-----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, Ogih9Zo61qnyRM3dsvgtMe5Q4m5jXK1TNbmsh47Zms4O2mdxGz+HrZ9kMQJsf6or Bfbkx7QrhcIvzyN56zuUCw== 0000950129-03-005682.txt : 20031114 0000950129-03-005682.hdr.sgml : 20031114 20031114150342 ACCESSION NUMBER: 0000950129-03-005682 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 20030930 FILED AS OF DATE: 20031114 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: 031003665 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 h10577e10vq.txt BMC SOFTWARE, INC.- SEPTEMBER 30, 2003 ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (MARK ONE) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2003 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM TO COMMISSION FILE NUMBER 001-16393 BMC SOFTWARE, INC. (Exact name of registrant as specified in its charter) DELAWARE 74-2126120 (State or other jurisdiction of (IRS Employer incorporation or organization) Identification No.) 2101 CITYWEST BOULEVARD HOUSTON, TEXAS 77042-2827 (Address of principal executive offices) (Zip Code) Registrant's telephone number including area code: (713) 918-8800 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes [X] No [ ] As of November 10, 2003, there were outstanding 226,252,108 shares of Common Stock, par value $.01, of the registrant. ================================================================================ BMC SOFTWARE, INC. AND SUBSIDIARIES QUARTER ENDED SEPTEMBER 30, 2003 INDEX
PAGE ---- PART I. FINANCIAL INFORMATION Item 1. Financial Statements Condensed Consolidated Balance Sheets as of March 31, 2003 and September 30, 2003 (Unaudited).......................................... 3 Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) for the three months and six months ended September 30, 2002 and 2003 (Unaudited)............................................... 4 Condensed Consolidated Statements of Cash Flows for the six months ended September 30, 2002 and 2003 (Unaudited).................... 5 Notes to Condensed Consolidated Financial Statements (Unaudited).......... 6 Item 2. Management's Discussion and Analysis of Results of Operations and Financial Condition....................................................... 11 Item 3. Quantitative and Qualitative Disclosures about Market Risk................... 25 Item 4. Controls and Procedures...................................................... 26 PART II. OTHER INFORMATION Item 1. Legal Proceedings............................................................ 26 Item 4. Submission of Matters to a Vote of Security Holders.......................... 27 Item 6. Exhibits and Reports on Form 8-K............................................. 27 Signatures................................................................... 29
2 PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS BMC SOFTWARE, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (IN MILLIONS)
MARCH 31, SEPTEMBER 30, 2003 2003 ----------- ------------- (UNAUDITED) ASSETS Current assets: Cash and cash equivalents ................................ $ 500.1 $ 391.4 Marketable securities .................................... 151.7 296.2 Trade accounts receivable, net ........................... 186.4 144.0 Current trade finance receivables, net ................... 154.4 103.0 Other current assets ..................................... 105.6 110.2 ----------- ------------- Total current assets .............................. 1,098.2 1,044.8 Property and equipment, net ................................ 408.4 400.5 Software development costs and related assets, net ......... 192.7 169.6 Long-term marketable securities ............................ 363.5 351.9 Long-term trade finance receivables, net ................... 175.9 122.0 Acquired technology, net ................................... 117.1 94.6 Goodwill, net .............................................. 353.4 354.1 Intangible assets, net ..................................... 57.4 50.9 Other long-term assets ..................................... 78.9 98.8 ----------- ------------- $ 2,845.5 $ 2,687.2 =========== ============= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Trade accounts payable ................................... $ 52.2 $ 25.5 Accrued liabilities ...................................... 225.0 211.4 Current portion of deferred revenue ...................... 561.6 582.3 ----------- ------------- Total current liabilities ......................... 838.8 819.2 Long-term deferred revenue ................................. 607.1 555.2 Other long-term liabilities ................................ 16.2 23.9 ----------- ------------- Total liabilities ................................. 1,462.1 1,398.3 Commitments and contingencies Stockholders' equity: Preferred stock .......................................... -- -- Common stock ............................................. 2.5 2.5 Additional paid-in capital ............................... 537.0 537.2 Retained earnings ........................................ 1,143.9 1,122.5 Accumulated other comprehensive income (loss) ............ (7.7) (2.9) ----------- ------------- 1,675.7 1,659.3 Less treasury stock, at cost ............................. (290.1) (369.2) Less unearned portion of restricted stock compensation ... (2.2) (1.2) ----------- ------------- Total stockholders' equity ........................ 1,383.4 1,288.9 ----------- ------------- $ 2,845.5 $ 2,687.2 =========== =============
The accompanying notes are an integral part of these condensed consolidated financial statements. 3 BMC SOFTWARE, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS) (IN MILLIONS, EXCEPT PER SHARE DATA) (UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, ---------------------------- -------------------------- 2002 2003 2002 2003 ------------ ------------ ----------- ----------- Revenues: License .......................................................... $ 120.4 $ 124.7 $ 256.4 $ 232.3 Maintenance ...................................................... 150.9 188.2 300.6 371.7 Professional services ............................................ 19.9 20.9 39.4 39.7 ------------ ------------ ----------- ----------- Total revenues ............................................. 291.2 333.8 596.4 643.7 ------------ ------------ ----------- ----------- Operating expenses: Selling and marketing expenses ..................................... 112.8 140.2 232.3 278.1 Research, development and support expenses ......................... 112.4 147.1 230.6 274.4 Cost of professional services ...................................... 20.9 20.0 42.3 39.0 General and administrative expenses ................................ 35.4 47.9 71.4 85.2 Amortization of acquired technology and intangibles ................ 12.4 15.3 24.8 30.9 Merger-related costs and compensation charges and other ............ 0.3 -- 0.8 -- ------------ ------------ ----------- ----------- Total operating expenses ................................... 294.2 370.5 602.2 707.6 ------------ ------------ ----------- ----------- Operating loss ............................................. (3.0) (36.7) (5.8) (63.9) Interest and other income, net ....................................... 17.1 16.7 32.9 38.4 Gain (loss) on marketable securities and other investments ........... -- 1.1 (6.3) 0.2 ------------ ------------ ----------- ----------- Other income, net .......................................... 17.1 17.8 26.6 38.6 ------------ ------------ ----------- ----------- Earnings (loss) before income taxes ........................ 14.1 (18.9) 20.8 (25.3) Income tax provision (benefit) ....................................... 4.0 (5.7) 5.5 (6.0) ------------ ------------ ----------- ----------- Net earnings (loss) ........................................ $ 10.1 $ (13.2) $ 15.3 $ (19.3) ============ ============ =========== =========== Basic earnings (loss) per share ...................................... $ 0.04 $ (0.06) $ 0.06 $ (0.08) ============ ============ =========== =========== Diluted earnings (loss) per share .................................... $ 0.04 $ (0.06) $ 0.06 $ (0.08) ============ ============ =========== =========== Shares used in computing basic earnings (loss) per share ............. 239.1 227.1 240.0 228.3 ============ ============ =========== =========== Shares used in computing diluted earnings (loss) per share ........... 239.8 227.1 241.2 228.3 ============ ============ =========== =========== Comprehensive income (loss): Net earnings (loss) ................................................ $ 10.1 $ (13.2) $ 15.3 $ (19.3) Foreign currency translation adjustment ............................ (2.8) (5.5) (10.2) 7.4 Unrealized gain (loss) on securities available for sale: Unrealized gain (loss), net of taxes of $0.6, $1.9, $0.7 and $0.9 ...................................................... 1.1 (3.5) 1.3 (1.7) Realized (gain) loss included in net earnings (loss), net of taxes of $--, $0.4, $0.5 and $0.1 ............................. -- (0.7) 1.0 (0.1) ------------ ------------ ----------- ----------- 1.1 (4.2) 2.3 (1.8) Unrealized gain (loss) on derivative instruments: Unrealized gain (loss), net of taxes of $0.1, $0.2, $2.0 and $1.1 ......................................................... 0.2 (0.4) (3.7) (2.1) Realized loss included in net earnings (loss), net of taxes of $0.1, $0.4, $0.7 and $0.7 .................................... 0.2 0.7 1.4 1.3 ------------ ------------ ----------- ----------- 0.4 0.3 (2.3) (0.8) ------------ ------------ ----------- ----------- Comprehensive income (loss) ................................ $ 8.8 $ (22.6) $ 5.1 $ (14.5) ============ ============ =========== ===========
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)
SIX MONTHS ENDED SEPTEMBER 30, ---------------------------- 2002 2003 ------------ ------------ Cash flows from operating activities: Net earnings (loss) .................................................... $ 15.3 $ (19.3) Adjustments to reconcile net earnings (loss) to net cash provided by operating activities: Accrued restructuring and severance costs ........................... 0.5 9.1 Merger-related costs and compensation charges ....................... 0.6 -- Depreciation and amortization ....................................... 101.2 134.7 (Gain) loss on marketable securities ................................ 6.3 (0.2) Earned portion of restricted stock compensation ..................... 1.3 1.0 Decrease in finance receivables ..................................... 10.6 105.0 Increase (decrease) in payables to third-party financing institutions for finance receivables ............................... 8.4 (34.2) Net change in income taxes receivable ............................... 54.2 2.7 Net change in trade receivables, payables, deferred revenue and other components of working capital ................................ 133.8 (40.7) ------------ ------------ Net cash provided by operating activities ...................... 332.2 158.1 ------------ ------------ Cash flows from investing activities: Debtor-in-possession financing provided to Peregrine Systems, Inc .................................................................. (46.0) -- Cash paid for technology acquisitions and other investments, net of cash acquired ................................................. (3.0) (6.7) Adjustment of cash paid for Remedy acquisition ......................... -- 7.2 Return of capital for cost-basis investments ........................... 0.7 0.1 Proceeds from sale of technology ....................................... -- 2.0 Purchases of marketable securities ..................................... (123.0) (267.2) Maturities of/proceeds from sales of marketable securities ............. 184.9 130.2 Purchases of property and equipment .................................... (9.0) (22.9) Capitalization of software development costs and related assets ........ (33.9) (31.8) ------------ ------------ Net cash used in investing activities .......................... (29.3) (189.1) ------------ ------------ Cash flows from financing activities: Stock options exercised and other ...................................... 17.9 9.0 Treasury stock acquired ................................................ (120.6) (90.0) ------------ ------------ Net cash used in financing activities .......................... (102.7) (81.0) ------------ ------------ Effect of exchange rate changes on cash .................................. (11.6) 3.3 ------------ ------------ Net change in cash and cash equivalents .................................. 188.6 (108.7) Cash and cash equivalents, beginning of period ........................... 330.0 500.1 ------------ ------------ Cash and cash equivalents, end of period ................................. $ 518.6 $ 391.4 ============ ============ Supplemental disclosure of cash flow information: Cash paid (refunded) for income taxes .................................. $ (54.9) $ 0.9 Capital lease obligation for computer hardware ......................... $ -- $ 16.7
The accompanying notes are an integral part of these condensed consolidated financial statements. 5 BMC SOFTWARE, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (1) BASIS OF PRESENTATION The accompanying condensed consolidated financial statements include the accounts of BMC Software, Inc. and its majority- owned subsidiaries (collectively, the Company or BMC). All significant intercompany balances and transactions have been eliminated in consolidation. Certain amounts previously reported have been reclassified to provide comparability among the periods presented. The accompanying unaudited interim condensed consolidated financial statements reflect all normal recurring adjustments which, in the opinion of management, are necessary for a fair presentation of the results for the periods presented. These financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. These financial statements should be read in conjunction with the Company's audited financial statements for the year ended March 31, 2003, as filed with the Securities and Exchange Commission on Form 10-K. (2) EARNINGS (LOSS) PER SHARE Basic earnings per share (EPS) is computed by dividing net earnings (loss) by the weighted average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock. For purposes of this calculation, outstanding stock options and unearned restricted stock are considered potential common shares using the treasury stock method. For the three-month periods ended September 30, 2002 and 2003, the treasury stock method effect of 37.0 million and 34.2 million weighted options, respectively, has been excluded from the calculation of diluted EPS as they are anti-dilutive. For the six-month periods ended September 30, 2002 and 2003, the treasury stock method effect of 37.1 million and 30.4 million weighted options, respectively, has been excluded from the calculation of diluted EPS as they are anti-dilutive. The following table summarizes the basic and diluted EPS computations for the three months and six months ended September 30, 2002 and 2003:
THREE MONTHS ENDED SIX MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, --------------------------- --------------------------- 2002 2003 2002 2003 ------------ ------------ ------------ ------------ (IN MILLIONS, EXCEPT PER SHARE DATA) Basic earnings (loss) per share: Net earnings (loss) ................................. $ 10.1 $ (13.2) $ 15.3 $ (19.3) ------------ ------------ ------------ ------------ Weighted average number of common shares ............ 239.1 227.1 240.0 228.3 ------------ ------------ ------------ ------------ Basic earnings (loss) per share ..................... $ 0.04 $ (0.06) $ 0.06 $ (0.08) ============ ============ ============ ============ Diluted earnings (loss) per share: Net earnings (loss) ................................. $ 10.1 $ (13.2) $ 15.3 $ (19.3) ------------ ------------ ------------ ------------ Weighted average number of common shares ............ 239.1 227.1 240.0 228.3 Incremental shares from assumed conversions of stock options and other .......................... 0.7 -- 1.2 -- ------------ ------------ ------------ ------------ Adjusted weighted average number of common shares ... 239.8 227.1 241.2 228.3 ------------ ------------ ------------ ------------ Diluted earnings (loss) per share ................... $ 0.04 $ (0.06) $ 0.06 $ (0.08) ============ ============ ============ ============
6 (3) SEGMENT REPORTING In the quarter ended June 30, 2003, BMC's management changed the way it was reviewing the results of the Company's software business and began reviewing those results by the following product categories: Enterprise Data Management (EDM) Software, including the Mainframe Data Management and Distributed Systems Data Management product lines, Enterprise Systems Management (ESM) Software, which includes the PATROL(R), MAINVIEW(R) and Scheduling & Output Management product lines, Security, Other Software and Remedy(R). Though the EDM and ESM product categories include the various product lines above, profitability is measured at the product category level. In addition to these software segments, the BMC professional services business is also considered a separate segment. Remedy's professional services business is included in the Remedy results. Through March 31, 2003, BMC's management reviewed the results of the Company's software business by different product categories. The amounts reported below for the three months and six months ended September 30, 2002 and 2003, reflect this change in the composition of the Company's business segments. For the EDM, ESM and BMC professional services segments, segment performance is measured based on contribution margin, reflecting only the direct controllable expenses of the segments. Segment performance for the Security segment is measured based on its direct controllable research and development (R&D) costs and the costs of the dedicated Security sales and services team in North America. As such, management's measure of profitability for these segments does not include allocation of indirect research and development and support expenses, the effect of software development cost capitalization and amortization, selling and marketing expenses other than for North America Security, general and administrative expenses, amortization of acquired technology and intangibles, one-time charges, other income, net, and income taxes. For the three months and six months ended September 30, 2003, the indirect portion of R&D and support expenses, cost of professional services and selling and marketing expenses includes costs associated with the exit activities described in footnote (6), as these exit costs are not included in the measurement of segment performance. Effective with the Company's acquisition of Remedy on November 20, 2002, Remedy is operated as a separate business unit and therefore its performance is measured based on operating margin and does not include amortization of acquired technology and intangibles, other income, net, and income taxes. Remedy's costs represent the direct controllable costs of the business unit and do not include the costs of services performed by BMC on Remedy's behalf or allocations of corporate expenses. Assets and liabilities are not accounted for by segment.
