally operate with little or no sales backlog and, as a result, license revenues in any quarter are dependent upon contracts entered into or orders booked and shipped in that quarter. Most of our sales are closed at the end of each quarter. Our business remains dependent on closing large enterprise license transactions, which can have sales cycles of up to a year or more and require approval by a customer's upper management or board of directors. These transactions are typically difficult to manage and predict. Failure to close an expected individually significant transaction or multiple expected transactions could cause our revenues and earnings in a period to fall short of expectations. We generally do not know whether revenues and earnings will meet expectations until the final days or day of a quarter. We have a High Degree of Operating Leverage. Our business model is characterized by a very high degree of operating leverage. A substantial portion of our operating costs and expenses consists of employee and facility related costs, which are relatively fixed over the short term. In addition, our expense levels and hiring plans are based substantially on our projections of future revenues. If near term demand weakens in a given quarter, there would likely be a material adverse effect on operating results and a resultant drop in our stock price. Our Operating Margins May Decline Further. There is a risk that our historically high operating margins may not be sustainable and may continue to decline, which would adversely affect our earnings. Our operating margins, excluding amortization of acquired technology, goodwill and intangibles, merger-related costs and compensation charges and one-time charges, declined during fiscal 2000 and declined further during fiscal 2001 and the first quarter of fiscal 2002 as compared to fiscal 1999 and prior periods. Operating expenses as a percentage of revenues associated with our distributed systems products are higher than those associated with our traditional mainframe products. Since our mix of business continues to shift to distributed systems, operating margins will experience more pressure. In addition, we are not currently profitable in our growing professional services business. We may be unable to increase or even maintain our current level of profitability on a quarterly or annual basis in the future. Additionally, we have acquired businesses experiencing lower operating margins than us. We May Not be Able to Attract and Retain Qualified Personnel. Our future success depends on the continued service of our executive officers and other key administrative, sales and marketing, development and support personnel. There is currently a shortage of individuals possessing the technical background necessary to sell, support and develop our products effectively. Competition for skilled personnel is intense, and we may not be able to attract, assimilate or retain highly qualified personnel in the future. Hiring qualified sales, marketing, administrative, research and development and customer support personnel is very competitive in our industry, particularly in some of the markets where our development teams are located, such as San Jose, California, Austin, Texas and Waltham, Massachusetts. Consequently, our growth rates may be limited by our ability to attract qualified personnel. Decreasing Demand for Mainframe Processing Capacity and Decreased IT Spending Could Adversely Affect Revenues. Fees from enterprise license transactions have historically been a fundamental component of our revenues and the primary source of mainframe license revenues. These revenues depend on our customers planning to grow their mainframe capacity and continuing to perceive an increasing need to use our existing software products on substantially greater mainframe processing capacity in future periods. The continued growth of distributed database management systems may have an adverse effect on growth rates for mainframe 14 15 computing systems. Although we believe that businesses will continue to demand greater mainframe computing capacity and that e-business will be a driver of this demand, there can be no assurance as to whether future demand for mainframe capacity will continue to grow or not. Slower growth in our customers' mainframe processing capacity will adversely affect our revenues. In addition, many industry analysts and economists are predicting slower growth and even declines in overall IT spending by businesses during this fiscal year. Any significant decline in overall IT spending could adversely affect our revenues. Increased Competition and Pricing Pressures Could Adversely Affect Our Earnings. The market for systems management software has been increasingly competitive for the past number of years. We compete with a variety of software vendors including IBM and CA. We derived over half of our total revenues in fiscal 2001 from software products for IBM and IBM-compatible mainframe computers. IBM continues, directly and through third parties, to enhance and market its utilities for IMS and DB2 as lower cost alternatives to the solutions provided by us and other independent software vendors. Although such utilities are currently less functional than our solutions, IBM has begun to invest more heavily in the IMS and DB2 utility market and appears to be committed to competing in these markets. If IBM is successful with its efforts to achieve performance and functional equivalence with our IMS, DB2 and other products at a lower cost, our business may be materially adversely affected. CA is also competing with us in these markets. Competition has lead to increased pricing pressures within the mainframe systems software markets. We continue to reduce the cost to our