-----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, S3nNSVmr4vK/ZdL57qyymqni57A/HSxNKeR5k/7zGSgBUd3nmG+d1Dr9fjIXKyZ9 nHybs57biI6ZTDWS1SV5+w== 0000950129-02-004083.txt : 20020813 0000950129-02-004083.hdr.sgml : 20020813 20020813172515 ACCESSION NUMBER: 0000950129-02-004083 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20020630 FILED AS OF DATE: 20020813 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: 02730804 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 h99069e10vq.txt BMC SOFTWARE, INC. - PERIOD ENDED JUNE 30, 2002 ================================================================================ 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, 2002 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 Identification No.) incorporation or organization) BMC SOFTWARE, INC. 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 [ ] As of August 8, 2002, there were outstanding 241,100,942 shares of Common Stock, par value $.01, of the registrant. ================================================================================ BMC SOFTWARE, INC. AND SUBSIDIARIES QUARTER ENDED JUNE 30, 2002 INDEX
PAGE ---- PART I. FINANCIAL INFORMATION Item 1. Financial Statements Condensed Consolidated Balance Sheets as of March 31, 2002 and June 30, 2002 (Unaudited).............................................. 3 Condensed Consolidated Statements of Operations and Comprehensive Loss for the three months ended June 30, 2001 and 2002 (Unaudited)..... 4 Condensed Consolidated Statements of Cash Flows for the three months ended June 30, 2001 and 2002 (Unaudited)........................ 5 Notes to Condensed Consolidated Financial Statements (Unaudited)......... 6 Item 2. Management's Discussion and Analysis of Results of Operations and Financial Condition.................................................... 9 Item 3. Quantitative and Qualitative Disclosures about Market Risk.................. 23 PART II. OTHER INFORMATION Item 1. Legal Proceedings........................................................... 23 Item 6. Exhibits and Reports on Form 8-K............................................ 23 Signatures........................................................................... 24
2 PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS BMC SOFTWARE, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (IN MILLIONS)
ASSETS MARCH 31, JUNE 30, 2002 2002 -------- -------- (UNAUDITED) Current assets: Cash and cash equivalents ................................ $ 330.0 $ 544.0 Marketable securities .................................... 215.8 217.2 Trade accounts receivable, net ........................... 182.6 136.3 Trade finance receivables, current ....................... 129.9 130.3 Income taxes receivable .................................. 70.1 69.3 Other current assets ..................................... 68.4 112.7 -------- -------- Total current assets .............................. 996.8 1,209.8 Property and equipment, net ................................ 443.0 429.2 Software development costs and related assets, net ......... 211.8 206.5 Long-term marketable securities ............................ 557.9 488.8 Long-term finance receivables .............................. 176.3 145.2 Acquired technology, net ................................... 50.2 40.4 Goodwill, net .............................................. 121.6 122.5 Intangible assets, net ..................................... 12.0 9.9 Other long-term assets ..................................... 106.6 107.1 -------- -------- $2,676.2 $2,759.4 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Trade accounts payable ................................... $ 16.2 $ 35.9 Accrued liabilities ...................................... 204.2 186.3 Current portion of deferred revenue ...................... 460.2 475.2 -------- -------- Total current liabilities ......................... 680.6 697.4 Long-term deferred revenue ................................. 483.1 570.8 Other long-term liabilities ................................ 5.9 13.8 -------- -------- Total liabilities ................................. 1,169.6 1,282.0 Commitments and contingencies Stockholders' equity: Preferred stock .......................................... -- -- Common stock ............................................. 2.5 2.5 Additional paid-in capital ............................... 536.9 536.9 Retained earnings ........................................ 1,126.6 1,106.9 Accumulated other comprehensive loss ..................... (18.8) (27.7) -------- -------- 1,647.2 1,618.6 Less treasury stock, at cost ............................. (135.2) (137.1) Less unearned portion of restricted stock compensation ... (5.4) (4.1) -------- -------- Total stockholders' equity ........................ 1,506.6 1,477.4 -------- -------- $2,676.2 $2,759.4 ======== ========
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 LOSS (IN MILLIONS, EXCEPT PER SHARE DATA) (UNAUDITED)
THREE MONTHS ENDED JUNE 30, ---------------------- 2001 2002 ------- ------- Revenues: License ......................................................... $ 180.0 $ 136.0 Maintenance ..................................................... 139.3 149.7 Professional services ........................................... 21.7 19.5 ------- ------- Total revenues .......................................... 341.0 305.2 ------- ------- Operating expenses: Selling and marketing expenses .................................. 152.8 119.5 Research and development expenses ............................... 113.0 118.2 Cost of professional services ................................... 26.9 21.4 General and administrative expenses ............................. 41.9 36.0 Amortization of acquired technology, goodwill and intangibles ... 48.2 12.4 Restructuring and severance costs ............................... 12.0 (0.1) Merger-related costs and compensation charges ................... 2.7 0.6 ------- ------- Total operating expenses ................................ 397.5 308.0 ------- ------- Operating loss .......................................... (56.5) (2.8) Interest and other income, net .................................... 16.4 15.8 Interest expense .................................................. (0.4) -- Loss on marketable securities ..................................... (7.4) (6.3) ------- ------- Other income, net ....................................... 8.6 9.5 ------- ------- Earnings (loss) before income taxes ..................... (47.9) 6.7 Income tax (benefit) provision .................................... (13.4) 1.5 ------- ------- Net earnings (loss) ..................................... $ (34.5) $ 5.2 ======= ======= Basic earnings (loss) per share ................................... $ (0.14) $ 0.02 ======= ======= Diluted earnings (loss) per share ................................. $ (0.14) $ 0.02 ======= ======= Shares used in computing basic earnings (loss) per share .......... 247.3 240.9 ======= ======= Shares used in computing diluted earnings (loss) per share ........ 247.3 242.5 ======= ======= Comprehensive Loss: Net earnings (loss) ............................................. $ (34.5) $ 5.2 Foreign currency translation adjustment ......................... 0.2 (7.4) Unrealized gain on securities available for sale: Unrealized gain, net of taxes of $0.1 and $0.1 ............... 0.2 0.2 Realized loss included in net earnings (loss), net of taxes of $2.6 and $0.5 ............................................. 4.8 1.0 ------- ------- 5.0 1.2 Unrealized gain on derivative instruments: Unrealized gain (loss), net of taxes of $1.5 and $2.1 ........ 2.8 (3.9) Realized (gain) loss included in net earnings (loss), net of taxes of $0.8 and $0.6 .................................... (1.4) 1.2 ------- ------- 1.4 (2.7) ------- ------- Comprehensive loss ...................................... $ (27.9) $ (3.7) ======= =======
