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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 JUNE 30, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 0-17136
BMC SOFTWARE, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 74-2126120
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
BMC SOFTWARE, INC.
2101 CITYWEST BOULEVARD
HOUSTON, TEXAS 77042-2827
(Address of principal (Zip Code)
executive offices)
Registrant's telephone number including area code: (713) 918-8800
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [v] No [ ]
As of August 8, 2001, there were outstanding 247,195,164 shares of Common
Stock, par value $.01, of the registrant.
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BMC SOFTWARE, INC. AND SUBSIDIARIES
QUARTER ENDED JUNE 30, 2001
INDEX
PAGE
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of March 31, 2001 and
June 30, 2001 (Unaudited)............................................... 3
Condensed Consolidated Statements of Earnings and Comprehensive
Income for the three months ended June 30, 2000 and 2001 (Unaudited).... 4
Condensed Consolidated Statements of Cash Flows for the three
months ended June 30, 2000 and 2001 (Unaudited)......................... 5
Notes to Condensed Consolidated Financial Statements (Unaudited).......... 6
Item 2. Management's Discussion and Analysis of Results of Operations and
Financial Condition....................................................... 8
Item 3. Quantitative and Qualitative Disclosures about Market Risk................... 18
PART II. OTHER INFORMATION
Item 1. Legal Proceedings............................................................ 18
Item 6. Exhibits and Reports on Form 8-K............................................. 18
Signatures................................................................... 19
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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, JUNE 30,
2001 2001
-------- --------
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents ............................ $ 146.0 $ 129.0
Marketable securities ................................ 144.7 162.7
Trade accounts receivable, net ....................... 292.6 259.3
Trade finance receivables, current ................... 213.5 151.9
Other current assets ................................. 105.9 142.3
-------- --------
Total current assets .......................... 902.7 845.2
Property and equipment, net ............................ 456.5 461.1
Software development costs and related assets, net ..... 242.7 255.6
Marketable securities .................................. 713.3 707.0
Long-term finance receivables .......................... 236.3 166.1
Acquired technology, net ............................... 95.3 84.3
Goodwill and other intangibles, net .................... 317.6 282.4
Other long-term assets ................................. 69.5 70.9
-------- --------
$3,033.9 $2,872.6
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Trade accounts payable ............................... $ 22.1 $ 15.7
Accrued liabilities .................................. 182.3 160.5
Short-term borrowings ................................ 150.0 --
Current portion of deferred revenue .................. 474.6 528.2
-------- --------
Total current liabilities ..................... 829.0 704.4
Deferred revenue ....................................... 382.8 390.7
Other long-term liabilities ............................ 6.8 11.3
-------- --------
Total liabilities ............................. 1,218.6 1,106.4
Commitments and contingencies
Stockholders' equity:
Preferred stock ...................................... -- --
Common stock ......................................... 2.5 2.5
Additional paid-in capital ........................... 530.9 536.0
Retained earnings .................................... 1,336.2 1,295.8
Accumulated other comprehensive income ............... (9.8) (3.2)
-------- --------
1,859.8 1,831.1
Less treasury stock, at cost ......................... (20.9) (46.1)
Less unearned portion of restricted stock compensation (23.6) (18.8)
-------- --------
Total stockholders' equity .................... 1,815.3 1,766.2
-------- --------
$3,033.9 $2,872.6
======== ========
The accompanying notes are an integral part of these condensed consolidated
financial statements.
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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
JUNE 30,
-----------------------------
2000 2001
-------- --------
Revenues:
License ..................................................... $ 229.7 $ 180.0
Maintenance ................................................. 125.7 139.3
Professional services ....................................... 17.3 19.9
-------- --------
Total revenues ...................................... 372.7 339.2
-------- --------
Operating expenses:
Selling and marketing expenses .............................. 152.2 152.8
Research and development expenses ........................... 106.6 113.0
Cost of professional services ............................... 20.6 25.1
General and administrative expenses ......................... 38.3 41.9
Acquired research and development ........................... 11.7 --
Amortization of acquired technology, goodwill and intangibles 39.6 48.2
Severance and related expenses .............................. -- 12.0
Merger-related costs and compensation charges ............... 2.1 2.7
-------- --------
Total operating expenses ............................ 371.1 395.7
-------- --------
Operating income (loss) ............................. 1.6 (56.5)
Interest and other income, net ................................ 15.6 16.4
Interest expense .............................................. (3.2) (0.4)
Loss on marketable securities ................................. -- (7.4)
-------- --------
Other income, net ................................... 12.4 8.6
-------- --------
Earnings (loss) before income taxes ................. 14.0 (47.9)
Income taxes .................................................. 4.0 (13.4)
-------- --------
Net earnings (loss) ................................. $ 10.0 $ (34.5)
======== ========
Basic earnings (loss) per share ............................... $ 0.04 $ (0.14)
======== ========
Diluted earnings (loss) per share ............................. $ 0.04 $ (0.14)
======== ========
Shares used in computing basic earnings (loss) per share ...... 245.5 247.3
======== ========
Shares used in computing diluted earnings (loss) per share .... 254.4 247.3
======== ========
Comprehensive Income (Loss):
Net earnings (loss) ......................................... $ 10.0 $ (34.5)
Foreign currency translation adjustment ..................... (5.6) 0.2
Unrealized gain on securities available for sale:
Unrealized gain (loss), net of taxes of $0.5 and $0.1 .... (1.0) 0.2
Realized loss included in net earnings, net of taxes of
$ -- and $2.6 ......................................... -- 4.8
-------- --------
(1.0) 5.0
Unrealized gain on derivative instruments:
Unrealized gain, net of taxes of $ -- and $1.5 .......... 0.1 2.8
Realized (gain) included in net earnings, net of taxes of
$1.6 and $0.8 ......................................... (3.0) (1.4)
-------- --------
(2.9) 1.4
-------- --------
Comprehensive income (loss) ......................... $ 0.5 $ (27.9)
======== ========
The accompanying notes are an integral part of these condensed consolidated
financial statements.