SOFTWARE, EXCLUDING REMEDY -------------------------------- PROFESSIONAL INDIRECT EDM ESM SECURITY OTHER SERVICES COSTS BMC REMEDY CONSOLIDATED ------ ------ -------- ------ ------------ -------- ------ ------ ------------ QUARTER ENDED SEPTEMBER 30, 2002 (IN MILLIONS) Revenues: License ................................... $ 54.0 $ 63.4 $ 3.0 $ -- $ -- $ -- $120.4 $ -- $120.4 Maintenance ............................... 73.0 73.5 3.2 1.2 -- -- 150.9 -- 150.9 Professional services ..................... -- -- -- -- 19.9 -- 19.9 -- 19.9 ------ ------ ------ ------ ------ ------ ------ ------ ------ Total revenues ............................... 127.0 136.9 6.2 1.2 19.9 -- 291.2 -- 291.2 R&D and support expenses ..................... 28.2 53.5 7.3 -- -- 23.4 112.4 -- 112.4 Cost of services ............................. -- -- 1.3 -- 19.6 -- 20.9 -- 20.9 ------ ------ ------ ------ ------ ------ ------ ------ ------ 98.8 83.4 (2.4) 1.2 0.3 (23.4) 157.9 -- 157.9 Selling and marketing expenses ............... -- -- 2.6 -- -- 110.2 112.8 -- 112.8 ------ ------ ------ ------ ------ ------ ------ ------ ------ Contribution margin ........................ $ 98.8 $ 83.4 $ (5.0) $ 1.2 $ 0.3 $(133.6) 45.1 -- 45.1 ====== ====== ====== ====== ====== ======= General and administrative expenses .................................................................. 35.4 -- 35.4 ------ ------ ------ Operating margin .................................................................................. $ 9.7 -- 9.7 ====== ====== Amortization of acquired technology and intangibles.................................................................... 12.4 Merger-related costs and compensation charges and other................................................................ 0.3 Other income, net ..................................................................................................... 17.1 ------ Consolidated earnings before taxes .................................................................................... $ 14.1 ======
7
SOFTWARE, EXCLUDING REMEDY ----------------------------------- PROFESSIONAL INDIRECT EDM ESM SECURITY OTHER SERVICES COSTS BMC REMEDY CONSOLIDATED ------ ------ -------- ------- ------------ -------- ------ ------ ------------ (IN MILLIONS) QUARTER ENDED SEPTEMBER 30, 2003 Revenues: License ............................ $ 46.1 $ 53.4 $ 1.9 $ 0.2 $ -- $ -- $101.6 $ 23.1 $ 124.7 Maintenance ........................ 72.6 77.1 4.4 -- -- -- 154.1 34.1 188.2 Professional services .............. -- -- -- -- 17.8 -- 17.8 3.1 20.9 ------ ------ ----- ------- ----------- ------- ------ ------ ------------ Total revenues ........................ 118.7 130.5 6.3 0.2 17.8 -- 273.5 60.3 333.8 R&D and support expenses .............. 26.3 43.7 7.0 -- -- 56.9 133.9 13.2 147.1 Cost of services ...................... -- -- 0.8 -- 14.3 2.2 17.3 2.7 20.0 ------ ------ ------ ------- ----------- ------- ------ ------ ------------ 92.4 86.8 (1.5) 0.2 3.5 (59.1) 122.3 44.4 166.7 Selling and marketing expenses ........ -- -- 2.8 -- -- 118.8 121.6 18.6 140.2 ------ ------ ------ ------- ----------- ------- ------ ------ ------------ Contribution margin ................. $ 92.4 $ 86.8 $ (4.3) $ 0.2 $ 3.5 $(177.9) 0.7 25.8 26.5 ====== ====== ====== ======= =========== ======= General and administrative expenses ................................................................ 43.2 4.7 47.9 ------ ------ ------------ Operating margin ................................................................................. $(42.5) $ 21.1 (21.4) ====== ====== Amortization of acquired technology and intangibles ................................................................ 15.3 Other income, net .................................................................................................. 17.8 ------------- Consolidated loss before taxes ..................................................................................... $ (18.9) =============
SOFTWARE, EXCLUDING REMEDY ----------------------------------- PROFESSIONAL INDIRECT EDM ESM SECURITY OTHER SERVICES COSTS BMC REMEDY CONSOLIDATED ------- ------- ------- ------- ------------ -------- ------- ------- ------------ SIX MONTHS ENDED SEPTEMBER 30, (IN MILLIONS) 2002 Revenues: License ........................ $ 117.1 $ 128.8 $ 10.4 $ 0.1 $ -- $ -- $ 256.4 $ -- $ 256.4 Maintenance .................... 146.7 146.0 6.6 1.3 -- -- 300.6 -- 300.6 Professional services .......... -- -- -- -- 39.4 -- 39.4 -- 39.4 ------- ------- ------- ------- ------------ -------- ------- ------- ------------ Total revenues .................... 263.8 274.8 17.0 1.4 39.4 -- 596.4 -- 596.4 R&D and support expenses .......... 58.0 108.7 12.7 -- -- 51.2 230.6 -- 230.6 Cost of services .................. -- -- 2.1 -- 40.2 -- 42.3 -- 42.3 ------- ------- ------- ------- ------------ -------- ------- ------- ------------ 205.8 166.1 2.2 1.4 (0.8) (51.2) 323.5 -- 323.5 Selling and marketing expenses .... -- -- 4.5 -- -- 227.8 232.3 -- 232.3 ------- ------- ------- ------- ------------ -------- ------- ------- ------------ Contribution margin ............. $ 205.8 $ 166.1 $ (2.3) $ 1.4 $ (0.8) $ (279.0) 91.2 -- 91.2 ======= ======= ======= ======= ============ ======== General and administrative expenses............................................................... 71.4 -- 71.4 ------- ------- ------------ Operating margin .............................................................................. $ 19.8 $ -- 19.8 ======= ======= Amortization of acquired technology and intangibles.................................................................. 24.8 Merger-related costs and compensation charges and other.............................................................. 0.8 Other income, net.................................................................................................... 26.6 ------------ Consolidated earnings before taxes................................................................................... $ 20.8 ============
SOFTWARE, EXCLUDING REMEDY ------------------------------------- PROFESSIONAL INDIRECT EDM ESM SECURITY OTHER SERVICES COSTS BMC REMEDY CONSOLIDATED ------- ------- -------- ------- ------------ -------- ------- -------- ----------- SIX MONTHS ENDED SEPTEMBER 30, (IN MILLIONS) 2003 Revenues: License ...................... $ 81.1 $ 101.7 $ 5.3 $ 0.3 $ -- $ -- $ 188.4 $ 43.9 $ 232.3 Maintenance .................. 146.4 152.2 8.6 0.6 -- -- 307.8 63.9 371.7 Professional services ........ -- -- -- -- 33.1 -- 33.1 6.6 39.7 ------- ------- -------- ------- ----------- -------- ------- -------- ----------- Total revenues .................. 227.5 253.9 13.9 0.9 33.1 -- 529.3 114.4 643.7 R&D and support expenses ........ 51.5 90.4 14.5 -- -- 90.7 247.1 27.3 274.4 Cost of services ................ -- -- 1.8 -- 29.8 2.2 33.8 5.2 39.0 ------- ------- -------- ------- ----------- -------- ------- -------- ----------- 176.0 163.5 (2.4) 0.9 3.3 (92.9) 248.4 81.9 330.3 Selling and marketing expenses .. -- -- 5.5 -- -- 235.9 241.4 36.7 278.1 ------- ------- -------- ------- ----------- -------- ------- -------- ----------- Contribution margin ........... $ 176.0 $ 163.5 $ (7.9) $ 0.9 $ 3.3 $ (328.8) 7.0 45.2 52.2 ======= ======= ======== ======= =========== ======== General and administrative expenses............................................................. 76.5 8.7 85.2 ------- -------- ----------- Operating margin.............................................................................. $ (69.5) $ 36.5 (33.0) ======= ======== Amortization of acquired technology and intangibles................................................................. 30.9 Other income, net................................................................................................... 38.6 ----------- Consolidated loss before taxes...................................................................................... $ (25.3) ===========
8 (4) STOCK INCENTIVE PLANS The Company has adopted numerous stock-based compensation plans that provide for the grant of options and restricted stock to employees and directors of the Company. All options under these plans vest over terms of one to five years. The restricted stock is subject to transfer restrictions that lapse over time, typically two to four years. The Company also has adopted an employee stock purchase plan (ESPP) under which rights to purchase the Company's common stock are granted at 85% of the lesser of the market value of the common stock at the offering date or on the exercise date. The Company accounts for stock-based employee compensation using the intrinsic value method in accordance with APB Opinion No. 25 and related interpretations, which generally requires that the amount of compensation cost that must be recognized, if any, is the quoted market price of the stock at the measurement date, which is generally the grant date, less the amount the grantee is required to pay to acquire the stock. Alternatively, Statement of Financial Accounting Standards (SFAS) No. 123, "Accounting for Stock-Based Compensation," employs fair value-based measurement and generally results in the recognition of compensation expense for all stock-based awards to employees. SFAS No. 123 does not require an entity to adopt those provisions, but rather, permits continued application of APB Opinion No. 25. The Company has elected not to adopt the recognition and measurement provisions of SFAS No. 123 and continues to account for its stock-based employee compensation plans under APB Opinion No. 25 and related interpretations. In accordance with APB Opinion No. 25, deferred compensation is generally recorded for stock-based employee compensation grants based on the excess of the market value of the common stock on the measurement date over the exercise price. The deferred compensation is amortized to expense over the vesting period of each unit of stock-based employee compensation granted. If the exercise price of the stock-based compensation is equal to or exceeds the market price of the Company's common stock on the date of grant, no compensation expense is recorded. For the three months ended September 30, 2002 and 2003, the Company recorded compensation expense of $0.6 million and $0.4 million, respectively, for restricted stock grants. For the six months ended September 30, 2002 and 2003, the Company recorded compensation expense of $1.9 million and $1.0 million, respectively, for restricted stock grants. The expense for the six months ended September 30, 2002 includes $0.6 million of merger-related compensation charges related to restricted shares issued as part of the Evity, Inc. acquisition. The Company was not required to record compensation expense for stock option grants and stock issued under the employee stock purchase plan during the same periods. The compensation expense recorded for restricted stock grants under the intrinsic value method is consistent with the expense that would be recorded under the fair value-based method. Had the compensation cost for the Company's employee stock option grants and stock issued under the ESPP been determined based on the grant date fair values of awards estimated using the Black-Scholes option pricing model, which is consistent with the method described in SFAS No. 123, the Company's reported net earnings (loss) and earnings (loss) per share would have been reduced to the following pro forma amounts:
THREE MONTHS ENDED SIX MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, --------------------- --------------------------- 2002 2003 2002 2003 --------- --------- ------------ ------------ (IN MILLIONS, EXCEPT PER SHARE DATA) Net earnings (loss): As Reported ....... $ 10.1 $ (13.2) $ 15.3 $ (19.3) Add stock-based employee compensation expense included in net earnings (loss) as reported, net of related tax effects .............................................. 0.4 0.3 1.2 0.7 Deduct stock-based employee compensation expense determined under the fair value-based method for all awards, net of related tax effects .................................. (21.7) (18.4) (39.1) (44.3) --------- --------- ------------ ------------ Pro Forma ......... $ (11.2) $ (31.3) $ (22.6) $ (62.9) Basic earnings (loss) per share: As Reported ....... $ 0.04 $ (0.06) $ 0.06 $ (0.08) Pro Forma ......... $ (0.05) $ (0.14) $ (0.09) $ (0.28) Diluted earnings (loss) per share: As Reported ....... $ 0.04 $ (0.06) $ 0.06 $ (0.08) Pro Forma ......... $ (0.05) $ (0.14) $ (0.09) $ (0.28)
9 (5) GUARANTEES In November 2002, the FASB issued Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others" (FIN 45). FIN 45 requires certain guarantees to be recorded at fair value and requires a guarantor to make disclosures, even when the likelihood of making any payments under the guarantee is remote. For those guarantees and indemnifications that do not fall within the initial recognition and measurement requirements of FIN 45, the Company must continue to monitor the conditions that are subject to the guarantees and indemnifications, as required under existing generally accepted accounting principles, to identify if a loss has been incurred. If the Company determines that it is probable that a loss has been incurred, any such estimable loss would be recognized. The initial recognition and measurement requirements do not apply to the Company's product warranties or to the provisions contained in the majority of the Company's software license agreements that indemnify licensees of the Company's software from damages and costs resulting from claims alleging that the Company's software infringes the intellectual property rights of a third party. The Company has historically received only a limited number of requests for payment under these provisions and has not been required to make material payments pursuant to these provisions. The Company has not identified any losses that are probable under these provisions and, accordingly, the Company has not recorded a liability related to these indemnification provisions. (6) EXIT ACTIVITIES AND RELATED COSTS During the quarter ended September 30, 2003, the Company implemented a plan to better align its cost structure with existing market conditions. This plan included the involuntary termination of approximately 740 employees during the quarter ended September 30, 2003. The workforce reduction was across all functions and geographies and affected employees were provided cash separation packages. As a global enterprise, the Company has been expanding its operations for a number of years in attractive labor markets, including in the Company's offices in India and Israel. The Company's plan to better align its cost structure with existing market conditions has, to an extent, accelerated its existing global expansion plans. The plan also includes exiting leases in certain locations around the world, reducing the square footage required to operate those locations and relocating those operations to lower cost facilities. These relocation efforts are expected to be completed in the quarter ending December 31, 2003. Charges for exit costs of $27.6 million were recorded for the quarter ended September 30, 2003 for employee severance and related costs and office relocations. Additionally, $6.8 million of incremental depreciation expense was recorded during the quarter related to the changes in estimated depreciable lives for leasehold improvements in locations to be exited and for certain information technology assets that will be eliminated as a result of the plan. These changes in estimated lives reduced basic and diluted earnings per share for both the quarter and six months ended September 30, 2003, by $0.02 per share. The expenses related to the exit activities are reflected in the accompanying condensed consolidated statements of operations as follows:
SEVERANCE & RELATED INCREMENTAL COSTS FACILITIES DEPRECIATION TOTAL ------------- ------------- ------------- ------------- (IN MILLIONS) Selling and marketing expenses ..................... $ 14.2 $ 0.7 $ 3.4 $ 18.3 Research, development and support expenses ......... 8.7 -- 2.8 11.5 Cost of professional services ...................... 2.2 -- -- 2.2 General and administrative expenses ................ 1.8 -- 0.6 2.4 ------------- ------------- ------------- ------------- Total included in operating expenses ..... $ 26.9 $ 0.7 $ 6.8 $ 34.4 ============= ============= ============= =============
The Company does not expect significant additional severance costs subsequent to September 30, 2003. The relocation of all facilities is expected to be completed by December 31, 2003, and related facilities costs of $68 million to $73 million are expected to be accrued in the quarter ending December 31, 2003. The amounts to be accrued represent the fair value of lease obligations after the respective facilities' cease-use dates, net of estimated sublease income that could be reasonably obtained in the future. Other than potential adjustments to lease accruals based on actual subleases entered in the future, the Company does not expect any significant additional charges subsequent to December 31, 2003. 10 As of September 30, 2003, $9.1 million of severance and facilities costs related to actions completed under the plan remained accrued for payment in future periods, as follows:
BALANCE AT BALANCE AT JUNE 30, CHARGED TO SEPT. 30, 2003 EXPENSE PAID OUT 2003 ------------ ------------ ------------ ------------ (IN MILLIONS) Severance and related costs ...................... $ -- $ 26.9 $ (18.5) $ 8.4 Facilities costs ................................. -- 0.7 -- 0.7 ------------ ------------ ------------ ------------ Total accrual .......................... $ -- $ 27.6 $ (18.5) $ 9.1 ============ ============ ============ ============
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION This section of the Report contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, which are identified by the use of the words "believe," "expect," "anticipate," "will," "contemplate," "would" and similar expressions that contemplate future events. Numerous important factors, risks and uncertainties affect our operating results, including, without limitation, those contained in this Report, and could cause our actual results to differ materially from the results implied by these or any other forward-looking statements made by us or on our behalf. There can be no assurance that future results will meet expectations. You should pay particular attention to the important risk factors and cautionary statements described in the section of this Report entitled "Certain Risks and Uncertainties." It is important that the historical discussion below be read together with the attached condensed consolidated financial statements and notes thereto, with the discussion of such risks and uncertainties and with the audited financial statements and notes thereto, and Management's Discussion and Analysis of Results of Operations and Financial Condition contained in our Annual Report on Form 10-K for fiscal 2003. CRITICAL ACCOUNTING POLICIES The preparation of condensed consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. On an on-going basis, we make and evaluate estimates and judgments, including those related to revenue recognition, capitalized software development costs, in-process research and development of acquired businesses, acquired technology, goodwill and intangible assets, deferred tax assets 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 Annual Report on Form 10-K for fiscal 2003 under Management's Discussion and Analysis of Results of Operations and Financial Condition where such policies affect our reported and expected financial results. 11 A. RESULTS OF OPERATIONS AND FINANCIAL CONDITION The following table sets forth, for the periods indicated, the percentages that selected items in the condensed consolidated statements of operations and comprehensive income (loss) bear to total revenues. These comparisons of financial results are not necessarily indicative of future results.