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)
THREE MONTHS ENDED JUNE 30, -------------------- 2001 2002 ------ ------ Cash flows from operating activities: Net earnings (loss) ................................................... $(34.5) $ 5.2 Adjustments to reconcile net earnings (loss) to net cash provided by operating activities: Merger-related costs and compensation charges ...................... 2.5 0.6 Depreciation and amortization ...................................... 91.0 52.9 Loss on marketable securities ...................................... 7.4 6.3 Earned portion of restricted stock compensation .................... 0.6 0.7 Net change in receivables, payables, deferred revenue and other components of working capital ............................... 94.4 154.0 ------ ------ Net cash provided by operating activities ..................... 161.4 219.7 ------ ------ Cash flows from investing activities: Cash paid for technology acquisitions and other investments, net of cash acquired ................................................ (3.2) (1.9) Purchases of marketable securities .................................... (54.3) (57.9) Maturities of/proceeds from sales of marketable securities ............ 39.6 80.7 Purchases of property and equipment ................................... (21.7) (3.8) Proceeds from sales of property and equipment ......................... 3.1 -- Capitalization of software development costs and related assets ....... (35.3) (17.5) Decrease in long-term finance receivables ............................. 70.2 31.1 ------ ------ Net cash provided by (used in) investing activities ........... (1.6) 30.7 ------ ------ Cash flows from financing activities: Payments on borrowings ................................................ (150.0) -- Stock options exercised and other ..................................... 6.1 10.9 Treasury stock acquired ............................................... (34.0) (38.7) ------ ------ Net cash used in financing activities ......................... (177.9) (27.8) ------ ------ Effect of exchange rate changes on cash ................................. 1.1 (8.6) ------ ------ Net change in cash and cash equivalents ................................. (17.0) 214.0 Cash and cash equivalents, beginning of period .......................... 146.0 330.0 ------ ------ Cash and cash equivalents, end of period ................................ $129.0 $544.0 ====== ====== Supplemental disclosure of cash flow information: Cash paid for interest, net of amounts capitalized .................... $ 1.7 $ -- Cash paid (refunded) for income taxes ................................. $ 4.8 $ (2.4)
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 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, 2002, 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 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 each of the three months ended June 30, 2001 and 2002, the treasury stock method effect of 37.2 million weighted options, has been excluded from the calculation of diluted EPS as they are antidilutive. For the three months ended June 30, 2001 and 2002, the treasury stock method effect of 0.7 million and -- weighted unearned restricted shares, respectively, 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, 2001 and 2002:
THREE MONTHS ENDED JUNE 30, -------------------------- 2001 2002 --------- --------- (IN MILLIONS, EXCEPT PER SHARE DATA) Basic earnings (loss) per share: Net earnings (loss) ................................ $ (34.5) $ 5.2 --------- --------- Weighted average number of common shares ........... 247.3 240.9 --------- --------- Basic earnings (loss) per share .................... $ (0.14) $ 0.02 ========= ========= Diluted earnings (loss) per share: Net earnings (loss) ................................ $ (34.5) $ 5.2 --------- --------- Weighted average number of common shares ........... 247.3 240.9 Incremental shares from assumed conversions of stock options and other ............................... -- 1.6 --------- --------- Adjusted weighted average number of common shares .. 247.3 242.5 --------- --------- Diluted earnings (loss) per share .................. $ (0.14) $ 0.02 ========= =========
6 (3) SEGMENT REPORTING In the quarter ended June 30, 2002, BMC's management began reviewing the results of the Company's software business by the following product categories: Enterprise Data Management Software, including the Mainframe Data Management and Distributed Systems Data Management product lines, Enterprise Systems Management Software, which includes the PATROL, MAINVIEW and Scheduling & Output Management product lines, and Other Software, which includes the High Potential product lines of Storage Management, Security Management, Enterprise Application Management, Subscription Services and Linux, and other. In addition to these software segments, the professional services business is also considered a separate segment. Through March 31, 2002. BMC's management reviewed the results of the Company's software business by different product categories. The amounts reported below for the quarters ended June 30, 2001 and 2002, reflect this change in the composition of the segments. Segment performance is measured based on contribution 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 DATA ENTERPRISE SYSTEMS MANAGEMENT SOFTWARE MANAGEMENT SOFTWARE ------------------- ---------------------------------- DISTRIBUTED MAINFRAME SYSTEMS SCHEDULING DATA DATA & OUTPUT MANAGEMENT MANAGEMENT PATROL MAINVIEW MANAGEMENT ----------- ----------- ------ -------- ---------- QUARTER ENDED JUNE 30, 2001 (IN MILLIONS) - --------------------------- Revenues: License ........................ $ 67.3 $ 21.6 $ 40.8 $ 19.9 $ 15.8 Maintenance .................... 61.4 12.5 23.6 22.0 11.9 Professional services .......... -- -- -- -- -- ------ ------ ------ ------ ------ Total revenues .................... $128.7 $ 34.1 $ 64.4 $ 41.9 $ 27.7 R&D expenses ...................... 18.8 14.0 27.7 7.5 9.7 Cost of professional services ..... -- -- -- -- -- ------ ------ ------ ------ ------ Contribution margin ............. $109.9 $ 20.1 $ 36.7 $ 34.4 $ 18.0 ====== ====== ====== ====== ====== Selling and marketing expenses General and administrative expenses................................................................. Amortization of acquired technology, goodwill and intangibles....................................... Restructuring and severance costs................................................................... Merger-related costs and compensation charges....................................................... Other income, net................................................................................... Consolidated loss before taxes...................................................................... OTHER SOFTWARE ------------------------ HIGH POTENTIAL PRODUCT PROFESSIONAL INDIRECT AS LINES OTHER SERVICES R&D REPORTED --------- -------- ------------ -------- -------- QUARTER ENDED JUNE 30, 2001 - --------------------------- (continued) Revenues: License ................... $ 13.7 $ 0.9 $ -- $ -- $ 180.0 Maintenance ............... 