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BMC SOFTWARE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN MILLIONS)
(UNAUDITED)
THREE MONTHS ENDED
JUNE 30,
---------------------------
2000 2001
------- -------
Cash flows from operating activities:
Net earnings (loss) ............................................. $ 10.0 $ (34.5)
Adjustments to reconcile net earnings (loss) to net cash provided
by operating activities:
Acquired research and development and merger-related
costs and compensation charges ............................. 13.8 2.5
Depreciation and amortization ................................ 64.1 91.0
Loss on marketable securities ................................ -- 7.4
Earned portion of restricted stock compensation .............. 2.0 0.6
Net change in receivables, payables, deferred revenue and
other components of working capital ......................... 138.7 94.4
------- -------
Net cash provided by operating activities ............... 228.6 161.4
------- -------
Cash flows from investing activities:
Cash paid for technology acquisitions and other investments,
net of cash acquired .......................................... (17.3) (3.2)
Purchases of marketable securities .............................. (111.7) (54.3)
Maturities of/proceeds from sales of marketable securities ...... 30.5 39.6
Purchases of property and equipment ............................. (47.0) (21.7)
Proceeds from sales of property and equipment ................... -- 3.1
Capitalization of software development costs and related assets . (19.0) (35.3)
Decrease in long-term finance receivables ....................... 41.4 70.2
------- -------
Net cash used in investing activities ................... (123.1) (1.6)
------- -------
Cash flows from financing activities:
Payments on borrowings .......................................... (103.0) (150.0)
Stock options exercised and other ............................... 10.5 6.1
Treasury stock acquired ......................................... (20.1) (34.0)
------- -------
Net cash used in financing activities ................... (112.6) (177.9)
------- -------
Effect of exchange rate changes on cash ........................... (5.6) 1.1
------- -------
Net change in cash and cash equivalents ........................... (12.7) (17.0)
Cash and cash equivalents, beginning of period .................... 152.4 146.0
------- -------
Cash and cash equivalents, end of period .......................... $ 139.7 $ 129.0
======= =======
Supplemental disclosure of cash flow information:
Cash paid for interest, net of amounts capitalized .............. $ 1.5 $ 1.7
Cash paid for income taxes ...................................... $ 9.6 $ 4.8
Common stock and options issued and liabilities assumed
in acquisitions .............................................. $ 55.3 $ --
The accompanying notes are an integral part of these condensed consolidated
financial statements.
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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 provide comparability among the periods presented.
The accompanying unaudited interim condensed consolidated financial
statements reflect all normal recurring adjustments which, in the opinion of
management, are necessary for a fair presentation of the results for the periods
presented. These financial statements have been prepared in accordance with
generally accepted accounting principles for interim financial information and
with the instructions to Form 10-Q and Article 10 of Regulation S-X.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for complete financial statements.
These financial statements should be read in conjunction with the
Company's audited financial statements for the year ended March 31, 2001, as
filed with the Securities and Exchange Commission on Form 10-K.
(2) EARNINGS (LOSS) PER SHARE
Statement of Financial Accounting Standards (SFAS) No. 128, "Earnings Per
Share," requires dual presentation of basic and diluted earnings per share
(EPS). Basic EPS is computed by dividing net income by the weighted average
number of common shares outstanding for the period. Diluted EPS reflects the
potential dilution that could occur if securities or other contracts to issue
common stock were exercised or converted into common stock. For purposes of this
calculation, outstanding stock options and unearned restricted stock are
considered potential common shares using the treasury stock method. For the
three months ended June 30, 2000 and 2001, the treasury stock method effect of
12.1 million and 37.2 million weighted options, respectively, has been excluded
from the calculation of diluted EPS as they are antidilutive. For the three
months ended June 30, 2001, the treasury stock method effect of 0.7 million
weighted unearned restricted shares has also been excluded as they are
antidilutive. The following table summarizes the basic and diluted EPS
computations for the three months ended June 30, 2000 and 2001:
THREE MONTHS ENDED
JUNE 30,
---------------------------
2000 2001
------- -------
(IN MILLIONS,
EXCEPT PER SHARE DATA)
Basic earnings (loss) per share:
Net earnings (loss) ................................ $ 10.0 $ (34.5)
------- -------
Weighted average number of common shares ........... 245.5 247.3
------- -------
Basic earnings (loss) per share .................... $ 0.04 $ (0.14)
======= =======
Diluted earnings (loss) per share:
Net earnings (loss) ................................ $ 10.0 $ (34.5)
------- -------
Weighted average number of common shares ........... 245.5 247.3
Incremental shares from assumed conversions of stock
options and other ............................... 8.9 --
------- -------
Adjusted weighted average number of common shares .. 254.4 247.3
------- -------
Diluted earnings (loss) per share .................... $ 0.04 $ (0.14)
======= =======
(3) SEGMENT REPORTING
BMC's management reviews the results of the Company's software business by
the following product categories: Enterprise Server Management, Business
Integrated Scheduling, Application & Database Performance Management, Recovery &
Storage Management and Other Software. In addition to these software segments,
the professional services business is also considered a separate segment.
Through June 30, 2001, the results of the business information integration
product group were included as part of the Other Software segment. Subsequent to
June 30, 2001, management began including a portion of this product group in the
Application & Database Performance Management segment and the remainder in the
Recovery & Storage Management segment. The amounts reported below for the
quarters ended June 30, 2000 and 2001 reflect this change in the composition of
the segments.
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Segment performance is measured based on operating margins, which reflect
only the direct controllable expenses of the segments and do not include
allocation of indirect research and development (R&D) expenses, the effect of
software development cost capitalization and amortization, selling and marketing
expenses, general and administrative expenses, amortization of acquired
technology, goodwill and intangibles, one-time charges, other income, net, and
income taxes. Assets and liabilities are not accounted for by segment.