PERCENTAGE OF TOTAL REVENUES THREE MONTHS ENDED SIX MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, ------------------------------ ------------------------------ 2002 2003 2002 2003 ------------ ------------ ------------ ------------ Revenues: License .................................................. 41.4% 37.3% 43.0% 36.1% Maintenance .............................................. 51.8 56.4 50.4 57.7 Professional services .................................... 6.8 6.3 6.6 6.2 ------------ ------------ ------------ ------------ Total revenues ....................................... 100.0 100.0 100.0 100.0 ------------ ------------ ------------ ------------ Selling and marketing expenses ............................. 38.7 42.0 38.9 43.2 Research, development and support expenses ................. 38.6 44.1 38.7 42.6 Cost of professional services .............................. 7.2 6.0 7.1 6.1 General and administrative expenses ........................ 12.1 14.3 12.0 13.2 Amortization of acquired technology and intangibles ........ 4.3 4.6 4.2 4.8 Merger-related costs and compensation charges and other .... 0.1 -- 0.1 -- ------------ ------------ ------------ ------------ Total operating expenses .............................. 101.0 111.0 101.0 109.9 ------------ ------------ ------------ ------------ Operating loss ........................................ (1.0) (11.0) (1.0) (9.9) Interest and other income, net ............................. 5.9 5.0 5.5 6.0 Gain (loss) on marketable securities and other investments ........................................... -- 0.3 (1.0) -- ------------ ------------ ------------ ------------ Other income, net ..................................... 5.9 5.3 4.5 6.0 Earnings (loss) before income taxes ................... 4.9 (5.7) 3.5 (3.9) Income tax provision (benefit) ............................. 1.4 (1.7) 0.9 (0.9) ------------ ------------ ------------ ------------ Net earnings (loss) .............................. 3.5% (4.0)% 2.6% (3.0)% ============ ============ ============ ============
REVENUES We generate revenues from licensing software, providing maintenance, enhancement and support for previously licensed products and providing professional services.
THREE MONTHS ENDED SIX MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, ------------------------- ------------------------- 2002 2003 CHANGE 2002 2003 CHANGE ----------- ----------- ------- ----------- ----------- ------- (IN MILLIONS) (IN MILLIONS) License: North America .............................. $ 65.1 $ 59.0 (9.4)% $ 152.5 $ 103.6 (32.1)% International .............................. 55.3 65.7 18.8% 103.9 128.7 23.9% ----------- ----------- ----------- ----------- Total license revenues ............... 120.4 124.7 3.6% 256.4 232.3 (9.4)% Maintenance: North America .............................. 90.8 110.7 21.9% 183.3 220.1 20.1% International .............................. 60.1 77.5 29.0% 117.3 151.6 29.2% ----------- ----------- ----------- ----------- Total maintenance revenues ............ 150.9 188.2 24.7% 300.6 371.7 23.7% Professional services: North America .............................. 8.9 11.5 29.2% 18.1 20.8 14.9% International .............................. 11.0 9.4 (14.5)% 21.3 18.9 (11.3)% ----------- ----------- ----------- ----------- Total professional services revenues ... 19.9 20.9 5.0% 39.4 39.7 0.8% ----------- ----------- ----------- ----------- Total revenues ....................... $ 291.2 $ 333.8 14.6% $ 596.4 $ 643.7 7.9% =========== =========== =========== ===========
Product License Revenues Our product license revenues primarily consist of fees related to products licensed to customers on a perpetual basis. Product license fees can be associated with a customer's licensing of a given software product for the first time or with a customer's purchase of the right to run a previously licensed product on additional computing capacity or by additional users. In addition to perpetual-based product license fees, our license revenues also include, to a lesser extent, term license fees which are generated when customers are granted license rights to a given software product for a defined period of time. License revenues for the quarter and six months ended September 30, 2003, increased 4% and decreased 9%, respectively, compared to the same periods last year. Excluding the impact of Remedy revenues during the quarter and six months ended September 30, 2003, license revenues declined 16% and 27%, respectively. Difficult economic conditions in domestic and international markets have resulted in reduced information technology (IT) spending by many of our customers, and we have 12 experienced a decline in the number and size of transactions with our largest customers, which historically have accounted for a significant portion of our revenues. Large transactions declined compared to the prior year as customers remain reluctant to sign large capacity-based transactions. Though license revenues excluding Remedy are down compared to the prior year, such revenues increased sequentially 17% over the quarter ended June 30, 2003. We believe that the global IT spending environment is stabilizing and although IT budgets may not be increasing, companies appear to be more willing to spend their allocated IT dollars. Transaction closure rates in the quarter ended September 30, 2003 improved compared to the quarter ended June 30, 2003, but we expect the IT spending environment to remain challenging throughout fiscal 2004. For the periods ended September 30, 2002 and 2003, our recognized revenues were impacted by the changes in our deferred license revenue balance as follows:
THREE MONTHS ENDED SIX MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, ---------------------------- ---------------------------- 2002 2003 2002 2003 ------------ ------------ ------------ ------------ (IN MILLIONS) Deferrals of license revenue .......................... $ (16.9) $ (28.0) $ (81.6) $ (49.8) Recognition from deferred license revenue ............. 20.3 20.0 38.6 43.8 ------------ ------------ ------------ ------------ Net impact on recognized license revenue .......... $ 3.4 $ (8.0) $ (43.0) $ (6.0) ============ ============ ============ ============ Deferred license revenue balance at end of quarter .... $ 211.9 $ 224.3
Based on licensing trends, increased customer requests for contractual terms that result in deferral of revenue and our recent initiative to ensure we clearly articulate to customers the flexibility that we offer in these areas, we expect that our base of deferred license revenue will continue to grow in the near future. Also, because of differing maintenance pricing methodologies for legacy BMC products and Remedy products, license revenues in transactions that include both types of products typically must be deferred under the residual method of accounting for multiple element arrangements. We expect the volume of such joint transactions to increase and accordingly, expect the deferred license revenue related to them to increase. Our North American operations generated 54% and 47% of license revenues in the quarters ended September 30, 2002 and 2003, respectively, and 59% and 45% in the six months ended September 30, 2002 and 2003, respectively. North American license revenues for the quarter and six months ended September 30, 2003 declined 9% and 32%, respectively, compared to the comparable periods in the prior fiscal year. Excluding the impact of Remedy revenues during the quarter and six months ended September 30, 2003, North American license revenues declined 31% and 49%, respectively, primarily due to declines in large transactions as discussed above. Though down from the prior year, North American license revenues increased sequentially 32% compared to the quarter ended June 30, 2003. International license revenues represented 46% and 53% of license revenues for the quarters ended September 30, 2002 and 2003, respectively, and 41% and 55% in the six months ended September 30, 2002 and 2003, respectively. International license revenues for the quarter and six months ended September 30, 2003 increased 19% and 24% compared to the same periods last year. Excluding the impact of Remedy revenues during the quarter and six months ended September 30, 2003, international license revenues increased 2% and 7%, respectively. Foreign currency exchange rate changes resulted in international license revenue increases of 8% for both the quarter and six months ended September 30, 2003, after giving effect to our foreign currency hedging program. Excluding this currency impact, international license revenues excluding Remedy declined 6% and 1% for the quarter and six months ended September 30, 2003, respectively. International license revenues including Remedy increased sequentially 4% compared to the quarter ended June 30, 2003. Maintenance, Enhancement and Support Revenues Maintenance, enhancement and support revenues represent the ratable recognition of fees to enroll licensed products in our software maintenance, enhancement and support program. Maintenance, enhancement and support enrollment generally entitles customers to product enhancements, technical support services and ongoing compatibility with third-party operating systems, database management systems, networks, storage systems and applications. Excluding Remedy, these fees are generally charged annually and equal 20% of the discounted price of the product. Maintenance revenues also include the ratable recognition of the bundled fees for any initial maintenance services covered by the related perpetual license agreement. Remedy's maintenance fees are generally charged annually and equal 15% to 22% of the list price of the product. In addition, 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 increased 25% and 24% for the quarter and six months ended September 30, 2003, respectively, over the comparable prior year periods primarily as a result of the additional maintenance revenue associated with Remedy and the continuing 13 growth in the base of installed products and the processing capacity on which they run. Excluding the impact of Remedy revenues during the quarter and six months ended September 30, 2003, maintenance revenues increased 2% in each period over the comparable prior year periods. Maintenance fees increase in proportion to the aggregate processing capacity on which the products are installed; consequently, we receive higher absolute maintenance fees as customers install our products on additional processing capacity. Due to the increased discounting for higher levels of additional processing capacity, the maintenance fees on a per unit of capacity basis are typically reduced in enterprise license agreements. These discounts, combined with the reduced maintenance percentages for long-term contracts discussed above and the recent decline in our license revenues, have led to lower growth rates for our maintenance revenue excluding Remedy. Further declines in our license revenue and/or increased discounting could lead to declines in our maintenance revenues excluding Remedy. Historically, our maintenance renewal rates have been high, but economic and competitive pressures could cause customers to reduce their licensed capacity and therefore the capacity upon which our maintenance, enhancement and support fees are charged. We expect Remedy's quarterly maintenance revenues to increase sequentially during fiscal 2004. As required by purchase accounting for the acquisition, the Remedy deferred maintenance revenue at the acquisition date was written down to fair value, as defined by U.S. generally accepted accounting principles. As such, the amounts recognized as maintenance revenue out of that acquisition-date deferred revenue balance will reflect this write-down. The vast majority of the acquisition-date deferred revenue will be recognized during the 12 months following the acquisition. All maintenance fees generated subsequent to the acquisition date are deferred and recognized over the maintenance period at full contractual amounts. Product Line Revenues
THREE MONTHS ENDED SIX MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, --------------------- --------------------- 2002 2003 CHANGE 2002 2003 CHANGE --------- --------- --------- --------- --------- ---------- (IN MILLIONS) (IN MILLIONS) Enterprise Data Management: Mainframe Data Management ...................... $ 100.4 $ 90.6 (9.8)% $ 201.7 $ 173.5 (14.0)% Distributed Systems Data Management ............ 26.6 28.1 5.6% 62.1 54.0 (13.0)% --------- --------- --------- --------- 127.0 118.7 (6.5)% 263.8 227.5 (13.8)% Enterprise Systems Management: PATROL ......................................... 60.2 67.3 11.8% 125.0 129.0 3.2% MAINVIEW ....................................... 44.9 31.5 (29.8)% 85.3 62.3 (27.0)% Scheduling & Output Management ................. 31.8 31.7 (0.3)% 64.5 62.6 (2.9)% --------- --------- --------- --------- 136.9 130.5 (4.7)% 274.8 253.9 (7.6)% Security ....................................... 6.2 6.3 1.6% 17.0 13.9 (18.2)% Other .......................................... 1.2 0.2 (83.3)% 1.4 0.9 (35.7)% --------- --------- --------- --------- Remedy ......................................... -- 57.2 -- -- 107.8 -- --------- --------- --------- --------- Total license & maintenance revenues .... $ 271.3 $ 312.9 15.3% $ 557.0 $ 604.0 8.4% ========= ========= ========= =========
We market software solutions designed to improve the availability, performance and recoverability of enterprise applications, databases and other IT systems components operating in mainframe, distributed computing and Internet environments. Our acquisition of Remedy in November 2002, extends our solutions to include products that automate service-related business processes through a complete suite of service management applications. In April 2003, we introduced a new strategic direction focused on Business Service Management (BSM), the direct linkage of IT resources, management and solutions with the goals of the overall business. The objective of our BSM strategy is to enable companies to move beyond traditional IT management and manage their business-critical services from both an IT and business perspective. Our solutions are broadly divided into four core business units. The Enterprise Data Management group includes products designed for managing database management systems on mainframe and distributed computing platforms. The Enterprise Systems Management group includes our systems management and monitoring, scheduling and output management solutions. The Security group includes products that facilitate user registration and password administration. The Remedy group includes our service, change and asset management solutions. Our Enterprise Data Management solutions combined represented 47% and 38% of our total software revenues for the quarters ended September 30, 2002 and 2003, respectively, and 47% and 38% for the six months ended September 30, 2002 and 2003, respectively. Total software revenues for this group declined 7% and 14%, respectively, in the quarter and six months ended September 30, 2003, from the same periods in the prior year. The overall decrease in both periods was primarily related to license 14 revenue declines for the mainframe data management products. For the quarter ended September 30, 2003, license and maintenance revenues increased for the distributed systems products. This license revenue increase is primarily the result of increased revenues generated by our inside sales team. Despite this increase for the quarter, license revenues for the distributed systems products declined for the six-month period. Total revenues for the Enterprise Data Management solutions increased sequentially 9% compared to the quarter ended June 30, 2003. Our Enterprise Systems Management solutions combined contributed 50% and 42% of our total software revenues for the quarters ended September 30, 2002 and 2003, respectively, and 49% and 42% for the six months ended September 30, 2002 and 2003, respectively. Total software revenues for this group decreased 5% and 8%, respectively, in the quarter and six months ended September 30, 2003, from the same periods in the prior year. For the quarter and six months ended September 30, 2003, the primary contributor to the declines was the decrease in MAINVIEW license and maintenance revenues. The MAINVIEW decline more than offset increases in PATROL license and maintenance revenues for the quarter ended September 30, 2003. The PATROL license revenue growth is primarily the result of increased acceptance of the new version of PATROL and transactions generated as a result of our BSM strategy discussed above. For the six months ended September 30, 2003, declines in PATROL and Scheduling & Output Management license revenues, together with the MAINVIEW decline, more than offset increases in maintenance revenues for these two product lines. Total revenues for the Enterprise Systems Management solutions increased sequentially 6% compared to the quarter ended June 30, 2003. Our Security solutions contributed 2% of total software revenues for both of the quarters ended September 30, 2002 and 2003, and contributed 3% and 2% for the six months ended September 30, 2002 and 2003, respectively. Total software revenues for this group increased 2% and decreased 18% in the quarter and six months ended September 30, 2003, respectively, from the same periods in the prior year. Security license revenues declined in both periods while maintenance revenues increased in both periods. Total revenues for the Security solutions decreased sequentially 15% compared to the quarter ended June 30, 2003. We continue to make changes to improve the performance of this business. Our Remedy solutions contributed 18% of total software revenues for both the quarter and six months ended September 30, 2003. As the acquisition of Remedy was completed less than one year ago, comparisons to prior periods are not available. Total software revenues for Remedy increased 13% sequentially compared to the quarter ended June 30, 2003. Professional Services Revenues Professional services revenues, representing fees from implementation, integration and education services performed during the periods, increased 5% and 1% during the quarter and six months ended September 30, 2003, respectively, from the comparable prior year periods. Excluding the impact of Remedy revenues during the quarter and six months ended September 30, 2003, professional services revenues declined 11% and 16%, respectively. This decline is the result of our decreased license revenues, as this results in less demand for our implementation and integration services. EXPENSES