customers of our mainframe tools and utilities in response to such competitive pressures. Microsoft entered the distributed systems monitoring and management market through its relationship with Net IQ and is now competing with us in the market for management tools for the Windows operating system. In connection with the introduction of its Z-series server, IBM has announced changes to its mainframe software pricing, including a new workload-based pricing model. We have also announced that we will support the new workload-based pricing structure for the Z-series, but the effect of this change on our future mainframe license revenues cannot be determined. Maintenance Revenue Growth Could Slow. Maintenance revenues have increased over the last three fiscal years and the first quarter of fiscal 2002 as a result of the continuing growth in the base of installed products and the processing capacity on which they run. Maintenance fees increase as the processing capacity on which the products are installed increases; consequently, we receive higher absolute maintenance fees as customers install our products on additional processing capacity. Due to increased discounting for higher levels of additional processing capacity, the maintenance fees on a per unit of capacity basis are typically reduced in enterprise license agreements for our mainframe products. Historically, we have enjoyed high maintenance renewal rates for our mainframe products. Should customers migrate from their mainframe applications or find alternatives to our products, increased cancellations could adversely impact the sustainability and growth of our maintenance revenues. To date, we have been successful in extending our traditional maintenance and support pricing model to the distributed systems market. Renewal rates for maintenance on our distributed systems products are lower than on our mainframe products. Failure to Adapt to Technological Change Could Adversely Affect Our Earnings. If we fail to keep pace with technological change in our industry, such failure would have an adverse effect on our revenues and earnings. We operate in a highly competitive industry characterized by rapid technological change, evolving industry standards, changes in customer requirements and frequent new product introductions and enhancements. During the past two years, funding for new ventures and start-ups in our industry has been at an all-time high with many new technological advancements and competing products entering the marketplace. The distributed systems and application management markets in which we operate are far more crowded and competitive than our traditional mainframe systems management markets. Our ability to compete effectively and our growth prospects depend upon many factors, including the success of our existing distributed systems products, the timely introduction and success of future software products, and the ability of our products to interoperate and perform well with existing and future leading databases and other platforms supported by our products. We have experienced long development cycles and product delays in the past, particularly with some of our distributed systems products, and expect to have delays in the future. Delays in new mainframe or distributed systems product introductions or less-than-anticipated market acceptance of these new products are possible and would have an adverse effect on our revenues and earnings. New products or new versions of existing products may, despite testing, contain undetected errors or bugs that could delay the introduction or adversely affect commercial acceptance of such products. 15 16 Changes in Pricing Practices Could Adversely Affect Revenues and Earnings. We may choose in fiscal 2002 or a future fiscal year to make changes to our product packaging, pricing or licensing programs. If made, such changes may have a material adverse impact on revenues or earnings. Our Customers May Not Accept our Product Strategies. Historically, we have focused on selling software products to address specific customer problems associated with their applications. We are now integrating multiple software products and offering packaged solutions for customers' systems. There can be no assurance that customers will perceive a need for such solutions. In addition, there may be technical difficulties in integrating individual products into a combined solution that may delay the introduction of such solutions to the market or adversely affect the demand for such solutions. Risks Related to Business Combinations. As part of our overall strategy, we have acquired or invested in, and plan to continue to acquire or invest in, complementary companies, products, and technologies and to enter into joint ventures and strategic alliances with other companies. Risks commonly encountered in such transactions include: the difficulty of assimilating the operations and personnel of the combined companies; the risk that we may not be able to integrate the acquired technologies or products with our current products and technologies; the potential disruption of our ongoing business; the inability to retain key technical and managerial personnel; the inability of management to maximize our financial and strategic position through the successful integration of acquired businesses; and decreases in reported earnings as a result of charges for in-process research and development and amortization of goodwill and acquired intangible assets. In order for us to maximize the return on our investments in acquired companies, the products of these entities must be integrated with our existing products. These integrations can be difficult and unpredictable, especially given the complexity of software and that acquired technology