ENTERPRISE SYSTEMS MANAGEMENT SOFTWARE
--------------------------------------------------------
APPLICATION
ENTERPRISE BUSINESS & DATABASE RECOVERY &
SERVER INTEGRATED PERFORMANCE STORAGE OTHER PROFESSIONAL INDIRECT AS
MANAGEMENT SCHEDULING MANAGEMENT MANAGEMENT SOFTWARE SERVICES R&D REPORTED
---------- ---------- ---------- ---------- -------- -------- --- --------
(IN MILLIONS)
QUARTER ENDED JUNE 30, 2000
- ---------------------------
Revenues:
License ................... $103.4 $ 11.0 $ 64.1 $ 43.6 $ 7.6 $ -- $ -- $229.7
Maintenance ............... 63.1 7.9 25.5 24.1 5.1 -- -- 125.7
Professional services ..... -- -- -- -- -- 17.3 -- 17.3
------ ------ ------ ------ ------ ------ ------ ------
Total revenues ............... $166.5 $ 18.9 $ 89.6 $ 67.7 $ 12.7 $ 17.3 $ -- $372.7
R&D expenses ................. 22.0 4.7 38.8 17.0 9.5 -- 14.6 106.6
Cost of professional services -- -- -- -- -- 20.6 -- 20.6
------ ------ ------ ------ ------ ------ ------ ------
Operating margin ........... $144.5 $ 14.2 $ 50.8 $ 50.7 $ 3.2 $ (3.3) $(14.6) 245.5
====== ====== ====== ====== ====== ====== ======
Selling and marketing expenses......................................................................................... 152.2
General and administrative expenses.................................................................................... 38.3
Acquired research and development...................................................................................... 11.7
Amortization of acquired technology, goodwill and intangibles.......................................................... 39.6
Merger-related costs and compensation charges.......................................................................... 2.1
Other income, net...................................................................................................... 12.4
------
Consolidated earnings before taxes..................................................................................... $ 14.0
======
ENTERPRISE SYSTEMS MANAGEMENT SOFTWARE
--------------------------------------------------------
APPLICATION
ENTERPRISE BUSINESS & DATABASE RECOVERY &
SERVER INTEGRATED PERFORMANCE STORAGE OTHER PROFESSIONAL INDIRECT AS
MANAGEMENT SCHEDULING MANAGEMENT MANAGEMENT SOFTWARE SERVICES R&D REPORTED
---------- ---------- ---------- ---------- -------- -------- --- --------
(IN MILLIONS)
QUARTER ENDED JUNE 30, 2001
- ---------------------------
Revenues:
License ................... $ 68.5 $ 13.7 $ 50.8 $ 33.6 $ 13.4 $ -- $ -- $180.0
Maintenance ............... 67.1 9.0 30.8 25.3 7.1 -- -- 139.3
Professional services ..... -- -- -- -- -- 19.9 -- 19.9
------ ------ ------ ------ ------ ------ ------ ------
Total revenues ............... $135.6 $ 22.7 $ 81.6 $ 58.9 $ 20.5 $ 19.9 $ -- $339.2
R&D expenses ................. 27.8 5.6 41.6 20.6 14.7 -- 2.7 113.0
Cost of professional services -- -- -- -- -- 25.1 -- 25.1
------ ------ ------ ------ ------ ------ ------ ------
Operating margin ........... $107.8 $ 17.1 $ 40.0 $ 38.3 $ 5.8 $ (5.2) $ (2.7) 201.1
====== ====== ====== ====== ====== ====== ======
Selling and marketing expenses........................................................................................ 152.8
General and administrative expenses................................................................................... 41.9
Amortization of acquired technology, goodwill and intangibles......................................................... 48.2
Severance and related expenses........................................................................................ 12.0
Merger-related costs and compensation charges......................................................................... 2.7
Other income, net..................................................................................................... 8.6
------
Consolidated loss before taxes........................................................................................ $(47.9)
======
(4) SEVERANCE AND RELATED EXPENSES
During the quarter ended June 30, 2001, the Company terminated
approximately 6% of its workforce worldwide. The action was across all divisions
and geographies and affected employees received cash severance packages, the
vast majority of which were paid during the quarter. The affected employees were
also given the option to receive outplacement services and continued health
benefits for a specified period after termination. A charge of $12.0 million was
recorded during the quarter ended June 30, 2001 for such severance and related
expenses, and as of June 30, 2001, $2.5 million of these termination benefits
remain accrued for payment in future periods.
(5) MERGER-RELATED COSTS
During the quarter ended June 30, 2001, the Company made no payments under
its plan of restructuring initiated in March 1999 in connection with the merger
with Boole & Babbage, Inc. (Boole). See the discussion of this plan in the
Company's Annual Report on Form 10-K for the year ended March 31, 2001. An
accrual of $1.1 million remains at June 30, 2001, for severance payments to be
made in future periods.
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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 our Form 10-K for fiscal 2001.
A. RESULTS OF OPERATIONS AND FINANCIAL CONDITION
The following table sets forth, for the periods indicated, the percentages
that selected items in the Condensed Consolidated Statements of Earnings and
Comprehensive Income bear to total revenues. These comparisons of financial
results are not necessarily indicative of future results.
PERCENTAGE OF
TOTAL REVENUES
THREE MONTHS ENDED
JUNE 30,
--------------------
2000 2001
------ ------
Revenues:
License ......................................... 61.6% 53.1%
Maintenance ..................................... 33.7 41.0
Professional services ........................... 4.7 5.9
------ ------
Total revenues .............................. 100.0 100.0
Operating expenses:
Selling and marketing expenses .................. 40.8 45.0
Research and development expenses ............... 28.6 33.3
Cost of professional services ................... 5.5 7.4
General and administrative expenses ............. 10.3 12.4
Acquired research and development ............... 3.1 --
Amortization of goodwill, acquired technology and
intangibles .................................... 10.6 14.2
Severance and related expenses .................. -- 3.5
Merger-related costs and compensation charges ... 0.6 0.8
------ ------
Total operating expenses ..................... 99.5 116.6
------ ------
Operating income (loss) ...................... 0.5 (16.6)
Interest and other income, net .................... 4.2 4.8
Interest expense .................................. (0.9) (0.1)
Loss on marketable securities ..................... -- (2.2)
------ ------
Other income, net ............................ 3.3 2.5
Earnings (loss) before income taxes .......... 3.8 (14.1)
Income taxes ...................................... 1.1 (3.9)
------ ------
Net earnings (loss) .......................... 2.7% (10.2)%
====== ======
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REVENUES
THREE MONTHS ENDED
JUNE 30,
--------------------
2000 2001 CHANGE
-------- -------- ------
(IN MILLIONS)
License:
North America .................. $ 156.6 $ 113.0 (27.8)%
International .................. 73.1 67.0 (8.3)%
-------- --------
Total license revenues ... 229.7 180.0 (21.6)%
Maintenance:
North America .................. 78.7 91.0 15.6%
International .................. 47.0 48.3 2.8%
-------- --------
Total maintenance revenues 125.7 139.3 10.8%
Professional Services:
North America .................. 10.1 10.7 5.9%
International .................. 7.2 9.2 27.8%
-------- --------
Total professional services 17.3 19.9 15.0%
-------- --------
Total revenues ........... $ 372.7 $ 339.2 (9.0)%
======== ========
Product License Revenues
Our product license revenues consist of product license fees and license
upgrade fees. Product license fees are all fees associated with a customer's
licensing of a given software product for the first time. License upgrade fees
are all fees associated with a customer's purchase of the right to run a
previously licensed product on a larger computer or additional computers.
License upgrade fees are primarily generated by our mainframe products and
include fees associated with both current and future additional processing
capacity.
License revenues decreased 22% in the first quarter of fiscal 2002 as
compared to the same period in fiscal 2001, primarily due to a decrease in
enterprise license transactions during the period and a reduction in license
upgrade fees as discussed below. Difficult economic conditions in domestic and
international markets have resulted in reduced IT spending by many of our
customers. Though the number of license transaction closed during the quarter
increased from the prior year, tighter budgets and higher required approval
levels caused many customers to choose smaller transactions in terms of dollar
value.
Our North American operations generated 68% and 63% of license revenues in
the three months ended June 30, 2000 and 2001, respectively. A decrease in
Enterprise Server Management license revenues was the largest contributor to the
28% decline in North American license revenues in the first quarter of fiscal
2002, primarily due to a decrease in capacity-based license upgrade fees.
