================================================================================
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, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 001-16393
BMC SOFTWARE, INC.
(Exact name of registrant as specified in its charter)
<Table>
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 offices) (Zip Code)
</Table>
Registrant's telephone number including area code: (713) 918-8800
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Rule 12b-2 of the Exchange Act).Yes [X] No [ ]
As of February 10, 2003, there were outstanding 233,294,188 shares of
Common Stock, par value $.01, of the registrant.
================================================================================
1
BMC SOFTWARE, INC. AND SUBSIDIARIES
QUARTER ENDED DECEMBER 31, 2002
INDEX
<Table>
<Caption>
PAGE
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of March 31, 2002 and
December 31, 2002 (Unaudited)....................................... 3
Condensed Consolidated Statements of Operations and Comprehensive
Income (Loss) for the three months and nine months ended
December 31, 2001 and 2002 (Unaudited) ............................. 4
Condensed Consolidated Statements of Cash Flows for the nine
months ended December 31, 2001 and 2002 (Unaudited)................. 5
Notes to Condensed Consolidated Financial Statements (Unaudited)...... 6
Item 2. Management's Discussion and Analysis of Results of Operations and
Financial Condition................................................... 14
Item 3. Quantitative and Qualitative Disclosures about Market Risk............... 31
Item 4. Controls and Procedures.................................................. 32
PART II. OTHER INFORMATION
Item 1. Legal Proceedings........................................................ 32
Item 6. Exhibits and Reports on Form 8-K......................................... 32
Signatures............................................................... 33
Certifications........................................................... 34
</Table>
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
BMC SOFTWARE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN MILLIONS)
<Table>
<Caption>
MARCH 31, DECEMBER 31,
2002 2002
----------- -----------
ASSETS (UNAUDITED)
Current assets:
Cash and cash equivalents.................................. $ 330.0 $ 287.2
Marketable securities...................................... 215.8 168.8
Trade accounts receivable, net............................. 182.6 168.4
Current trade finance receivables, net..................... 129.9 182.7
Income taxes receivable.................................... 70.1 17.1
Other current assets....................................... 68.4 82.3
----------- -----------
Total current assets................................ 996.8 906.5
Property and equipment, net.................................. 443.0 416.9
Software development costs and related assets, net........... 211.8 203.8
Long-term marketable securities.............................. 557.9 443.5
Long-term finance receivables................................ 176.3 224.6
Acquired technology, net..................................... 50.2 125.1
Goodwill, net................................................ 121.6 318.8
Intangible assets, net....................................... 12.0 59.2
Other long-term assets....................................... 106.6 119.8
----------- -----------
$ 2,676.2 $ 2,818.2
========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Trade accounts payable..................................... $ 16.2 $ 58.8
Accrued liabilities........................................ 204.2 236.0
Current portion of deferred revenue........................ 460.2 501.3
----------- -----------
Total current liabilities........................... 680.6 796.1
Long-term deferred revenue................................... 483.1 595.0
Other long-term liabilities.................................. 5.9 26.0
----------- -----------
Total liabilities................................... 1,169.6 1,417.1
Commitments and contingencies
Stockholders' equity:
Preferred stock............................................ -- --
Common stock............................................... 2.5 2.5
Additional paid-in capital................................. 536.9 537.0
Retained earnings.......................................... 1,126.6 1,124.3
Accumulated other comprehensive loss....................... (18.8) (14.0)
----------- -----------
1,647.2 1,649.8
Less treasury stock, at cost............................. (135.2) (245.9)
Less unearned portion of restricted stock compensation... (5.4) (2.8)
----------- -----------
Total stockholders' equity.......................... 1,506.6 1,401.1
----------- -----------
$ 2,676.2 $ 2,818.2
=========== ===========
</Table>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
3
BMC SOFTWARE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE INCOME (LOSS)
(IN MILLIONS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<Table>
<Caption>
THREE MONTHS ENDED NINE MONTHS ENDED
DECEMBER 31, DECEMBER 31,
----------------------- ---------------------
2001 2002 2001 2002
----------- ----------- -------- ---------
Revenues:
License......................................................... $ 152.3 $ 168.5 $ 463.8 $ 424.9
Maintenance..................................................... 146.3 159.1 426.8 459.7
Professional services........................................... 22.4 22.0 66.5 61.4
-------- -------- --------- ---------
Total revenues.......................................... 321.0 349.6 957.1 946.0
-------- -------- --------- ---------
Operating expenses:
Selling and marketing expenses.................................. 128.4 129.4 414.1 361.6
Research and development expenses............................... 137.2 120.5 356.0 351.1
Cost of professional services................................... 22.7 22.3 74.7 64.6
General and administrative expenses............................. 36.1 41.1 118.2 112.5
Acquired research and development............................... -- 12.0 -- 12.0
Amortization and impairment of acquired technology, goodwill and
intangibles................................................... 103.9 17.8 200.6 42.6
Restructuring costs............................................. 8.2 (0.3) 52.9 (0.1)
Merger-related costs and compensation charges................... 5.8 -- 11.6 0.6
-------- ------- --------- ---------
Total operating expenses................................ 442.3 342.8 1,228.1 944.9
-------- -------- --------- ---------
Operating income (loss)................................. (121.3) 6.8 (271.0) 1.1
Interest and other income, net.................................... 16.1 16.1 50.9 49.0
Interest expense.................................................. -- -- (0.4) --
Loss on marketable securities and other investments............... (1.2) (4.4) (8.8) (10.7)
-------- -------- --------- ---------
Other income, net....................................... 14.9 11.7 41.7 38.3
-------- -------- --------- ---------
Earnings (loss) before income taxes..................... (106.4) 18.5 (229.3) 39.4
Income tax provision (benefit).................................... (11.9) 6.4 (47.0) 12.0
-------- -------- --------- ---------
Net earnings (loss)..................................... $ (94.5) $ 12.1 $ (182.3) $ 27.4
======== ======== ========= =========
Basic earnings (loss) per share................................... $ (0.39) $ 0.05 $ (0.74) $ 0.12
======== ======== ========= =========
Diluted earnings (loss) per share................................. $ (0.39) $ 0.05 $ (0.74) $ 0.11
======== ======== ========= =========
Shares used in computing basic earnings (loss) per share.......... 243.6 234.6 245.9 238.2
======== ======== ========= =========
Shares used in computing diluted earnings (loss) per share........ 243.6 235.5 245.9 239.3
======== ======== ========= =========
Comprehensive income (loss):
Net earnings (loss)............................................. $ (94.5) $ 12.1 $ (182.3) $ 27.4
Foreign currency translation adjustment......................... 1.5 2.7 (0.6) (7.5)
Unrealized gain (loss) on securities available for sale:
Unrealized gain (loss), net of taxes of $1.6, $6.5, $0.5 and
$7.2....................................................... (3.1) 12.0 (0.9) 13.3
Realized loss included in net earnings (loss), net of taxes of
$0.4, $0, $3.1 and $0.5.................................... 0.8 -- 5.7 1.0
-------- -------- --------- --------
(2.3) 12.0 4.8 14.3
Unrealized gain (loss) on derivative instruments:
Unrealized gain (loss), net of taxes of $0.7, $0.4, $0, and
$2.4....................................................... 1.3 (0.8) -- (4.5)
Realized (gain) loss included in net earnings (loss), net of
taxes of $0.8, $0.6 $1.6 and $1.3.......................... (1.6) 1.1 (3.0) 2.5
-------- -------- -------- --------
(0.3) 0.3 (3.0) (2.0)
-------- -------- -------- --------
Comprehensive income (loss)............................. $ (95.6) $ 27.1 $ (181.1) $ 32.2
======== ======== ======== ========
</Table>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