is typically developed independently and designed with no regard to integration. The difficulties are compounded when the products involved are well established because compatibility with the existing base of installed products must be preserved. Successful integration also requires coordination of different development and engineering teams. This too can be difficult and unpredictable because of possible cultural conflicts and different opinions on technical decisions and product roadmaps. There can be no assurance that we will be successful in our product integration efforts or that we will realize the expected benefits. With each of our acquisitions, we have initiated efforts to integrate the disparate cultures, employees, systems and products of these companies. Retention of key employees is critical to ensure the continued advancement, development, support, sales and marketing efforts pertaining to the acquired products. We have implemented retention programs to keep many of the key technical, sales and marketing employees; nonetheless, we have lost some key employees and may lose others in the future. Enforcement of Our Intellectual Property Rights. We rely on a combination of copyright, patent, trademark, trade secrets, confidentiality procedures and contractual procedures to protect our intellectual property rights. Despite our efforts to protect our intellectual property rights, it may be possible for unauthorized third parties to copy certain portions of our products or to reverse engineer or obtain and use technology or other information that we regard as proprietary. There can also be no assurance that our intellectual property rights would survive a legal challenge to their validity or provide significant protection for us. In addition, the laws of certain countries do not protect our proprietary rights to the same extent as do the laws of the United States. Accordingly, there can be no assurance that we will be able to protect our proprietary technology against unauthorized third party copying or use, which could adversely affect our competitive position. Possibility of Infringement Claims. From time to time, we receive notices from third parties claiming infringement by our products of third party patent and other intellectual property rights. We expect that software products will increasingly be subject to such claims as the number of products and competitors in our industry segments grow and the functionality of products overlap. In addition, we expect to receive more patent infringement claims as companies increasingly seek to patent their software and business methods, especially in light of recent developments in the law that extend the ability to patent software and business methods. Regardless of its merit, responding to any such claim could be time-consuming, result in costly litigation and require us to enter into royalty and licensing agreements which 16 17 may not be offered or available on terms acceptable to us. If a successful claim is made against us and we fail to develop or license a substitute technology, our business, results of operations or financial position could be materially adversely affected. Risks Related to International Operations and the Euro Currency. We have committed, and expect to continue to commit, substantial resources and funding to build our international service and support infrastructure. Operating costs in many countries, including many of those in which we operate, are higher than in the United States. In order to increase international sales in fiscal 2002 and subsequent periods, we must continue to globalize our software product lines; expand existing and establish additional foreign operations; hire additional personnel; identify suitable locations for sales, marketing, customer service and development; and recruit international distributors and resellers in selected territories. Future operating results are dependent on sustained performance improvement by our international offices, particularly our European operations. Our operations and financial results internationally could be significantly adversely affected by several risks such as changes in foreign currency exchange rates, sluggish regional economic conditions and difficulties in staffing and managing international operations. Generally, our foreign sales are denominated in our foreign subsidiaries' local currencies. If these foreign currency exchange rates change unexpectedly, we could have significant gains or losses. Many systems and applications software vendors are experiencing difficulties internationally. The European Union's adoption of the Euro single currency raises a variety of issues associated with our European operations. Although the transition will be phased in over several years, the Euro became Europe's single currency on January 1, 1999. Our foreign exchange exposures to legacy sovereign currencies of the participating countries in the Euro became foreign exchange exposures to the Euro upon its introduction. Although we are not aware of any material adverse financial risk consequences of the change from legacy sovereign currencies to the Euro, conversion may result in problems, which may have an adverse impact on our business since we may be required to incur unanticipated expenses to remedy these problems. Conditions in Israel. Our INCONTROL and enterprise resource planning (ERP) development operations are conducted primarily in Israel and, accordingly, we are directly affected by economic, political and military conditions in Israel. Any major hostilities involving Israel or the interruption or curtailment of trade between Israel and its present trading partners could materially adversely affect our business, operating results and financial condition. Israel's