THREE MONTHS ENDED SIX MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, --------------------- --------------------- 2002 2003 CHANGE 2002 2003 CHANGE --------- --------- -------- --------- --------- -------- (IN MILLIONS) (IN MILLIONS) Selling and marketing .................................... $ 112.8 $ 140.2 24.3% $ 232.3 $ 278.1 19.7% Research, development and support ........................ 112.4 147.1 30.9% 230.6 274.4 19.0% Cost of professional services ............................ 20.9 20.0 (4.3)% 42.3 39.0 (7.8)% General and administrative ............................... 35.4 47.9 35.3% 71.4 85.2 19.3% Amortization of acquired technology and intangibles ...... 12.4 15.3 23.4% 24.8 30.9 24.6% Merger-related costs and compensation charges and other .. 0.3 -- (100.0)% 0.8 -- (100.0)% --------- --------- --------- --------- Total operating expenses ....................... $ 294.2 $ 370.5 25.9% $ 602.2 $ 707.6 17.5% ========= ========= ========= =========
Exit Activities and Related Costs During the quarter ended September 30, 2003, we implemented a plan to better align our cost structure with existing market conditions. This plan included the involuntary termination of approximately 740 employees during the quarter ended September 30, 2003. The workforce reduction was across all functions and geographies and affected employees were provided cash separation packages. As a global enterprise, we have been expanding our operations for a number of years in attractive labor markets, including in our offices in India and Israel. Our plan to better align our cost structure with existing market conditions has, to an extent, accelerated our existing global expansion plans. The plan also includes exiting leases in certain locations around the world, reducing the square footage required to operate those locations and relocating those operations to lower cost facilities. These relocation efforts are expected to be completed in the quarter ending December 31, 2003. Charges for exit costs of $27.6 million were recorded for the quarter ended September 30, 2003 for employee severance and related costs and office relocations. Additionally, $6.8 million of incremental depreciation expense was recorded during the quarter related to the changes in estimated depreciable lives for leasehold improvements in locations to be exited and for certain information technology assets that will be eliminated as a result of the plan. 15 These changes in estimated lives reduced basic and diluted earnings per share for both the quarter and six months ended September 30, 2003, by $0.02 per share. The expenses related to the exit activities are reflected in the accompanying condensed consolidated statements of operations as follows:
SEVERANCE & RELATED INCREMENTAL COSTS FACILITIES DEPRECIATION TOTAL ------------ ------------ ------------ ------------ (IN MILLIONS) Selling and marketing expenses ................... $ 14.2 $ 0.7 $ 3.4 $ 18.3 Research, development and support expenses ....... 8.7 -- 2.8 11.5 Cost of professional services .................... 2.2 -- -- 2.2 General and administrative expenses .............. 1.8 -- 0.6 2.4 ------------ ------------ ------------ ------------ Total included in operating expenses ... $ 26.9 $ 0.7 $ 6.8 $ 34.4 ============ ============ ============ ============
We do not expect significant additional severance costs subsequent to September 30, 2003. The relocation of all facilities is expected to be completed by December 31, 2003, and related facilities costs of $68 million to $73 million are expected to be accrued in the quarter ending December 31, 2003. The amounts to be accrued represent the fair value of lease obligations after the respective facilities' cease-use dates, net of estimated sublease income that could be reasonably obtained in the future. Other than potential adjustments to lease accruals based on actual subleases entered in the future, we do not expect any significant additional charges subsequent to December 31, 2003. Upon completion of all activities under the plan, we expect annual operating expense savings of approximately $100 million to $120 million, beginning in the quarter ending March 31, 2004. As of September 30, 2003, $9.1 million of severance and facilities costs related to actions completed under the plan remained accrued for payment in future periods, as follows:
BALANCE AT BALANCE AT JUNE 30, CHARGED TO SEPT. 30, 2003 EXPENSE PAID OUT 2003 ------------ ------------ ------------ ------------ (IN MILLIONS) Severance and related costs ............ $ -- $ 26.9 $ (18.5) $ 8.4 Facilities costs ....................... -- 0.7 -- 0.7 ------------ ------------ ------------ ------------ Total accrual ................ $ -- $ 27.6 $ (18.5) $ 9.1 ============ ============ ============ ============
Selling and Marketing Our selling and marketing expenses primarily include personnel and related costs, sales commissions and costs associated with advertising, industry trade shows and sales seminars. Excluding the impact of costs related to the exit activities discussed above, selling and marketing expenses represented 39% and 37% of total revenues for the quarters ended September 30, 2002 and 2003, respectively, and 39% and 40% of total revenues for the six months ended September 30, 2002 and 2003, respectively. Excluding the impact of costs related to exit activities, selling and marketing expenses increased 8% and 12%, respectively, for the quarter and six months ended September 30, 2003, as compared to the prior year. Excluding the impact of the costs related to exit activities and Remedy expenses during the quarter and six months ended September 30, 2003, selling and marketing expenses decreased 8% and 4%, respectively. The declines in both periods are primarily related to decreased sales commissions and bonuses due to the revenue performance discussed above and reduced bad debt expense related to license billings. Research, Development and Support Research, development and support expenses mainly comprise personnel costs related to software developers and development support personnel, including software programmers, testing and quality assurance personnel and writers of technical documentation such as product manuals and installation guides. These expenses also include costs associated with the maintenance, enhancement and support of our products, computer hardware/software costs and telecommunications expenses necessary to maintain our data processing center, royalties and the effect of software development cost capitalization and amortization. Research, development and support expenses were reduced in the quarters and six-month periods ended September 30, 2002 and 2003, by amounts capitalized in accordance with SFAS No. 86, "Accounting for the Costs of Computer Software to Be Sold, Leased, or Otherwise Marketed." We capitalize our software development costs when the projects under development reach technological feasibility as defined by SFAS No. 86, and amortize these costs over the products' estimated economic lives, which are typically three years. As discussed below, we revised the estimated economic lives for certain of our software products as of January 1, 2003. 16 The following table summarizes the amounts capitalized and amortized during the three months and six months ended September 30, 2002 and 2003. Amortization for these periods includes amounts accelerated for certain software products that were not expected to generate sufficient future revenues to realize the carrying value of the assets.
THREE MONTHS ENDED SIX MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, ---------------------------- ---------------------------- 2002 2003 2002 2003 ------------ ------------ ------------ ------------ (IN MILLIONS) Software development and purchased software costs capitalized ............................................ $ (16.4) $ (16.8) $ (33.9) $ (31.8) Total amortization ......................................... 17.2 32.4 39.9 55.6 ------------ ------------ ------------ ------------ Net impact on research and development expense ......... $ 0.8 $ 15.6 $ 6.0 $ 23.8 ============ ============ ============ ============ Accelerated amortization included in total amortization above .................................................. $ 7.5 $ 7.6 $ 18.0 $ 7.6
As a result of the changes in market conditions and research and development headcount reductions during fiscal 2002 and 2003, we focused more on our core businesses during those years. As part of this effort, we reviewed our product portfolio during fiscal 2002 and fiscal 2003 and discontinued certain products. To the extent that there were any capitalized software development costs remaining on the balance sheet related to these products, we accelerated the amortization to write off these balances. The continued need to accelerate amortization to maintain our capitalized software costs at net realizable value, the results of the valuation performed for the Remedy acquisition that indicated a three-year life was appropriate for that acquired technology and changes in the average life cycles for certain of our software products caused us to evaluate the estimated economic lives for our internally developed software products. As a result of this evaluation, we revised the estimated economic lives of certain products as of January 1, 2003, such that most products will be amortized over an estimated life of three years. These changes in estimated economic lives resulted in an additional $11.1 million and $23.5 million of amortization expense in the quarter and six months ended September 30, 2003, respectively, and reduced basic and diluted earnings per share for the quarter and six months by $0.03 per share and $0.07 per share, respectively. Excluding the impact of costs related to the exit activities discussed above, research, development and support expenses represented 39% and 41% of total revenues for the quarters ended September 30, 2002 and 2003, respectively, and 39% and 41% of total revenues for the six months ended September 30, 2002 and 2003, respectively. Excluding the impact of costs related to exit activities, research, development and support expenses increased 21% and 14% in the three months and six months ended September 30, 2003, respectively, over the same periods in the prior year. Excluding the impact of the costs related to exit activities and Remedy expenses during the three months and six months ended September 30, 2003, research, development and support expenses increased 9% and 2%, respectively, primarily due to the net effect of the software cost capitalization and amortization described above, which more than offset reduced personnel costs. Cost of Professional Services Cost of professional services consists primarily of personnel costs associated with implementation, integration and education services that we perform for our customers, and the related infrastructure to support this business. Excluding the impact of costs related to the exit activities discussed above, the cost of professional services represented 7% and 5% of total revenues for the quarters ended September 30, 2002 and 2003, respectively, and 7% and 6% of total revenues for the six months ended September 30, 2002 and 2003, respectively. Excluding the impact of costs related to exit activities, the cost of professional services decreased 15% and 13% during the quarter and six months ended September 30, 2003, respectively, from the comparable periods in the prior year. Excluding the impact of the costs related to exit activities and Remedy expenses during the quarter and six months ended September 30, 2003, cost of professional services declined 28% and 25%, respectively. The decreases resulted primarily from headcount reductions as a result of the decline in professional services revenues. General and Administrative General and administrative expenses are comprised primarily of compensation and personnel costs within executive management, finance and accounting, IT, facilities management, legal and human resources. Other costs included in general and administrative expenses are fees paid for outside legal and accounting services, consulting projects, insurance and bad debt expense related to maintenance billings. Excluding the impact of costs related to the exit activities discussed above, general and administrative expenses represented 12% and 14% of total revenues in the quarters ended September 30, 2002 and 2003, respectively, and 12% and 13% of total revenues for the six months ended September 30, 2002 and 2003, respectively. Excluding the impact of costs related to exit activities, these expenses increased 29% and 16%, respectively, for the quarter and six months ended September 30, 2003, compared to the same periods in the prior year. Excluding the impact of costs related to exit activities and Remedy expenses during the quarter 17 and six months ended September 30, 2003, general and administrative expenses increased 15% and 4%, respectively. These increases included higher consulting fees, primarily related to an ongoing infrastructure software implementation, legal fees and currency losses which offset decreased personnel costs. Amortization of Acquired Technology and Intangibles Under the purchase accounting method for certain of our acquisitions, portions of the purchase prices were allocated to acquired software and other intangible assets. We are amortizing these intangibles over three-year periods, which reflect the estimated useful lives of the respective assets. The increases in amortization expense for the quarter and six months ended September 30, 2003, relates to the additional intangibles being amortized as a result of the Remedy and IT Masters acquisitions during the quarters ended December 31, 2002 and March 31, 2003, respectively, which more than offset the decrease in amortization expense related to intangibles that have recently become fully amortized. Merger-Related Costs and Compensation Charges and Other For the six months ended September 30, 2002, merger-related costs and compensation charges and other primarily included compensation expense related to the vesting of common stock issued as part of the Evity acquisition to certain Evity shareholders who we employed after the acquisition. Vesting was completed during that period. OTHER INCOME, NET Other income, net consists primarily of interest earned on cash, cash equivalents, marketable securities and finance receivables, rental income on owned facilities and gains and losses on marketable securities and other investments. For the quarter and six months ended September 30, 2003, other income, net was $17.8 million and $38.6 million, respectively, reflecting an increase of $0.7 million and $12.0 million from the same periods of fiscal 2003. The increase in other income, net for the six months is primarily due to a $6.3 million write-off of marketable securities in the prior year, and the gain on the licensing of our PATROL Storage Manager product to EMC Corporation during the quarter ended June 30, 2003. INCOME TAX PROVISION (BENEFIT) For the quarter and six months ended September 30, 2003, our income tax benefit was $5.7 million and $6.0 million, respectively, compared to income tax expense of $4.0 million and $5.5 million for the same periods in the prior year. Our effective tax rate was 30% and 24%, respectively, for the quarter and six months ended September 30, 2003 compared to 28% and 26% for the comparable prior year periods. The effective tax rate for the quarter and six months ended September 30, 2003 is impacted primarily by the recognition of deferred taxes on current year foreign earnings, the research credit and tax exempt interest income. As previously disclosed, we have received a Revenue Agent's Report (RAR) from the Internal Revenue Service (IRS) for the tax years ended March 31, 1998 and 1999. We are working with the IRS Appeals division to resolve disputes related to this RAR. We believe that we have meritorious defenses to the proposed adjustments and that adequate provisions for income taxes have been made, and therefore that the ultimate resolution of the issues will not have a material adverse impact on our consolidated financial position or results of operations. The IRS is currently examining our federal income tax returns filed for the fiscal years ended March 31, 2000 and 2001. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENT In January 2003, the FASB issued Interpretation No. 46, "Consolidation of Variable Interest Entities, an interpretation of Accounting Research Bulletin No. 51" (FIN 46). FIN 46 requires the consolidation of entities in which an enterprise absorbs a majority of the entity's expected losses, receives a majority of the entity's expected residual returns, or both, as a result of ownership, contractual or other interests in the entity. Previously, entities were generally consolidated by an enterprise when it had a controlling financial interest through ownership of a majority voting interest in the entity. The consolidation requirements of FIN 46 apply to variable interest entities created after January 31, 2003 and to older entities in the first fiscal year or interim period ending after December 15, 2003. We are in the process of evaluating the implications of FIN 46 to variable interest entities with which we have involvement. We believe that adoption of FIN 46 will not have a material effect on our consolidated financial position or results of operations. 