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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED DECEMBER 31, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 0-17136
BMC SOFTWARE, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 74-2126120
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
BMC SOFTWARE, INC.
2101 CITYWEST BOULEVARD
HOUSTON, TEXAS 77042-2827
(Address of principal executive officer) (Zip Code)
Registrant's telephone number including area code: (713) 918-8800
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
As of February 9, 2001, there were outstanding 243,632,057 shares of Common
Stock, par value $.01, of the registrant.
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BMC SOFTWARE, INC. AND SUBSIDIARIES
QUARTER ENDED DECEMBER 31, 2000
INDEX
PAGE
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of March 31, 2000 and
December 31, 2000 (Unaudited)....................................... 3
Condensed Consolidated Statements of Earnings and Comprehensive
Income for the three months and nine months ended December 31,
1999 and 2000 (Unaudited) .......................................... 4
Condensed Consolidated Statements of Cash Flows for the nine
months ended December 31, 1999 and 2000 (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............... 23
PART II. OTHER INFORMATION
Item 1. Legal Proceedings........................................................ 24
Item 4. Submission of Matters to a Vote of Security Holders...................... 24
Item 6. Exhibits and Reports on Form 8-K......................................... 24
Signatures............................................................... 25
2
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
BMC SOFTWARE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN MILLIONS)
MARCH 31, DECEMBER 31,
2000 2000
----------- -----------
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents.................................... $ 152.4 $ 148.7
Investment securities........................................ 102.8 146.9
Trade accounts receivable, net............................... 374.1 285.3
Trade finance receivables, current........................... 158.1 173.5
Other current assets......................................... 108.8 114.8
---------- -----------
Total current assets.................................. 896.2 869.2
Property and equipment, net.................................... 337.5 424.7
Software development costs and related assets, net............. 193.4 227.6
Investment securities.......................................... 820.3 726.4
Long-term finance receivables.................................. 222.6 203.6
Acquired technology, net....................................... 109.7 98.0
Goodwill and other intangibles, net............................ 329.1 344.3
Other long-term assets......................................... 53.3 52.6
---------- -----------
$ 2,962.1 $ 2,946.4
========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Trade accounts payable....................................... $ 29.3 $ 52.4
Accrued liabilities and other................................ 185.0 148.4
Short-term borrowings........................................ 263.0 166.0
Current portion of deferred revenue.......................... 406.6 433.9
---------- -----------
Total current liabilities............................. 883.9 800.7
Deferred revenue............................................... 288.6 350.5
Other long-term liabilities.................................... 8.7 7.9
---------- -----------
Total liabilities..................................... 1,181.2 1,159.1
Commitments and contingencies
Stockholders' equity:
Preferred stock.............................................. -- --
Common stock................................................. 2.4 2.5
Additional paid-in capital................................... 401.1 526.3
Retained earnings............................................ 1,385.6 1,392.5
Accumulated other comprehensive income (loss)................ (3.4) (16.7)
---------- -----------
1,785.7 1,904.6
Less treasury stock, at cost............................... -- (86.2)
Less unearned portion of restricted stock compensation..... (4.8) (31.1)
---------- -----------
Total stockholders' equity............................ 1,780.9 1,787.3
---------- -----------
$ 2,962.1 $ 2,946.4
========== ===========
See the accompanying notes to condensed consolidated financial statements.
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BMC SOFTWARE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
AND COMPREHENSIVE INCOME
(IN MILLIONS, EXCEPT PER SHARE DATA)
(UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
DECEMBER 31, DECEMBER 31,
----------------------- ---------------------
1999 2000 1999 2000
----------- ----------- --------- ---------
Revenues:
License.............................................................. $ 288.3 $ 228.9 $ 850.6 $ 632.5
Maintenance.......................................................... 124.9 133.6 355.8 388.6
Professional services................................................ 13.2 23.0 36.4 60.1
--------- -------- --------- ---------
Total revenues............................................... 426.4 385.5 1,242.8 1,081.2
--------- -------- --------- ---------
Selling and marketing expenses......................................... 139.5 154.4 402.9 439.4
Research and development expenses...................................... 54.6 56.6 161.4 173.2
Cost of maintenance services and product licenses...................... 43.7 54.6 121.8 154.8
Cost of professional services.......................................... 19.1 24.0 52.5 68.1
General and administrative expenses.................................... 37.4 36.4 101.4 112.9
Acquired research and development...................................... -- 0.4 80.8 18.1
Amortization of goodwill, acquired technology and intangibles.......... 36.2 46.7 102.8 131.1
Legal settlement....................................................... 16.6 -- 55.4 --
Merger-related costs and compensation charges.......................... 0.4 2.4 14.3 7.8
--------- -------- --------- ---------
Total operating expenses..................................... 347.5 375.5 1,093.3 1,105.4
--------- -------- --------- ---------
Operating income (loss) ..................................... 78.9 10.0 149.5 (24.2)
Interest expense....................................................... (5.8) (1.9) (19.0) (7.8)
Interest and other income, net......................................... 16.5 22.5 50.4 60.2
--------- -------- --------- ---------
Other income, net............................................ 10.7 20.6 31.4 52.4
--------- -------- --------- ---------
Earnings before income taxes................................. 89.6 30.6 180.9 28.2
Income taxes........................................................... 20.4 8.7 36.4 8.8
--------- -------- --------- ---------
Net earnings................................................. $ 69.2 $ 21.9 $ 144.5 $ 19.4
========= ======== ========= =========
Basic earnings per share............................................... $ 0.28 $ 0.09 $ 0.60 $ 0.08
========= ======== ========= =========
Diluted earnings per share............................................. $ 0.27 $ 0.09 $ 0.57 $ 0.08
========= ======== ========= =========
Shares used in computing basic earnings per share...................... 242.7 244.7 240.0 245.2
========= ======== ========= =========
Shares used in computing diluted earnings per share.................... 255.4 249.3 252.8 252.5
========= ======== ========= =========
Comprehensive Income:
Net earnings......................................................... $ 69.2 $ 21.9 $ 144.5 $ 19.4
Foreign currency translation adjustment, net of taxes of
($0.6), $--, $1.1 and $--....................................... (1.8) (0.5) 3.2 (5.9)
Unrealized gain (loss) on securities available for sale:
Unrealized gain (loss), net of taxes of $(1.2), $(0.6),
$1.9 and $(1.1)................................................ (3.4) (1.1) 5.4 (2.1)
Realized (gain) loss included in net earnings, net of taxes of
$(0.2), ($0.1), $0.1 and $--................................... 0.6 0.1 (0.4) (0.1)
--------- -------- --------- ---------
Net unrealized gain (loss) on securities available for sale (2.8) (1.0) 5.0 (2.2)
Unrealized gain (loss) on derivative instruments:
Unrealized gain (loss), net of taxes of $0.9, $(1.5), $1.1
and $2.8....................................................... 2.7 (2.8) 3.2 5.2
Realized (gain) included in net earnings, net of taxes of
$0.3, $2.2, $0.1 and $5.6...................................... (0.9) (4.1) (0.3) (10.4)
--------- -------- --------- ---------
Net unrealized gain (loss) on derivative instruments......... 1.8 (6.9) 2.9 (5.2)
--------- -------- --------- ---------
Comprehensive income......................................... $ 66.4 $ 13.5 $ 155.6 $ 6.1
========= ======== ========= =========
See the accompanying notes to condensed consolidated financial statements.
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BMC SOFTWARE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN MILLIONS)
(UNAUDITED)
NINE MONTHS ENDED
DECEMBER 31,
----------------------
1999 2000
-------- --------
Cash flows from operating activities:
Net earnings ........................................................................ $ 144.5 $ 19.4
Adjustments to reconcile net earnings to net cash provided by operating activities:
Acquired research and development and merger-related costs and
compensation charges ......................................................... 80.8 25.9
Depreciation and amortization .................................................... 149.5 228.2
Gain on sale of investment securities ............................................ (1.3) (0.1)
Gain on sale of financial instrument ............................................. -- (2.9)
Gain from real estate transaction ................................................ -- (6.3)
Earned portion of restricted stock compensation and other compensatory
stock issuances ............................................................... 2.1 8.6
Net change in receivables, payables, deferred revenue and other components of
working capital ............................................................... (206.2) 160.0
-------- --------
Net cash provided by operating activities ................................... 169.4 432.8
-------- --------
Cash flows from investing activities:
Cash paid for technology acquisitions and other investments, net of cash acquired ... (649.1) (112.0)
Purchases of property and equipment ................................................. (72.6) (135.3)
Capitalization of software development costs and related assets ..................... (56.0) (74.5)
Purchases of investment securities .................................................. (168.7) (128.4)
Maturities of/proceeds from sales of investment securities .......................... 88.1 166.5
Proceeds from sale of financial instrument .......................................... -- 9.4
Proceeds from real estate transaction ............................................... -- 6.5
Decrease in long-term finance receivables ........................................... 42.3 19.0
-------- --------
Net cash used in investing activities ....................................... (816.0) (248.8)
-------- --------
Cash flows from financing activities:
Proceeds from borrowings ............................................................ 498.8 35.0
Payments on borrowings .............................................................. (180.0) (132.5)
Stock options exercised and other ................................................... 80.7 26.1
Treasury stock acquired ............................................................. -- (110.4)
-------- --------
Net cash provided by (used in) financing activities ......................... 399.5 (181.8)
-------- --------
Effect of exchange rate changes on cash ............................................... 4.3 (5.9)
-------- --------
Net change in cash and cash equivalents ............................................... (242.8) (3.7)
Cash and cash equivalents, beginning of period ........................................ 347.9 152.4
-------- --------
Cash and cash equivalents, end of period .............................................. $ 105.1 $ 148.7
======== ========
Supplemental disclosure of cash flow information:
Cash paid for interest, net of amounts capitalized .................................. $ 14.2 $ 7.8
Cash paid for income taxes .......................................................... $ 30.8 $ 16.4
Common stock and options issued and liabilities assumed in acquisitions ............. $ -- $ 57.6
See the accompanying notes to condensed consolidated financial statements.