economy has been subject to numerous destabilizing factors, including a period of rampant inflation in the early to mid-1980's, low foreign exchange reserves, fluctuations in world commodity prices, military conflicts and civil unrest. Since the establishment of the State of Israel in 1948, a state of hostility has existed, varying in degree and intensity, between Israel and the Palestinian people and the Arab countries. In addition, Israel and companies doing business with Israel have been the subject of an economic boycott by the Arab countries since Israel's establishment. Although Israel has entered into various agreements with certain Arab countries and the Palestinian Authority, and various declarations have been signed in connection with efforts to resolve some of the economic and political problems in the Middle East, we cannot predict whether or in what manner these problems will be resolved. To date, the current unrest in the region and hostilities within Israel associated with the ongoing peace process have not caused disruption of our operations located in Israel. In addition, certain of our INCONTROL and ERP employees are currently obligated to perform annual reserve duty in the Israel Defense Forces and are subject to being called for active military duty at any time. Although our businesses located in Israel have historically operated effectively under these requirements, we cannot predict the effect of these obligations on our operations in the future. Possible Adverse Impact Of Interpretations of Existing Accounting Pronouncements. On April 1, 1998 and 1999 we adopted American Institute of Certified Public Accountants Statement of Position ("SOP") 97-2, "Software Revenue Recognition," and SOP 98-9 "Modification of SOP 97-2, Software Revenue Recognition, With Respect to Certain Transactions," respectively. The adoption of these standards did not have a material impact on 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. However, the American Institute of Certified Public Accountants and its Software Revenue Recognition Task Force continue to issue interpretations and guidance for applying the relevant standards to a wide range of sales contract terms and business arrangements that are prevalent in the software industry. Also, the Securities and Exchange Commission ("SEC") has issued Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements," which provides guidance 17 18 related to revenue recognition based on interpretations and practices followed by the SEC. Future interpretations of existing accounting standards or changes in our business practices could result in future changes in our revenue accounting policies that could have a material adverse effect on our business, financial condition and results of operations. ITEM 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 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, 2001, therefore our foreign currency exchange rate risk and interest rate risk related to investments remain substantially unchanged from the description in our Form 10-K for the year ended March 31, 2001. PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS On February 4, 2000, an action styled Dov Klein v. BMC Software, Inc., Richard P. Gardner, Stephen B. Solcher, Roy J. Wilson, Kevin M. Weiss, Kevin M. Klausmeyer, Max P. Watson, Jr., William M. Austin, Wayne S. Morris, M. Brinkley Morse, Robert E. Beauchamp, and Theodore W. Van Duyn, No. 00-CV-359, was filed in the United States District Court for the Southern District of Texas, Houston Division. The plaintiff alleges that BMC Software and eleven current and former senior executives violated Sections 10(b) and 20(a) of the Securities Exchange Act and Rule 10b-5. The plaintiff contends that BMC Software and the individual defendants artificially inflated our stock price by extending unusual payment terms to purchasers of our products, failing to disclose softening demand and increasing competition for our products, and failing to disclose difficulties in managing our sales force. The plaintiff seeks unspecified compensatory damages, interest and costs, including legal fees. The action is subject to the Private Securities Litigation Reform Act of 1995. On March 9, 2000, the court consolidated four similar actions, ordered that all subsequently filed similar actions be consolidated, and set out a briefing schedule. Subsequently, six additional cases were filed that made similar allegations. These cases were also consolidated into the main action. On August 14, 2000, the plaintiff filed a consolidated amended complaint. This complaint alleges a class of all persons who purchased BMC stock between July 29, 1999 and July 5, 2000. We have filed a motion to dismiss the complaints and we intend to defend the consolidated action vigorously. Briefing on the motion to dismiss is complete. At this early stage of the litigation, it is not possible to estimate potential damages, but it appears that if liability were established, an unfavorable judgment or settlement could have a material adverse effect on our financial position and results of operations. We are subject to various other legal proceedings and claims, either asserted or unasserted, which arise in the ordinary course of business. Management does not believe that the outcome of any of these legal matters will have a material adverse effect on our financial position or results of operations. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits. None (b) Reports on Form 8-K. None 18 19 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 August 10, 2001 By: /s/ JOHN W. COX --------------------------- John W. Cox Vice President, Chief Financial Officer and Chief Accounting Officer August 10, 2001 19 -----END PRIVACY-ENHANCED MESSAGE-----