International license revenues represented 32% and 37% of total license revenues
for the quarters ended June 30, 2000 and 2001, respectively. International
license revenues declined 8% from the first quarter of fiscal 2001, principally
due to foreign currency impact and decreased license upgrade fees associated
with Enterprise Server Management products. International license revenues
decreased by 4% due to foreign currency exchange rate changes from fiscal 2001
to fiscal 2002, after giving effect to our foreign currency hedging program. In
both regions, new product license fees decreased only slightly from the first
quarter of fiscal 2001.
Maintenance and Support Revenues
Maintenance and support revenues represent the ratable recognition of fees
to enroll licensed products in our software maintenance, enhancement and support
program. Maintenance and support enrollment entitles customers to product
enhancements, technical support services and ongoing compatibility with
third-party operating systems, database management systems and applications.
These fees are generally charged annually and equal 15% to 20% of the discounted
price of the product. In addition, customers are entitled to reduced maintenance
percentages for prepayment of annual maintenance fees. Maintenance revenues also
include the ratable recognition of the bundled fees for any initial maintenance
services covered by the related perpetual license agreement.
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10
Maintenance revenues have increased for the three months ended June 30,
2001 over the comparable prior year period as a result of the continuing growth
in the base of installed products and the processing capacity on which they run.
Maintenance fees increase in proportion to the aggregate processing capacity on
which the products are installed; consequently, we receive higher absolute
maintenance fees as customers install our products on additional processing
capacity. Due to the increased discounting for higher levels of additional
processing capacity, the maintenance fees on a per unit of capacity basis are
typically reduced in enterprise license agreements for mainframe products.
Historically, we have enjoyed high maintenance renewal rates for our
mainframe-based products. Should customers migrate from their mainframe
applications or find alternatives to our products, increased cancellations could
adversely impact the sustainability and growth of our maintenance revenues. To
date, we have been successful in extending our traditional maintenance and
support pricing model to the distributed systems market.
Product Line Revenues
THREE MONTHS ENDED
JUNE 30,
--------------------
2000 2001 CHANGE
-------- -------- ------
(IN MILLIONS)
Enterprise Server Management ................ $ 166.5 $ 135.6 (18.6)%
Business Integrated Scheduling .............. 18.9 22.7 20.1%
Application & Database Performance
Management................................. 89.6 81.6 (8.9)%
Recovery & Storage Management ............... 67.7 58.9 (13.0)%
Other Software .............................. 12.7 20.5 61.4%
-------- --------
Total license & maintenance revenues $ 355.4 $ 319.3 (10.2)%
======== ========
We market software solutions designed to improve the availability,
performance and recoverability of enterprise applications, databases and other
IT systems components operating in mainframe, distributed computing and Internet
environments. These solutions fall into the five broad categories above. In
managing our investment in these product categories we consider each to be
included in one of three strategic groups. The first group includes our
Enterprise Server Management and Business Integrated Scheduling solutions. Our
objective for this group is to extend our core strengths in these markets. The
second strategic group includes our Application & Database Performance
Management and Recovery & Storage Management solutions. Our objective for this
group is to build our business in fast-growing markets. The last group includes
our other software products, such as our security, ERP, network management,
output management and service provider solutions. The objective for this group
is to make strategic investments in what we anticipate will be sources of future
growth.
Our Enterprise Server Management and Business Integrated Scheduling
solutions combined represented 52% and 50% of total software revenues for the
quarters ended June 30, 2000 and 2001, respectively. Total software revenues for
this group declined 15% in the first quarter of fiscal 2002 from the same period
in fiscal 2001. Because the Enterprise Server Management group includes a high
proportion of mainframe solutions, decreased capacity-based upgrade fees were
the primary cause of the revenue decline in the fiscal 2002 quarter, more than
offsetting the revenue growth for our Business Integrated Scheduling solutions.
Our Application & Database Performance Management and Recovery & Storage
Management solutions combined contributed 44% of total software revenues for
each of the quarters ended June 30, 2000 and 2001. Total software revenues for
this group declined 11% in the first quarter of fiscal 2002 from the same period
in fiscal 2001 primarily due to the economic conditions discussed above.
Our other software solutions contributed 4% and 6% of total software
revenues for the quarters ended June 30, 2000 and 2001, respectively. Total
software revenues for this group grew 61% in the first quarter of fiscal 2002
from the same period in fiscal 2001. This growth includes increases in revenue
from our security solutions and from our acquisition of OptiSystems Solutions,
Ltd. (OptiSystems) in the second quarter of fiscal 2001.
Professional Services Revenues
Professional services revenues, representing fees from implementation,
integration and education services performed during the period, increased 15%
during the three months ended June 30, 2001, over the comparable prior year
period. Our professional services headcount has continued to increase to meet
the increasing demand for our expanding service offerings.
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EXPENSES
THREE MONTHS ENDED
JUNE 30,
------------------
2000 2001 CHANGE
------ ------ ------
(IN MILLIONS)
Selling and marketing ........................... $152.2 $152.8 0.4%
Research and development ........................ 106.6 113.0 6.0%
Cost of professional services ................... 20.6 25.1 21.8%
General and administrative ...................... 38.3 41.9 9.4%
Acquired research and development ............... 11.7 -- (100.0)%
Amortization of acquired technology, goodwill and
intangibles ..................................... 39.6 48.2 21.7%
Severance and related expenses .................. -- 12.0 n/m
Merger-related costs and compensation charges ... 2.1 2.7 28.6%
------ ------
Total operating expenses .............. $371.1 $395.7 6.6%
====== ======
Selling and Marketing
Our selling and marketing expenses primarily include personnel and related
costs, sales commissions, and costs associated with advertising, industry trade
shows and sales seminars. Selling and marketing expenses increased slightly in
the first quarter of fiscal 2002 over the same period in fiscal 2001. An
increase in personnel costs in the three months ended June 30, 2001, due in part
to increased headcount over the comparable prior year quarter, was mostly offset
by a decrease in sales commissions as a result of the 22% decrease in license
revenues and a decrease in bad debt expense related to license billings.
Research and Development
Research and development expenses mainly comprise personnel costs related
to software developers and development support personnel, including software
programmers, testing and quality assurance personnel and writers of technical
documentation such as product manuals and installation guides. These expenses
also include costs associated with the maintenance, enhancement and support of
our products, computer hardware/software costs and telecommunications expenses
necessary to maintain our data processing center, royalties and the effect of
software development cost capitalization and amortization. Research and
development costs are reduced by amounts capitalized in accordance with SFAS No.
86, "Accounting for the Costs of Computer Software to Be Sold, Leased or
Otherwise Marketed." We capitalize our software development costs when the
projects under development reach technological feasibility as defined by SFAS
No. 86, and amortize these costs over the products' estimated useful lives.