4
BMC SOFTWARE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN MILLIONS)
(UNAUDITED)
<Table>
<Caption>
NINE MONTHS ENDED
DECEMBER 31,
---------------------
2001 2002
-------- -------
Cash flows from operating activities:
Net earnings (loss)................................................................... $ (182.3) $ 27.4
Adjustments to reconcile net earnings (loss) to net cash provided by operating activities:
Restructuring costs................................................................ 21.5 (1.3)
Acquired research & development and merger-related costs & compensation charges.... 10.9 12.6
Depreciation and amortization...................................................... 283.4 171.6
Impairment of acquired technology, goodwill and intangibles........................ 63.3 --
Impairment of technology assets and investments.................................... 5.0 4.5
Loss on marketable securities...................................................... 8.8 6.2
Equity in loss of unconsolidated affiliate......................................... 0.5 --
Earned portion of restricted stock compensation.................................... 2.3 2.0
Decrease in income taxes receivable................................................ 3.4 53.0
(Increase) decrease in long-term finance receivables............................... 59.9 (48.3)
Net change in receivables, payables, deferred revenue and other components of
working capital.................................................................. 133.0 152.4
--------- ---------
Net cash provided by operating activities..................................... 409.7 380.1
--------- ---------
Cash flows from investing activities:
Debtor-in-possession financing provided to Peregrine Systems, Inc..................... -- (53.8)
Proceeds from debtor-in-possession financing provided to Peregrine Systems, Inc....... -- 53.8
Cash paid for technology acquisitions and other investments, net of cash acquired..... (10.4) (366.1)
Return of capital for cost-basis investments.......................................... 0.4 0.7
Purchases of marketable securities.................................................... (54.4) (123.6)
Maturities of/proceeds from sales of marketable securities............................ 173.3 297.3
Purchases of property and equipment................................................... (50.3) (16.1)
Proceeds from sales of property and equipment......................................... 3.1 --
Capitalization of software development costs and related assets....................... (85.4) (66.3)
---------- ----------
Net cash used in investing activities......................................... (23.7) (274.1)
--------- ---------
Cash flows from financing activities:
Payments on borrowings................................................................ (150.0) --
Stock options exercised and other..................................................... 15.1 19.6
Treasury stock acquired............................................................... (115.3) (158.8)
--------- ---------
Net cash used in financing activities......................................... (250.2) (139.2)
--------- ---------
Effect of exchange rate changes on cash................................................. (0.1) (9.6)
--------- ---------
Net change in cash and cash equivalents................................................. 135.7 (42.8)
Cash and cash equivalents, beginning of period.......................................... 146.0 330.0
--------- ---------
Cash and cash equivalents, end of period................................................ $ 281.7 $ 287.2
========= =========
Supplemental disclosure of cash flow information:
Cash paid for interest, net of amounts capitalized.................................... $ 1.7 $ --
Cash paid for income taxes, net of amounts refunded................................... $ 20.3 $ (48.2)
Liabilities assumed in acquisitions................................................... $ -- $ 69.3
Common stock received as consideration for technology sale............................ $ 0.2 $ --
</Table>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
5
BMC SOFTWARE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(1) BASIS OF PRESENTATION
The accompanying condensed consolidated financial statements include
the accounts of BMC Software, Inc. and its wholly owned subsidiaries
(collectively, the Company or BMC). All significant intercompany balances and
transactions have been eliminated in consolidation. Certain amounts previously
reported have been reclassified to ensure comparability among the periods
presented. Beginning in the quarter ended December 31, 2002, changes in
long-term finance receivables have been reported as a component of cash flows
from operating activities in the condensed consolidated statements of cash
flows, whereas these were previously reported as a component of cash flows from
investing activities. All periods presented have been reclassified for
consistency.
The accompanying unaudited interim condensed consolidated financial
statements reflect all normal recurring adjustments which, in the opinion of
management, are necessary for a fair presentation of the results for the periods
presented. These financial statements have been prepared in accordance with
generally accepted accounting principles for interim financial information and
with the instructions to Form 10-Q and Article 10 of Regulation S-X.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for complete financial statements.
These financial statements should be read in conjunction with the
Company's audited financial statements for the year ended March 31, 2002, as
filed with the Securities and Exchange Commission on Form 10-K.
As discussed in Note 3, the Company acquired the assets and assumed
certain liabilities related to the Remedy(R) products (Remedy) from Peregrine
Systems, Inc. effective November 20, 2002, and as such, Remedy's results have
been included in the Company's fiscal 2003 financial results from the
acquisition date. The Company does not believe that the assets and liabilities
acquired in the Remedy acquisition constitute a "business" in accordance with
the guidance set forth in Rule 11-01(d) of Regulation S-X, and the Company
intends to file a no-action request letter with the Securities and Exchange
Commission to confirm the Company's position.
(2) EARNINGS PER SHARE
Basic earnings per share (EPS) is computed by dividing net earnings
(loss) by the weighted average number of common shares outstanding for the
period. Diluted EPS reflects the potential dilution that could occur if
securities or other contracts to issue common stock were exercised or converted
into common stock. For purposes of this calculation, outstanding stock options
and unearned restricted stock are considered potential common shares using the
treasury stock method. For the three-month periods ended December 31, 2001 and
2002, the treasury stock method effect of 37.0 million and 29.5 million weighted
options, respectively, and 0.5 million and 0.0 weighted unearned restricted
shares, respectively, has been excluded from the calculation of EPS as it is
anti-dilutive. For the nine-month periods ended December 31, 2001 and 2002, the
treasury stock method effect of 37.4 million and 30.3 million weighted options,
respectively, and 0.6 million and 0.0 weighted unearned restricted shares,
respectively, 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, 2001 and
2002:
<Table>
<Caption>
THREE MONTHS ENDED NINE MONTHS ENDED
DECEMBER 31, DECEMBER 31,
------------ ------------
2001 2002 2001 2002
-------- -------- -------- --------
(IN MILLIONS, EXCEPT PER SHARE DATA)
Basic earnings (loss) per share:
Net earnings (loss)................................ $(94.5) $ 12.1 $(182.3) $ 27.4
------ ------ ------- ------
Weighted average number of common shares........... 243.6 234.6 245.9 238.2
------ ------ ------- ------
Basic earnings (loss) per share.................... $(0.39) $ 0.05 $ (0.74) $ 0.12
====== ====== ======= ======
Diluted earnings (loss) per share:
Net earnings (loss)................................ $(94.5) $ 12.1 $(182.3) $ 27.4
------ ------ ------- ------
Weighted average number of common shares........... 243.6 234.6 245.9 238.2
Incremental shares from assumed conversions of
stock options and unearned restricted stock...... -- 0.9 -- 1.1
Adjusted weighted average number of common shares.. 243.6 235.5 245.9 239.3
------ ------ ------- ------
Diluted earnings (loss) per share.................. $(0.39) $ 0.05 $ (0.74) $ 0.11
====== ====== ======= ======
</Table>
6
(3) BUSINESS COMBINATION
On November 20, 2002, the Company acquired the assets of Remedy from
Peregrine Systems, Inc. (Peregrine) for $355.0 million in cash plus the
assumption of certain liabilities of Remedy. In accordance with the purchase
agreement, the cash purchase price is subject to adjustment and this purchase
price adjustment has not yet been finalized. Remedy's results have been included
in the Company's consolidated financial statements since the acquisition date.