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BMC SOFTWARE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(1) BASIS OF PRESENTATION
The accompanying condensed consolidated financial statements include the
accounts of BMC Software, Inc. and its wholly owned subsidiaries (collectively,
the Company or BMC). All significant intercompany balances and transactions have
been eliminated in consolidation. Certain amounts previously reported have been
reclassified to ensure 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, 2000, as filed with
the Securities and Exchange Commission on Form 10-K.
The Company acquired New Dimension Software, Ltd. (New Dimension) effective
April 14, 1999, Evity, Inc. (Evity) effective April 25, 2000, and OptiSystems
Solutions, Ltd. (OptiSystems) effective August 8, 2000, in purchase
transactions. As such, their results have been included in the Company's fiscal
2000 and 2001 financial results from their respective acquisition dates.
(2) EARNINGS PER SHARE
Statement of Financial Accounting Standards (SFAS) No. 128, "Earnings Per
Share" requires dual presentation of basic and diluted earnings per share (EPS).
Basic EPS is computed by dividing net income by the weighted average number of
common shares outstanding for the period. Diluted EPS reflects the potential
dilution that could occur if securities or other contracts to issue common stock
were exercised or converted into common stock. For purposes of this calculation,
outstanding stock options and unearned restricted stock are considered potential
common shares using the treasury stock method. For the three months ended
December 31, 2000, the treasury stock method effect of 30.7 million weighted
options and 1.0 million weighted unearned restricted shares has been excluded
from the calculation of EPS as it is anti-dilutive. For the nine months ended
December 31, 2000, the treasury stock method effect of 19.4 million weighted
options and 0.9 million weighted unearned restricted shares has been excluded
from the calculation of EPS as it is anti-dilutive. The following table
summarizes the basic and diluted EPS computations for the three months and nine
months ended December 31, 1999 and 2000:
THREE MONTHS ENDED NINE MONTHS ENDED
DECEMBER 31, DECEMBER 31,
------------------- -------------------
1999 2000 1999 2000
------- ------- ------- -------
(IN MILLIONS, EXCEPT PER SHARE DATA)
Basic earnings per share:
Net earnings ........................................ $ 69.2 $ 21.9 $ 144.5 $ 19.4
------- ------- ------- -------
Weighted average number of common shares ............ 242.7 244.7 240.0 245.2
------- ------- ------- -------
Basic earnings per share ............................ $ 0.28 $ 0.09 $ 0.60 $ 0.08
======= ======= ======= =======
Diluted earnings per share:
Net earnings ........................................ $ 69.2 $ 21.9 $ 144.5 $ 19.4
------- ------- ------- -------
Weighted average number of common shares ............ 242.7 244.7 240.0 245.2
Incremental shares from assumed conversions of
options and other stock .......................... 12.7 4.6 12.8 7.3
------- ------- ------- -------
Adjusted weighted average number of common shares ... 255.4 249.3 252.8 252.5
------- ------- ------- -------
Diluted earnings per share .......................... $ 0.27 $ 0.09 $ 0.57 $ 0.08
======= ======= ======= =======
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(3) REVENUE RECOGNITION
The Company generates revenues from licensing software, providing
maintenance and support for previously licensed products and providing other
professional services. The Company generally utilizes written contracts as the
means to establish the terms and conditions by which the Company's products,
support and services are sold to its customers.
The Company recognizes revenue in accordance with the American Institute of
Certified Public Accountants Statement of Position ("SOP") 97-2, "Software
Revenue Recognition." This statement provides guidance on applying generally
accepted accounting principles in recognizing revenue on software transactions.
In applying SOP 97-2, the Company recognizes software license fees upon meeting
the following four criteria: execution of the signed contract, delivery of the
software to the customer, determination that the software license fees are fixed
and determinable, and determination that the collection of the software license
fees is probable. In instances when any one of the four criteria are not met,
the Company will either defer recognition of the software license revenue until
the criteria are met or will recognize the software license revenue on a ratable
basis, as required by SOP 97-2. Maintenance and support revenues are recognized
ratably over the term of the arrangement on a straight-line basis. Revenues from
other professional services are typically recognized as the services are
performed for time and materials contracts or on a percentage-of-completion
basis.
When several elements, including software licenses, maintenance and support
and professional services, are sold to a customer through a single contract, the
revenues from such multiple-element arrangements are allocated to each element
based upon the residual method, whereby the fair value of the undelivered
elements of the contract is deferred. The Company has established
vendor-specific objective evidence of fair value for maintenance and support and
other professional services. Accordingly, software license fees are recognized
under the residual method for arrangements in which the software is licensed
with maintenance and support and/or other professional services, and where the
maintenance and support and/or other professional services are not essential to
the functionality of the delivered software. In those instances where other
professional services are essential to the functionality of the software
licenses, contract accounting is applied to both the software license and
services elements of the arrangement.
(4) TECHNOLOGY ACQUISITIONS
On April 25, 2000, the Company acquired all of the outstanding shares of
Evity in a transaction accounted for as a purchase. The aggregate purchase price
totaled $67.3 million, including cash consideration of $10.0 million, 1.0
million shares of common stock, 0.4 million common stock options and transaction
costs, and was allocated as follows: $2.5 million to acquired technology, $57.8
million to goodwill and other intangibles and $7.0 million (10% of the purchase
price) to purchased in-process research and development (IPR&D). Net tangible
assets acquired were insignificant. All intangible assets are being amortized on
a straight-line basis over three years, which represents the estimated future
periods to be benefited.
On August 8, 2000, the Company acquired all of the outstanding shares of
OptiSystems in a transaction accounted for as a purchase. The aggregate purchase
price totaled $71.5 million in cash, including transaction costs, and was
allocated as follows: $6.3 million to acquired technology, $55.2 million to
goodwill and other intangibles, $4.0 million to equipment, receivables and other
non-software assets, net of liabilities assumed, and $6.0 million (8% of the
purchase price) to purchased in-process research and development. All intangible
assets are being amortized on a straight-line basis over three years, which
represents the estimated future periods to be benefited.
The amounts allocated to purchased IPR&D were charged to expense in the
quarters ended June 30, 2000, and September 30, 2000, respectively, and
represent the present value of the estimated after-tax cash flows expected to be
generated by the purchased technology, which at the acquisition dates, had not
yet reached technological feasibility. The cash flow estimates for revenues, for
both completed and in-process technologies, were based on estimates of relevant
market sizes and growth factors, expected trends in technology, and the nature
and expected timing of new product introductions by the Company and its
competitors. Estimated operating expenses and income taxes were deducted from
estimated revenue projections to arrive at estimated after-tax cash flows.
Estimated operating expenses included cost of goods sold, selling and marketing
expenses, general and administrative expenses, and research and development,
including estimated costs to maintain the products once they have been
introduced into the market and are generating revenue. The rates utilized to
discount the estimated cash flows for in-process technologies and developed
technologies, respectively, were 30% and 20% for Evity and 25% and 20% for
OptiSystems, and were based primarily on estimated cost of capital calculations.
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The following unaudited pro forma results of operations for the three months
and nine months ended December 31, 1999 and 2000, are as if the acquisitions of
Evity and OptiSystems had occurred at the beginning of each period presented.
The pro forma consolidated results do not purport to be indicative of results
that would have occurred had the acquisitions been in effect for the periods
presented, nor do they purport to be indicative of the results that will be
obtained in the future. The pro forma net earnings exclude the effect of the
$7.0 million and $6.0 million write-offs of IPR&D associated with the
acquisitions, respectively, in accordance with generally accepted accounting
principles.
THREE MONTHS ENDED NINE MONTHS ENDED
DECEMBER 31, DECEMBER 31,
--------------------- ---------------------
1999 2000 1999 2000
-------- -------- -------- --------
(IN MILLIONS, EXCEPT PER SHARE DATA)
Revenues ..................... $ 428.3 $ 385.5 $1,247.9 $1,082.2
Net earnings ................. $ 55.0 $ 21.9 $ 101.9 $ 19.5
Basic EPS .................... $ 0.23 $ 0.09 $ 0.42 $ 0.08
Diluted EPS .................. $ 0.21 $ 0.09 $ 0.40 $ 0.08
In connection with the Evity acquisition, 0.6 million restricted shares of
common stock were issued to certain employee shareholders of Evity. These shares
vest monthly over a two-year period based on continued employment with the
Company. The $25.1 million fair value of these shares was recorded as unearned
restricted stock compensation, a component of stockholders' equity, at the
acquisition date, and is being charged to expense as merger-related costs and
compensation charges over the service period.
During fiscal 2001, the Company completed other minor technology
acquisitions. The aggregate purchase price for these transactions totaled $13.0
million in cash and $0.3 million in common stock options and was allocated as
follows: $7.2 million to acquired technology, $5.7 million to goodwill and other
intangibles, and $0.4 million to purchased in-process research and development.
All intangible assets are being amortized on a straight-line basis over
approximately three years, which represents the estimated future periods to be
benefited.