18 LIQUIDITY AND CAPITAL RESOURCES At September 30, 2003, our cash, cash equivalents and marketable securities were $1,039.5 million, an increase of $24.2 million from the March 31, 2003 balance primarily as a result of positive operating cash flow. Of the cash, cash equivalents and marketable securities at September 30, 2003, $707.4 million is held in international locations and was largely generated from our international operations. U.S. income taxes have not been recorded on the majority of the earnings generated by our international operations. These earnings would be subject to U.S. income tax if repatriated to the United States. The potential related deferred tax liability for these earnings is approximately $251.0 million; however, we have not provided a deferred tax liability on this portion of these earnings as we currently plan to utilize this cash in international locations for foreign investment purposes. Our working capital as of September 30, 2003, was $225.6 million, reflecting a decrease from the March 31, 2003 balance of $259.4 million. A significant dollar portion of our marketable securities is invested in securities with maturities beyond one year, and while typically yielding greater returns, investing in such securities reduces reported working capital. Our marketable securities are primarily investment grade and highly liquid. Stockholders' equity as of September 30, 2003, was $1.3 billion. We continue to finance our operations primarily through funds generated from operations. For the six months ended September 30, 2003, net cash provided by operating activities was $158.1 million. Our primary source of cash is the sale of our software licenses, software maintenance and professional services. We provide financing on a portion of these sales transactions to customers that meet our specified standards of creditworthiness. Our practice of providing financing at reasonable interest rates enhances our competitive position. We participate in established programs with third-party financial institutions to securitize or sell a significant portion of our finance receivables, enabling us to collect cash sooner and reduce credit risk. For a detailed discussion of these programs, see the Liquidity and Capital Resources section of our Annual Report on Form 10-K. During the six months ended September 30, 2002 and 2003, we transferred $244.7 million and $112.4 million, respectively, 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. To meet the needs of our customers we have been providing more licensing options, and this increased focus on flexibility may lead to more customer transactions where cash payments will be received over time. Recent shifts in various market factors have made the transfer of certain of our finance receivables more difficult and/or less cost effective, including changes in the overall capacity of the market for such receivables, in customers' credit quality, in the credit risk that third-party financial institutions are willing to accept and in the documentation requirements of the third-party financial institutions. These factors may impact our ability to transfer finance receivables in the future. We considered these shifts in our annual cash flow from operations guidance for fiscal 2004. Net cash used in investing activities for the six months ended September 30, 2003 was $189.1 million, primarily for the purchase of marketable securities during the period. Net cash used in financing activities for the six months ended September 30, 2003 was $81.0 million, which primarily related to purchases of our common stock. On April 24, 2000, our board of directors authorized the purchase of up to $500.0 million in common stock, and on July 30, 2002, they authorized the purchase of an additional $500.0 million. During the six months ended September 30, 2003, we purchased 5.7 million shares for $90.0 million. Since the inception of the repurchase plan, we have purchased 35.4 million shares for $611.8 million. We plan to continue to buy our common stock during fiscal 2004, subject to market conditions and other possible uses of our cash. During the six months ended September 30, 2003, we entered various operating leases for facilities around the world, as discussed above under Exit Activities and Related Costs, and a 48-month capital lease for computer hardware. The $4.2 million current portion of the obligation for the capital lease is reflected in the accompanying condensed consolidated balance sheet as of September 30, 2003 as an accrued liability, and the $12.5 million long-term portion of the obligation is reflected as an other long-term liability. Payments due under the operating leases entered during the quarter are $1.2 million in fiscal 2004, $6.5 million in fiscal 2005, $7.3 million in fiscal 2006, $7.5 million in fiscal 2007, $7.3 million in fiscal 2008 and $8.4 million in fiscal 2009 and beyond. We believe that our existing cash balances and funds generated from operations will be sufficient to meet our liquidity requirements for the foreseeable future. 19 B. CERTAIN RISKS AND UNCERTAINTIES We operate in a dynamic and rapidly changing environment that involves numerous risks and uncertainties. The following section describes some, but not all, of these risks and uncertainties that we believe may adversely affect our business, financial condition or results of operations. WE MAY EXPERIENCE A SHORTFALL IN REVENUE IN ANY GIVEN QUARTER OR MAY ANNOUNCE LOWER FORECASTED REVENUE OR EARNINGS, WHICH COULD CAUSE OUR STOCK PRICE TO DECLINE. Our revenue is difficult to forecast and is likely to fluctuate from quarter to quarter due to many factors outside of our control. In addition, a significant amount of our license transactions are completed during the final weeks and days of the quarter, and therefore we generally do not know whether revenues, earnings, cash flows and/or changes to the deferred license revenue balances will have met expectations until the first few days of the following quarter. Any significant revenue shortfall or lowered forecasts could cause our stock price to decline substantially. Factors that could affect our financial results include, but are not limited to: o the possibility that our customers may defer or limit purchases as a result of reduced information technology budgets, reduced data processing capacity demand or the current uncertain economic and industry conditions; o the possibility that our customers may elect not to license our products for additional processing capacity until their actual processing capacity or expected future processing capacity exceeds the capacity they have already licensed from us; o the possibility that our customers may defer purchases of our products in anticipation of new products or product updates from us or our competitors; o the unpredictability of the timing and magnitude of our sales through direct sales channels, value-added resellers and distributors, which tend to occur late in each quarter; o the possibility that our customers may demand more license transactions that require revenues to be deferred or recognized ratably over time rather than upfront and that we may not accurately forecast the mix of license transactions; o the timing of new product introductions by us and the market acceptance of new products, which may be delayed as a result of weak and uncertain economic and industry conditions; o changes in our pricing and distribution terms or those of our competitors; and o the possibility that our business will be adversely affected as a result of the threat of significant external events that increase global economic uncertainty. Investors should not rely on the results of prior periods as an indication of our future performance. Our operating expense levels are based, in significant part, on our expectations of future revenue. If we have a shortfall in revenue in any given quarter, we will not be able to reduce our operating expenses for that quarter proportionally in response. Therefore, any significant shortfall in revenue will likely have an immediate adverse effect on our operating results for that quarter. DECREASING DEMAND FOR ENTERPRISE LICENSE TRANSACTIONS COULD ADVERSELY AFFECT REVENUES. Fees from enterprise license transactions have historically been a fundamental component of our revenues. These revenues depend on our customers planning to grow their computer processing capacity and continuing to perceive an increasing need to use our existing software products on substantially greater processing capacity in future periods. Prior to 2000, we licensed many of our larger customers to operate our mainframe products on significant levels of processing capacity in excess of their then current mainframe processing capacity. During the past several years, we also entered into many enterprise license agreements with our larger customers to operate our distributed systems products on significant levels of processing capacity in excess of their then current distributed processing capacity. These customers may elect not to license our products for additional processing capacity until their actual processing capacity or expected future processing capacity exceeds the capacity they have already licensed from us. Demand for data processing capacity is correlated to overall economic activity, and the recent uncertain economic environment has reduced customers' expectations of future capacity growth, thus lessening demand for licensing excess processing capacity in anticipation of future growth. In the past, customers tended to renew their enterprise license agreements prior to their expiration. Recent experience indicates that some customers renew early while other customers continue to operate under their existing capacity. Sustained sluggishness in IT and capital spending can result in customers engaging in contract renewal discussions later than we anticipate. These factors make it difficult to anticipate the size and timing of renewals of enterprise licenses. If our customers who have entered into multi-year capacity-based licenses for excess processing capacity do not increase their processing capacity beyond the levels previously licensed from us or license additional processing capacity in anticipation of future growth, then our license revenues may not grow and our earnings could be adversely affected. 20 WE MAY HAVE DIFFICULTY ACHIEVING OUR CASH FLOW FROM OPERATIONS GOAL. Our quarterly cash flow is and has been volatile. If our cash generated from operations proved in some future period to be materially less than the market expects, the market price of our common stock could decline. To meet the needs of our customers, we have been providing more licensing options, and this increased focus on flexibility may lead to more contracts that will be recognized ratably versus upfront and where cash payments may be received over time versus upfront. Factors that could adversely affect our cash flow from operations in the future include: reduced net earnings; increased time required for the collection of accounts receivable; an increase in uncollectible accounts receivable; a significant shift from multi-year committed contracts to short-term contracts; a reduced ability to transfer finance receivables to third parties and thus increased financing provided by us; an increase in contracts where expenses such as sales commissions are paid upfront but payments from customers are collected over time; reduced renewal rates for maintenance; and a reduced yield from marketable securities and cash and cash equivalents balances. MAINTENANCE REVENUE COULD DECLINE. Maintenance revenues have increased in each of the last three fiscal years as a result of the continuing growth in the base of installed products and the processing capacity on which they run. Maintenance fees increase as the processing capacity on which the products are installed increases; consequently, we receive higher absolute maintenance fees as customers install our products on additional processing capacity. Due to increased discounting for higher levels of additional processing capacity, the maintenance fees on a per unit of capacity basis are typically reduced in enterprise license agreements for our mainframe products. In addition, customers may be entitled to reduced maintenance percentages for entering into long-term maintenance contracts that include prepayment of the maintenance fees or that are supported by a formal financing arrangement. These discounts, combined with reduced maintenance percentages for long-term contracts and the recent decline in our license revenues, have led to lower growth rates for our maintenance revenue, excluding the impact of Remedy revenues subsequent to the acquisition date. Further declines in our license revenue and/or increased discounting would lead to declines in our maintenance revenues. Although renewal rates remain high, should customers migrate from their mainframe applications or find alternatives to our products, increased cancellations could lead to declines in our maintenance revenue. OUR RESTRUCTURING INITIATIVES MAY NOT ACHIEVE OUR DESIRED RESULTS AND, IF UNSUCCESSFUL, COULD ADVERSELY AFFECT OUR BUSINESS. We have recently implemented a restructuring plan and have revised our fiscal year targets for expenses and cash flow from operations to reflect the effects of this restructuring. Our plan involves reducing our workforce and moving into lower cost facilities in some of our locations. Although we have made efforts to minimize the impact on quota-carrying sales representatives, the workforce reductions have included some employees directly responsible for sales, which may affect our ability to close future revenue transactions with our customers and prospects. The failure to retain and effectively manage our remaining employees and hire and train international employees could impact our development efforts and the quality of our products, delay the delivery of new products or product updates and affect customer service. In addition, to achieve our estimates of expense savings from our restructuring plan, we must successfully exit multiple leased facilities in a short time period. We may not be able to exit existing high cost facilities, locate alternative lower cost facilities and move into new facilities in a timely manner. If we are unable to achieve the desired results of our restructuring plan, we may fall short of our revised financial expectations. It is also possible that additional restructuring activity may be required for us to achieve our profitability objectives. OUR STOCK PRICE IS VOLATILE. Our stock price has been and is highly volatile. Our stock price is highly influenced by current expectations of future revenue, earnings and cash flows from operations. Any failure to meet anticipated revenue, earnings and cash flow from operations levels in a period or any negative change in our perceived long-term growth prospects would likely have a significant adverse effect on our stock price. INTENSE COMPETITION AND PRICING PRESSURES COULD ADVERSELY AFFECT OUR EARNINGS. The market for systems management software is highly competitive. We compete with a variety of software vendors including IBM, Hewlett Packard (HP), Computer Associates (CA) and a number of smaller software vendors. We derived a significant portion of our total revenues in fiscal 2003 from software products for IBM and IBM-compatible mainframe computers. IBM 21 continues, directly and through third parties, to enhance and market its utilities for IMS and DB2 as lower cost alternatives to the solutions provided by us and other independent software vendors. Although such utilities are currently less functional than our solutions, IBM continues to invest in the IMS and DB2 utility market. If IBM is successful with its efforts to achieve performance and functional equivalence with our IMS, DB2 and other products at a lower cost, our business would be materially adversely affected. As a large hardware vendor and outsourcer of IT services, IBM has the ability to bundle its other goods and services with its software and offer packaged solutions to customers which could result in increased pricing pressure. To date, our solutions have competed well against IBM's because we have developed advanced automation and artificial intelligence features and our utilities have maintained a speed advantage. In addition, we believe that because we provide enterprise management solutions across multiple platforms we are better positioned to provide customers with comprehensive management solutions for their complex multi-vendor IT environments than integrated hardware and software companies like IBM. CA is also competing with us in these markets. Competition has led to increased pricing pressures within the mainframe software markets. We continue to reduce the cost to our customers of our mainframe tools and utilities in response to such competitive pressures. Although to date we have not experienced significant competition from Microsoft, their dominant position in the operating system market makes them capable of exerting competitive pressure in the systems management market as well. We also face competition from several niche software vendors, particularly for our distributed systems product lines. In addition, the software industry is experiencing continued consolidation. There is a risk that some of our competitors may combine and consolidate market positions or combine technology, making them stronger competitors. OUR PRODUCTS MUST REMAIN COMPATIBLE WITH EVER-CHANGING OPERATING AND DATABASE ENVIRONMENTS. IBM, HP, Microsoft and Oracle are by far the largest suppliers of systems and database software and, in many cases, are the manufacturers of the computer hardware systems used by most of our customers. Historically, operating and database system developers have modified or introduced new operating systems, database systems, systems software and computer hardware. Such new products could incorporate features which perform functions currently performed by our products or could require substantial modification of our products to maintain compatibility with these companies' hardware or software. Although we have to date been able to adapt our products and our business to changes introduced by hardware manufacturers and operating and database system software developers, there can be no assurance that we will be able to do so in the future. Failure to adapt our products in a timely manner to such changes or customer decisions to forego the use of our products in favor of those with comparable functionality contained either in the hardware or operating system could have a material adverse effect on our business, financial condition and operating results. FUTURE PRODUCT DEVELOPMENT IS DEPENDENT UPON ACCESS TO THIRD-PARTY SOURCE CODE. In the past, licensees using proprietary operating systems were furnished with "source code," which makes the operating system generally understandable to programmers, and "object code," which directly controls the hardware and other technical documentation. Since the availability of source code facilitated the development of systems and applications software which must interface with the operating systems, independent software vendors such as BMC Software were able to develop and market compatible software. IBM and other hardware vendors have a policy of restricting the use or availability of the source code for some of their operating systems. To date, this policy has not had a material effect on us. Some companies, however, may adopt more restrictive policies in the future or impose unfavorable terms and conditions for such access. These restrictions may, in the future, result in higher research and