During the first quarters of fiscal 2001 and 2002, we capitalized approximately
$19.0 million and $35.3 million, respectively, of software development and
purchased software costs. The growth in capitalized costs is primarily due to
increases in distributed systems product development and platform compatibility
efforts. We amortized $8.0 million and $22.4 million in the first quarters of
fiscal 2001 and 2002, respectively, of capitalized software development and
purchased software costs pursuant to SFAS No. 86, including $8.5 million in the
first quarter of fiscal 2002 to accelerate the amortization of certain software
products. We accelerated the amortization of these software products as they
were not expected to generate sufficient future revenues which would be required
for us to realize the carrying value of the assets.
Research and development expenses increased 6% during the first quarter of
fiscal 2002 compared to the same period in fiscal 2001. Though headcount at the
end of the quarter remained flat compared to the same period in fiscal 2001,
growth in personnel costs due to annual base pay increases was the primary
contributor to the increase, along with additional software costs. These
increases were partially offset by a reduction in contract labor expense and the
net effect of software development cost capitalization and amortization.
Cost of Professional Services
Cost of professional services consists primarily of personnel costs
associated with implementation, integration and education services that we
perform for our customers, and the related infrastructure to support this
business. The increase in these costs in the three months ended June 30, 2001,
over the comparable prior year period, resulted from increased headcount to
support growth in our professional services revenues.
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General and Administrative
General and administrative expenses are comprised primarily of
compensation and personnel costs within executive management, finance and
accounting, facilities management and human resources. Other costs included in
general and administrative expenses are fees paid for legal and accounting
services, consulting projects, insurance, costs of managing our foreign currency
exposure and bad debt expense related to maintenance billings. Growth in general
and administrative expenses for the three months ended June 30, 2001 over the
same period in the prior year was primarily attributable to increases in
property and other taxes, professional fees and costs of our currency hedging
program, which more than offset reduced management bonuses for the quarter.
Acquired Research and Development
Acquired research and development costs for the three months ended June
30, 2000 include $7.0 million related to the acquisition of Evity, Inc. (Evity)
in the first quarter of fiscal 2001, and the write-off of assets totaling $4.7
million, related to a technology agreement with Envive Corporation that was
terminated during that quarter. See the discussion of the Evity acquisition in
the fiscal 2001 Annual Report on Form 10-K. There was no charge for acquired
research and development during the three months ended June 30, 2001.
Amortization of Acquired Technology, Goodwill and Intangibles
Under the purchase accounting method for certain of our acquisitions,
portions of the purchase prices were allocated to goodwill, workforce, customer
base, software and other intangible assets. We are amortizing these intangibles
over three to five-year periods, which reflect the estimated useful lives of the
respective assets. The increase in the quarterly amortization expense is related
to the Evity, OptiSystems and other acquisitions completed during fiscal 2001.
Severance and Related Expenses
During the quarter ended June 30, 2001, we terminated approximately 6% of
our workforce worldwide. The action was across all divisions and geographies and
affected employees received cash severance packages, the vast majority of which
were paid during the quarter. The affected employees were also given the option
to receive outplacement services and continued health benefits for a specified
period after termination. A charge of $12.0 million was recorded during the
quarter ended June 30, 2001 for such severance and related expenses, and as of
June 30, 2001, $2.5 million of these termination benefits remain accrued for
payment in future periods.
Merger-Related Costs and Compensation Charges
In conjunction with our merger with Boole & Babbage, Inc. in March 1999,
management approved a formal plan of restructuring which included steps to be
taken to integrate the operations of the two companies, consolidate duplicate
facilities and streamline operations to achieve reductions in overhead expenses
in future periods. No charges related to this restructuring plan were recorded
during the quarters ended June 30, 2000 and 2001, and as of June 30, 2001, we
have remaining accrued termination benefits of approximately $1.1 million.
During the quarters ended June 30, 2000 and 2001, we recorded compensation
charges of $2.1 million and $2.7 million, respectively, primarily related to the
vesting of common stock issued as part of the Evity acquisition to certain Evity
employee shareholders who we employed after the acquisition.
OTHER INCOME, NET
For the first quarter of fiscal 2002, other income, net was $8.6 million,
reflecting a decrease of 31% from $12.4 million in the same quarter of fiscal
2001. Other income, net consists primarily of interest earned on cash, cash
equivalents and marketable securities, gains and losses on marketable securities
and interest expense on short-term borrowings. The decrease in other income, net
is primarily due to a $7.4 million loss on a marketable security, which was
partially offset by a decrease in interest expense as a result of reduced
borrowings outstanding during the first quarter of fiscal 2002 and an increase
in interest income.
INCOME TAXES
For the three months ended June 30, 2001, the income tax benefit was $13.4
million, compared to expense of $4.0 million for the same period in fiscal 2001.
Our effective tax rate was 28% for the three months ended June 30, 2001 and 29%
for the comparable prior year period. The reduction in income tax expense is
attributable to the decline in pre-tax earnings discussed above.
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RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board issued SFAS No.
141, "Business Combinations," and SFAS No. 142, "Goodwill and Other Intangible
Assets." SFAS No. 141 addresses financial accounting and reporting for business
combinations and requires that all business combinations be accounted for using
one method, the purchase method. The Statement applies to all business
combinations initiated after June 30, 2001. SFAS No. 142 addresses financial
accounting and reporting at the point of acquisition for intangible assets
acquired individually or with a group of other assets, other than those acquired
in a business combination, and the financial accounting and reporting for
goodwill and other intangible assets subsequent to their acquisition. Under this
Statement, all goodwill and those intangible assets with indefinite useful lives
will no longer be amortized, but rather will be tested at least annually for
impairment. Intangible assets with finite useful lives will continue to be
amortized over those useful lives. The provisions of SFAS No. 142 are required
to be applied for fiscal years beginning after December 15, 2001, except that
goodwill and intangibles that arise from business combinations after June 30,
2001 will not be amortized. As such, we will adopt the Statement in its entirety
on April 1, 2002, and will apply the appropriate provisions to any business
combinations we may complete between June 30, 2001 and that date. Adoption of
these Statements will eliminate a portion of the amortization expense from our
Statement of Earnings and Comprehensive Income, which for the quarter ended June
30, 2001, totaled $35.6 million. For acquisitions completed through June 30,
2001, we estimate that a balance of approximately $160 million of goodwill and
intangibles will remain at adoption that will no longer be amortized. Impairment
charges at adoption or in the future, if any, cannot be estimated.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 2001, our cash, cash equivalents and marketable securities
were $998.7 million, approximately even with the March 31, 2001 balance. Our
working capital as of June 30, 2001, was $140.8 million, reflecting an increase
from the March 31, 2001 balance of $73.7 million due primarily to positive
operating cash flow and the decrease of $150.0 million in short-term borrowings.