During fiscal 1999, the Company entered into a technology agreement with
Envive Corporation and allocated $6.4 million of the committed transaction costs
to software assets, prepaid royalties and interest. During the first quarter of
fiscal 2001, this agreement was terminated and the remaining assets, totaling
$4.7 million, were charged to expense. This expense is included as an acquired
research and development charge in the accompanying statement of earnings and
comprehensive income for the nine months ended December 31, 2000.
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(5) SEGMENT REPORTING
The Company operates primarily in one segment, distributing its enterprise
systems management software products. The Company also provides consulting and
education services related to these software products. During the first quarter
of fiscal 2001, management began reviewing the results and assessing the
performance of the professional services operations as a separate segment within
the Company. The following table reflects the results of the software and
professional services segments for the three months and nine months ended
December 31, 1999 and 2000. Performance is measured based on operating margins,
which reflect only the direct controllable expenses of the segment and do not
include allocation of general and administrative expenses, amortization of
goodwill, acquired technology and intangibles, one-time charges, other income,
net, and income taxes. Total assets of the professional services segment are not
significant.
THREE MONTHS ENDED NINE MONTHS ENDED
DECEMBER 31, DECEMBER 31,
---------------------- ----------------------
1999 2000 1999 2000
-------- -------- -------- --------
(IN MILLIONS)
Software:
License and maintenance revenues ................... $ 413.2 $ 362.5 $1,206.4 $1,021.1
Operating expenses ................................. 237.8 265.6 686.1 767.4
-------- -------- -------- --------
Operating margin ........................... 175.4 96.9 520.3 253.7
-------- -------- -------- --------
Professional services:
Revenues ........................................... 13.2 23.0 36.4 60.1
Operating expenses ................................. 19.1 24.0 52.5 68.1
-------- -------- -------- --------
Operating loss ............................. (5.9) (1.0) (16.1) (8.0)
-------- -------- -------- --------
General and administrative expenses .................. 37.4 36.4 101.4 112.9
Acquired research and development .................... -- 0.4 80.8 18.1
Amortization of goodwill, acquired technology and
intangibles ........................................ 36.2 46.7 102.8 131.1
Legal settlement ..................................... 16.6 -- 55.4 --
Merger-related costs and compensation charges ........ 0.4 2.4 14.3 7.8
Other income, net .................................... 10.7 20.6 31.4 52.4
-------- -------- -------- --------
Consolidated earnings before income taxes ............ $ 89.6 $ 30.6 $ 180.9 $ 28.2
======== ======== ======== ========
Revenues are tracked by both geography and product categories based upon the
predominant operating environments of enterprise computing: mainframe and
distributed systems. The Company is not organized into business units along
these product categories nor does it capture expenses on this basis. Revenues
relating to product categories are as follows:
THREE MONTHS ENDED NINE MONTHS ENDED
DECEMBER 31, DECEMBER 31,
--------------------- ---------------------
1999 2000 1999 2000
-------- -------- -------- --------
(IN MILLIONS)
REVENUES
Mainframe:
License ............................................ $ 180.8 $ 132.1 $ 543.1 $ 354.8
Maintenance ........................................ 91.7 94.1 267.0 272.8
-------- -------- -------- --------
Total mainframe revenues ................... 272.5 226.2 810.1 627.6
Distributed systems:
License ............................................ 107.5 96.8 307.5 277.7
Maintenance ........................................ 33.2 39.5 88.8 115.8
-------- -------- -------- --------
Total distributed systems revenues ......... 140.7 136.3 396.3 393.5
-------- -------- -------- --------
Total license and maintenance revenues ..... $ 413.2 $ 362.5 $1,206.4 $1,021.1
======== ======== ======== ========
Mainframe revenues relate to products which operate primarily within the IBM
mainframe operating system environment. Distributed systems revenues relate to
all non-mainframe products which operate primarily within the Unix, MS Windows
2000 and other distributed systems environments. Also classified as distributed
systems products are cross-platform products that operate in both environments.
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The table below summarizes revenues by geographic region.
THREE MONTHS ENDED NINE MONTHS ENDED
DECEMBER 31, DECEMBER 31,
-------------------- --------------------
1999 2000 1999 2000
-------- -------- -------- --------
(IN MILLIONS)
REVENUES
North America...................... $ 246.3 $ 202.5 $ 800.4 $ 634.5
Europe, Middle East and Africa..... 144.5 144.6 351.4 344.9
Asia Pacific and Other............. 35.6 38.4 91.0 101.8
-------- -------- -------- --------
Total revenues............. $ 426.4 $ 385.5 $1,242.8 $1,081.2
======== ======== ======== ========
(6) MERGER-RELATED COSTS
During the nine months ended December 31, 2000, the Company paid $2.5
million of facility and termination costs under the plan of restructuring
initiated in March 1999, in connection with the merger with Boole & Babbage,
Inc. (Boole). During the quarter ended December 31, 2000, $1.0 million of
previously accrued merger costs were reversed, as certain lease and severance
obligations were satisfied at amounts below the amounts originally estimated.
This reversal is reflected as a reduction of merger-related costs and
compensation charges in the accompanying statements of earnings and
comprehensive income for the three months and nine months ended December 31,
2000. An accrual of $3.1 million remains at December 31, 2000, for facility and
termination payments to be made in future periods.
(7) STOCK INCENTIVE PLANS
On August 9, 2000, the Company granted 9.7 million common stock options to
employees. The exercise price of these options was equal to the fair market
value of the Company's common stock on that date.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
This section of the Form 10-Q contains certain forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended, which are
identified by the use of the words "believe," "expect," "anticipate," "will,"
"contemplate," "would" and similar expressions that contemplate future events.
Numerous important factors, risks and uncertainties affect our operating
results, including, without limitation, those contained in this report, and
could cause our actual results to differ materially from the results implied by
these or any other forward-looking statements made by us or on our behalf. There
can be no assurance that future results will meet expectations. You should pay
particular attention to the important risk factors and cautionary statements
described in the section of this Report entitled "Certain Risks and
Uncertainties That Could Affect Future Operating Results." It is important that
the historical discussion below be read together with the attached condensed
consolidated financial statements and notes thereto, with the discussion of such
risks and uncertainties and with the audited financial statements and notes
thereto, and Management's Discussion and Analysis of Results of Operations and
Financial Condition, contained in the Company's Form 10-K for fiscal 2000.
A. RESULTS OF OPERATIONS AND FINANCIAL CONDITION
The following table sets forth, for the periods indicated, the percentages
that selected items in the Condensed Consolidated Statements of Earnings and
Comprehensive Income bear to total revenues. These comparisons of financial
results are not necessarily indicative of future results.
PERCENTAGE OF TOTAL REVENUE
THREE MONTHS ENDED NINE MONTHS ENDED
DECEMBER 31, DECEMBER 31,
----------------------- -----------------------
1999 2000 1999 2000
-------- -------- -------- --------
Revenues:
License ............................................ 67.6% 59.4% 68.5% 58.5%
Maintenance ........................................ 29.3 34.6 28.6 35.9
Professional services .............................. 3.1 6.0 2.9 5.6
-------- -------- -------- --------
Total revenues ................................. 100.0 100.0 100.0 100.0
Selling and marketing expenses ....................... 32.7 40.0 32.4 40.7
Research and development expenses .................... 12.8 14.7 13.0 16.0
Cost of maintenance services and product licenses .... 10.2 14.2 9.8 14.3
Cost of professional services ........................ 4.5 6.2 4.2 6.3
General and administrative expenses .................. 8.8 9.4 8.2 10.4
Acquired research and development .................... -- 0.1 6.5 1.7
Amortization of goodwill, acquired technology and
intangibles ........................................ 8.5 12.1 8.3 12.1
Legal settlement ..................................... 3.9 -- 4.5 --
Merger-related costs and compensation charges ........ 0.1 0.6 1.1 0.7
-------- -------- -------- --------
Operating income (loss) ......................... 18.5 2.7 12.0 (2.2)
Interest expense ..................................... (1.4) (0.5) (1.5) (0.7)
Interest and other income, net ....................... 3.9 5.8 4.0 5.5
-------- -------- -------- --------
Other income, net ............................... 2.5 5.3 2.5 4.8
Earnings before income taxes .................... 21.0 8.0 14.5 2.6
Income taxes ......................................... 4.8 2.3 2.9 0.8
-------- -------- -------- --------
Net earnings ............................... 16.2% 5.7% 11.6% 1.8%
======== ======== ======== ========
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REVENUES
THREE MONTHS ENDED NINE MONTHS ENDED
DECEMBER 31, DECEMBER 31,
--------------------- ---------------------
1999 2000 CHANGE 1999 2000 CHANGE
-------- -------- ------- -------- -------- -------
(IN MILLIONS) (IN MILLIONS)
License:
North America ............................... $ 163.7 $ 110.2 (32.7)% $ 560.8 $ 358.9 (36.0)%
International ............................... 124.6 118.7 (4.7)% 289.8 273.6 (5.6)%
-------- -------- -------- --------
Total license revenues ................ 288.3 228.9 (20.6)% 850.6 632.5 (25.6)%
Maintenance:
North America ............................... 75.1 80.0 6.5% 216.4 242.5 12.1%
International ............................... 49.8 53.6 7.6% 139.4 146.1 4.8%
-------- -------- -------- --------
Total maintenance revenues ............. 124.9 133.6 7.0% 355.8 388.6 9.2%
Professional services:
North America ............................... 7.5 12.3 64.0% 23.2 33.1 42.7%
International ............................... 5.7 10.7 87.7% 13.2 27.0 104.5%
-------- -------- -------- --------
Total professional services revenues ... 13.2 23.0 74.2% 36.4 60.1 65.1%
-------- -------- -------- --------
Total revenues ........................ $ 426.4 $ 385.5 (9.6)% $1,242.8 $1,081.2 (13.0)%
======== ======== ======== ========
Product Line Revenues
At December 31, 2000, we marketed over 450 software products designed to
improve the availability, performance and recoverability of enterprise
applications, databases and other information technology ("IT") systems
components operating in mainframe, distributed computing and Internet
environments. Our mainframe products accounted for 64% and 59% of total
revenues, respectively, in the quarters ended December 31, 1999 and 2000, and
65% and 58% of total revenues, respectively, for the nine-month periods ended
December 31, 1999 and 2000. Total revenues from mainframe products for the
three-month and nine-month periods ended December 31, 2000 declined 17% and 23%
as compared to the respective prior year periods. In general, the revenues from
these products are driven largely by our customers' demand for additional
processing capacity. The decline in the fiscal 2001 periods resulted primarily
from a decrease in enterprise license transactions during those periods and a
reduction in license upgrade fees as discussed below. Demand weakness was
experienced across the board in the June, September and December quarters by
independent software vendors with mainframe product portfolios. We believe that
this indicates that external market factors contributed significantly to this
weakness. While it is impossible to assign weights to any individual factors,
market factors that may have contributed to this weakness and the resultant
negative effect on license revenues experienced by us and our competitors
included uncertainties associated with the roll-out of IBM's Z-series mainframe
product family and workload-based pricing model and continued customer
absorption of MIPS capacity purchased in association with Year 2000 compliance
programs. Though total mainframe revenues for the third quarter of fiscal 2001
were down compared to the prior year, such revenues increased 34% sequentially
over the second quarter of fiscal 2001.