development costs for us in connection with the enhancement and modification of our existing products and the development of new products. Although we do not expect that such restrictions will have this adverse effect, there can be no assurances that such restrictions or other restrictions will not have a material adverse effect on our business, financial condition and operating results. FUTURE PRODUCT DEVELOPMENT IS DEPENDENT UPON EARLY ACCESS TO THIRD-PARTY OPERATING AND DATABASE SYSTEMS. Operating and database system software developers have in the past provided us with early access to pre-generally available (GA) versions of their software in order to have input into the functionality and to ensure that we can adapt our software to exploit new functionality in these systems. Some companies, however, may adopt more restrictive policies in the future or impose unfavorable terms and conditions for such access. These restrictions may result in higher research and development costs for us in connection with the enhancement and modification of our existing products and the development of new products. Although we do not expect that such restrictions will have this adverse effect, there can be no assurances that such restrictions or other restrictions will not have a material adverse effect on our business, financial condition and operating results. FAILURE TO ADAPT TO TECHNOLOGICAL CHANGE COULD ADVERSELY AFFECT OUR EARNINGS. If we fail to keep pace with technological change in our industry, such failure would have an adverse effect on our revenues and earnings. We operate in a highly competitive industry characterized by rapid technological change, evolving industry standards, changes in customer requirements and frequent new product introductions and enhancements. During the past several years, many new technological advancements and competing products entered the marketplace. The distributed systems and application 22 management markets in which we operate are far more crowded and competitive than our traditional mainframe systems management markets. Our ability to compete effectively and our growth prospects depend upon many factors, including the success of our existing distributed systems products, the timely introduction and success of future software products, and the ability of our products to interoperate and perform well with existing and future leading databases and other platforms supported by our products. We have experienced long development cycles and product delays in the past, particularly with some of our distributed systems products, and expect to have delays in the future. Delays in new product introductions or less-than-anticipated market acceptance of these new products are possible and would have an adverse effect on our revenues and earnings. New products or new versions of existing products may, despite testing, contain undetected errors or bugs that could delay the introduction or adversely affect commercial acceptance of such products. FAILURE TO MAINTAIN OUR EXISTING DISTRIBUTION CHANNELS AND DEVELOP ADDITIONAL CHANNELS IN THE FUTURE COULD ADVERSELY AFFECT REVENUES AND EARNINGS. With the acquisition of Remedy, the percentage of our revenue from sales of our products and services through distribution channels such as systems integrators and value-added resellers is increasing. Conducting business through indirect distribution channels presents a number of risks, including: o each of our systems integrators and value-added resellers can cease marketing our products and services with limited or no notice and with little or no penalty; o our existing systems integrators and value-added resellers may not be able to effectively sell new products and services that we may introduce; o we do not have direct control over the business practices adopted by our systems integrators and value-added resellers; o our systems integrators and value-added resellers may also offer competitive products and services and as such, may not give priority to the marketing of our products and services as compared to our competitors' products; and o we may face conflicts between the activities of our indirect channels and our direct sales and marketing activities. CHANGES IN PRICING PRACTICES COULD ADVERSELY AFFECT REVENUES AND EARNINGS. We may choose to make changes to our product packaging, pricing or licensing programs in response to competition or customer demands or as a means to differentiate our product offerings. If made, such changes may have a material adverse impact on revenues or earnings. OUR CUSTOMERS MAY NOT ACCEPT OUR PRODUCT STRATEGIES. Historically, we have focused on selling software products to address specific customer problems associated with their applications. Our BSM strategy requires us to integrate multiple software products so that they work together to provide comprehensive systems management solutions. There can be no assurance that customers will perceive a need for such solutions. In addition, there may be technical difficulties in integrating individual products into a combined solution that may delay the introduction of such solutions to the market or adversely affect the demand for such solutions. We may also adopt different sales strategies for marketing our products, and there can be no assurance that our strategies for selling solutions will be successful. RISKS RELATED TO BUSINESS COMBINATIONS. As part of our overall strategy, we have acquired or invested in, and plan to continue to acquire or invest in, complementary companies, products, and technologies and to enter into joint ventures and strategic alliances with other companies. Risks commonly encountered in such transactions include: the difficulty of assimilating the operations and personnel of the combined companies; the risk that we may not be able to integrate the acquired technologies or products with our current products and technologies; the potential disruption of our ongoing business; the inability to retain key technical, sales and managerial personnel; the inability of management to maximize our financial and strategic position through the successful integration of acquired businesses; the risk that revenues from acquired companies, products and technologies do not meet our expectations; and decreases in reported earnings as a result of charges for in-process research and development and amortization of acquired intangible assets. 23 For us to maximize the return on our investments in acquired companies, the products of these entities must be integrated with our existing products. These integrations can be difficult and unpredictable, especially given the complexity of software and that acquired technology is typically developed independently and designed with no regard to integration. The difficulties are compounded when the products involved are well established because compatibility with the existing base of installed products must be preserved. Successful integration also requires coordination of different development and engineering teams. This too can be difficult and unpredictable because of possible cultural conflicts and different opinions on technical decisions and product roadmaps. There can be no assurance that we will be successful in our product integration efforts or that we will realize the expected benefits. With each of our acquisitions, we have initiated efforts to integrate the disparate cultures, employees, systems and products of these companies. Retention of key employees is critical to ensure the continued advancement, development, support, sales and marketing efforts pertaining to the acquired products. We have implemented retention programs to keep many of the key technical, sales and marketing employees of acquired companies; nonetheless, we have lost some key employees and may lose others in the future. ENFORCEMENT OF OUR INTELLECTUAL PROPERTY RIGHTS. We rely on a combination of copyright, patent, trademark, trade secrets, confidentiality procedures and contractual procedures to protect our intellectual property rights. Despite our efforts to protect our intellectual property rights, it may be possible for unauthorized third parties to copy certain portions of our products or to reverse engineer or obtain and use technology or other information that we regard as proprietary. There can also be no assurance that our intellectual property rights would survive a legal challenge to their validity or provide significant protection for us. In addition, the laws of certain countries do not protect our proprietary rights to the same extent as do the laws of the United States. Accordingly, there can be no assurance that we will be able to protect our proprietary technology against unauthorized third party copying or use, which could adversely affect our competitive position. POSSIBILITY OF INFRINGEMENT CLAIMS. From time to time, we receive notices from third parties claiming infringement by our products of patent and other intellectual property rights. We expect that software products will increasingly be subject to such claims as the number of products and competitors in our industry segments grows and the functionality of products overlaps. In addition, we may receive more patent infringement claims as companies increasingly seek to patent their software and business methods and enforce such patents, especially given the increase in software and business method patents issued during the past several years. Regardless of its merit, responding to any such claim could be time-consuming, result in costly litigation and require us to enter into royalty and licensing agreements which may not be offered or available on terms acceptable to us. If a successful claim is made against us and we fail to develop or license a substitute technology, our business, results of operations or financial position could be materially adversely affected. RISKS RELATED TO INTERNATIONAL OPERATIONS. We have committed, and expect to continue to commit, substantial resources and funding to our international infrastructure. Operating costs in many countries, including many of those in which we operate, are higher than in the United States. To increase international sales in fiscal 2004 and subsequent periods, we must continue to globalize our software product lines; expand existing and establish additional foreign operations; strategically hire additional personnel; identify suitable locations for sales, marketing, customer service and development; and recruit international distributors and resellers in selected territories. Future operating results are dependent on sustained performance improvement by our international offices, particularly our European operations. Our operations and financial results internationally could be significantly adversely affected by several risks such as changes in foreign currency exchange rates, sluggish regional economic conditions and difficulties in staffing and managing international operations. Generally, our foreign sales are denominated in our foreign subsidiaries' local currencies. If these foreign currency exchange rates change unexpectedly, we could have significant gains or losses. We maintain a software development and information technology operations office in India which operates as an extension of our primary development and information technology operations and we contract with third-party developers in India. As other software companies have done and are continuing to do, we plan to continue to allocate more development and IT resources to India with the expectation of achieving significant efficiencies, including reducing operational costs and permitting an around-the-clock development cycle. To date, the dispute between India and Pakistan involving the Kashmir region has not adversely affected our operations in India. Should we be unable to conduct operations in India in the future, we believe that our business could be temporarily adversely affected. 24 We conduct substantial development and marketing operations in multiple locations in Israel and, accordingly, we are directly affected by economic, political and military conditions in Israel. Any major hostilities involving Israel or the interruption or curtailment of trade between Israel and its present trading partners could materially adversely affect our business, operating results and financial condition. We maintain comprehensive contingency and business continuity plans, and to date, the current conflict in the region and hostilities within Israel have not caused disruption of our operations located in Israel. ACCOUNTING PRONOUNCEMENTS UNDER CONSIDERATION RELATED TO STOCK-BASED COMPENSATION WOULD REDUCE OUR REPORTED EARNINGS AND COULD ADVERSELY AFFECT OUR ABILITY TO ATTRACT AND RETAIN KEY PERSONNEL BY REDUCING THE STOCK-BASED COMPENSATION WE ARE ABLE TO PROVIDE. We have used stock options and other long-term equity incentives as a fundamental component of our employee compensation packages. We believe that stock options and other long-term equity incentives directly motivate our employees to maximize long-term stockholder value and, through the use of vesting, encourage employees to remain with BMC Software. In accounting for our stock option grants using the intrinsic value method under the provisions of Accounting Principles Board Opinion No. 25, we recognize no compensation cost because the exercise price of options granted is equal to the market value of our common stock on the date of grant. The Financial Accounting Standards Board (FASB) is currently considering changes to US generally accepted accounting principles that, if implemented, would require us to record charges to earnings for employee stock option grants, which would negatively impact our earnings. For example, as disclosed in Note (4) to the accompanying Condensed Consolidated Financial Statements, recording charges for employee stock options using the fair value method under SFAS No. 123, "Accounting for Stock-Based Compensation" would have reduced net earnings by $21.3 million and $18.1 million for the quarters ended September 30, 2002 and 2003, respectively and by $37.9 million and $43.6 million for the six months ended September 30, 2002 and 2003, respectively. In addition, new regulations adopted by The New York Stock Exchange requiring stockholder approval for all stock option plans as well as new regulations prohibiting NYSE member organizations from giving a proxy to vote on equity-compensation plans unless the beneficial owner of the shares has given voting instructions could make it more difficult for us to grant options to employees in the future. To the extent that new regulations make it more difficult or costly to grant options and/or other stock-based compensation to employees, we may incur increased cash compensation costs or find it difficult to attract, retain and motivate employees, either of which could materially adversely affect our business. POSSIBLE ADVERSE IMPACT OF INTERPRETATIONS OF EXISTING ACCOUNTING PRONOUNCEMENTS. On April 1, 1998 and 1999 we adopted AICPA SOP 97-2, "Software Revenue Recognition," and SOP 98-9 "Modification of SOP 97-2, Software Revenue Recognition, With Respect to Certain Transactions," respectively. The adoption of these standards did not have a material impact on our financial position or results of operations. Based on our reading and interpretation of these SOPs, we believe that our current sales contract terms and business arrangements have been properly reported. Future interpretations of existing accounting standards or changes in our business practices could result in future changes in our revenue accounting policies that could have a material adverse effect on our business, financial condition and results of operations. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK We are exposed to a variety of risks, including foreign currency exchange rate fluctuations and changes in the market value of our investments in marketable securities. In the normal course of business, we employ established policies and procedures to manage these risks including the use of derivative instruments. There have been no material changes in our foreign exchange risk management strategy or our marketable securities subsequent to March 31, 2003, therefore our market risk sensitive instruments remain substantially unchanged from the description in our Annual Report on Form 10-K for the year ended March 31, 2003. 25 ITEM 4. CONTROLS AND PROCEDURES EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES As of September 30, 2003, the Company's principal executive officer and principal financial officer evaluated the effectiveness of the Company's disclosure controls and procedures. Based on the evaluation, the Company's principal executive officer and principal financial officer believe that: o the Company's disclosure controls and procedures are designed to ensure that information required to be disclosed by the Company in the reports it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms; and o the Company's disclosure controls and procedures were effective to ensure such information was accumulated and communicated to the Company's management, including the Company's principal executive officer and the principal financial officer, as appropriate, to allow timely decisions regarding required disclosure. CHANGES IN INTERNAL CONTROLS There have been no significant changes in the Company's internal controls or in other factors that could significantly affect the Company' internal controls subsequent to their evaluation, nor have there been any corrective actions with regard to significant deficiencies or material weaknesses. PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS On January 29, 2003, we filed a complaint against NetIQ Corporation (NetIQ) in the United States District Court of the Southern District of Texas, Houston Division, alleging that one or more of NetIQ's software products and their use infringe a valid U.S. patent and that Net IQ infringed one or more trademarks held by us. On August 22, 2003, the Court ordered the case stayed pending arbitration. On September 18, 2003, we filed a Statement of Claim with the American Arbitration Association asserting our claims of patent infringement, subject to our objections to the arbitration proceeding. BMC Software seeks to enjoin NetIQ's current and future infringement of our patent and to recover compensatory damages and enhanced damages, interest, costs and fees. 26 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS At BMC Software's Annual Meeting of Stockholders held on August 21, 2003 the following proposals were adopted by the margins indicated.