We continue to invest cash in securities with maturities beyond one year. While
typically yielding greater returns, this reduces reported working capital. Our
marketable securities are primarily investment grade and highly liquid.
Stockholders' equity as of June 30, 2001, was $1.8 billion.
We continue to primarily finance our growth through funds generated from
operations. For the quarter ended June 30, 2001, net cash provided by operating
activities was $161.4 million. Our primary source of cash is the sale of our
software licenses, software maintenance and professional services. We provide
financing on a portion of these sales transactions, to customers that meet our
specified standards of creditworthiness. We participate in established programs
with third-party financing institutions that allow us to transfer a significant
portion of our finance receivables on a non-recourse basis for cash. During the
quarter ended June 30, 2001, we transferred $113.1 million of such receivables
through these programs. The high credit quality of our finance receivables and
the existence of these third-party facilities extend our ability to offer
financing to qualifying customers on an ongoing basis without a negative cash
flow impact.
Net cash used in investing activities in the quarter ended June 30, 2001
was $1.6 million, primarily related to disbursements for the purchase of
marketable securities and the construction of an expansion to our corporate
headquarters, which were offset by cash receipts from the maturities of
marketable securities and sales of finance receivables. Net cash used in
financing activities in the quarter ended June 30, 2001 was $177.9 million,
which derived primarily from the repayment of all short-term borrowings and
treasury stock purchases. On April 24, 2000, the board of directors authorized
us to purchase up to $500.0 million in common stock. During the quarter ended
June 30, 2001 we purchased 1.4 million shares for $34.0 million. Since the
inception of the repurchase plan, we have purchased 8.5 million shares for
$189.1 million. We plan to continue to buy stock on the open market from time to
time, depending on market conditions.
In April 2001, the term loan outstanding at March 31, 2001 matured and we
paid the balance outstanding. We entered a new 364-day $100.0 million revolving
credit facility, which is secured by certain of our financial assets whose
market value must equal or exceed 115% of the commitment under the facility.
Interest on the borrowings under this facility is payable monthly and is accrued
at a margin above LIBOR. There were no short-term borrowings outstanding as of
June 30, 2001.
We believe that our existing cash balances and funds generated from
operations will be sufficient to meet our liquidity requirements for the
foreseeable future.
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B. CERTAIN RISKS AND UNCERTAINTIES THAT COULD AFFECT FUTURE OPERATING RESULTS
Our Stock Price is Volatile.
Our stock price has been and is highly volatile. Our stock price is highly
influenced by current expectations of future revenue and earnings growth rates.
Any failure to meet anticipated revenue and earnings levels in a period or any
negative change in our perceived long-term growth prospects would likely have a
significant adverse effect on our stock price. Our historical financial results
should not be seen as indicative of future results.
The Timing and Size of License Contracts Could Cause Our Quarterly Revenues and
Earnings to Fluctuate.
Our revenues and results of operations are difficult to predict and may
fluctuate substantially quarter to quarter. The timing and amount of our license
revenues are subject to a number of factors that make estimation of operating
results prior to the end of a quarter extremely uncertain. We generally operate
with little or no sales backlog and, as a result, license revenues in any
quarter are dependent upon contracts entered into or orders booked and shipped
in that quarter. Most of our sales are closed at the end of each quarter. Our
business remains dependent on closing large enterprise license transactions,
which can have sales cycles of up to a year or more and require approval by a
customer's upper management or board of directors. These transactions are
typically difficult to manage and predict. Failure to close an expected
individually significant transaction or multiple expected transactions could
cause our revenues and earnings in a period to fall short of expectations. We
generally do not know whether revenues and earnings will meet expectations until
the final days or day of a quarter.
We have a High Degree of Operating Leverage.
Our business model is characterized by a very high degree of operating
leverage. A substantial portion of our operating costs and expenses consists of
employee and facility related costs, which are relatively fixed over the short
term. In addition, our expense levels and hiring plans are based substantially
on our projections of future revenues. If near term demand weakens in a given
quarter, there would likely be a material adverse effect on operating results
and a resultant drop in our stock price.
Our Operating Margins May Decline Further.
There is a risk that our historically high operating margins may not be
sustainable and may continue to decline, which would adversely affect our
earnings. Our operating margins, excluding amortization of acquired technology,
goodwill and intangibles, merger-related costs and compensation charges and
one-time charges, declined during fiscal 2000 and declined further during fiscal
2001 and the first quarter of fiscal 2002 as compared to fiscal 1999 and prior
periods. Operating expenses as a percentage of revenues associated with our
distributed systems products are higher than those associated with our
traditional mainframe products. Since our mix of business continues to shift to
distributed systems, operating margins will experience more pressure. In
addition, we are not currently profitable in our growing professional services
business. We may be unable to increase or even maintain our current level of
profitability on a quarterly or annual basis in the future. Additionally, we
have acquired businesses experiencing lower operating margins than us.
We May Not be Able to Attract and Retain Qualified Personnel.
Our future success depends on the continued service of our executive
officers and other key administrative, sales and marketing, development and
support personnel. There is currently a shortage of individuals possessing the
technical background necessary to sell, support and develop our products
effectively. Competition for skilled personnel is intense, and we may not be
able to attract, assimilate or retain highly qualified personnel in the future.
Hiring qualified sales, marketing, administrative, research and development and
customer support personnel is very competitive in our industry, particularly in
some of the markets where our development teams are located, such as San Jose,
California, Austin, Texas and Waltham, Massachusetts. Consequently, our growth
rates may be limited by our ability to attract qualified personnel.
Decreasing Demand for Mainframe Processing Capacity and Decreased IT Spending
Could Adversely Affect Revenues.
Fees from enterprise license transactions have historically been a
fundamental component of our revenues and the primary source of mainframe
license revenues. These revenues depend on our customers planning to grow their
mainframe capacity and continuing to perceive an increasing need to use our
existing software products on substantially greater mainframe processing
capacity in future periods. The continued growth of distributed database
management systems may have an adverse effect on growth rates for mainframe
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computing systems. Although we believe that businesses will continue to demand
greater mainframe computing capacity and that e-business will be a driver of
this demand, there can be no assurance as to whether future demand for mainframe
capacity will continue to grow or not. Slower growth in our customers' mainframe
processing capacity will adversely affect our revenues. In addition, many
industry analysts and economists are predicting slower growth and even declines
in overall IT spending by businesses during this fiscal year. Any significant
decline in overall IT spending could adversely affect our revenues.
Increased Competition and Pricing Pressures Could Adversely Affect Our Earnings.