The high performance utilities and administrative tools for IBM's IMS and
DB2 database management systems comprise the largest portion of our
mainframe-based revenues and total revenues. Our tools and utilities for IMS and
DB2 databases collectively contributed 35% and 33% of total revenues for the
three months ended December 31, 1999 and 2000, and 40% and 34% of total revenues
for the nine-month periods ended December 31, 1999 and 2000, respectively. Total
revenues and license revenues from these product lines combined decreased 16%
and 26%, respectively, in the third quarter of fiscal 2001, and declined 26% and
40% in the nine-month period ended December 31, 2000, compared to the respective
prior year periods. The balance of our mainframe products contributed 29% and
26% of total revenues for the three months ended December 31, 1999 and 2000,
respectively, and 25% and 24% of total revenues for the nine-month periods ended
December 31, 1999 and 2000. Total revenues and license revenues for these other
mainframe products decreased 18% and 28%, respectively, in the third quarter of
fiscal 2001 and declined 16% and 26% in the nine-month period ended December 31,
2000.
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Our principal distributed systems management product lines are the PATROL(R)
application and data management suite, the PATROL Performance Manager products,
the PATROL for Prediction and Capacity Management products, the PATROL
Enterprise Manager products, the INCONTROL(TM) CONTROL-M(R) job scheduling,
CONTROL-D(R) output management and CONTROL-SA(R) security administration
products, the PATROL DB database administration products, and a management suite
for IBM's MQSeries middleware technology. Late in the first quarter of fiscal
2001, we introduced PATROL 2000, the first major integration of the PATROL,
BEST/1(R) and COMMAND/POST(R) products into a comprehensive solution for
distributed systems. In total, the distributed systems product lines contributed
33% and 35% of total revenues for the quarters ended December 31, 1999 and 2000,
respectively, and 37% and 42% of license revenues for the same periods. In the
nine months ended December 31, 1999 and 2000, these product lines contributed
32% and 36% of total revenues and 36% and 44% of license revenues, respectively.
Total distributed systems revenues fell 3% and license revenues from distributed
systems fell 10% in the third quarter of fiscal 2001, and decreased 1% and 10%,
respectively, for the nine months ended December 31, 2000. Total distributed
systems revenues for the third quarter of fiscal 2001 increased slightly on a
sequential basis over the second quarter of fiscal 2001. In addition to the
various external factors that we believe may have affected our mainframe license
revenues, our distributed systems license revenues may have been negatively
affected because many of our mainframe customers are also customers of our
distributed systems products and sometimes purchase distributed systems products
together with mainframe products in enterprise solutions. The revenues from our
distributed systems product offerings also depend upon the continued market
acceptance of our existing products and our ability to successfully develop and
deliver additional products for the distributed systems environment. Despite the
license revenue decrease in the first nine months of fiscal 2001, we have
experienced rapid growth in our distributed systems product lines since their
introduction in late fiscal 1994. The distributed systems market is highly
competitive and dynamic and there can be no assurance that this growth will
resume.
Product License Revenues
Our product license revenues consist of product license fees and license
upgrade fees. Product license fees are all fees associated with a customer's
licensing of a given software product for the first time. License upgrade fees
are all fees associated with a customer's purchase of the right to run a
previously licensed product on a larger computer or computers. License upgrade
fees are primarily generated by our mainframe products and include fees
associated both with current and future additional processing capacity.
Our North American operations generated 57% and 48% of license revenues in
the three months ended December 31, 1999 and 2000, and 66% and 57% of license
revenues for the nine-month periods ended December 31, 1999 and 2000. Decreased
capacity- based license upgrade fees were the largest contributor to the 33% and
36% declines in North American license revenues in the three months and nine
months ended December 31, 2000, respectively, followed by a decline in
distributed systems initial product license fees. Though North American license
revenues for the third quarter of fiscal 2001 decreased compared to the prior
year, such revenues increased 20% sequentially over the second quarter of fiscal
2001. International license revenues represented 43% and 52% of total license
revenues for the quarters ended December 31, 1999 and 2000, respectively, and
34% and 43% of total license revenues in the nine-month periods ending on such
dates. International license revenues declined 5% from the third quarter of
fiscal 2000 to the comparable quarter of fiscal 2001 and 6% for the nine months
ended December 31, 2000. The declines in the third quarter and nine-month period
were principally due to foreign currency exchange rate changes from the
comparable fiscal 2000 periods, after giving effect to our foreign currency
hedging program. For the third quarter, decreased international product license
fees offset an increase in capacity-based license upgrade fees. For the nine
months ended December 31, 2000, the remainder of the decrease resulted from a
decline in upgrade fees, as initial product license fees were flat compared to
fiscal 2000. Though international license revenues for the third quarter of
fiscal 2001 decreased compared to the prior year, such revenues increased 45%
sequentially over the second quarter of fiscal 2001.
The sustainability and growth of our mainframe-based license revenues are
dependent upon capacity-based license upgrade fees, particularly within our
largest customer accounts. During the quarters ended December 31, 1999 and 2000,
mainframe license upgrade fees (for current and future processing capacity)
accounted for 29% and 22% of our total revenues. Most of our largest mainframe
customers have entered into enterprise license agreements allowing them to
install our products on any number of CPUs, subject to a maximum limit on the
aggregate processing power of the CPUs as measured in millions of instructions
per second (MIPS). Additional license upgrade fees are due if the MIPS limit is
exceeded. Substantially all of these transactions include license upgrade fees
associated with additional processing capacity beyond the customers' current
usage levels, and some include product license fees for additional products. In
our typical enterprise license transactions, the fees associated with future
additional mainframe processing capacity comprise from one-half to substantially
all of the license fees received in these transactions. Prior to fiscal 2000, we
experienced several years of increasing demand from our mainframe customers for
the right to run our products on increased future mainframe processing capacity.
This led to larger single transactions with higher per MIPS discounts. Growth in
mainframe capacity-based license upgrade fees slowed in fiscal 2000 and such
fees actually declined in the first nine months of fiscal 2001.
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Because we expect that we will continue to be dependent upon these
capacity-related license upgrade fees, continued slowing of this demand would
adversely impact our mainframe license revenues and operating results. See the
discussion below under the heading "Certain Risks and Uncertainties that Could
Affect Future Operating Results."
Maintenance and Support Revenues
Maintenance and support revenues represent the ratable recognition of fees
to enroll licensed products in our software maintenance, enhancement and support
program. Maintenance and support enrollment entitles customers to product
enhancements, technical support services and ongoing compatibility with
third-party operating systems, database management systems and applications.
These fees are generally charged annually and equal 15% to 20% of the discounted
price of the product. In addition, customers are entitled to reduced maintenance
percentages for prepayment of annual maintenance fees. Maintenance revenues also
include the ratable recognition of the bundled fees for any first-year
maintenance services covered by the related perpetual license agreement.
Maintenance revenues have increased for the three-month and nine-month
periods ended December 31, 2000 over the comparable prior year periods as a
result of the continuing growth in the base of installed products and the
processing capacity on which they run. Maintenance fees increase in proportion
to the aggregate processing capacity on which the products are installed;
consequently, we receive higher absolute maintenance fees as customers install
our products on additional processing capacity. Due to the increased discounting
for higher levels of additional processing capacity, the maintenance fees on a
per MIPS basis are typically reduced in enterprise license agreements for
mainframe products. Historically, we have enjoyed high maintenance renewal rates
for our mainframe-based products. Should customers migrate from their mainframe
applications or find alternatives to our products, increased cancellations could
adversely impact the sustainability and growth of our maintenance revenues. To
date, we have been successful in extending our traditional maintenance and
support pricing model to the distributed systems market.
Professional Services Revenues
Professional services revenues, representing fees from implementation,
integration and education services performed during the period, increased 74%
and 65%, respectively, during the three-month and nine-month periods ended
December 31, 2000, over the comparable prior year periods. Our professional
services headcount has increased significantly over the last twelve months to
meet the increasing demand for our expanding service offerings.