NUMBER OF SHARES VOTED FOR WITHHELD ------------- ---------------- 1. To elect nine directors of the Company, each to serve until the next annual meeting or until his/her respective successor has been duly elected and qualified. B. Garland Cupp 186,182,915 9,691,932 Robert E. Beauchamp 192,500,567 3,374,279 Jon E. Barfield 189,950,368 5,924,479 John W. Barter 189,963,157 5,911,690 Meldon K. Gafner 186,178,030 9,696,817 L. W. Gray 186,668,194 9,206,653 Kathleen A. O'Neil 189,229,985 6,644,861 George F. Raymond 190,418,117 5,456,730 Tom C. Tinsley 186,673,381 9,201,466
NUMBER OF SHARES VOTED FOR VOTED AGAINST ABSTAIN --------- ------------- ------- 2. To ratify the Board of Directors' appointment of Ernst & Young LLP as the Company's independent auditors for the year ending March 31, 2004. 190,089,898 4,598,033 1,186,915
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits. 10.1 BMC Software, Inc. Deferred Compensation Plan for Outside Directors. 31.1 Certification of the Chief Executive Officer of BMC Software, Inc. pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 31.2 Certification of the Chief Financial Officer of BMC Software, Inc. pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 32.1 Certification of the Chief Executive Officer of BMC Software, Inc. pursuant to 18 U.S.C. Section 1350. 32.2 Certification of the Chief Financial Officer of BMC Software, Inc. pursuant to 18 U.S.C. Section 1350. 27 (b) Reports on Form 8-K. On July 7, 2003, BMC Software filed a Current Report on Form 8-K, dated July 7, 2003, furnishing under Item 9 (pursuant to Item 12) its news release to report its preliminary financial results for the quarter ended June 30, 2003, and reporting under Item 9 the conference call scheduled to discuss its preliminary financial results for the quarter ended June 30, 2003. On July 28, 2003, BMC Software filed a Current Report on Form 8-K, dated July 28, 2003, furnishing under Item 9 (pursuant to Item 12) its news release to report its historical financial results for the quarter ended June 30, 2003, and reporting under Item 9 the conference call scheduled to discuss its historical financial results for the quarter ended June 30, 2003 and its financial guidance for fiscal 2004. On August 1, 2003, BMC Software filed a Current Report on Form 8-K/A, dated August 1, 2003, amending its Current Report on Form 8-K dated as of November 20, 2002, which was originally filed with the Securities and Exchange Commission ("SEC") on December 4, 2002 and was amended by Amendment No. 1 filed with the SEC on February 14, 2003, to amend and restate unaudited historical financial statements and related notes for Remedy as of September 30, 2002 and for the six months then ended, and pro forma financial information of BMC after giving effect to the acquisition of Remedy, that were previously filed in Amendment No. 1 to BMC's Current Report on Form 8-K. 28 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 November 13, 2003 By: /s/ John W. Cox --------------------------------------------- John W. Cox Vice President, Chief Financial Officer and Chief Accounting Officer November 13, 2003 29 INDEX TO EXHIBITS
EXHIBIT NUMBER DESCRIPTION - ------ ----------- 10.1 BMC Software, Inc. Deferred Compensation Plan for Outside Directors. 31.1 Certification of the Chief Executive Officer of BMC Software, Inc. pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 31.2 Certification of the Chief Financial Officer of BMC Software, Inc. pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 32.1 Certification of the Chief Executive Officer of BMC Software, Inc. pursuant to 18 U.S.C. Section 1350. 32.2 Certification of the Chief Financial Officer of BMC Software, Inc. pursuant to 18 U.S.C. Section 1350.
EX-10.1 3 h10577exv10w1.txt DEFERRED COMPENSATION PLAN FOR OUTSIDE DIRECTORS EXHIBIT 10.1 BMC SOFTWARE, INC. DEFERRED COMPENSATION PLAN FOR OUTSIDE DIRECTORS Effective September 1, 2003 TABLE OF CONTENTS
ARTICLE PAGE ---- I. DEFINITIONS AND CONSTRUCTION ..............................................I-1 II. PARTICIPATION ............................................................II-1 III. ACCOUNT CREDITS AND VALUATION OF ACCOUNTS ...............................III-1 IV. DEEMED INVESTMENT OF ACCOUNTS ............................................IV-1 V. DISTRIBUTIONS .............................................................V-1 VI. ADMINISTRATION OF THE PLAN ...............................................VI-1 VII. ADMINISTRATION OF FUNDS .................................................VII-1 VIII. NATURE OF THE PLAN .....................................................VIII-1 IX. MISCELLANEOUS ............................................................IX-1
(i) BMC SOFTWARE, INC. DEFERRED COMPENSATION PLAN FOR OUTSIDE DIRECTORS WITNESSETH: WHEREAS, the Board of Directors of BMC Software, Inc., desiring to aid its outside directors in making provision for their retirement, has decided to adopt the following BMC Software, Inc. Deferred Compensation Plan for Outside Directors; NOW THEREFORE, said plan is hereby adopted as follows, effective as of September 1, 2003: (ii) I. DEFINITIONS AND CONSTRUCTION 1.1 DEFINITIONS. Where the following words and phrases appear in the Plan, they shall have the respective meanings set forth below, unless their context clearly indicates to the contrary. (1) ACCOUNT: An individual bookkeeping account for each Member to which is credited his or her Compensation deferrals pursuant to Section 3.1 and which reflects such account's changes in value as provided in Section 3.2. A Member shall have a 100% vested and nonforfeitable interest in his or her Account at all times. (2) BOARD: The Board of Directors of the Company. (3) CHANGE IN CONTROL: The occurrence of any of the following events: (i) the acquisition by any person or entity (including a "group" as contemplated by Section 13(d)(3) of the Securities Exchange Act of 1934, as amended) of at least 50% of the Company's outstanding voting stock, (ii) an unapproved change in the majority of the Board, (iii) a merger, consolidation, or similar corporate transaction in which the Company's shareholders immediately prior to the transaction do not own more than 60% of the voting stock of the surviving corporation in the transaction, or (iv) shareholder approval of the Company's liquidation, dissolution, or sale of substantially all of its assets. (4) COMMITTEE: The Corporate Governance Committee of the Board. (5) COMPANY: BMC Software, Inc. (6) COMPANY STOCK: The common stock of the Company, par value $.01 per share. (7) COMPENSATION: The retainer, fees and other special compensation paid in cash to or for the benefit of a Member for services rendered or labor performed in his or her capacity as a Director and while a Member. (8) DIRECTOR: Any individual who is a member of the Board and who is not an employee of the Company or any of its affiliates. (9) EFFECTIVE DATE: September 1, 2003. (10) MEMBER: Each Director who has become a participant in the Plan pursuant to Article II. (11) PLAN: The BMC Software, Inc. Deferred Compensation Plan for Outside Directors, as amended from time to time. (12) PLAN YEAR: The twelve-consecutive month period commencing April 1 of each year; provided, however, that the first Plan Year shall commence on the Effective Date and shall end on March 31, 2004. I - 1 (13) PLAN YEAR SUBACCOUNT(s): With respect to each Scheduled Distribution elected by a Member with respect to a Plan Year, a separate subaccount within the Member's Account to which is credited his or her Compensation deferrals pursuant to Section 3.1 for such Plan Year and which is adjusted to reflect such subaccount's changes in value as provided in Section 3.2. (14) SCHEDULED DISTRIBUTION: A distribution of a Member's Compensation deferral under the Plan for a Plan Year (as adjusted to reflect changes in value as provided in Section 3.2) that the Member has elected to have paid to him or her at the time elected by the Member under Section 3.1(c)(ii). (15) TERMINATION OF SERVICE: The termination of a Member's service on the Board for any reason whatsoever. (16) TRADING DAY: A day during which trading in securities generally occurs in the principal securities market in which Company Stock is traded. (17) TRUST: The trust, if any, established under the Trust Agreement. (18) TRUST AGREEMENT: The agreement, if any, entered into between the Company and the Trustee pursuant to Article VIII. (19) TRUST FUND: The funds and properties, if any, held pursuant to the provisions of the Trust Agreement, together with all income, profits and increments thereto. (20) TRUSTEE: The trustee or trustees qualified and acting under the Trust Agreement at any time. 1.2 NUMBER AND GENDER. Wherever appropriate herein, words used in the singular shall be considered to include the plural and words used in the plural shall be considered to include the singular. The masculine gender, where appearing in the Plan, shall be deemed to include the feminine gender. 1.3 HEADINGS. The headings of Articles and Sections herein are included solely for convenience, and if there is any conflict between such headings and the text of the Plan, the text shall control. I - 2 II. PARTICIPATION Each Director shall be eligible to participate in the Plan as of the later of the Effective Date or the date he or she becomes a Director. Except as provided in the following paragraph, a Director may become a Member, effective as of the first day of a Plan Year that is coincident with or after the date such Director becomes eligible to participate in the Plan, by executing and filing with the Committee the Compensation deferral election prescribed by the Committee prior to the start of such Plan Year. Notwithstanding the preceding paragraph, if an individual becomes a Director after the start of a Plan Year, then such individual may elect to become a Member with respect to such Plan Year by executing and filing with the Committee, within 30 days after the date such individual became a Director and in accordance with the procedures established by the Committee, the Compensation deferral election prescribed by the Committee. A Director who has filed such election in accordance with this paragraph shall become a Member as of the day such election is filed with the Committee. Until a Member incurs a Termination of Service, such Member shall remain eligible to defer Compensation hereunder for each Plan Year following his or her commencement of participation in the Plan. II - 1 III. ACCOUNT CREDITS AND VALUATION OF ACCOUNTS 3.1 MEMBER DEFERRALS. (a) In accordance with the procedures established from time to time by the Committee, a Member (or a Director, if such Director has not yet become a Member pursuant to Article II) may annually elect to defer an integral percentage of from 1% to 100% of his or her Compensation for a Plan Year. Compensation not so deferred by such election shall be received by such Member in cash. A Member's election to defer an amount of his or her Compensation pursuant to this Section shall be made by executing a Compensation deferral election in accordance with Paragraph (b) below pursuant to which the Member authorizes the Company to reduce his or her Compensation for a Plan Year in the elected amount and the Company, in consideration thereof, agrees to credit an equal amount to the Member's Account maintained under the Plan. Compensation deferrals made by a Member for a Plan Year shall be credited to his or her Account as of the date upon which the Compensation deferred would have been received by such Member in cash if he or she had not elected to defer such amount pursuant to this Section 3.1. (b) A Member's (or a Director's, if such Director has not yet become a Member pursuant to Article II) annual election to defer an integral percentage of his or her Compensation earned with respect to a Plan Year under Paragraph (a) of this Section must be made prior to the start of such Plan Year and in accordance with the procedures established by the Committee, and shall become effective as of the first day of such Plan Year (and such election shall be effective only with respect to Compensation earned on or subsequent to such date). Notwithstanding the foregoing, a deferral election made by a Director who becomes a Member pursuant to the second paragraph of Article II shall become effective as of the day such election is filed with the Committee and shall be effective only with respect to Compensation earned on or subsequent to such day. A deferral election under this Section with respect to a Plan Year shall be irrevocable. (c) In accordance with the procedures established by the Committee, for each Plan Year, a Member may elect for such Plan Year that: (i) 100% of the Member's Compensation deferred under the Plan for such Plan Year (as adjusted to reflect changes in value as provided in Section 3.2) shall be deferred until paid pursuant to Article V (other than Section 5.1) following such Member's Termination of Service; or (ii) 100% of the Member's Compensation deferred under the Plan for such Plan Year (as adjusted to reflect changes in value as provided in Section 3.2) shall be paid as a Scheduled Distribution on the last day of a Plan Year specified by such Member in such election (which specified Plan Year must end no earlier than one year III - 1 after the last day of the Plan Year to which the Compensation deferral relates) in a single lump sum cash payment. Any election made pursuant to clause (ii) of this Paragraph shall be irrevocable. With respect to any Plan Year for which an election to receive a Scheduled Distribution is not made, a Member shall be deemed to have made an election under clause (i) of this Paragraph for such Plan Year. The provisions of Section 5.1 shall apply with respect to each election by a Member to receive a Scheduled Distribution. 3.2 VALUATION OF ACCOUNTS. All amounts credited to a Member's Account (including any Plan Year Subaccounts thereunder) shall be deemed invested in accordance with the provisions of Article IV, and the balance of each Account (including any Plan Year Subaccounts thereunder) shall reflect the result of daily pricing of the assets in which such Account (and Plan Year Subaccounts) is deemed invested from time to time until the time of distribution. III - 2 IV. DEEMED INVESTMENT OF ACCOUNTS On each date a Member's deferral pursuant to Section 3.1 is credited to his or her Account, the Company shall credit to such Account (in lieu of an amount in cash) a number of hypothetical shares (including fractional shares) of Company Stock equal to (a) the cash amount of such deferral divided by (b) the closing price of a share of Company Stock on such date (or the next preceding Trading Day if such date is not a Trading Day). Dividends and other distributions that would be paid with respect to a number of shares of Company Stock equal to the number of hypothetical shares of Company Stock credited to a Member's Account as of the date of such dividend or other distribution shall be credited to the Member's Account as of such date and shall be deemed to be invested in hypothetical shares (including fractional shares) of Company Stock based on the closing price of a share of Company Stock on the date of such dividend or other distribution (or the next preceding Trading Day if such date is not a Trading Day). If the Committee determines that any distribution (whether in the form of cash, shares, other securities, or other property), recapitalization, stock split, reverse stock split, reorganization, merger, consolidation, split-up, spin-off, combination, repurchase, or exchange of shares or other securities of the Company, issuance of warrants or other rights to purchase shares or other securities of the Company, or other similar corporate transaction or event affects the Company Stock such that an adjustment is determined by the Committee to be appropriate in order to prevent dilution or enlargement of the benefits intended to be provided under the Plan, then the Committee shall, in such manner as it may deem equitable, adjust the number and type of hypothetical shares of Company Stock (or other securities or property) credited to a Member's Account. IV - 1 V. DISTRIBUTIONS 5.1 SCHEDULED DISTRIBUTIONS. Subject to the provisions of Sections 5.2, 5.3 and 5.4, with respect to each election by a Member to receive a Scheduled Distribution, as soon as administratively practicable after the last day of the Plan Year specified by such Member in such election, such Member shall receive a single lump sum distribution in an amount equal to the then value of such Member's Plan Year Subaccount for the Plan Year for which such election to receive a Scheduled Distribution was made. 5.2 DISTRIBUTIONS UPON TERMINATION OF SERVICE. (a) Subject to the provisions of Sections 5.3 and 5.4, each Member shall elect, in accordance with the procedures set forth in Paragraph (b) below, one of the following forms of payment for the payment of his or her Plan benefit following such Member's Termination of Service for a reason other than death: (i) A single lump sum payment on the one-year anniversary of such Member's Termination of Service in an amount equal to the then value of such Member's Account; or (ii) Annual installment payments for a period of two, three, four or five years, as elected by such Member, commencing on the one-year anniversary of such Member's Termination of Service. The amount of each annual installment shall be computed by dividing the value of the Member's Account as of the date such installment is to be paid by the remaining number of years in the elected installment period. (b) A Member's election as to the form of benefit payment under Paragraph (a) above shall be made in writing on the form prescribed by the Committee, in accordance with the procedures established by the Committee, and shall be made prior to the first day of such Member's participation in the Plan. In the event a Member fails to timely elect in accordance with this Paragraph the form in which his or her Plan benefit is to be paid, then such Member shall be deemed to have made an election to receive his or her Plan benefit in the form described in clause (i) of Paragraph (a) above. 