Remedy focuses on automating service-related business processes through a
complete suite of service management applications. Remedy's products will extend
BMC's core market-leading data and systems management solutions to deliver
comprehensive and integrated business service management solutions. In
connection with the acquisition, the Company provided $53.8 million of
debtor-in-possession financing to Peregrine which was repaid to the Company in
conjunction with the close of the acquisition.
The aggregate purchase price prior to adjustment was $363.4 million,
including cash consideration of $355.0 million and direct costs of the
transaction. The allocation of the purchase price to specific assets and
liabilities was based, in part, upon outside appraisals of the fair value of
certain assets of Remedy. The following table summarizes the estimated fair
values of the assets acquired and liabilities assumed at the date of
acquisition. The Company is in the process of determining the fair values of
certain assets and liabilities; thus, the allocation of the purchase price is
subject to refinement.
<Table>
<Caption>
NOVEMBER 20,
2002
-------------
(IN MILLIONS)
Current assets $ 32.3
Property and equipment and other long-term assets 28.1
Intangible assets 176.0
Goodwill 196.3
---------
Total assets acquired 432.7
---------
Current liabilities (69.3)
---------
Net assets acquired $ 363.4
=========
</Table>
Of the $176.0 million of acquired intangible assets, $20.0 million was
assigned to tradenames that are not subject to amortization and $12.0 million,
or 3% of the purchase price, was assigned to research and development assets
that were written off at the date of the acquisition in accordance with
Financial Accounting Standards Board Interpretation No. 4, "Applicability of
FASB Statement No. 2 to Business Combinations Accounted for by the Purchase
Method," as discussed below. Those write-offs are reflected as acquired research
and development in the accompanying statements of operations and comprehensive
income (loss) for the three months and nine months ended December 31, 2002. The
amount allocated to tradenames consists primarily of the estimated fair value of
the Remedy and Action Request System(R) names. A discount rate of 20% was used
in discounting the cash flows associated with the tradenames to estimate the
fair value of these intangible assets. Tradenames will not be amortized because
the assets have indefinite remaining useful lives, but will be reviewed
periodically for impairment.
The remaining $144.0 million of acquired intangible assets have an
estimated weighted-average useful life of three years, and include $109.0
million of acquired technology with an estimated weighted-average useful life of
three years and $35.0 million of customer relationships with an estimated
weighted-average useful life of three years. Acquired technology, which consists
of products that have reached technological feasibility, primarily relates to
Remedy's Action Request System (AR System(R)) multi-tier architecture and
developed out-of-the-box application solutions that sit on top of the AR System.
Customer relationships represent existing contracts with customers to provide
maintenance related to Remedy's installed base. A discount rate of 20% was used
in discounting the cash flows associated with acquired technology and customer
relationships to estimate the fair values of these intangible assets.
The $196.3 million of goodwill was assigned to the Remedy segment and
all of that amount is expected to be deductible for tax purposes. Factors that
contributed to a purchase price that results in goodwill include, but are not
limited to, the retention of research and development personnel with the skills
to develop future Remedy technology, support personnel to provide the
maintenance services related to Remedy products and a trained sales force
capable of selling current and future Remedy products, the opportunity to
cross-sell Remedy and BMC products to existing customers and the positive
reputation that Remedy has in the market.
As discussed above, the Company allocated $12.0 million of the purchase
price to in-process research and development (IPR&D) projects. The amount
allocated represents the estimated fair value, based on risk-adjusted cash flows
and historical costs expended, related to Remedy's incomplete research and
development projects. At the date of acquisition, the development of these
projects had
7
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.
At the acquisition date, Remedy was conducting design, development,
engineering and testing activities associated with the completion of
next-generation core and application technologies that are expected to address
emerging market demands in the service management market. At the acquisition
date, the technologies under development were approximately 25%-35% complete
based on engineering man-month data and technological progress. Remedy had
incurred nearly $6 million on the in-process projects, and expected to spend
approximately $16 million to complete all phases of the research and
development. Anticipated completion dates ranged from 3 to 12 months, at which
times the Company expects to begin benefiting from the developed technologies.
In making its purchase price allocation to IPR&D for the Remedy
acquisition, the Company considered present value calculations of income, an
analysis of project accomplishments and remaining outstanding items, an
assessment of overall contributions, as well as project risks. The value
assigned to purchased in-process technology was 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 projection used to value the
in-process research and development was 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.
The resulting net cash flows from such projects are based on the Company's
estimates of cost of sales, operating expenses and income taxes from such
projects.
In the present value calculations, aggregate revenues for the
developed, in-process and future Remedy products were estimated to grow at a
compounded annual growth rate of approximately 15% from fiscal 2003 to fiscal
2006, 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 the
acquisition and then decline 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 forecast and the risks associated with the projected growth and
profitability of the developmental projects, discount rates of 40% to 45% were
considered appropriate for the IPR&D. These discount rates were commensurate
with Remedy's stage of development and the uncertainties in the economic
estimates described above.
The estimates used in valuing all intangible assets, including IPR&D,
were based upon assumptions believed to be reasonable but which are inherently
uncertain and unpredictable. Assumptions may be incomplete or inaccurate, and
unanticipated events and circumstances may occur. Accordingly, actual results
may differ from the projected results used to determine fair value.
The following unaudited pro forma results of operations for the three
months and nine months ended December 31, 2001 and 2002, are as if the
acquisition of Remedy 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 acquisition 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
$12.0 million write-off of IPR&D associated with the acquisition.
<Table>
<Caption>
THREE MONTHS ENDED NINE MONTHS ENDED
DECEMBER 31, DECEMBER 31,
------------------------ ------------------------
2001 2002 2001 2002
----------- --------- ----------- ---------
(IN MILLIONS, EXCEPT PER SHARE DATA)
Revenues............................... $ 388.7 $364.5 $1,156.8 $1,039.1
Net earnings (loss).................... $(104.9) $ (1.4) $ (210.6) $ (11.5)
Basic EPS.............................. $ (0.43) $(0.01) $ (0.86) $ (0.05)
Diluted EPS............................ $ (0.43) $(0.01) $ (0.86) $ (0.05)
</Table>
8
(4) SEGMENT REPORTING
In the quarter ended June 30, 2002, BMC's management began reviewing
the results of the Company's software business by the following product
categories: Enterprise Data Management Software, which includes the Mainframe
Data Management and Distributed Systems Data Management product lines,
Enterprise Systems Management Software, which includes the PATROL(R),
MAINVIEW(R) and Scheduling & Output Management product lines, and Other
Software, which includes the High Potential product lines of Storage Management,
Security Management, Enterprise Applications Management, Subscription Services
and Linux Management, and other. In addition to these software segments, the
professional services business is also considered a separate segment. Through
March 31, 2002, BMC's management reviewed the results of the Company's software
business by different product categories. The amounts reported below for the
three months and nine months ended December 31, 2001 and 2002 reflect this
change in the composition of the segments. Upon the acquisition of Remedy during
the quarter ended December 31, 2002 as discussed in Note 3, BMC's management
began reviewing Remedy's results as a separate segment.