OPERATING EXPENSES
THREE MONTHS ENDED NINE MONTHS ENDED
DECEMBER 31, DECEMBER 31,
---------------------- ----------------------
1999 2000 CHANGE 1999 2000 CHANGE
---------- ---------- ------- ---------- ---------- -------
(IN MILLIONS) (IN MILLIONS)
Selling and marketing................................ $ 139.5 $ 154.4 10.7% $ 402.9 $ 439.4 9.1%
Research and development............................. 54.6 56.6 3.7% 161.4 173.2 7.3%
Cost of maintenance services and product licenses.... 43.7 54.6 24.9% 121.8 154.8 27.1%
Cost of professional services........................ 19.1 24.0 25.7% 52.5 68.1 29.7%
General and administrative........................... 37.4 36.4 (2.7%) 101.4 112.9 11.3%
Acquired research and development.................... -- 0.4 N/A 80.8 18.1 (77.6%)
Amortization of goodwill, acquired technology and
intangibles........................................ 36.2 46.7 29.0% 102.8 131.1 27.5%
Legal settlement..................................... 16.6 -- (100.0%) 55.4 -- (100.0%)
Merger related costs and compensation charges........ 0.4 2.4 500.0% 14.3 7.8 (45.5%)
---------- ---------- ---------- ----------
Total operating expenses................... $ 347.5 $ 375.5 8.1% $ 1,093.3 $ 1,105.4 1.1%
========== ========== ========== ==========
Selling and Marketing
Our selling and marketing expenses include personnel and related costs,
sales commissions and costs associated with advertising, industry trade shows
and sales seminars. Personnel and commission costs were the largest contributors
to the expense growth in the three months ended December 31, 2000, due to
increased headcount over the prior year and sales incentive programs implemented
during the fiscal 2001 quarter. For the nine months ended December 31, 2000, in
addition to higher personnel and commission costs, the expense increase also
included the costs associated with the global user conference held during the
first quarter of fiscal 2001. In general, marketing costs have continued to
increase to meet the requirements of marketing a greater number of increasingly
complex distributed systems products and to support a growing indirect
distribution channel.
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Research and Development
Research and development expenses mainly comprise personnel costs related to
software developers and development support personnel, including software
programmers, testing and quality assurance personnel and writers of technical
documentation such as product manuals and installation guides. These expenses
also include computer hardware/software costs and telecommunications expenses
necessary to maintain our data processing center. Increases in our research and
development expenses for the three months and nine months ended December 31,
2000, were the result of increased compensation costs associated with both
software developers and development support personnel, as well as associated
benefits and facilities costs, and increased depreciation expense related to
computer hardware. Research and development costs were reduced by amounts
capitalized in accordance with Statement of Financial Accounting Standards
(SFAS) No. 86, "Accounting for the Costs of Computer Software to Be Sold, Leased
or Otherwise Marketed." We capitalize our software development costs when the
projects under development reach technological feasibility as defined by SFAS
No. 86. During the third quarters of fiscal 2000 and 2001, we capitalized
approximately $21.4 million and $25.5 million, respectively, of software
development costs. Capitalized software development costs for the nine months
ended December 31, 1999 and 2000 were $54.5 million and $74.5 million,
respectively. The growth in capitalized costs is primarily due to increases in
distributed systems product development and product integration efforts.
Cost of Maintenance Services and Product Licenses
Cost of maintenance services and product licenses consists of amortization
of purchased and internally developed software, costs associated with the
maintenance, enhancement and support of our products and royalty fees.
Maintenance, enhancement and support costs are increasing as a percentage of
maintenance fees as our product revenue mix shifts to distributed systems, which
require a higher level of support. We amortized $8.3 million and $24.0 million
in the third quarters of fiscal 2000 and 2001, respectively, of capitalized
software development costs pursuant to SFAS No. 86, including $2.1 million and
$9.0 million, respectively, to accelerate the amortization of certain software
products. For the nine months ended December 31, 1999 and 2000, we amortized
$19.8 million and $40.9 million, respectively, including accelerated
amortization of $2.8 million and $9.5 million. We accelerated the amortization
of certain software products as they were not expected to generate sufficient
future revenues which would be required for us to realize the carrying value of
the assets.
We expect our cost of maintenance services and product licenses will
continue to increase as we capitalize a higher level of software development
costs and as we build our distributed systems product support organization,
which is less cost-effective than our mainframe support organization because of
the complexity and variability of the environments in which the products
operate. The distributed systems products operate in a high number of operating
environments, including operating systems, database management systems and ERP
applications, and require greater ongoing platform support development activity
relative to our mainframe products.
Cost of Professional Services
Cost of professional services consists primarily of personnel costs
associated with implementation, integration and education services that we
perform for our customers, and the related infrastructure to support this
business. The increase in these costs for the three months and nine months ended
December 31, 2000, over the comparable prior year periods resulted from
increased headcount to support the 74% and 65% growth in professional services
revenues during these periods.
General and Administrative
General and administrative expenses are comprised primarily of compensation
and personnel costs within executive management, finance and accounting, product
distribution, facilities management and human resources. Other expenses included
in general and administrative expenses are fees paid for legal and accounting
services, consulting projects, insurance, bad debt expense and costs of managing
our foreign currency exposure. The decline in general and administrative
expenses for the quarter ended December 31, 2000, was primarily related to
decreased bad debt expense. Growth in general and administrative expenses for
the nine months ended December 31, 2000 over the same period in the prior year
was primarily attributable to increased personnel costs.
Subsequent to December 31, 2000, we have had various management changes. The
related severance costs will be included in general and administrative expenses
for the quarter ending March 31, 2000. As a result, we expect a one-time
increase in general and administrative expenses for the fourth quarter of fiscal
2001.
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Acquired Research and Development and Related Costs
Acquired IPR&D costs for the nine months ended December 31, 1999 and 2000,
were $80.8 million and $18.1 million, respectively. These technology charges
primarily related to the acquisitions of New Dimension in the first quarter of
fiscal 2000, Evity in the first quarter of fiscal 2001 and OptiSystems in the
second quarter of fiscal 2001. The acquired IPR&D charge for the nine months
ended December 31, 2000 also includes the write-off of assets totaling $4.7
million related to a technology agreement with Envive Corporation that was
terminated during the first quarter of fiscal 2001 and a minor technology
acquisition during the third quarter of fiscal 2001.
The following table presents information concerning the purchase price
allocations for the acquisitions accounted for under the purchase method for the
nine months ended December 31, 1999 and 2000. See the discussion of the New
Dimension acquisition in the fiscal 2000 Annual Report on Form 10-K.
ACQUIRED GOODWILL TOTAL
COMPANY NAME SOFTWARE IPR&D AND OTHER PRICE
------------ -------- -------- --------- ---------
(IN MILLIONS)
Fiscal 2000:
New Dimension...... $ 126.3 $ 80.8 $ 465.9 $ 673.0
-------- ------- -------- ---------
$ 126.3 $ 80.8 $ 465.9 $ 673.0
======== ======= ======== =========
Fiscal 2001:
Evity.............. $ 2.5 $ 7.0 $ 57.8 $ 67.3
OptiSystems........ 6.3 6.0 59.2 71.5
Others............. 7.2 0.4 5.7 13.3
-------- ------- -------- ---------
$ 16.0 $ 13.4 $ 122.7 $ 152.1
======== ======= ======== =========
On April 25, 2000, we acquired all of the outstanding shares of Evity in a
transaction accounted for as a purchase. The aggregate purchase price totaled
$67.3 million, including cash consideration of $10.0 million, 1.0 million shares
of common stock, 0.4 million common stock options and transaction costs, and was
allocated as follows: $2.5 million to acquired technology, $57.8 million to
goodwill and other intangibles and $7.0 million (10% of the purchase price) to
purchased in-process research and development (IPR&D). Net tangible assets
acquired were insignificant. The amount allocated to purchased IPR&D represents
the estimated fair value, based on risk-adjusted cash flows, related to Evity's
research and development projects not yet completed. At the date of acquisition,
the development of these projects had not yet reached technological feasibility,
and the research and development in progress had no alternative future uses.
Accordingly, these costs were expensed as of the acquisition date, during the
quarter ended June 30, 2000.
At the acquisition date, Evity was conducting design, development,
engineering and testing activities associated with the completion of SiteAngel
2.0, an enhanced version of Evity's SiteAngel Website performance monitoring
product, as well as new technologies in the areas of load testing and network
infrastructure. The projects under development at the valuation date represent
next-generation technologies that are expected to address emerging market
demands for the Web performance market.
At the acquisition date, the technologies under development were
approximately 45% complete based on engineering man-month data and technological
progress. Evity had spent nearly $1.0 million on the in-process projects and
expected to spend approximately $1.3 million to complete all phases of the
research and development. Anticipated completion dates ranged from 4 to 18
months, at which times we expect to begin benefiting from the developed
technologies.
On August 8, 2000, we acquired all of the outstanding shares of OptiSystems
in a transaction accounted for as a purchase. The aggregate purchase price
totaled $71.5 million in cash, including transaction costs, and was allocated as
follows: $6.3 million to acquired technology, $55.2 million to goodwill and
other intangibles, $4.0 million to equipment, receivables and other non-software
assets, net of liabilities assumed, and $6.0 million (8% of the purchase price)
to purchased in-process research and development. The amount allocated to
purchased IPR&D represents the estimated fair value, based on risk-adjusted cash
flows, related to OptiSystems' incomplete research and development projects. At
the date of acquisition, the development of these projects had not yet reached
technological feasibility, and the research and development in progress had no
alternative future uses. Accordingly, these costs were expensed as of the
acquisition date, during the quarter ended September 30, 2000.