5.3 DISTRIBUTIONS UPON DEATH. If a Member shall cease to be a Director by reason of his or her death or if a Member shall die after he or she becomes entitled to a distribution pursuant to Sections 5.1 or 5.2 but prior to receipt of all such distributions, then the aggregate unpaid balance in the Member's Account (computed as of the date of his or her death) shall be distributed in a single lump sum payment to the Member's designated beneficiary (determined under Section 5.5) as soon as administratively practicable after the date of the Member's death. V - 1 5.4 DISTRIBUTIONS UPON A CHANGE IN CONTROL. Notwithstanding any provision in this Article to the contrary, if a Change in Control shall occur, then the aggregate unpaid balance in each Member's Account (computed as of the date of such Change in Control) shall be paid to the Member in the form of a single lump sum payment as soon as administratively practicable, but no later than 30 days, after the date upon which the Change in Control occurs. 5.5 DESIGNATION OF BENEFICIARIES. (a) Each Member shall have the right to designate the beneficiary or beneficiaries to receive payment of the Member's benefit in the event of his or her death. Each such designation shall be made by executing the beneficiary designation form prescribed by the Committee and filing same with the Committee. Any such designation may be changed at any time by execution of a new designation in accordance with this Section. (b) If no such designation is on file with the Committee at the time of the death of the Member or such designation is not effective for any reason as determined by the Committee, then the designated beneficiary or beneficiaries to receive such benefit shall be as follows: (i) If a Member leaves a surviving spouse, his or her benefit shall be paid to such surviving spouse; (ii) If a Member leaves no surviving spouse, his or her benefit shall be paid to such Member's executor or administrator, or to his or her heirs at law if there is no administration of such Member's estate. 5.6 PAYMENT OF BENEFITS. To the extent the Trust Fund has sufficient assets, the Trustee shall pay benefits to Members or their beneficiaries, except to the extent the Company pays the benefits directly and provides adequate evidence of such payment to the Trustee. To the extent the Trustee does not or cannot pay benefits out of the Trust Fund, the benefits shall be paid by the Company. Any benefit payments made to a Member or for his or her benefit pursuant to any provision of the Plan shall be debited to such Member's Account. All benefit payments pursuant to any provision of the Plan shall be made in cash to the fullest extent practicable. 5.7 UNCLAIMED BENEFITS. In the case of a benefit payable on behalf of a Member, if the Committee is unable to locate the Member or beneficiary to whom such benefit is payable, upon the Committee's determination thereof, such benefit shall be forfeited to the Company. Notwithstanding the foregoing, if subsequent to any such forfeiture the Member or beneficiary to whom such benefit is payable makes a valid claim for such benefit, such forfeited benefit (without any adjustment for earnings or loss after the time of such forfeiture) shall be restored to the Plan by the Company and paid in accordance with the Plan. V - 2 VI. ADMINISTRATION OF THE PLAN 6.1 THE COMMITTEE. The general administration of the Plan shall be vested in the Committee. 6.2 SELF-INTEREST OF MEMBERS. No member of the Committee shall have any right to vote or decide upon any matter relating solely to himself or herself under the Plan or to vote in any case in which his or her individual right to claim any benefit under the Plan is particularly involved. In any case in which a Committee member is so disqualified to act and the remaining members cannot agree, the Board shall appoint a temporary substitute member to exercise all the powers of the disqualified member concerning the matter in which he or she is disqualified. 6.3 COMMITTEE POWERS AND DUTIES. The Committee shall supervise the administration and enforcement of the Plan according to the terms and provisions hereof and shall have all powers necessary to accomplish these purposes, including, but not by way of limitation, the right, power, and authority: (a) To make rules, regulations, and bylaws for the administration of the Plan that are not inconsistent with the terms and provisions hereof, and to enforce the terms of the Plan and the rules and regulations promulgated thereunder by the Committee; (b) To construe in its discretion all terms, provisions, conditions, and limitations of the Plan; (c) To correct any defect or to supply any omission or to reconcile any inconsistency that may appear in the Plan in such manner and to such extent as it shall deem in its discretion expedient to effectuate the purposes of the Plan; (d) To employ and compensate such accountants, attorneys, investment advisors, and other agents, employees, and independent contractors as the Committee may deem necessary or advisable for the proper and efficient administration of the Plan; (e) To determine in its discretion all questions relating to eligibility; (f) To determine whether and when a Member has incurred a Termination of Service, and the reason for such termination; (g) To make a determination in its discretion as to the right of any person to a benefit under the Plan and to prescribe procedures to be followed by distributees in obtaining benefits hereunder; (h) To receive and review reports from the Trustee as to the financial condition of the Trust Fund, including its receipts and disbursements; and VI - 1 (i) To appoint subcommittees, individuals, or any other agents as it deems advisable and to delegate to any of such appointees any or all of the powers and duties of the Committee. 6.4 COMPANY TO SUPPLY INFORMATION. The Company shall supply full and timely information to the Committee, including, but not limited to, information relating to each Member's Compensation, retirement, death, or other cause of Termination of Service and such other pertinent facts as the Committee may require. The Company shall advise the Trustee of such of the foregoing facts as are deemed necessary for the Trustee to carry out the Trustee's duties under the Plan and the Trust Agreement. When making a determination in connection with the Plan, the Committee shall be entitled to rely upon the aforesaid information furnished by the Company. 6.5 INDEMNITY. To the extent permitted by applicable law, the Company shall indemnify and save harmless each member of the Committee against any and all expenses, liabilities and claims (including legal fees incurred to defend against such liabilities and claims) arising out of their discharge in good faith of responsibilities under or incident to the Plan. Expenses and liabilities arising out of willful misconduct shall not be covered under this indemnity. This indemnity shall not preclude such further indemnities as may be available under insurance purchased by the Company or provided by the Company under any bylaw, agreement, vote of stockholders or disinterested directors or otherwise, as such indemnities are permitted under applicable law. VI - 2 VII. ADMINISTRATION OF FUNDS 7.1 PAYMENT OF EXPENSES. All expenses incident to the administration of the Plan and Trust, including but not limited to, legal, accounting, Trustee fees, and expenses of the Committee, may be paid by the Company and, if not paid by the Company, shall be paid by the Trustee from the Trust Fund. 7.2 TRUST FUND PROPERTY. All income, profits, recoveries, contributions, forfeitures and any and all moneys, securities and properties of any kind at any time received or held by the Trustee shall be held for investment purposes as a commingled Trust Fund pursuant to the terms of the Trust Agreement. The Committee shall maintain an Account in the name of each Member, but the maintenance of an Account designated as the Account of a Member shall not mean that such Member shall have a greater or lesser interest than that due him or her by operation of the Plan and shall not be considered as segregating any funds or property from any other funds or property contained in the commingled fund. No Member shall have any title to any specific asset in the Trust Fund. 7.3 CONTRIBUTIONS TO THE TRUST FUND. The amount of contributions to the Trust Fund, if any, shall be determined by and in the sole discretion of the Committee. 7.4 INVESTMENT OF THE TRUST FUND. The Committee shall have the right, power, authority, and duty to instruct the Trustee as to the management, investment, and reinvestment of the Trust Fund. VII - 1 VIII. NATURE OF THE PLAN The Company intends and desires by the adoption of the Plan to recognize the value to the Company of the past and present services of individuals covered by the Plan and to encourage and assure their continued service with the Company by making more adequate provision for their future retirement security. The Plan is intended to constitute an unfunded, unsecured plan of deferred compensation. Plan benefits herein provided are a contractual obligation of the Company which shall be paid out of the Company's general assets. Nevertheless, subject to the terms hereof and of the Trust Agreement, the Company may, in the sole discretion of the Committee, transfer money or other property to the Trustee to provide Plan benefits hereunder, and the Trustee shall pay Plan benefits to Members and their beneficiaries out of the Trust Fund. The Company, in the sole discretion of the Committee, may establish the Trust and enter into the Trust Agreement. In such event, the Company shall remain the owner of all assets in the Trust Fund and the assets shall be subject to the claims of the Company's creditors if the Company ever becomes insolvent. For purposes hereof, the Company shall be considered "insolvent" if (a) the Company is unable to pay its debts as such debts become due, or (b) the Company is subject to a pending proceeding as a debtor under the United Sates Bankruptcy Code (or any successor federal statute). The chief executive officer of the Company and the Board shall have the duty to inform the Trustee in writing if the Company becomes insolvent. Such notice given under the preceding sentence by any party shall satisfy all of the parties' duty to give notice. When so informed, the Trustee shall suspend payments to the Members and hold the assets for the benefit of the Company's general creditors. If the Trustee receives a written allegation that the Company is insolvent, the Trustee shall suspend payments to the Members and hold the Trust Fund for the benefit of the Company's general creditors, and shall determine in the manner specified in the Trust Agreement whether the Company is insolvent. If the Trustee determines that the Company is not insolvent, the Trustee shall resume payments to the Members. No Member or beneficiary shall have any preferred claim to, or any beneficial ownership interest in, any assets of the Trust Fund, and, upon commencement of participation in the Plan, each Member shall have agreed to waive his or her priority credit position, if any, under applicable state law with respect to the assets of the Trust Fund. VIII - 1 IX. MISCELLANEOUS 9.1 NO RIGHT TO CONTINUED SERVICE ON THE BOARD. The adoption and maintenance of the Plan shall not be deemed to be a contract between the Company and any person or to be consideration for the employment of any person. Nothing herein contained shall be deemed to give any person any right with respect to continuation of membership on the Board. 9.2 ALIENATION OF INTEREST FORBIDDEN. The interest of a Member or his or her beneficiary or beneficiaries hereunder may not be sold, transferred, assigned, or encumbered in any manner, either voluntarily or involuntarily, and any attempt to anticipate, alienate, sell, transfer, assign, pledge, encumber, or charge the same shall be null and void; neither shall the benefits hereunder be liable for or subject to the debts, contracts, liabilities, engagements or torts of any person to whom such benefits or funds are payable, nor shall they be an asset in bankruptcy or subject to garnishment, attachment or other legal or equitable proceedings. 9.3 WITHHOLDING. All Compensation deferrals and payments provided for hereunder shall be subject to applicable withholding and other deductions as shall be required of the Company under any applicable local, state or federal law. 9.4 AMENDMENT AND TERMINATION. The Committee or the Board may from time to time, in their discretion, amend, in whole or in part, any or all of the provisions of the Plan; provided, however, that no amendment may be made that would impair the rights of a Member with respect to amounts already allocated to his or her Account. The Committee or the Board may terminate the Plan at any time. In the event that the Plan is terminated, the balance in a Member's Account shall be paid to such Member or his or her designated beneficiary in the manner specified by the Committee or the Board, as applicable, which may include the payment of a single lump sum payment in full satisfaction of all of such Member's or beneficiary's benefits hereunder. Notwithstanding the foregoing, upon the occurrence of a Change in Control, the Plan may not be amended or terminated in any manner that affects the rights of a Member pursuant to Section 5.4. 9.5 SEVERABILITY. If any provision of the Plan shall be held illegal or invalid for any reason, said illegality or invalidity shall not affect the remaining provisions hereof; instead, each provision shall be fully severable and the Plan shall be construed and enforced as if said illegal or invalid provision had never been included herein. 9.6 GOVERNING LAWS. ALL PROVISIONS OF THE PLAN SHALL BE CONSTRUED IN ACCORDANCE WITH THE LAWS OF TEXAS EXCEPT TO THE EXTENT PREEMPTED BY FEDERAL LAW. IX - 1 EXECUTED this ______ day of _______________, 2003. BMC SOFTWARE, INC. By: ---------------------------------- Name: ---------------------------- Title: --------------------------- (iii) EX-31.1 4 h10577exv31w1.txt CERTIFICATION OF CEO PURSUANT TO SECTION 302 EXHIBIT 31.1 CERTIFICATION OF CHIEF EXECUTIVE OFFICER OF BMC SOFTWARE, INC. PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 I, Robert E. Beauchamp, certify that: 1. I have reviewed this Quarterly Report on Form 10-Q of BMC Software, Inc. (the "registrant"); 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and we have: a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b. Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c. Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): a. All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: November 13, 2003 By: /s/ ROBERT E. BEAUCHAMP -------------------------------- Robert E. Beauchamp Chief Executive Officer EX-31.2 5 h10577exv31w2.txt CERTIFICATION OF CFO PURSUANT TO SECTION 302 EXHIBIT 31.2 CERTIFICATION OF CHIEF FINANCIAL OFFICER OF BMC SOFTWARE, INC. PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 I, John W. Cox, certify that: 1. I have reviewed this Quarterly Report on Form 10-Q of BMC Software, Inc. (the "registrant"); 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and we have: a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b. Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c. Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): a. All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: November 13, 2003 By: /s/ JOHN W. COX ------------------------------------- John W. Cox Chief Financial Officer EX-32.1 6 h10577exv32w1.txt CERTIFICATION OF CEO PURSUANT TO SECTION 906 EXHIBIT 32.1 CERTIFICATION OF CHIEF EXECUTIVE OFFICER OF BMC SOFTWARE, INC. PURSUANT TO 18 U.S.C. Section 1350 Based on my knowledge, I, Robert E. Beauchamp, Chief Executive Officer of BMC Software, Inc. (the "Company"), hereby certify that the accompanying report on Form 10-Q for the period ending September 30, 2003 and filed with the Securities and Exchange Commission on the date hereof pursuant to Section 13(a) of the Securities Exchange Act of 1934 (the "Report") by the Company fully complies with the requirements of that section. Based on my knowledge, I further certify that the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. /s/ ROBERT E. BEAUCHAMP ------------------------------ Robert E. Beauchamp November 13, 2003 EX-32.2 7 h10577exv32w2.txt CERTIFICATION OF CFO PURSUANT TO SECTION 906 EXHIBIT 32.2 CERTIFICATION OF CHIEF FINANCIAL OFFICER OF BMC SOFTWARE, INC. PURSUANT TO 18 U.S.C. Section 1350 Based on my knowledge, I, John W. Cox, Chief Financial Officer of BMC Software, Inc. (the "Company"), hereby certify that the accompanying report on Form 10-Q for the period ending September 30, 2003 and filed with the Securities and Exchange Commission on the date hereof pursuant to Section 13(a) of the Securities Exchange Act of 1934 (the "Report") by the Company fully complies with the requirements of that section. Based on my knowledge, I further certify that the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. /s/ JOHN W. COX ---------------------------- John W. Cox November 13, 2003 -----END PRIVACY-ENHANCED MESSAGE-----