Excluding Remedy, segment performance is measured based on contribution
margin, which reflects only the direct controllable expenses of the segments and
does 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 and
impairment of acquired technology, goodwill and intangibles, one-time charges,
other income, net, and income taxes. Remedy is operated as a separate business
unit and therefore its performance is measured based on operating margin and
does not include amortization of acquired technology and intangibles, one-time
charges, other income, net, and income taxes. Assets and liabilities are not
accounted for by segment, other than for Remedy. Remedy's assets include the
identifiable intangibles and goodwill recorded at the acquisition date, but as
discussed above, the performance of the Remedy business unit is measured based
on operating margin, excluding the amortization of these assets and any
impairment charges that may be incurred.
9
<Table>
<Caption>
ENTERPRISE DATA ENTERPRISE
MANAGEMENT SOFTWARE SYSTEMS MANAGEMENT SOFTWARE OTHER SOFTWARE
------------------- --------------------------- --------------
MAINFRAME DISTRIBUTED SCHEDULING HIGH
DATA SYSTEMS DATA & OUTPUT POTENTIAL
MANAGEMENT MANAGEMENT PATROL MAINVIEW MANAGEMENT PRODUCT LINES OTHER
---------- ---------- ------ -------- ---------- ------------- -----
QUARTER ENDED DEC. 31, 2001 (IN MILLIONS)
- ---------------------------
Revenues:
License...................... $ 52.5 $ 16.7 $ 36.4 $ 14.3 $ 19.3 $ 12.8 $ 0.3
Maintenance.................. 60.4 13.2 24.3 24.1 13.8 7.0 3.5
Professional services........ -- -- -- -- -- -- --
--------- -------- -------- -------- -------- -------- --------
Total revenues.................. $ 112.9 $ 29.9 $ 60.7 $ 38.4 $ 33.1 $ 19.8 $ 3.8
R&D expenses.................... 14.3 12.3 31.0 7.3 8.3 14.7 --
Cost of professional services... -- -- -- -- -- -- --
--------- -------- -------- -------- -------- -------- --------
Contribution margin .......... $ 98.6 $ 17.6 $ 29.7 $ 31.1 $ 24.8 $ 5.1 $ 3.8
========= ========= ========= ========= ========= ========= =========
</Table>
<Table>
<Caption>
INDIRECT R&D
PROFESSIONAL & CAPITALIZED TOTAL BEFORE AS
SERVICES SOFTWARE REMEDY REMEDY REPORTED
-------- -------- ------ ------ --------
QUARTER ENDED DEC. 31, 2001 (IN MILLIONS)
- ---------------------------
Revenues:
License............................................ $ -- $ -- $ 152.3 $ -- $ 152.3
Maintenance........................................ -- -- 146.3 -- 146.3
Professional services.............................. 22.4 -- 22.4 -- 22.4
--------- -------- --------- -------- ---------
Total revenues........................................ $ 22.4 $ -- $ 321.0 $ -- $ 321.0
R&D expenses.......................................... -- 49.3 137.2 -- 137.2
Cost of professional services......................... 22.7 -- 22.7 -- 22.7
--------- -------- --------- -------- ---------
Contribution margin ................................ $ (0.3) $ (49.3) 161.1 -- 161.1
========= ========
Selling and marketing expenses........................................................ 128.4 -- 128.4
General and administrative expenses................................................... 36.1 -- 36.1
--------- -------- ---------
Operating margin................................................................... $ (3.4) $ -- (3.4)
========= ========
Amortization and impairment of acquired technology, goodwill and intangibles........................................... 103.9
Restructuring costs.................................................................................................... 8.2
Merger-related costs and compensation charges.......................................................................... 5.8
Other income, net...................................................................................................... 14.9
------
Consolidated loss before income taxes.................................................................................. (106.4)
======
</Table>
<Table>
<Caption>
ENTERPRISE DATA ENTERPRISE
MANAGEMENT SOFTWARE SYSTEMS MANAGEMENT SOFTWARE OTHER SOFTWARE
------------------- --------------------------- --------------
MAINFRAME DISTRIBUTED SCHEDULING HIGH
DATA SYSTEMS DATA & OUTPUT POTENTIAL
MANAGEMENT MANAGEMENT PATROL MAINVIEW MANAGEMENT PRODUCT LINES OTHER
---------- ---------- ------ -------- ---------- ------------- -----
QUARTER ENDED DEC. 31, 2002 (IN MILLIONS)
- ---------------------------
Revenues:
License...................... $ 57.6 $ 19.5 $ 30.3 $ 17.6 $ 18.3 $ 10.0 $ 0.1
Maintenance.................. 56.5 16.3 28.7 21.4 17.2 10.1 0.1
Professional services........ -- -- -- -- -- -- --
--------- -------- -------- -------- -------- -------- --------
Total revenues.................. $ 114.1 $ 35.8 $ 59.0 $ 39.0 $ 35.5 $ 20.1 $ 0.2
R&D expenses.................... 15.2 12.8 25.3 8.0 8.1 17.4 --
Cost of professional services... -- -- -- -- -- -- --
--------- -------- -------- -------- -------- -------- --------
Contribution margin .......... $ 98.9 $ 23.0 $ 33.7 $ 31.0 $ 27.4 $ 2.7 $ 0.2
========= ========= ========= ========= ========= ========= =========
</Table>
<Table>
<Caption>
INDIRECT R&D
PROFESSIONAL & CAPITALIZED TOTAL BEFORE AS
SERVICES SOFTWARE REMEDY REMEDY REPORTED
-------- -------- ------ ------ --------
QUARTER ENDED DEC. 31, 2002 (IN MILLIONS)
- ---------------------------
Revenues:
License............................................ $ -- $ -- $ 153.4 $ 15.1 $ 168.5
Maintenance........................................ -- -- 150.3 8.8 159.1
Professional services.............................. 20.9 -- 20.9 1.1 22.0
--------- -------- --------- ---------- ---------
Total revenues........................................ $ 20.9 $ -- $ 324.6 $ 25.0 $ 349.6
R&D expenses.......................................... -- 28.7 115.5 5.0 120.5
Cost of professional services......................... 21.4 -- 21.4 0.9 22.3
--------- -------- --------- ---------- ---------
Contribution margin ................................ $ (0.5) $ 28.7) 187.7 19.1 206.8
========= ========
Selling and marketing expenses.......................................................... 123.8 5.6 129.4
General and administrative expenses..................................................... 37.3 3.8 41.1
--------- ---------- ---------
Operating margin..................................................................... $ 26.6 $ 9.7 36.3
========= ==========
Acquired research and development................................................................................... 12.0
Amortization of acquired technology and intangibles................................................................. 17.8
Restructuring costs................................................................................................. (0.3)
Other income, net................................................................................................... 11.7
---------
Consolidated earnings before income taxes........................................................................... $ 18.5
=========
</Table>
10
<Table>
<Caption>
ENTERPRISE DATA ENTERPRISE
MANAGEMENT SOFTWARE SYSTEMS MANAGEMENT SOFTWARE OTHER SOFTWARE
------------------- --------------------------- --------------
MAINFRAME DISTRIBUTED SCHEDULING HIGH
DATA SYSTEMS DATA & OUTPUT POTENTIAL
MANAGEMENT MANAGEMENT PATROL MAINVIEW MANAGEMENT PRODUCT LINES OTHER
---------- ---------- ------ -------- ---------- ------------- -----
NINE MONTHS ENDED DEC. 31, 2001 (IN MILLIONS)
- --------------------------------
Revenues:
License...................... $ 157.8 $ 55.1 $ 112.6 $ 48.2 $ 50.3 $ 38.5 $ 1.3
Maintenance.................. 182.7 39.2 71.9 67.6 38.7 21.1 5.6
Professional services........ -- -- -- -- -- -- --
--------- -------- -------- -------- -------- -------- --------
Total revenues.................. $ 340.5 $ 94.3 $ 184.5 $ 115.8 $ 89.0 $ 59.6 $ 6.9