6.9 1.0 -- -- 139.3 Professional services ..... -- -- 21.7 -- 21.7 -------- -------- -------- -------- -------- Total revenues ............... $ 20.6 $ 1.9 $ 21.7 $ -- $ 341.0 R&D expenses ................. 20.5 6.1 -- 8.7 113.0 Cost of professional services. -- -- 26.9 -- 26.9 -------- -------- -------- -------- -------- Contribution margin ........ $ 0.1 $ (4.2) $ (5.2) $ (8.7) 201.1 ======== ======== ======== ======== Selling and marketing expenses ............................................................... 152.8 General and administrative expenses............................................................ 41.9 Amortization of acquired technology, goodwill and intangibles.................................. 48.2 Restructuring and severance costs.............................................................. 12.0 Merger-related costs and compensation charges.................................................. 2.7 Other income, net.............................................................................. 8.6 -------- Consolidated loss before taxes................................................................. $ (47.9) ========
ENTERPRISE DATA ENTERPRISE SYSTEMS MANAGEMENT SOFTWARE MANAGEMENT SOFTWARE ------------------- ---------------------------------------- DISTRIBUTED MAINFRAME SYSTEMS SCHEDULING DATA DATA & OUTPUT MANAGEMENT MANAGEMENT PATROL MAINVIEW MANAGEMENT -------- ------------- -------- -------- ----------- QUARTER ENDED JUNE 30, 2002 (IN MILLIONS) - --------------------------- Revenues: License.......................... $ 44.3 $ 18.7 $ 26.3 $ 14.9 $ 18.1 Maintenance ..................... 56.8 16.9 28.5 23.4 14.6 Professional services ........... -- -- -- -- -- -------- -------- -------- -------- -------- Total revenues...................... $ 101.1 $ 35.6 $ 54.8 $ 38.3 $ 32.7 R&D expenses ....................... 15.7 14.1 21.2 9.9 7.9 Cost of professional services ...... -- -- -- -- -- -------- -------- -------- -------- -------- Contribution margin .............. $ 85.4 $ 21.5 $ 33.6 $ 28.4 $ 24.8 ======== ======== ======== ======== ======== Selling and marketing expenses.................................................................................... General and administrative expenses............................................................................... Amortization of acquired technology and intangibles............................................................... Restructuring and severance costs................................................................................. Merger-related costs and compensation charges..................................................................... Other income, net................................................................................................. Consolidated earnings before taxes................................................................................ OTHER SOFTWARE ----------------------- HIGH POTENTIAL PRODUCT PROFESSIONAL INDIRECT AS LINES OTHER SERVICES R&D REPORTED --------- -------- ------------ -------- -------- QUARTER ENDED JUNE 30, 2002 - --------------------------- (continued) Revenues: License.......................... $ 13.6 $ 0.1 $ -- $ -- $ 136.0 Maintenance ..................... 9.4 0.1 -- -- 149.7 Professional services ........... -- -- 19.5 -- 19.5 --------- -------- -------- -------- -------- Total revenues...................... $ 23.0 $ 0.2 $ 19.5 $ -- $ 305.2 R&D expenses ....................... 20.8 4.8 -- 23.8 118.2 Cost of professional services ...... -- -- 21.4 -- 21.4 --------- -------- -------- -------- -------- Contribution margin .............. $ 2.2 $ (4.6) $ (1.9) $ (23.8) 165.6 ========= ======== ======== ======== Selling and marketing expenses.................................................................. 119.5 General and administrative expenses............................................................. 36.0 Amortization of acquired technology and intangibles............................................. 12.4 Restructuring and severance costs............................................................... (0.1) Merger-related costs and compensation charges................................................... 0.6 Other income, net............................................................................... 9.5 -------- Consolidated earnings before taxes.............................................................. $ 6.7 ========
7 (4) RESTRUCTURING AND SEVERANCE COSTS During the year ended March 31, 2002, BMC implemented a restructuring plan to better align the Company's cost structure with existing market conditions. The Company also discontinued certain business information integration products as a result of the dissolution of that business unit, and announced the closure of certain locations throughout the world. See the discussion of this plan in the Company's Annual Report on Form 10-K for the year ended March 31, 2002. As of June 30, 2002, $1.8 million of severance and facilities costs related to actions completed under the restructuring plan remained accrued for payment in future periods. (5) STOCK INCENTIVE PLANS The Company has adopted numerous stock 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 three to five years. The restricted stock is subject to transfer restrictions that lapse over one to four years. The Company's accounting for stock options is in accordance with APB Opinion No. 25 and related interpretations, which generally require that the amount of compensation cost that must be recognized, if any, is the quoted market price of the stock at the measurement date, less the amount the grantee is required to pay to acquire the stock. Alternatively, SFAS No. 123, "Accounting for Stock-Based Compensation," employs fair value-based measurement and generally results in the recognition of compensation 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 employee stock-based compensation plans under APB Opinion No. 25 and related interpretations. In accordance with APB Opinion No. 25, deferred compensation is recorded for stock-based compensation grants based on the excess of the market value of the common stock on the measurement date over the exercise price. The deferred compensation is amortized to expense over the vesting period of each unit of stock-based compensation granted. If the exercise price of the stock-based compensation is equal to or exceeds the market price of the Company's stock on the date of grant, no compensation expense is recorded. For the three months ended June 30, 2001 and 2002, the Company recorded compensation expense of $4.2 million and $1.3 million, respectively, for restricted stock grants. The expense for the three months ended June 30, 2001 and 2002, includes $3.1 million and $0.6 million, respectively, of merger-related compensation charges related to restricted shares issued as part of the Evity acquisition. The Company was not required to record compensation expense for stock option grants and stock issued under the employee stock purchase plan during the same periods. Had compensation cost for the stock-based compensation plans been determined based on the grant date fair values of award, which is 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 proforma amounts shown below:
THREE MONTHS ENDED JUNE 30, --------------------------- 2001 2002 --------- ---------- (IN MILLIONS, EXCEPT PER SHARE DATA) Net earnings (loss): As Reported ................... $ (34.5) $ 5.2 Pro Forma ..................... $ (56.5) $ (11.4) Basic EPS: As Reported ................... $ (0.14) $ 0.02 Pro Forma ..................... $ (0.23) $ (0.05) Diluted EPS: As Reported ................... $ (0.14) $ 0.02 Pro Forma ..................... $ (0.23) $ (0.05)
In computing the above pro forma amounts, the fair values of each option grant and each purchase right under the purchase plan are estimated using the Black-Scholes option pricing model with the following weighted average assumptions used for grants in the first quarter of fiscal 2002 and 2003, respectively: risk-free interest rate of 4.55% and 3.41%, expected life of 5 years for options and 6 months for purchase plan shares, expected volatility of 75% and no expected dividend yields. 8 (6) GOODWILL AND INTANGIBLE ASSETS As of April 1, 2002, the Company adopted SFAS No. 142, "Goodwill and Other Intangible Assets." 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 are not amortized, but rather are tested for impairment annually and when events and circumstances indicate that their fair value has been reduced below carrying value. Intangible assets with finite useful lives are amortized over those useful lives. We are in the process of determining the impairment charge, if any, that is required upon adoption of this Statement. If such a charge is required, it will be reflected as the effect of a change in accounting principle in the consolidated statement of operations and comprehensive loss for the quarter ended June 30, 2002. The following reconciles the Company's reported net earnings (loss) and earnings (loss) per share to those amounts that would have resulted had goodwill and intangible assets been accounted for under SFAS No. 142 for all periods presented:
THREE MONTHS ENDED JUNE 30, -------------------- 2001 2002 ------ ------ (IN MILLIONS, EXCEPT PER SHARE DATA) Net earnings (loss): As Reported ......................................................... $(34.5) $ 5.2 Add back: Amortization of goodwill, net of taxes ................... 26.2 -- Add back: Amortization of intangible assets, net of taxes .......... 0.6 -- -------- ------ Adjusted ............................................................ $ (7.8) $ 5.2 ======== ====== Basic EPS: As Reported ......................................................... $(0.14) $ 0.02 Add back: Amortization of goodwill, net of taxes ................... 0.11 -- Add back: Amortization of intangible assets, net of taxes .......... -- -- -------- ------ Adjusted ............................................................ $(0.03) $ 0.02 ======== ====== Diluted EPS: As Reported ......................................................... $(0.14) $ 0.02 Add back: Amortization of goodwill, net of taxes ................... 0.11 -- Add back: Amortization of intangible assets, net of taxes .......... -- -- -------- ------ Adjusted ............................................................ $(0.03) $ 0.02 ======== ======
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." 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 2002. 9 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 evaluate estimates and judgments, including those related to revenue recognition, capitalized software development costs, intangible assets, deferred tax assets and marketable securities. 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 are discussed further throughout our Form 10-K for fiscal 2002 under Management's Discussion and Analysis of Results of Operations and Financial Condition where such policies affect our reported and expected financial results. 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 Loss 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, ------------------- 2001 2002 ----- ----- Revenues: License ............................................................ 52.8% 44.6% Maintenance ........................................................ 40.9 49.0 Professional services .............................................. 6.3 6.4 ----- ----- Total revenues ................................................. 100.0 100.0 Operating expenses: Selling and marketing expenses ..................................... 44.8 39.1 Research and development expenses .................................. 33.1 38.7 Cost of professional services ...................................... 7.9 7.0 General and administrative expenses ................................ 12.3 11.8 Amortization of acquired technology, goodwill and intangibles ...... 14.1 4.1 Restructuring and severance costs................................... 3.5 -- Merger-related costs and compensation charges ...................... 0.8 0.2 ----- ----- Total operating expenses ........................................ 116.5 100.9 ----- ----- Operating loss................................................... (16.5) (0.9) Interest and other income, net ....................................... 4.8 5.2 Interest expense ..................................................... (0.1) -- Loss on marketable securities ........................................ (2.2) (2.1) ----- ----- Other income, net ............................................... 2.5 3.1 Earnings (loss) before income taxes ............................. (14.0) 2.2 Income tax (benefit) provision........................................ (3.9) (0.5) ----- ----- Net earnings (loss) ............................................. (10.1)% 1.7% ===== =====
10 REVENUES We recognize revenue in accordance with the American Institute of Certified Public Accountants (AICPA) 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." 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 AICPA and its Software Revenue Recognition Task Force continue to issue interpretations and guidance for applying the relevant standards to a wide range of sales contract terms and business arrangements that are prevalent in the software industry. Also, the Securities and Exchange Commission (SEC) has issued Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements," which provides guidance related to revenue recognition based on interpretations and practices followed by the SEC. Future interpretations of existing accounting standards or changes in our business practices could result in future changes in our revenue accounting policies that could have a material adverse effect on our business, financial condition and results of operations. For a more detailed discussion of our revenue recognition policies, see the footnotes to the consolidated financial statements included in our Annual Report on Form 10-K for the year ended March 31, 2002.