The market for systems management software has been increasingly
competitive for the past number of years. We compete with a variety of software
vendors including IBM and CA. We derived over half of our total revenues in
fiscal 2001 from software products for IBM and IBM-compatible mainframe
computers. IBM continues, directly and through third parties, to enhance and
market its utilities for IMS and DB2 as lower cost alternatives to the solutions
provided by us and other independent software vendors. Although such utilities
are currently less functional than our solutions, IBM has begun to invest more
heavily in the IMS and DB2 utility market and appears to be committed to
competing in these markets. If IBM is successful with its efforts to achieve
performance and functional equivalence with our IMS, DB2 and other products at a
lower cost, our business may be materially adversely affected. CA is also
competing with us in these markets. Competition has lead to increased pricing
pressures within the mainframe systems software markets. We continue to reduce
the cost to our customers of our mainframe tools and utilities in response to
such competitive pressures. Microsoft entered the distributed systems monitoring
and management market through its relationship with Net IQ and is now competing
with us in the market for management tools for the Windows operating system.
In connection with the introduction of its Z-series server, IBM has
announced changes to its mainframe software pricing, including a new
workload-based pricing model. We have also announced that we will support the
new workload-based pricing structure for the Z-series, but the effect of this
change on our future mainframe license revenues cannot be determined.
Maintenance Revenue Growth Could Slow.
Maintenance revenues have increased over the last three fiscal years and
the first quarter of fiscal 2002 as a result of the continuing growth in the
base of installed products and the processing capacity on which they run.
Maintenance fees increase as the processing capacity on which the products are
installed increases; consequently, we receive higher absolute maintenance fees
as customers install our products on additional processing capacity. Due to
increased discounting for higher levels of additional processing capacity, the
maintenance fees on a per unit of capacity basis are typically reduced in
enterprise license agreements for our mainframe products. Historically, we have
enjoyed high maintenance renewal rates for our mainframe products. Should
customers migrate from their mainframe applications or find alternatives to our
products, increased cancellations could adversely impact the sustainability and
growth of our maintenance revenues. To date, we have been successful in
extending our traditional maintenance and support pricing model to the
distributed systems market. Renewal rates for maintenance on our distributed
systems products are lower than on our mainframe products.
Failure to Adapt to Technological Change Could Adversely Affect Our Earnings.
If we fail to keep pace with technological change in our industry, such
failure would have an adverse effect on our revenues and earnings. We operate in
a highly competitive industry characterized by rapid technological change,
evolving industry standards, changes in customer requirements and frequent new
product introductions and enhancements. During the past two years, funding for
new ventures and start-ups in our industry has been at an all-time high with
many new technological advancements and competing products entering the
marketplace. The distributed systems and application management markets in which
we operate are far more crowded and competitive than our traditional mainframe
systems management markets. Our ability to compete effectively and our growth
prospects depend upon many factors, including the success of our existing
distributed systems products, the timely introduction and success of future
software products, and the ability of our products to interoperate and perform
well with existing and future leading databases and other platforms supported by
our products. We have experienced long development cycles and product delays in
the past, particularly with some of our distributed systems products, and expect
to have delays in the future. Delays in new mainframe or distributed systems
product introductions or less-than-anticipated market acceptance of these new
products are possible and would have an adverse effect on our revenues and
earnings. New products or new versions of existing products may, despite
testing, contain undetected errors or bugs that could delay the introduction or
adversely affect commercial acceptance of such products.
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Changes in Pricing Practices Could Adversely Affect Revenues and Earnings.
We may choose in fiscal 2002 or a future fiscal year to make changes to
our product packaging, pricing or licensing programs. If made, such changes may
have a material adverse impact on revenues or earnings.
Our Customers May Not Accept our Product Strategies.
Historically, we have focused on selling software products to address
specific customer problems associated with their applications. We are now
integrating multiple software products and offering packaged solutions for
customers' systems. There can be no assurance that customers will perceive a
need for such solutions. In addition, there may be technical difficulties in
integrating individual products into a combined solution that may delay the
introduction of such solutions to the market or adversely affect the demand for
such solutions.
Risks Related to Business Combinations.
As part of our overall strategy, we have acquired or invested in, and plan
to continue to acquire or invest in, complementary companies, products, and
technologies and to enter into joint ventures and strategic alliances with other
companies. Risks commonly encountered in such transactions include: the
difficulty of assimilating the operations and personnel of the combined
companies; the risk that we may not be able to integrate the acquired
technologies or products with our current products and technologies; the
potential disruption of our ongoing business; the inability to retain key
technical and managerial personnel; the inability of management to maximize our
financial and strategic position through the successful integration of acquired
businesses; and decreases in reported earnings as a result of charges for
in-process research and development and amortization of goodwill and acquired
intangible assets.
In order for us to maximize the return on our investments in acquired
companies, the products of these entities must be integrated with our existing
products. These integrations can be difficult and unpredictable, especially
given the complexity of software and that acquired technology is typically
developed independently and designed with no regard to integration. The
difficulties are compounded when the products involved are well established
because compatibility with the existing base of installed products must be
preserved. Successful integration also requires coordination of different
development and engineering teams. This too can be difficult and unpredictable
because of possible cultural conflicts and different opinions on technical
decisions and product roadmaps. There can be no assurance that we will be
successful in our product integration efforts or that we will realize the
expected benefits.
With each of our acquisitions, we have initiated efforts to integrate the
disparate cultures, employees, systems and products of these companies.
Retention of key employees is critical to ensure the continued advancement,
development, support, sales and marketing efforts pertaining to the acquired
products. We have implemented retention programs to keep many of the key
technical, sales and marketing employees; nonetheless, we have lost some key
employees and may lose others in the future.
Enforcement of Our Intellectual Property Rights.
We rely on a combination of copyright, patent, trademark, trade secrets,
confidentiality procedures and contractual procedures to protect our
intellectual property rights. Despite our efforts to protect our intellectual
property rights, it may be possible for unauthorized third parties to copy
certain portions of our products or to reverse engineer or obtain and use
technology or other information that we regard as proprietary. There can also be
no assurance that our intellectual property rights would survive a legal
challenge to their validity or provide significant protection for us. In
addition, the laws of certain countries do not protect our proprietary rights to
the same extent as do the laws of the United States. Accordingly, there can be
no assurance that we will be able to protect our proprietary technology against
unauthorized third party copying or use, which could adversely affect our
competitive position.
Possibility of Infringement Claims.
From time to time, we receive notices from third parties claiming
infringement by our products of third party patent and other intellectual
property rights. We expect that software products will increasingly be subject
to such claims as the number of products and competitors in our industry
segments grow and the functionality of products overlap. In addition, we expect
to receive more patent infringement claims as companies increasingly seek to
patent their software and business methods, especially in light of recent
developments in the law that extend the ability to patent software and business
methods. Regardless of its merit, responding to any such claim could be
time-consuming, result in costly litigation and require us to enter into royalty
and licensing agreements which
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may not be offered or available on terms acceptable to us. If a successful claim
is made against us and we fail to develop or license a substitute technology,
our business, results of operations or financial position could be materially
adversely affected.