R&D expenses.................... 48.7 38.9 94.2 23.1 25.8 46.2 --
Cost of professional services... -- -- -- -- -- -- --
--------- -------- -------- -------- -------- -------- --------
Contribution margin .......... $ 291.8 $ 55.4 $ 90.3 $ 92.7 $ 63.2 $ 13.4 $ 6.9
========= ========= ========= ========= ========= ========= =========
</Table>
<Table>
<Caption>
INDIRECT R&D
PROFESSIONAL & CAPITALIZED TOTAL BEFORE AS
SERVICES SOFTWARE REMEDY REMEDY REPORTED
-------- -------- ------ ------ --------
NINE MONTHS ENDED DEC. 31, 2001 (IN MILLIONS)
- -------------------------------
Revenues:
License............................................ $ -- $ -- $ 463.8 $ -- $ 463.8
Maintenance........................................ -- -- 426.8 -- 426.8
Professional services.............................. 66.5 -- 66.5 -- 66.5
--------- -------- --------- -------- ---------
Total revenues........................................ $ 66.5 $ -- $ 957.1 $ -- $ 957.1
R&D expenses.......................................... -- 79.1 356.0 -- 356.0
Cost of professional services......................... 74.7 -- 74.7 -- 74.7
--------- -------- --------- -------- ---------
Contribution margin ................................ $ (8.2) $ (79.1) 526.4 -- 526.4
========= ========
Selling and marketing expenses........................................................... 414.1 -- 414.1
General and administrative expenses...................................................... 118.2 -- 118.2
--------- -------- ---------
Operating margin $ (5.9) $ -- (5.9)
========= ========
Amortization and impairment of acquired technology, goodwill and intangibles......................................... 200.6
Restructuring costs.................................................................................................. 52.9
Merger-related costs and compensation charges........................................................................ 11.6
Other income, net.................................................................................................... 41.7
---------
Consolidated loss before income taxes................................................................................ $ (229.3)
=========
</Table>
<Table>
<Caption>
ENTERPRISE DATA ENTERPRISE
MANAGEMENT SOFTWARE SYSTEMS MANAGEMENT SOFTWARE OTHER SOFTWARE
------------------- --------------------------- --------------
MAINFRAME DISTRIBUTED SCHEDULING HIGH
DATA SYSTEMS DATA & OUTPUT POTENTIAL
MANAGEMENT MANAGEMENT PATROL MAINVIEW MANAGEMENT PRODUCT LINES OTHER
---------- ---------- ------ -------- ---------- ------------- -----
NINE MONTHS ENDED DEC. 31, 2002 (IN MILLIONS)
- -------------------------------
Revenues:
License...................... $ 145.2 $ 49.0 $ 76.5 $ 52.1 $ 51.7 $ 35.1 $ 0.2
Maintenance.................. 170.5 48.9 83.8 68.4 48.3 29.6 1.4
Professional services........ -- -- -- -- -- -- --
--------- -------- -------- -------- -------- -------- --------
Total revenues.................. $ 315.7 $ 97.9 $ 160.3 $ 120.5 $ 100.0 $ 64.7 $ 1.6
R&D expenses.................... 46.5 39.6 76.3 26.5 23.7 50.9 --
Cost of professional services... -- -- -- -- -- -- --
--------- -------- -------- -------- -------- -------- --------
Contribution margin .......... $ 269.2 $ 58.3 $ 84.0 $ 94.0 $ 76.3 $ 13.8 $ 1.6
========= ========= ========= ========= ========= ========= =========
</Table>
<Table>
<Caption>
INDIRECT R&D
PROFESSIONAL & CAPITALIZED TOTAL BEFORE AS
SERVICES SOFTWARE REMEDY REMEDY REPORTED
-------- -------- ------ ------ --------
NINE MONTHS ENDED DEC. 31, 2002 (IN MILLIONS)
- --------------------------------
Revenues:
License............................................ $ -- $ -- $ 409.8 $ 15.1 $ 424.9
Maintenance........................................ -- -- 450.9 8.8 459.7
Professional services.............................. 60.3 -- 60.3 1.1 61.4
--------- -------- --------- ---------- ---------
Total revenues........................................ $ 60.3 $ -- $ 921.0 $ 25.0 $ 946.0
R&D expenses.......................................... -- 82.6 346.1 5.0 351.1
Cost of professional services......................... 63.7 -- 63.7 0.9 64.6
--------- -------- --------- ---------- ---------
Contribution margin ................................ $ (3.4) $ (82.6) 511.2 19.1 530.3
========= ========
Selling and marketing expenses......................................................... 356.0 5.6 361.6
General and administrative expenses.................................................... 108.7 3.8 112.5
--------- ---------- ---------
Operating margin.................................................................... $ 46.5 $ 9.7 56.2
========= ==========
Acquired research and development.................................................................................. 12.0
Amortization of acquired technology and intangibles................................................................ 42.6
Restructuring costs................................................................................................ (0.1)
Merger-related costs and compensation charges...................................................................... 0.6
Other income, net.................................................................................................. 38.3
---------
Consolidated earnings before income taxes.......................................................................... $ 39.4
=========
</Table>
11
<Table>
<Caption>
TOTAL BEFORE AS
REMEDY REMEDY REPORTED
------ ------ --------
(IN MILLIONS)
Total assets as of December 31, 2002 .................................................. $ 2,407.7 $ 410.5 $ 2,818.2
========= =========== ==========
</Table>
(5) STOCK INCENTIVE PLANS
The Company has adopted numerous stock-based compensation plans that
provide for the grant of options and restricted stock to employees and directors
of the Company. All options under these plans vest over terms of three to five
years. The restricted stock is subject to transfer restrictions that lapse over
one to four years. The Company also has adopted an employee stock purchase plan
under which rights to purchase the Company's common stock are granted at 85% of
the lesser of the market value of the common stock at the offering date or on
the exercise date.
The Company accounts for stock-based employee compensation using the
intrinsic value method in accordance with APB Opinion No. 25 and related
interpretations, which generally requires that the amount of compensation cost
that must be recognized, if any, is the quoted market price of the stock at the
measurement date, which is generally the grant date, less the amount the grantee
is required to pay to acquire the stock. Alternatively, Statement of Financial
Accounting Standards (SFAS) No. 123, "Accounting for Stock-Based Compensation,"
employs fair value-based measurement and generally results in the recognition of
compensation expense for all stock-based awards to employees. SFAS No. 123 does
not require an entity to adopt those provisions, but rather, permits continued
application of APB Opinion No. 25. The Company has elected not to adopt the
recognition and measurement provisions of SFAS No. 123 and continues to account
for its stock-based employee compensation plans under APB Opinion No. 25 and
related interpretations. In accordance with APB Opinion No. 25, deferred
compensation is generally recorded for stock-based employee compensation grants
based on the excess of the market value of the common stock on the measurement
date over the exercise price. The deferred compensation is amortized to expense
over the vesting period of each unit of stock-based employee compensation
granted. If the exercise price of the stock-based compensation is equal to or
exceeds the market price of the Company's common stock on the date of grant, no
compensation expense is recorded.