THREE MONTHS ENDED JUNE 30, ----------------------- 2001 2002 CHANGE -------- -------- ------ (IN MILLIONS) License: North America ............................. $ 113.0 $ 87.4 (22.7)% International ............................. 67.0 48.6 (27.5)% -------- -------- Total license revenues .............. 180.0 136.0 (24.4)% Maintenance: North America ............................. 91.0 92.5 1.6% International ............................. 48.3 57.2 18.4% -------- -------- Total maintenance revenues ........... 139.3 149.7 7.5% Professional Services: North America ............................. 12.4 9.2 (25.8)% International ............................. 9.3 10.3 10.8% -------- -------- Total professional services .......... 21.7 19.5 (10.1)% -------- -------- Total revenues ...................... $ 341.0 $ 305.2 (10.5)% ======== ========
Product License Revenues Our product license revenues primarily consist of product license fees and license upgrade fees, both of which are related to products licensed to customers on a perpetual basis. 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. In addition to product license fees and license upgrade fees, 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 limited period of time. Difficult economic conditions in domestic and international markets have continued to result in reduced IT spending by many of our customers. Tighter budgets have caused many customers to choose smaller transactions in terms of dollar value. In addition, there was a significant increase in transactions where the terms and conditions within our contracts resulted in the deferral of license revenue. We executed a large domestic transaction in the first quarter of fiscal 2003 in which almost all the license revenue was deferred to later periods. This transaction accounted for approximately one-half of the gross contract license deferrals in the quarter. As of March 31, 2002 and June 30, 2002, our total deferred license revenue balance was $168.9 million and $215.3 million, respectively. Our North American operations generated 63% and 64% of license revenues in the three months ended June 30, 2001 and 2002, respectively. The 23% decline in North American license revenues in the first quarter of fiscal 2003 is mostly attributed to the trend towards smaller transaction sizes, particularly in the Enterprise Data Management segment. 11 International license revenues represented 37% and 36% of total license revenues for the quarters ended June 30, 2001 and 2002, respectively. International license revenues declined 28% from the first quarter of fiscal 2002, primarily due to weakening demand in Europe and a greater demand for term-based licenses, which, in general, are deferred and recognized evenly over the license period. 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 program. Maintenance, enhancement and support enrollment entitles customers to product enhancements, technical support services and ongoing compatibility with third-party operating systems, database management systems, networks, storage systems and applications. These fees are generally charged annually and have historically equaled 15% to 20% of the discounted price of the product. During the fourth quarter of fiscal 2002, we revised our maintenance program to a single maintenance offering of 24x7 support with a standard rate of 20% of the discounted price of the associated product. 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. Maintenance revenues also include the ratable recognition of the bundled fees for any initial maintenance services covered by the related perpetual license agreement. Maintenance revenues increased 7.5% for the three months ended June 30, 2002 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. Our maintenance revenues have continued to grow, but at a slower rate due to the continued decline in our license revenues. 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, ------------------------- 2001 2002 CHANGE --------- --------- ------ (IN MILLIONS) Enterprise Data Management: Data Management - Distributed Systems .......... $ 34.1 $ 35.6 4.4% Data Management - Mainframe .................... 128.7 101.1 (21.4)% --------- --------- 162.8 136.7 (16.0)% Enterprise Systems Management: Scheduling & Output Management ................. 27.7 32.7 18.1% MAINVIEW ....................................... 41.9 38.3 (8.6)% PATROL ......................................... 64.4 54.8 (14.9)% --------- --------- 134.0 125.8 (6.1)% Other Software: High Potential Product Lines ................... 20.6 23.0 11.7% Other Software ................................. 1.9 0.2 (89.5)% --------- --------- 22.5 23.2 3.1% Total license & maintenance revenues .... $ 319.3 $ 285.7 (10.5)% ========= =========
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 solutions are broadly divided into two core business units and a third business unit geared towards future high potential solution areas. 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 scheduling, output management, and systems management and monitoring solutions. Our objective for both the Enterprise Data Management and Enterprise Systems Management groups is to extend our core strengths in these markets. The High Potential product lines encompass storage management, security, subscription services, enterprise application management, and Linux management. Our objective for this group is to develop our business in fast-growing markets. 12 Our Enterprise Data Management solutions combined represented 51% and 48% of total software revenues for the quarters ended June 30, 2001 and 2002, respectively. Total software revenues for this group declined 16% in the first quarter of fiscal 2003 from the same period in fiscal 2002. The decrease in mainframe data management solutions is attributed to smaller dollar transaction sizes and to the deferral of the large domestic transaction noted above. Our Enterprise Systems Management solutions combined contributed 42% and 44% of total software revenues for the quarters ended June 30, 2001 and 2002, respectively. Total software revenues for this group declined 6% in the first quarter of fiscal 2003 from the same period in fiscal 2002 primarily due to the continued weakness in IT spending and a reduction in Unix shipments from hardware manufacturers such as Sun Microsystems, Hewlett-Packard, and IBM. Our High Potential product lines contributed 6% and 8% of total software revenues for the quarters ended June 30, 2001 and 2002, respectively. Total software revenues for this group grew 12% in the first quarter of fiscal 2003 from the same period in fiscal 2002. This growth includes increases in license and maintenance revenues from our storage and security solutions. Professional Services Revenues Professional services revenues, representing fees from implementation, integration and education services performed during the period, decreased 10% during the three months ended June 30, 2002, over the comparable prior year period. This decline is the result of the decline in our software license revenue, especially within the PATROL product line, as this results in less demand for our implementation and integration services. Our professional services headcount has decreased to accommodate the lower license revenue levels. EXPENSES