At the acquisition date, OptiSystems was conducting design, development,
engineering and testing activities associated with the completion of several
components of its Energizer for R/3 product. The projects under development at
the valuation date represent next-generation technologies that are expected to
address emerging market demands for the enterprise application performance
market.
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At the acquisition date, the technologies under development were
approximately 50% complete based on engineering man-month data and technological
progress. OptiSystems had spent approximately $1.0 million on the in-process
projects, and expected to spend approximately $1.2 million to complete all
phases of the research and development. Anticipated completion dates ranged from
2 to 11 months, at which times we expect to begin benefiting from the developed
technologies.
In making its purchase price allocations for Evity and OptiSystems, we
considered present value calculations of income, analyses of project
accomplishments and remaining outstanding items, assessments of overall
contributions, as well as project risks. The values assigned to purchased
in-process technology were determined by estimating the costs to develop the
acquired technology into commercially viable products, estimating the resulting
net cash flows from the projects, and discounting the net cash flows to their
present value. The revenue projections used to value the in-process research and
development were based on estimates of relevant market sizes and growth factors,
expected trends in technology, and the nature and expected timing of new product
introductions by us and our competitors. The resulting net cash flows from such
projects are based on our estimates of cost of sales, operating expenses, and
income taxes from such projects.
Aggregate revenues for the Evity and OptiSystems developed, in-process and
future products were estimated to grow at compounded annual growth rates of
approximately 155% and 43%, respectively, for the five years following
acquisition, assuming the successful completion and market acceptance of the
major current and future research and development programs. The estimated
revenues for the in-process projects were expected to peak within three years of
acquisition and then decline sharply as other new products and technologies are
expected to enter the market.
The rates utilized to discount the net cash flows to their present value
were based on estimated cost of capital calculations. Due to the nature of the
forecasts and the risks associated with the projected growth and profitability
of the developmental projects, discount rates of 30% for Evity and 25% for
OptiSystems were considered appropriate for the in-process R&D. These discount
rates were commensurate with Evity's and OptiSystems' stages of development and
the uncertainties in the economic estimates described above.
If these projects are not successfully developed, the sales and
profitability of the combined company may be adversely affected in future
periods. Additionally, the value of other acquired intangible assets may become
impaired.
Amortization of Goodwill and Intangibles
In connection with the application of the purchase accounting method to
certain of our acquisitions, portions of the purchase price were allocated to
goodwill, workforce, customer base, software and other intangible assets. We are
amortizing these intangibles over three to five-year periods, which reflect the
estimated useful lives of the respective assets. The increase in amortization
expense is primarily related to the acquisitions of Evity and OptiSystems
discussed above.
Merger-Related Costs and Compensation Charges
In conjunction with our merger with Boole in March 1999, management approved
a formal plan of restructuring which included steps to be taken to integrate the
operations of the two companies, consolidate duplicate facilities and streamline
operations to achieve reductions in overhead expenses in future periods. In
connection with this restructuring plan, we charged $0.4 million to expense
during the third quarter of fiscal 2000. During the third quarter of fiscal
2001, $1.0 million of previously accrued merger costs were reversed, as certain
lease and severance obligations were satisfied at amounts below the amounts
originally estimated. This reversal is reflected as a reduction of
merger-related costs and compensation charges in the accompanying statements of
earnings and comprehensive income. An accrual of $3.1 million remains at
December 31, 2000, for facility and termination payments to be made in future
periods. During the three months and nine months ended December 31, 2000, we
recorded compensation charges of $3.4 million and $8.8 million, respectively,
primarily related to the vesting of common stock issued as part of the Evity
acquisition to certain Evity employee shareholders who we employed after the
acquisition.
OTHER INCOME, NET
For the three months and nine months ended December 31, 2000, other income,
net was $20.6 million and $52.4 million, reflecting an increase of 93% and 67%
from the same periods of fiscal 2000. Other income, net consists primarily of
interest earned on cash, cash equivalents and investment securities and interest
expense on short-term borrowings. Other income for the third quarter of fiscal
2001 includes a one-time gain of $6.3 million related to a real estate
transaction. Year-to-date other income for fiscal 2001 also includes a $2.9
million one-time gain in the second quarter related to the sale of a financial
instrument. The remaining increases in other income, net for the quarter and
nine months are due to decreased borrowings and increased investment income in
both periods.
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INCOME TAXES
For the three months and nine months ended December 31, 2000, income tax
expense was $8.7 million and $8.8 million, respectively, compared to $20.4
million and $36.4 million for the same periods in fiscal 2000. Our effective tax
rates were 28% and 34% for the three months and nine months ended December 31,
2000 and 23% and 20% for the comparable prior year periods. The reduction in
income tax expense is attributable to the decline in pre-tax earnings discussed
above.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In September 2000, the Financial Accounting Standards Board issued SFAS No.
140, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities - A Replacement of FASB Statement No. 125." This
Statement revises the standards for accounting for securitizations and other
transfers of financial assets and collateral and requires certain disclosures,
but it carries over most of SFAS No. 125's provisions without reconsideration.
SFAS No. 140 is effective for transfers and servicing of financial assets and
extinguishments of liabilities occurring after March 31, 2001. It is effective
for recognition and reclassification of collateral and for disclosures relating
to securitization transactions and collateral for fiscal years ending after
December 15, 2000. We believe that adoption of SFAS No. 140 will not have a
material effect on our financial position or results of operations.
LIQUIDITY AND CAPITAL RESOURCES
We continue to primarily finance our growth through funds generated from
operations. For the nine months ended December 31, 2000, net cash provided by
operating activities was $432.8 million. As of December 31, 1999, we had cash,
cash equivalents and investment securities of $1.0 billion and short-term
borrowings of $166.0 million.
During the first quarter of fiscal 2001, our board of directors authorized
us to purchase up to $500 million in common stock. We repurchased 5.3 million
common shares on the open market for $110.4 million through December 31, 2000.
We believe that existing cash balances and funds generated from operations
will be sufficient to meet our liquidity requirements for the foreseeable
future.
B. CERTAIN RISKS AND UNCERTAINTIES THAT COULD AFFECT FUTURE OPERATING RESULTS.
Our Stock Price is Volatile.
Our stock price has been and is highly volatile. Our stock price is highly
influenced by current expectations of future revenue and earnings growth rates.
Any failure to meet anticipated revenue and earnings levels in a period or any
negative change in our perceived long-term growth prospects would likely have a
significant adverse effect on our stock price. Our historical financial results
should not be seen as indicative of future results.
The Timing and Size of License Contracts Could Cause Our Quarterly Revenues and
Earnings to Fluctuate.
Our revenues and results of operations are difficult to predict and may
fluctuate substantially quarter to quarter. The timing and amount of our license
revenues are subject to a number of factors that make estimation of operating
results prior to the end of a quarter extremely uncertain. We generally operate
with little or no sales backlog and, as a result, license revenues in any
quarter are dependent upon contracts entered into or orders booked and shipped
in that quarter. Most of our sales are closed at the end of each quarter. Our
business remains dependent on closing large enterprise license transactions,
which can have sales cycles of up to a year or more and require approval by a
customer's upper management. These transactions are typically difficult to
manage and predict. Failure to close an expected individually significant
transaction or multiple expected transactions could cause our revenues and
earnings in a period to fall short of expectations. We generally do not know
whether revenues and earnings will meet expectations until the final days or day
of a quarter.
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We have a High Degree of Operating Leverage.
Our business model is characterized by a very high degree of operating
leverage. A substantial portion of our operating costs and expenses consists of
employee and facility related costs, which are relatively fixed over the short
term. In addition, our expense levels and hiring plans are based substantially
on our projections of future revenues. If near term demand weakens in a given
quarter, there would likely be a material adverse effect on operating results
and a resultant drop in our stock price.
Our Operating Margins May Decline Further.
There is a risk that our historically high operating margins may not be
sustainable and may continue to decline, which would adversely affect our
earnings. Our operating margins, excluding amortization of goodwill, acquired
technology and intangibles, merger-related compensation and one-time charges,
declined during fiscal 2000 and declined further during the first nine months of
fiscal 2001 as compared to fiscal 1999 and prior periods. We do not compile
margin analysis other than on an aggregated basis; however, we are aware that
operating expenses as a percentage of revenues associated with our distributed
systems products are higher than those associated with our traditional mainframe
products. Since our mix of business continues to shift to distributed systems,
operating margins will experience more pressure. In addition, we are not
currently profitable in our growing professional services business. We may be
unable to increase or even maintain our current level of profitability on a
quarterly or annual basis in the future. Additionally, we have acquired
businesses experiencing lower operating margins than us.
We May Not be Able to Attract and Retain Qualified Personnel.
Our future success depends on the continued service of our executive
officers and other key administrative, sales and marketing, development and
support personnel. There is currently a shortage of individuals possessing the
technical background necessary to sell, support and develop our products
effectively. Competition for skilled personnel is intense, and we may not be
able to attract, assimilate or retain highly qualified personnel in the future.
Hiring qualified sales, marketing, administrative, research and development and
customer support personnel is very competitive in our industry, particularly in
some of the markets where our development teams are located, such as San Jose,
California, Austin, Texas and Waltham, Massachusetts. In addition to our direct
competitors, we are competing for qualified personnel with start-ups and small
companies, many of which are offering significant ownership interests in the
form of stock options to attract employees. In competing with start-ups and
other high growth companies, our recent stock price performance, with our shares
trading well below the average stock price over the last two years, has made it
more difficult for us to attract and retain employees. Consequently, our growth
rates may be limited by our ability to attract qualified personnel.