For the three months ended December 31, 2001 and 2002, the Company
recorded compensation expense of $5.9 million and $0.7 million, respectively,
for restricted stock grants. The expense for the three months ended December 31,
2001 includes $5.1 million of merger-related compensation charges related to
restricted shares issued as part of the Evity, Inc. acquisition. For the nine
months ended December 31, 2001 and 2002, the Company recorded compensation
expense of $13.6 million and $2.6 million, respectively, for restricted stock
grants. The expense for the nine months ended December 31, 2001 and 2002
includes $11.3 million and $0.6 million, respectively, of merger-related
compensation charges related to restricted shares issued as part of the Evity,
Inc. acquisition. The Company was not required to record compensation expense
for stock option grants and stock issued under the employee stock purchase plan
during the same periods.
Had compensation cost for the stock-based employee compensation plans
been determined based on the grant date fair values of awards estimated using
the Black-Scholes option pricing model, which is consistent with the method
described in SFAS No. 123, the Company's reported net earnings (loss) and
earnings (loss) per share would have been reduced to the pro forma amounts shown
below:
<Table>
<Caption>
THREE MONTHS ENDED NINE MONTHS ENDED
DECEMBER 31, DECEMBER 31,
------------ ------------
2001 2002 2001 2002
--------- --------- --------- -------
(IN MILLIONS, EXCEPT PER SHARE DATA)
Net earnings (loss) As Reported...... $ (94.5) $12.1 $ (182.3) $ 27.4
Deduct total stock-based employee
compensation expense determined under
the fair value based method for all
awards, net of related tax effects (13.7) (16.8) (57.0) (54.7)
------- ------ ------ ------
Net loss Pro Forma........ $(108.2) $ (4.7) $ (239.3) $(27.3)
Basic EPS: As Reported...... $ (0.39) $ 0.05 $ (0.74) $ 0.12
Pro Forma........ $ (0.44) $ (0.02) $ (0.97) $(0.11)
Diluted EPS: As Reported...... $ (0.39) $ 0.05 $ (0.74) $ 0.11
Pro Forma........ $ (0.44) $ (0.02) $ (0.97) $(0.11)
</Table>
12
In December 2002, the Financial Accounting Standards Board issued SFAS
No. 148, "Accounting for Stock-Based Compensation - Transition and Disclosure -
An Amendment of FASB Statement No. 123." This Statement provides alternative
methods of transition for a voluntary change to the fair value based method of
accounting for stock-based employee compensation and requires prominent
disclosures in both annual and interim financial statements about the method of
accounting for stock-based employee compensation and the effect of the method
used on reported results. The Company has elected not to adopt the recognition
and measurement provisions of SFAS No. 123 and continues to account for its
stock-based employee compensation plans under APB Opinion No. 25 and related
interpretations and therefore the transition provisions will not have an impact
on the Company's financial position or results of operations. The required
expanded interim disclosures are provided above.
On September 10, 2002, pursuant to an Offer to Exchange, the Company
offered to certain U.S. employees the right to exchange outstanding stock
options with an exercise price of $30.00 per share or more granted under certain
of the Company's stock incentive plans for new options that cover a lesser
number of shares to be granted under those stock incentive plans at least six
months and one day following the cancellation of the options. The Company's
senior officers and board of directors were ineligible to participate in the
exchange offer. Amendments to the stock incentive plans to permit the offer were
approved by the Company's stockholders at the Company's Annual Meeting held on
August 29, 2002. The offer expired on October 9, 2002. The Company accepted for
exchange options to purchase an aggregate of 6.5 million shares of Company
common stock, representing approximately 88% of the options that were eligible
for the exchange. These options have been cancelled and are no longer
outstanding. On April 10, 2003, subject to the terms and conditions of the Offer
to Exchange, the Company will issue new options at fair market value as of such
date to purchase an aggregate of 2.4 million shares of Company common stock in
exchange for such exchanged options.
(6) GOODWILL AND INTANGIBLE ASSETS
As of April 1, 2002, the Company adopted SFAS No. 142, "Goodwill and
Other Intangible Assets." SFAS No. 142 addresses financial accounting and
reporting at the point of acquisition for intangible assets acquired
individually or with a group of other assets, other than those acquired in a
business combination, and the financial accounting and reporting for goodwill
and other intangible assets subsequent to their acquisition. Under SFAS No. 142,
all goodwill and those intangible assets with indefinite useful lives are not
amortized, but rather are tested for impairment annually and when events and
circumstances indicate that their fair value has been reduced below carrying
value. Intangible assets with finite useful lives are amortized over those
useful lives.
BMC assigned its goodwill to the Company's applicable reporting units
and tested its goodwill for impairment as of April 1, 2002 in accordance with
SFAS No. 142. The fair value of each of the Company's reporting units with
goodwill assigned exceeded the respective carrying value of the reporting unit's
allocated net assets, including goodwill, and therefore no goodwill was
considered impaired as of April 1, 2002.
The following reconciles the Company's reported net earnings (loss) and
earnings (loss) per share to those amounts that would have resulted had there
been no amortization of goodwill and intangible assets with indefinite lives for
all periods presented:
<Table>
<Caption>
THREE MONTHS ENDED NINE MONTHS ENDED
DECEMBER 31, DECEMBER 31,
------------------ -----------------
2001 2002 2001 2002
-------- ------- -------- -------
(IN MILLIONS, EXCEPT PER SHARE DATA)
Net earnings As Reported.................................................. $ (94.5) $ 12.1 $ (182.3) $ 27.4
(loss):
Add back: Amortization of goodwill, net of taxes............ 20.4 -- 72.8 --
Add back: Amortization of intangible assets, net of taxes... 0.6 -- 1.8 --
--------------------------------------
Adjusted..................................................... $ (73.5) $ 12.1 $ (107.7) $ 27.4
======================================
Basic EPS: As Reported.................................................. $ (0.39) $ 0.05 $ (0.74) $ 0.12
Add back: Amortization of goodwill, net of taxes............ 0.09 -- 0.29 --
Add back: Amortization of intangible assets, net of taxes... -- -- 0.01 --
--------------------------------------
Adjusted..................................................... $ (0.30) $ 0.05 $ (0.44) $ 0.12
======================================
Diluted EPS: As Reported.................................................. $ (0.39) $ 0.05 $ (0.74) $ 0.11
Add back: Amortization of goodwill, net of taxes............ 0.09 -- 0.29 --
Add back: Amortization of intangible assets, net of taxes... -- -- 0.01 --
--------------------------------------
Adjusted..................................................... $ (0.30) $ 0.05 $ (0.44) $ 0.11
======================================
</Table>
13
(7) MARKETABLE SECURITIES
On December 31, 2002, the Company reclassified its held-to-maturity
portfolio to the available-for-sale portfolio. The amortized cost of the
transferred securities was $396.1 million at the date of reclassification. When
the securities were transferred to the available-for-sale portfolio, a net
unrealized gain of $15.8 million was recorded as a component of accumulated
other comprehensive income (loss). The transfer of securities from the
held-to-maturity portfolio was made to increase the Company's flexibility to
react to the unprecedented volatility in the debt securities markets that
developed over the quarters preceding the date of transfer.