THREE MONTHS ENDED JUNE 30, ----------------------- 2001 2002 CHANGE -------- -------- ------ (IN MILLIONS) Selling and marketing ........................................... $ 152.8 $ 119.5 (21.8)% Research and development ........................................ 113.0 118.2 4.6% Cost of professional services ................................... 26.9 21.4 (20.4)% General and administrative ...................................... 41.9 36.0 (14.1)% Amortization of acquired technology, goodwill and intangibles ... 48.2 12.4 (74.3)% Restructuring and severance costs ............................... 12.0 (0.1) n/m Merger-related costs and compensation charges ................... 2.7 0.6 (77.8)% -------- -------- Total operating expenses .............................. $ 397.5 $ 308.0 (22.5)% ======== ========
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 decreased 22% in the first quarter of fiscal 2003 over the same period in fiscal 2002. Contributing to the decline in selling and marketing expenses were decreases in sales commissions, bad debt expense related to license billings, personnel related costs and travel and entertainment costs. 13 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 2002 and 2003, we capitalized approximately $35.3 million and $17.5 million, respectively, of software development and purchased software costs. The decrease in capitalized costs is primarily due to a reduction in the number of current development projects which qualify for capitalization under SFAS No. 86. We amortized $22.4 million and $22.7 million in the first quarters of fiscal 2002 and 2003, respectively, of capitalized software development and purchased software costs pursuant to SFAS No. 86, including $8.5 million and $10.5 million in the first quarters of fiscal 2002 and 2003, respectively, 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 to realize the carrying value of the assets. Research and development expenses increased 5% during the first quarter of fiscal 2003 compared to the same period in fiscal 2002. Lower personnel related costs were offset by an increase in the net expense 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 decrease in these costs in the three months ended June 30, 2002, over the comparable prior year period, resulted from the 10% professional services revenue decline and related headcount reductions, particularly within the PATROL solutions, combined with lower consulting fees. 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. The decline in general and administrative expenses for the three months ended June 30, 2002 over the same period in the prior year was primarily attributable to decreased bad debt expense, offset slightly by higher depreciation expense. 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, 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. As of April 1, 2002, we adopted SFAS No. 142, "Goodwill and Other Intangible Assets." Under this pronouncement, goodwill and those intangible assets with indefinite lives are no longer amortized, but rather are tested for impairment annually and when events or circumstances indicate that their fair value has been reduced below carrying value. Acquired technology continues to be amortized under SFAS No. 86. As a result of our adoption of SFAS No. 142, the amortization of acquired technology, goodwill and intangibles expense declined by approximately $36 million from the amount recorded in the first quarter of fiscal 2002. See Note 6 to the Condensed Consolidated Financial Statements contained herein for a reconciliation of our reported net earnings (loss) and earnings (loss) per share to those amounts that would have resulted had goodwill and intangible assets been accounted for under SFAS No. 142 for all periods presented. 14 Restructuring and Severance Costs 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 ended June 30, 2001. 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. 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, 2001 and 2002, and as of June 30, 2002, we have remaining accrued facilities costs of approximately $0.3 million. During the quarters ended June 30, 2001 and 2002, we recorded compensation charges of $2.7 million and $0.6 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 2003, other income, net was $9.5 million, reflecting an increase of 10% from $8.6 million in the same quarter of fiscal 2002. 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 increase in other income, net is primarily due to a $1.1 million reduction of losses on marketable securities and elimination of interest expense on short-term borrowings which were paid off in the quarter ended June 30, 2001. In the first quarters ended June 30, 2001 and June 30, 2002, we wrote off $7.4 million and $6.3 million, respectively, of marketable securities. INCOME TAX (BENEFIT) PROVISION For the three months ended June 30, 2002, income tax expense was $1.5 million, compared to a benefit of $13.4 million for the same period in fiscal 2002. Our effective tax rate was 22% for the three months ended June 30, 2002 and 28% for the comparable prior year period. 15 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 for impairment annually and when events or circumstances indicate that their fair value has been reduced below carrying value. Intangible assets with finite useful lives will continue to be amortized over those useful lives. As of April 1, 2002, we have adopted SFAS No. 141 and SFAS No. 142. The primary impact of adoption is the elimination of amortization expense related to our goodwill and intangible assets with indefinite lives from our Consolidated Statement of Operations and Comprehensive Loss. See Note 6 to the Condensed Consolidated Financial Statements contained herein for a reconciliation of our reported net earnings (loss) and earnings (loss) per share to those amounts that would have resulted had goodwill and intangible assets been accounted for under SFAS No. 142 for all periods presented. We are in the process of determining the impairment charge, if any, that will be required upon adoption of SFAS No. 142. If such a charge is required, it will be reflected as the effect of a change in accounting principle in the Consolidated Statement of Operations and Comprehensive Loss for the quarter ended June 30, 2002. In August 2001, the Financial Accounting Standards Board issued SFAS No. 143, "Accounting for Asset Retirement Obligations," and SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." SFAS No. 143 requires the recognition of a liability for the fair value of an asset retirement obligation in the period in which the obligation is incurred, if a reasonable estimate of fair value can be made. If a reasonable estimate of fair value cannot be made in the period the obligation is incurred, the liability must be recognized when a reasonable estimate of fair value can be made. Upon initial recognition of such a liability, an equal amount must be capitalized into the carrying amount of the related long-lived asset and subsequently expensed over its useful life. The provisions of SFAS No. 143 are required to be applied for fiscal years beginning after June 15, 2002. SFAS No. 144 supercedes SFAS No. 121 and the accounting and reporting provisions of APB Opinion No. 30 for the disposal of a segment of a business. This statement establishes a single