Decreasing Demand for Mainframe Processing Capacity and Decreased IT Spending
Could Adversely Affect Revenues.
Fees from enterprise license transactions have historically been a
fundamental component of our revenues and the primary source of mainframe
license revenues. These revenues depend on our customers planning to grow their
mainframe capacity and continuing to perceive an increasing need to use our
existing software products on substantially greater mainframe processing
capacity in future periods. Over the past year, IBM has experienced a decline in
shipments of new mainframe hardware. In addition, the continued growth of
distributed database management systems may have an adverse effect on growth
rates for mainframe computing systems. Although we believe that businesses will
continue to demand greater mainframe computing capacity and that e-business will
be a driver of this demand, there can be no assurance as to whether future
demand for mainframe capacity will continue to grow or not. Slower growth in our
customers' mainframe processing capacity will adversely affect our revenues. In
addition, many industry analysts and economists are predicting slower growth and
even declines in overall IT spending by businesses during the next several
quarters. Any significant decline in overall IT spending could adversely affect
our revenues.
Increased Competition and Pricing Pressures Could Adversely Affect Our Sales.
The market for systems management software has been increasingly competitive
for the past number of years and is currently intensifying. We compete with a
variety of software vendors including IBM and Computer Associates International,
Inc. (CA). We derived approximately 64% of our total revenues in fiscal 2000 and
58% of our total revenues in the first nine months of fiscal 2001 from software
products for IBM and IBM-compatible mainframe computers. IBM continues to focus
on reducing the overall software costs associated with the OS/390 mainframe
platform. IBM continues, directly and through third parties, to aggressively
enhance its utilities for IMS and DB2 to provide lower cost alternatives to the
products provided by us and other independent software vendors. IBM has
significantly increased its level of activity in the IMS and DB2 high-speed
utility markets over the last two years and recently launched a significant
research and development commitment to compete in these markets. If IBM is
successful with its efforts to
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achieve performance and functional equivalence with our IMS, DB2 and other
products at a lower cost, our business will be materially adversely affected. CA
entered the mainframe database tools and utilities market with its acquisition
of Platinum Technology International, Inc. (DB2 tools and utilities) and
Innovative Designs, Inc. (IMS tools and utilities) and is competing with us in
these markets. Microsoft entered the distributed systems monitoring and
management market through its relationship with Net IQ and is now competing with
us in the market for management tools for the Windows operating system.
Capacity-based upgrade fees associated with both current and future
processing capacity contributed approximately one-fourth to one-third of our
total revenues in each of fiscal years 1998, 1999 and 2000. Due to the decreases
in our mainframe business during fiscal 2001, such mainframe upgrade fees have
declined to 20% of total revenues for the first nine months of fiscal 2001. The
charging of upgrade fees based on the capacity to which the product is licensed
is standard among mainframe systems software vendors, including IBM. While we
believe our current pricing policies properly reflect the value provided by our
products, the pricing of mainframe systems software and particularly the
charging of capacity-based upgrade fees is under constant pressure from
customers and competitive vendors. IBM continues to reduce the costs of its
mainframe systems software to increase the overall cost competitiveness of its
mainframe hardware and software products and generally charges less for its
software products. In connection with the introduction of its Z-series server,
IBM has announced changes to its mainframe software pricing, including a new
workload-based pricing model. These actions continue to increase pricing
pressures within the mainframe systems software markets. We continue to reduce
the cost of our mainframe tools and utilities in response to these and other
competitive pressures. We have also announced that we will support the new
workload-based pricing structure for the Z-series, but the effect of this change
on our future mainframe license revenues cannot be determined.
Maintenance Revenue Growth Could Slow.
Maintenance revenues have increased over the last three fiscal years and the
first nine months of fiscal 2001 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 MIPS basis are typically reduced in enterprise license
agreements for our mainframe products. Historically, we have enjoyed high
maintenance renewal rates for our mainframe-based products. Should customers
migrate from their mainframe applications or find alternatives to our products,
increased cancellations could adversely impact the sustainability and growth of
our maintenance revenues. To date, we have been successful in extending our
traditional maintenance and support pricing model to the distributed systems
market. Renewal rates for maintenance on our distributed systems products are
lower than on our mainframe products.
Failure to Adapt to Technological Change Could Adversely Affect Our Earnings.
If we fail to keep pace with technological change in our industry, such
failure would have an adverse effect on our revenues and earnings. We operate in
a highly competitive industry characterized by rapid technological change,
evolving industry standards, changes in customer requirements and frequent new
product introductions and enhancements. During the past two years, funding for
new ventures and start-ups in our industry has been at an all-time high with
many new technological advancements and competing products entering the
marketplace. The distributed systems and application management markets in which
we operate are far more crowded and competitive than our traditional mainframe
systems management markets. Our ability to compete effectively and our growth
prospects depend upon many factors, including the success of our existing
distributed systems products, the timely introduction and success of future
software products, and the ability of our products to interoperate and perform
well with existing and future leading databases and other platforms supported by
our products. We have experienced long development cycles and product delays in
the past, particularly with some of our distributed systems products, and expect
to have delays in the future. Delays in new mainframe or distributed systems
product introductions or less-than-anticipated market acceptance of these new
products are possible and would have an adverse effect on our revenues and
earnings. New products or new versions of existing products may, despite
testing, contain undetected errors or bugs that will delay the introduction or
adversely affect commercial acceptance of such products.
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Because the Market for E-Business Solutions is New and Evolving, We Cannot
Accurately Predict the Future Growth Rate of this Market or its Ultimate
Size.
We are increasingly focusing our selling and marketing efforts on
providing solutions for e-business applications. This is a new and evolving
market, and there can be no assurance that customers will perceive a need for or
accept our e-business solutions. In addition, our success in the e-business
market may ultimately depend on the success of the Internet as a medium for
conducting business transactions. As the Internet continues to experience
significant growth in the number of users and the complexity of Web-based
applications increases, the Internet infrastructure may not be able to support
the demands placed on it or the performance or reliability of the Internet might
be adversely affected. Failure of a significant market to develop for e-business
application solutions, failure of our e-business solutions to achieve broad
market acceptance, or reduced growth in the Internet as a medium for business
transactions could adversely affect our business, operating results and
financial condition.
Changes in Pricing Practices Could Adversely Affect Revenues and Earnings.
We may choose in fiscal 2001 or a future fiscal year to make changes to our
product packaging, pricing or licensing programs. If made, such changes may have
a material adverse impact on revenues or earnings.
Our Customers May Not Accept our Product Strategies.
Historically, we have focused on selling software products to address
specific customer problems associated with their applications. We are now
increasingly moving toward integrating multiple software products and offering
packaged solutions for customers' systems. There can be no assurance that
customers will perceive a need for such solutions. In addition, there may be
technical difficulties in integrating individual products into a combined
solution that may delay the introduction of such solutions to the market or
adversely affect the demand for such solutions.
Risks Related to Business Combinations.
As part of our overall strategy, we have acquired or invested in, and plan
to continue to acquire or invest in, complementary companies, products, and
technologies and to enter into joint ventures and strategic alliances with other
companies. Our acquisitions of BGS Systems, Inc. (BGS) in March 1998, Boole in
March 1999, New Dimension in April 1999, Evity in April 2000 and OptiSystems in
August 2000 are the results of this strategy. Risks commonly encountered in such
transactions include: the difficulty of assimilating the operations and
personnel of the combined companies; the risk that we may not be able to
integrate the acquired technologies or products with our current products and
technologies; the potential disruption of our ongoing business; the inability to
retain key technical and managerial personnel; the inability of management to
maximize our financial and strategic position through the successful integration
of acquired businesses; and decreases in reported earnings as a result of
charges for in-process research and development and amortization of goodwill and
acquired intangible assets.
In order for us to maximize the return on our investments in acquired
companies, the products of these entities must be integrated with our existing
products. These integrations can be difficult and unpredictable, especially
given the complexity of software and that acquired technology is typically
developed independently and designed with no regard to integration. The
difficulties are compounded when the products involved are well established
because compatibility with the existing base of installed products must be
preserved. Successful integration also requires coordination of different
development and engineering teams. This too can be difficult and unpredictable
because of possible cultural conflicts and different opinions on technical
decisions and product roadmaps. There can be no assurance that we will be
successful in our product integration efforts or that we will realize the
expected benefits.
With each of our acquisitions, we have initiated efforts to integrate the
disparate cultures, employees, systems and products of these companies.
Retention of key employees is critical to ensure the continued advancement,
development, support, sales and marketing efforts pertaining to the acquired
products. We have implemented retention programs to keep many of the key
technical, sales and marketing employees; nonetheless, we have lost some key
employees and may lose others in the future.
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Risks Associated With Managing Growth.
We have experienced an extended period of: (i) significant revenue growth
prior to fiscal 2001; (ii) acquisitions; (iii) expansion of our software product
lines and supported platforms; (iv) significant expansion in our number of
employees; (v) increased pressure on the viability and scope of our operating
and financial systems; and (vi) expansion in the geographic scope of our
operations. This growth has resulted in new and increased responsibilities for
management personnel and has placed a significant strain upon our management,
operating and financial controls and resources, including our information
systems and services and development organizations. To accommodate growth,
compete effectively and manage potential future growth, we must continue to
implement and improve the speed and quality of our information decision support
systems, management decisions, reporting systems, procedures and controls. To
the extent our personnel, procedures, systems and controls are not adequate to
support our future operations, our results of operations and financial position
may be materially adversely affected.