(8) RESTRUCTURING AND SEVERANCE COSTS
During the year ended March 31, 2002, BMC implemented a restructuring
plan to better align the Company's cost structure with existing market
conditions. As part of this plan, the Company reduced its workforce,
discontinued certain business information integration products as a result of
the dissolution of that business unit and closed certain locations throughout
the world. See the discussion of this plan in the Company's Annual Report on
Form 10-K for the year ended March 31, 2002.
As of December 31, 2002, $1.2 million of severance and facilities costs
related to actions completed under the restructuring plan remained accrued for
payment in future periods.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
This section of the Report contains certain forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended, which are
identified by the use of the words "believe," "expect," "anticipate," "will,"
"contemplate," "would" and similar expressions that contemplate future events.
Numerous important factors, risks and uncertainties affect our operating
results, including, without limitation, those contained in this report, and
could cause our actual results to differ materially from the results implied by
these or any other forward-looking statements made by us or on our behalf. There
can be no assurance that future results will meet expectations. Particular
attention should be paid to the important risk factors and cautionary statements
described in the section of this Report entitled "Certain Risks and
Uncertainties." It is important that the historical discussion below be read
together with the attached condensed consolidated financial statements and notes
thereto, with the discussion of such risks and uncertainties and with the
audited financial statements and notes thereto and Management's Discussion and
Analysis of Results of Operations and Financial Condition contained in our
Annual Report on Form 10-K for the year ended March 31, 2002.
CRITICAL ACCOUNTING POLICIES
The preparation of condensed consolidated financial statements requires
us to make estimates and judgments that affect the reported amounts of assets,
liabilities, revenues and expenses. On an on-going basis, we make and evaluate
estimates and judgments, including those related to revenue recognition,
capitalized software development costs, in-process research and development of
acquired businesses, goodwill and intangible assets, deferred tax assets and
marketable securities. We base our estimates on historical experience and on
various other assumptions that are believed to be reasonable under the
circumstances, the results of which form the basis for making judgments about
amounts and timing of revenues and expenses, the carrying values of assets and
the recorded amounts of liabilities that are not readily apparent from other
sources. Actual results may differ from these estimates and such estimates may
change if the underlying conditions or assumptions change. The critical
accounting policies related to the estimates and judgments listed above are
discussed further throughout our Annual Report on Form 10-K for the year ended
March 31, 2002 under Management's Discussion and Analysis of Results of
Operations and Financial Condition and below, where such policies affect our
reported and expected financial results.
14
A. RESULTS OF OPERATIONS AND FINANCIAL CONDITION
The following table sets forth, for the periods indicated, the
percentages that selected items in the Condensed Consolidated Statements of
Operations and Comprehensive Income (Loss) bear to total revenues. These
comparisons of financial results are not necessarily indicative of future
results.
<Table>
<Caption>
PERCENTAGE OF TOTAL REVENUES
THREE MONTHS ENDED NINE MONTHS ENDED
DECEMBER 31, DECEMBER 31,
------------------ -----------------
2001 2002 2001 2002
------ ------ ------ ------
Revenues:
License.............................................. 47.4% 48.2% 48.5% 44.9%
Maintenance.......................................... 45.6 45.5 44.6 48.6
Professional services................................ 7.0 6.3 6.9 6.5
----- ----- ----- -----
Total revenues................................... 100.0 100.0 100.0 100.0
----- ----- ----- -----
Selling and marketing expenses......................... 40.0 37.0 43.3 38.2
Research and development expenses...................... 42.7 34.5 37.2 37.1
Cost of professional services.......................... 7.1 6.4 7.8 6.8
General and administrative expenses.................... 11.2 11.8 12.3 11.9
Acquired research and development...................... -- 3.4 -- 1.3
Amortization and impairment of acquired technology,
goodwill and intangibles............................. 32.3 5.1 21.0 4.5
Restructuring costs.................................... 2.6 (0.1) 5.5 --
Merger-related costs and compensation charges.......... 1.8 -- 1.2 --
----- ---- ----- ----
Total operating expenses.......................... 137.7 98.1 128.3 99.8
----- ----- ----- -----
Operating income (loss)........................... (37.7) 1.9 (28.3) 0.2
Interest and other income, net......................... 5.0 4.6 5.3 5.1
Interest expense....................................... -- -- -- --
Loss on marketable securities and other investments.... (0.4) (1.2) (0.9) (1.1)
----- ----- ----- -----
Other income, net................................. 4.6 3.4 4.4 4.0
Earnings (loss) before income taxes............... (33.1) 5.3 (23.9) 4.2
Income tax provision (benefit)......................... (3.7) 1.8 (4.9) 1.3
----- ----- ------ -----
Net earnings (loss).......................... (29.4)% 3.5% (19.0)% 2.9%
===== ===== ===== =====
</Table>
REVENUES
We generate revenues from licensing software, providing maintenance,
enhancement and support for previously licensed products and providing
professional services. We generally utilize written contracts as the means to
establish the terms and conditions by which our products, support and services
are sold to our customers.
We recognize revenue in accordance with the American Institute of
Certified Public Accountants (AICPA) Statement of Position (SOP) 97-2, "Software
Revenue Recognition" and SOP 98-9, "Modification of SOP 97-2, Software Revenue
Recognition, With Respect to Certain Transactions." These statements provide
guidance on applying generally accepted accounting principles in recognizing
revenue on software transactions. In applying these statements, we recognize
software license fees upon meeting the following four criteria: execution of the
signed contract, delivery of the underlying products to the customer and the
acceptance of such products by the customer, determination that the software
license fees are fixed and determinable, and determination that collection of
the software license fees is probable. In instances when any one of the four
criteria is not met, we 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 SOPs 97-2 and 98-9. Maintenance,
enhancement and support revenues are recognized ratably over the term of the
arrangement on a straight-line basis. Revenues from license and maintenance
transactions that are financed are generally recognized in the same manner as
those requiring current payment. We have an established business practice of
offering installment contracts to customers and have a history of successfully
enforcing original payment terms without making concessions. Further, the
payment obligations are unrelated to product implementation or any other
post-transaction activity. Revenues from sales through agents, distributors and
resellers are recorded either at the gross amount charged the customer or net of
commissions paid, based on the economic risks and ongoing product support
responsibilities we assume. On occasion, we have purchased goods or services for
our operations from customers at or about the same time that we licensed our
software to these customers. License revenues from such transactions represent
less than one percent of our total license revenues in any period. Revenues from
professional services are typically recognized as the services are performed for
time-and-materials contracts, or on a percentage-of-completion basis. Our
professional services revenues also include sales of third-party software
products which typically support our product lines. These revenues are recorded
net of amounts payable to the third-party software vendors.
When several elements, including software licenses, maintenance,
enhancement 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
15
the residual method, whereby the fair value of the undelivered elements of the
contract is deferred. We have established vendor-specific objective evidence of
fair value for maintenance, enhancement and support and professional services.
Accordingly, software license fees are recognized under the residual method for
arrangements in which the software is licensed with maintenance, enhancement and
support and/or professional services, and where the maintenance, enhancement and
support and/or professional services are not essential to the functionality of
the delivered software. In those instances where professional services are
essential to the functionality of the software, contract accounting is applied
to both the software license and services elements of the arrangement. In the
event a contract contains terms which are inconsistent with our vendor-specific
objective evidence, all revenues from the contract are deferred until such
evidence is established or are recognized on a ratable basis.