Risks Related to International Operations and the Euro Currency.
We have committed, and expect to continue to commit, substantial resources
and funding to build our international service and support infrastructure.
Operating costs in many countries, including many of those in which we operate,
are higher than in the United States. In order to increase international sales
in fiscal 2002 and subsequent periods, we must continue to globalize our
software product lines; expand existing and establish additional foreign
operations; hire additional personnel; identify suitable locations for sales,
marketing, customer service and development; and recruit international
distributors and resellers in selected territories. Future operating results are
dependent on sustained performance improvement by our international offices,
particularly our European operations. Our operations and financial results
internationally could be significantly adversely affected by several risks such
as changes in foreign currency exchange rates, sluggish regional economic
conditions and difficulties in staffing and managing international operations.
Generally, our foreign sales are denominated in our foreign subsidiaries' local
currencies. If these foreign currency exchange rates change unexpectedly, we
could have significant gains or losses. Many systems and applications software
vendors are experiencing difficulties internationally.
The European Union's adoption of the Euro single currency raises a variety
of issues associated with our European operations. Although the transition will
be phased in over several years, the Euro became Europe's single currency on
January 1, 1999. Our foreign exchange exposures to legacy sovereign currencies
of the participating countries in the Euro became foreign exchange exposures to
the Euro upon its introduction. Although we are not aware of any material
adverse financial risk consequences of the change from legacy sovereign
currencies to the Euro, conversion may result in problems, which may have an
adverse impact on our business since we may be required to incur unanticipated
expenses to remedy these problems.
Conditions in Israel.
Our INCONTROL and enterprise resource planning (ERP) development
operations are conducted primarily in Israel and, accordingly, we are directly
affected by economic, political and military conditions in Israel. Any major
hostilities involving Israel or the interruption or curtailment of trade between
Israel and its present trading partners could materially adversely affect our
business, operating results and financial condition.
Israel's economy has been subject to numerous destabilizing factors,
including a period of rampant inflation in the early to mid-1980's, low foreign
exchange reserves, fluctuations in world commodity prices, military conflicts
and civil unrest. Since the establishment of the State of Israel in 1948, a
state of hostility has existed, varying in degree and intensity, between Israel
and the Palestinian people and the Arab countries. In addition, Israel and
companies doing business with Israel have been the subject of an economic
boycott by the Arab countries since Israel's establishment. Although Israel has
entered into various agreements with certain Arab countries and the Palestinian
Authority, and various declarations have been signed in connection with efforts
to resolve some of the economic and political problems in the Middle East, we
cannot predict whether or in what manner these problems will be resolved. To
date, the current unrest in the region and hostilities within Israel associated
with the ongoing peace process have not caused disruption of our operations
located in Israel.
In addition, certain of our INCONTROL and ERP employees are currently
obligated to perform annual reserve duty in the Israel Defense Forces and are
subject to being called for active military duty at any time. Although our
businesses located in Israel have historically operated effectively under these
requirements, we cannot predict the effect of these obligations on our
operations in the future.
Possible Adverse Impact Of Interpretations of Existing Accounting
Pronouncements.
On April 1, 1998 and 1999 we adopted American Institute of Certified
Public Accountants Statement of Position ("SOP") 97-2, "Software Revenue
Recognition," and SOP 98-9 "Modification of SOP 97-2, Software Revenue
Recognition, With Respect to Certain Transactions," respectively. The adoption
of these standards did not have a material impact on our financial position or
results of operations. Based on our reading and interpretation of these SOPs, we
believe that our current sales contract terms and business arrangements have
been properly reported. However, the American Institute of Certified Public
Accountants and its Software Revenue Recognition Task Force continue to issue
interpretations and guidance for applying the relevant standards to a wide range
of sales contract terms and business arrangements that are prevalent in the
software industry. Also, the Securities and Exchange Commission ("SEC") has
issued Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial
Statements," which provides guidance
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related to revenue recognition based on interpretations and practices followed
by the SEC. Future interpretations of existing accounting standards or changes
in our business practices could result in future changes in our revenue
accounting policies that could have a material adverse effect on our business,
financial condition and results of operations.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to a variety of risks, including foreign currency exchange
rate fluctuations and changes in the market value of our investments. In the
normal course of business, we employ established policies and procedures to
manage these risks including the use of derivative instruments. There have been
no material changes in our foreign exchange risk management strategy or our
marketable securities subsequent to March 31, 2001, therefore our foreign
currency exchange rate risk and interest rate risk related to investments remain
substantially unchanged from the description in our Form 10-K for the year ended
March 31, 2001.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On February 4, 2000, an action styled Dov Klein v. BMC Software, Inc.,
Richard P. Gardner, Stephen B. Solcher, Roy J. Wilson, Kevin M. Weiss, Kevin M.
Klausmeyer, Max P. Watson, Jr., William M. Austin, Wayne S. Morris, M. Brinkley
Morse, Robert E. Beauchamp, and Theodore W. Van Duyn, No. 00-CV-359, was filed
in the United States District Court for the Southern District of Texas, Houston
Division. The plaintiff alleges that BMC Software and eleven current and former
senior executives violated Sections 10(b) and 20(a) of the Securities Exchange
Act and Rule 10b-5. The plaintiff contends that BMC Software and the individual
defendants artificially inflated our stock price by extending unusual payment
terms to purchasers of our products, failing to disclose softening demand and
increasing competition for our products, and failing to disclose difficulties in
managing our sales force. The plaintiff seeks unspecified compensatory damages,
interest and costs, including legal fees. The action is subject to the Private
Securities Litigation Reform Act of 1995. On March 9, 2000, the court
consolidated four similar actions, ordered that all subsequently filed similar
actions be consolidated, and set out a briefing schedule. Subsequently, six
additional cases were filed that made similar allegations. These cases were also
consolidated into the main action. On August 14, 2000, the plaintiff filed a
consolidated amended complaint. This complaint alleges a class of all persons
who purchased BMC stock between July 29, 1999 and July 5, 2000. We have filed a
motion to dismiss the complaints and we intend to defend the consolidated action
vigorously. Briefing on the motion to dismiss is complete. At this early stage
of the litigation, it is not possible to estimate potential damages, but it
appears that if liability were established, an unfavorable judgment or
settlement could have a material adverse effect on our financial position and
results of operations.
We are subject to various other legal proceedings and claims, either
asserted or unasserted, which arise in the ordinary course of business.
Management does not believe that the outcome of any of these legal matters will
have a material adverse effect on our financial position or results of
operations.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
None
(b) Reports on Form 8-K.
None
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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
August 10, 2001
By: /s/ JOHN W. COX
---------------------------
John W. Cox
Vice President, Chief
Financial Officer and
Chief Accounting Officer
August 10, 2001
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