Enforcement of Our Intellectual Property Rights.
We rely on a combination of copyright, patent, trademark, trade secrets,
confidentiality procedures and contractual procedures to protect our
intellectual property rights. Despite our efforts to protect our intellectual
property rights, it may be possible for unauthorized third parties to copy
certain portions of our products or to reverse engineer or obtain and use
technology or other information that we regard as proprietary. There can also be
no assurance that our intellectual property rights would survive a legal
challenge to their validity or provide significant protection for us. In
addition, the laws of certain countries do not protect our proprietary rights to
the same extent as do the laws of the United States. Accordingly, there can be
no assurance that we will be able to protect our proprietary technology against
unauthorized third party copying or use, which could adversely affect our
competitive position.
Possibility of Infringement Claims.
From time to time, we receive notices from third parties claiming
infringement by our products of third party patent and other intellectual
property rights. We expect that software products will increasingly be subject
to such claims as the number of products and competitors in our industry
segments grow and the functionality of products overlap. In addition, we expect
to receive more patent infringement claims as companies increasingly seek to
patent their software and business methods, especially in light of recent
developments in the law that extend the ability to patent software and business
methods. Regardless of its merit, responding to any such claim could be
time-consuming, result in costly litigation and require us to enter into royalty
and licensing agreements which may not be offered or available on terms
acceptable to us. If a successful claim is made against us and we fail to
develop or license a substitute technology, our business, results of operations
or financial position could be materially adversely affected.
Risk of Year 2000 Related Problems.
Through the year following January 1, 2000, we have not experienced any
material failures related to Year 2000; however, there remains a risk that
latent Year 2000 problems could affect us or our products. We have tested the
ability of our software products to process Year 2000 data without interruption
or errors and believe that our products are substantially Year 2000 compliant.
Despite these tests, there can be no assurance that undetected errors or defects
do not exist that could cause these software products to fail to process Year
2000 data correctly. There is a risk that such undetected errors or defects
could surface at a later date, and that customers may assert claims against us
for any losses resulting from such errors or defects. To date, we are not aware
of any material claims being asserted or made against us related to Year 2000
failures. However, we cannot predict whether or to what extent any legal claims
will be brought, or whether we will suffer any liability as a result of any
adverse consequences to our customers related to Year 2000 failures.
Risks Related to International Operations and the Euro Currency.
We have committed, and expect to continue to commit, substantial resources
and funding to build our international service and support infrastructure.
Operating costs in many countries, including many of those in which we operate,
are higher than in the United States. In order to increase international sales
in fiscal 2001 and subsequent periods, we must continue to globalize our
software product lines; expand existing and establish additional foreign
operations; hire additional personnel; identify suitable locations for sales,
marketing, customer service and development; and recruit international
distributors and resellers in selected territories. Future operating results are
dependent on sustained performance improvement by our international offices,
particularly our European operations. Revenue growth by our European operations
has generally been slower than revenue growth in North America. There can be no
assurance that we will be successful in accelerating the revenue growth of our
European operations. Our operations and
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financial results internationally could be significantly adversely affected by
several risks such as changes in foreign currency exchange rates, sluggish
regional economic conditions and difficulties in staffing and managing
international operations. Generally, our foreign sales are denominated in our
foreign subsidiaries' local currencies. If these foreign currency exchange rates
change unexpectedly, we could have significant gains or losses. Many systems and
applications software vendors are experiencing difficulties internationally.
The European Union's adoption of the Euro single currency raises a variety
of issues associated with our European operations. Although the transition will
be phased in over several years, the Euro became Europe's single currency on
January 1, 1999. Our foreign exchange exposures to legacy sovereign currencies
of the participating countries in the Euro became foreign exchange exposures to
the Euro upon its introduction. Although we are not aware of any material
adverse financial risk consequences of the change from legacy sovereign
currencies to the Euro, conversion may result in problems, which may have an
adverse impact on our business since we may be required to incur unanticipated
expenses to remedy these problems.
Conditions in Israel.
Our INCONTROL and R/3 operations are conducted partially in Israel and,
accordingly, we are directly affected by economic, political and military
conditions in Israel. Any major hostilities involving Israel or the interruption
or curtailment of trade between Israel and its present trading partners could
materially adversely affect our business, operating results and financial
condition.
Israel's economy has been subject to numerous destabilizing factors,
including a period of rampant inflation in the early to mid-1980's, low foreign
exchange reserves, fluctuations in world commodity prices, military conflicts
and civil unrest. Since the establishment of the State of Israel in 1948, a
state of hostility has existed, varying in degree and intensity, between Israel
and the Palestinian people and the Arab countries. In addition, Israel and
companies doing business with Israel have been the subject of an economic
boycott by the Arab countries since Israel's establishment. Although Israel has
entered into various agreements with certain Arab countries and the Palestinian
Authority, and various declarations have been signed in connection with efforts
to resolve some of the economic and political problems in the Middle East, we
cannot predict whether or in what manner these problems will be resolved. To
date, the current unrest in the region and hostilities within Israel associated
with the ongoing peace process have not caused disruption of our operations
located in Israel.
In addition, certain of our INCONTROL and R/3 employees are currently
obligated to perform annual reserve duty in the Israel Defense Forces and are
subject to being called for active military duty at any time. Although our
businesses located in Israel have historically operated effectively under these
requirements, we cannot predict the effect of these obligations on our
operations in the future.
Possible Adverse Impact Of Recent Accounting Pronouncements.
On April 1, 1998 and 1999 we adopted 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 the Company's financial
position or results of operations. Based on our reading and interpretation of
these SOPs, we believe that our current sales contract terms and business
arrangements have been properly reported. However, the American Institute of
Certified Public Accountants and its Software Revenue Recognition Task Force
continue to issue interpretations and guidance for applying the relevant
standards to a wide range of sales contract terms and business arrangements that
are prevalent in the software industry. Also, the Securities and Exchange
Commission (SEC) has issued Staff Accounting Bulletin No. 101, "Revenue
Recognition in Financial Statements," which provides guidance related to revenue
recognition based on interpretations and practices followed by the SEC. Future
interpretations of existing accounting standards or changes in our business
practices could result in future changes in our revenue accounting policies that
could have a material adverse effect on our business, financial condition and
results of operations.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to a variety of risks, including foreign currency exchange
rate fluctuations and changes in the market value of our investments. In the
normal course of business, we employ established policies and procedures to
manage these risks including the use of derivative instruments. There have been
no material changes in our foreign exchange risk management strategy or our
investment securities subsequent to March 31, 2000, therefore our foreign
currency exchange rate risk and interest rate risk related to investments remain
substantially unchanged from the description in our Form 10-K for the year ended
March 31, 2000.
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
On February 4, 2000, an action styled Dov Klein v. BMC Software, Inc.,
Richard P. Gardner, Stephen B. Solcher, Roy J. Wilson, Kevin M. Weiss, Kevin M.
Klausmeyer, Max P. Watson, Jr., William M. Austin, Wayne S. Morris, M. Brinkley
Morse, Robert E. Beauchamp, and Theodore W. Van Duyn, No. 00-CV-359, was filed
in the United States District Court for the Southern District of Texas, Houston
Division. The plaintiff alleges that BMC Software and eleven current and former
senior executives violated Sections 10(b) and 20(a) of the Securities Exchange
Act and Rule 10b-5. The plaintiff contends that BMC Software and the individual
defendants artificially inflated our stock price by extending unusual payment
terms to purchasers of our products, failing to disclose softening demand and
increasing competition for our products, and failing to disclose difficulties in
managing our sales force. The plaintiff seeks unspecified compensatory damages,
interest and costs, including legal fees. The action is subject to the Private
Securities Litigation Reform Act of 1995. On March 9, 2000, the court
consolidated four similar actions, ordered that all subsequently filed similar
actions be consolidated, and set out a briefing schedule. Subsequently, six
additional cases were filed that made similar allegations. These cases were also
consolidated into the main action. On August 14, 2000, the plaintiff filed a
consolidated amended complaint. This complaint alleges a class of all persons
who purchased BMC stock between July 29, 1999 and July 5, 2000. We have filed a
motion to dismiss the complaints and we intend to defend the consolidated action
vigorously. Briefing on the motion to dismiss is not complete. At this early
stage of the litigation, it is not possible to estimate potential damages, but
it appears that if liability were established, an unfavorable judgment or
settlement could have a material adverse effect on our financial position and
results of operations.
We are subject to various other legal proceedings and claims, either
asserted or unasserted, which arise in the ordinary course of business.
Management does not believe that the outcome of any of these legal matters will
have a material adverse effect on our financial position or results of
operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At BMC Software's Special Meeting of Stockholders held on November 9,
2000 the following proposal was adopted by the margin indicated.
NUMBER OF SHARES
VOTED FOR VOTED AGAINST ABSTAIN
----------- ---------------- -------
1. To approve an amendment to the BMC Software,
Inc. 1996 Employee Stock Purchase Plan to
increase the number of shares of common stock
that may be issued under the Plan. 204,458,420 5,745,685 856,792
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
None
(b) Reports on Form 8-K.
None
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
BMC SOFTWARE, INC.
By: /s/ ROBERT E. BEAUCHAMP
--------------------------------
Robert E. Beauchamp
President and Chief Executive
Officer
February 14, 2001
By: /s/ JOHN W. COX
--------------------------------
John W. Cox
Vice President, Chief Financial
Officer and Chief Accounting
Officer
February 14, 2001
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