accounting model, based on the framework in SFAS No. 121, for long-lived assets to be disposed of by sale and resolves significant implementation issues related to Statement 121. We adopted the provisions of SFAS No. 144 as of April 1, 2002. We believe that adoption of SFAS No. 143 and SFAS No. 144 will not have a material effect on our financial position or results of operations. In April 2002, the Financial Accounting Standards Board issued SFAS No. 145, "Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections." SFAS No. 145 rescinds various other statements that required extraordinary treatment for the early extinguishment of debt. This pronouncement allows extraordinary treatment of gains or losses associated with extinguishment of debt when the criteria under Accounting Principles Board Opinion No. 30, "Reporting the Results of Operations -- Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions" are met. SFAS No. 145 also amends SFAS No. 13, "Accounting for Leases", such that lease modifications which have economic effects similar to sale-leaseback transactions are now required to be accounted for in the same manner as sale-leasebacks. The portion of SFAS No. 145 relating to treatment of early extinguishment of debt is effective for fiscal years beginning after May 15, 2002, while the other provisions of this statement are effective either for transactions occurring after that date or for financial statements issued after that date. We believe that adoption of SFAS No. 145 will not have a material effect on our financial position or results of operations. 16 LIQUIDITY AND CAPITAL RESOURCES At June 30, 2002, our cash, cash equivalents and marketable securities were $1.25 billion, a $146.3 million or 13% increase from the March 31, 2002 balance. The $1.25 billion of cash, cash equivalents and marketable securities at June 30, 2002 includes approximately $640 million of unremitted earnings of foreign subsidiaries that we consider permanently reinvested outside of the United States. These earnings would be subject to United States income tax if repatriated to the United States. The potential deferred tax liability for these earnings is approximately $224 million. We have not provided a deferred tax liability on any portion of the $640 million as we plan to utilize these funds for foreign investment purposes. Our working capital as of June 30, 2002, was $512.4 million, reflecting an increase of $196.2 million from the March 31, 2002 balance of $316.2 million due primarily to positive operating cash flow. A significant dollar portion of our marketable securities is invested in securities with maturities beyond one year. While typically yielding greater returns, this reduces reported working capital. Because of current economic trends, we have begun investing in securities with shorter original maturities. Our marketable securities are primarily investment grade and highly liquid. Stockholders' equity as of June 30, 2002, was $1.5 billion. We continue to primarily finance our growth through funds generated from operations. For the quarter ended June 30, 2002, net cash provided by operating activities was $219.7 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 to securitize or sell a significant portion of our finance receivables. We utilize certain wholly-owned, fully consolidated special-purpose entities in these transfers. In addition, we securitize finance receivables from customers with investment-grade credit ratings through two special-purpose entities sponsored by third-party financial institutions. The entities sponsored by third-party financial institutions are multi-seller conduits with access to commercial paper markets, that purchase interests in similar receivables from numerous other companies unrelated to us. We have no ownership in either of the third-party financial institution sponsored entities and have no voting influence over either of these entities' operating and financial decisions. As a result, we do not consolidate these entities. When we sell receivables in securitizations of software installment contracts, we retain a beneficial interest in the securitized receivables, which is subordinate to the interests of the entities sponsored by the third-party financial institutions. The subordinate interests are measured and recorded at fair value based on the present value of future expected cash flows estimated using our best estimates of the key assumptions, including expected credit losses and discount rates commensurate with the risks involved. We periodically review the key assumptions and estimates used in determining the fair value of the retained interest. The financing institutions have no recourse to our other assets for failure of debtors to pay when due. Our retained interests are subordinate to the investors' interests and the value of the retained interests is subject to credit and interest rate risks on the transferred financial assets. At June 30, 2002, our retained interest was $22 million which is included in long-term finance receivables. Other finance receivables are sold to third-party financial institutions on a non-recourse basis. We record such transfers of beneficial interests in finance receivables to third-party financing institutions as sales of such finance receivables when we have surrendered control of such receivables, including determining that such assets have been isolated beyond our reach and the reach of our creditors. We have not guaranteed the transferred receivables and have no obligation upon default. During the quarter ended June 30, 2002, we transferred a total of $199 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 provided by investing activities in the quarter ended June 30, 2002 was $30.7 million, primarily related to cash receipts from the maturities of marketable securities and sales of long-term finance receivables offset by disbursements for the purchase of marketable securities. Net cash used in financing activities in the quarter ended June 30, 2002 was $27.8 million, which derived primarily from treasury stock purchases. On April 24, 2000, the board of directors authorized the purchase of up to $500.0 million of our common stock. During the quarter ended June 30, 2002 we purchased 2.3 million shares for $38.7 million. Since the inception of the repurchase plan, we have purchased 18.5 million shares for $348.9 million. Subsequent to June 30, 2002, the board of directors authorized the purchase of an additional $500.0 million of our common stock. We plan to continue to buy stock on the open market from time to time, depending on market conditions, and other possible uses of our cash. We have no short-term or long-term debt outstanding. We believe that our existing cash balances and funds generated from operations will be sufficient to meet our liquidity requirements for the foreseeable future. 17 B. CERTAIN RISKS AND UNCERTAINTIES 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 are not necessarily indicative of future results. The Timing, Type 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, type 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. We are also executing a larger number of license transactions where the contract terms and conditions require us to defer the license revenue. We provide targets for the change in our deferred license revenue balance along with targets for revenues and earnings. 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 and/or changes to the deferred license revenue balances 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 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 or if current weak global economic conditions continue, then we may find it difficult to meet our revenue expectations and there may be a material adverse effect on our operating results and a resultant drop in our stock price. We May Have Difficulty Achieving our Cash Flow from Operations Goal. Our cash flow is and has been volatile. If our cash generated from operations proved in some future period to be materially less than we currently expect, our stock price could decline. Factors that could adversely affect the cash flow from operations in the future include: reduced net earnings; increased time required for the collection cycle of accounts receivable; an increase in uncollectible accounts receivable; a reduced ability to securitize and syndicate financed receivables; reduced renewal rates for maintenance; deferring less revenue than anticipated; and a reduced average yield from marketable securities and cash and cash equivalents balances. 18 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. In a weak economy, 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. If economic conditions weaken further, demand for data processing capacity could continue to slow or even decline. In addition, the uncertain economic environment has reduced customers' expectations of future capacity growth, thus lessening demand for licensing excess processing capacity in anticipation of future growth. 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. 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 Computer Associates. We derived over half of our total revenues in fiscal 2002 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 led 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 NetIQ and is now competing with us in the market for management tools for the Windows environment. We provide selected metrics about our performance against our competitors which are compiled from data only obtained from our internal field sales organization and, accordingly, this information should not be relied upon as coming from independent sources. Our Products Must Remain Compatible with Ever-changing Operating and Database Environments. IBM, HP, Sun, 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. 19 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 us 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 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 assure 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. Maintenance Revenue Growth 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. Although renewal rates remain high, 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. Also, renewal rates for maintenance on our distributed systems products are lower than on our mainframe products. 20 Changes in Pricing Practices Could Adversely Affect Revenues and Earnings. We may choose in fiscal 2003 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. During the fourth quarter of fiscal 2002, we revised our maintenance program to a single maintenance offering of 24x7 support at a standard rate of 20% of the discounted price of the associated product. In connection with this revision, we have extended our standard warranty and initial support period to one year for all our products, whereas prior to this revision such periods were 90 days for distributed systems products and one year for mainframe products. Because our maintenance revenues include the ratable recognition of the bundled fees for any initial maintenance services covered by the related perpetual license agreement, in certain new license transactions the extension of the initial support period for distributed systems products will cause us to recognize more maintenance revenues over time and less license revenues when the transactions occur. While this change in our maintenance program will not have a material effect on our total revenues over time, there will be a negative short-term revenue impact, which we have considered in determining our estimates of future revenues. In addition, there is a risk that our revenues could be negatively impacted if customers do not accept these changes to the maintenance program and choose to license competing products instead. 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 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. 21 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 grow and the functionality of products overlap. 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. Risks Related to International Operations. 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 2003 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. We maintain a software development office in India which operates as an extension of our primary development offices and we contract with third-party developers in India. 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 would not be materially adversely affected. Conditions in Israel. Our scheduling, security, output management and Enterprise Application Management (EAM) 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. 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. 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. 22 In addition, certain of our Israeli 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 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. However, the AICPA 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 SEC has issued Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements," which provides guidance related to revenue recognition based on interpretations and practices followed by the SEC. Future interpretations of existing accounting standards or changes in our business practices could result in future changes in our revenue accounting policies that could have a material adverse effect on our business, financial condition and results of operations. ITEM 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, 2002, 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, 2002. PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS We are subject to various 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. Current report filed on August 1, 2002, which contained exhibits of the Written Statement of Robert E. Beauchamp, Chief Executive Officer of BMC Software, Inc. dated July 31, 2002 and the Written Statement of John W. Cox, Chief Financial Officer of BMC Software, Inc. dated July 30, 2002, in each case, delivered pursuant to SEC Order 4-460. Current report filed on August 13, 2002, which contained exhibits of the Written Statement of Robert E. Beauchamp, Chief Executive Officer of BMC Software, Inc. dated August 13, 2002 and the Written Statement of John W. Cox, Chief Financial Officer of BMC Software, Inc. dated August 13, 2002, in each case, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 23 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 13, 2002 By: /s/ John W. Cox -------------------------------------------- John W. Cox Vice President, Chief Financial Officer and Chief Accounting Officer August 13, 2002 24 -----END PRIVACY-ENHANCED MESSAGE-----