Based on our interpretation of SOP 97-2 and SOP 98-9, we believe that
our current sales contract terms and business arrangements have been properly
reported. However, the AICPA and its Software Revenue Recognition Task Force
continue to issue interpretations and guidance for applying the relevant
standards to a wide range of sales contract terms and business arrangements that
are prevalent in the software industry. Also, the Securities and Exchange
Commission (SEC) has issued Staff Accounting Bulletin No. 101, "Revenue
Recognition in Financial Statements," which provides guidance related to revenue
recognition based on interpretations and practices followed by the SEC. Future
interpretations of existing accounting standards or changes in our business
practices could result in future changes in our revenue accounting policies that
could have a material adverse effect on our business, financial condition and
results of operations.
<Table>
<Caption>
THREE MONTHS ENDED NINE MONTHS ENDED
DECEMBER 31, DECEMBER 31,
-------------------- ------------------
2001 2002 CHANGE 2001 2002 CHANGE
------- --------- --------- ------- ------- --------
(IN MILLIONS) (IN MILLIONS)
License:
North America............................ $ 79.6 $ 81.1 1.9% $ 265.0 $ 233.6 (11.8)%
International............................ 72.7 87.4 20.2% 198.8 191.3 (3.8)%
-------- -------- -------- --------
Total license revenues............. 152.3 168.5 10.6% 463.8 424.9 (8.4)%
Maintenance:
North America............................ 86.3 96.2 11.5% 265.2 279.5 5.4%
International............................ 60.0 62.9 4.8% 161.6 180.2 11.5%
-------- -------- -------- --------
Total maintenance revenues.......... 146.3 159.1 8.7% 426.8 459.7 7.7%
Professional services:
North America............................ 10.5 8.8 (16.2%) 34.9 26.9 (22.9%)
International............................ 11.9 13.2 10.9% 31.6 34.5 9.2%
-------- -------- -------- --------
Total professional services revenues. 22.4 22.0 (1.8%) 66.5 61.4 (7.7%)
-------- -------- -------- --------
Total revenues..................... $ 321.0 $ 349.6 8.9% $ 957.1 $ 946.0 (1.2)%
======== ======== ======== ========
</Table>
Product License Revenues
Our product license revenues primarily consist of fees related to
products licensed to customers on a perpetual basis. Product license fees can be
associated with a customer's licensing of a given software product for the first
time or with a customer's purchase of the right to run a previously licensed
product on a larger computer or additional computers. The license fees for
additional processing capacity are primarily generated by our mainframe products
and include fees associated with both current and future additional processing
capacity. In addition to perpetual-based product license fees, our product
license revenues also include, to a lesser extent, term license fees which are
generated when customers are granted license rights to a given software product
for a limited period of time.
Difficult economic conditions in domestic and international markets
throughout fiscal 2002 and the first nine months of fiscal 2003 have resulted in
reduced IT spending by many of our customers as compared to historical levels.
Tighter budgets have caused many customers to choose smaller transactions in
terms of dollar value during these periods. License revenues increased 11% and
decreased 8%, respectively, for the three months and nine months ended December
31, 2002, as compared to the same periods in fiscal 2002. As discussed in Note 3
to the condensed consolidated financial statements, we acquired Remedy during
the quarter ended December 31, 2002. Excluding the impact of the Remedy revenues
subsequent to the acquisition date, license revenues increased 1% and decreased
12%, respectively, for the three months and nine months ended December 31, 2002.
For the three-month period, the slight growth was primarily related to an
increase in the amount of license revenue recognized that had been deferred in
prior quarters. License revenue recognized out of deferred revenue represented
12% of license revenue for the quarter, excluding Remedy. For the nine-month
period, the decline was primarily due to (1) the negative impact of internal and
external factors on our PATROL revenues as discussed below under Product Line
Revenues, (2) the reduction in license revenues as a result of our new
maintenance program discussed below under Maintenance, Enhancement and Support
Revenues and (3) significant increases in transactions where the terms and
conditions within our contracts resulted in the deferral of license revenue and
in term license transactions. Foreign currency exchange rate changes, after
giving effect to our foreign currency hedging program, also had a positive
impact on license revenues for the periods.
16
For the year ending March 31, 2003, we expect to defer license revenues
of $130 to $145 million that will be recognized in future periods due to
flexible contract terms and conditions and term licenses. Through December 31,
2002, gross additions to deferred license revenue were $113.5 million. Based on
licensing trends and increased customer requests for contractual terms that
result in deferral of revenue, we expect that our base of deferred license
revenue will continue to grow in the near future. The contract terms and
conditions that result in deferral of revenue recognition for a given
transaction result from arm's length negotiations between us and our customers.
During these negotiations, the contract terms and conditions that result in
deferral may be requested by a customer, while in some cases we may suggest
inclusion of these terms and conditions where it makes business sense to do so.
In either case, the resulting contract must be acceptable to both parties. Once
it is determined that license revenue for a particular contract must be
deferred, based on the contractual terms and application of revenue recognition
policies to those terms, the Company recognizes such license revenue either
ratably over the term of the contract or when the revenue recognition criteria
are met. Because of this, we generally know the timing of the subsequent
recognition of license revenue at the time of deferral. Therefore, the amount of
license revenue to be recognized out of the deferred revenue balance in each
future quarter is predictable, and our total license revenues to be recognized
each quarter become more predictable as a larger percentage of those revenues
come from the deferred balance. As of March 31, 2002 and December 31, 2002, our
total deferred license revenue balance was $168.9 million and $224.8 million,
respectively.
Our North American operations generated 52% and 48% of license revenues
in the three months ended December 31, 2001 and 2002, respectively, and 57% and
55% in the nine months ended December 31, 2001 and 2002, respectively. License
revenues increased 2% and decreased 12%, respectively, for the three months and
nine months ended December 31, 2002, as compared to the same periods in fiscal
2002. Excluding the impact of the Remedy revenues subsequent to the acquisition
date, license revenues declined 9% and 15%, respectively. Decreases in PATROL
and High Potential Products license revenues were the largest contributors to
the decline in North American license revenues in the three months ended
December 31, 2002, more than offsetting increases in MAINVIEW and Distributed
Systems Data Management license revenues. The decline for the nine months ended
December 31, 2002 was primarily due to decreases in Mainframe Data Management
and PATROL license revenues which more than offset increases in Scheduling and
Output Management and Storage Management license revenues.
International license revenues represented 48% and 52% of total license
revenues in the three months ended December 31, 2001 and 2002, respectively, and
43% and 45% in the nine months ended December 31, 2001 and 2002, respectively.
International license revenues increased 20% and declined 4% in the three months
and nine months ended December 31, 2002, respectively, from the comparable
periods in fiscal 2002. Excluding the impact of the Remedy revenues subsequent
to the acquisition date, license revenues increased 11% and declined 7%,
respectively. License revenues for the three months increased 7.5% due to
foreign currency exchange rate changes during the period, after giving effect to
our foreign currency hedging program. License revenue increased across all
product categories except PATROL and Scheduling and Output Management. License
revenue decreased for the nine months principally due to decreased PATROL
product license fees. This decline was primarily caused by weakening demand in
Europe and a greater demand for term-based licenses, which, in general, are
deferred and recognized evenly over the license period. For the nine months
ended December 31, 2002, the decrease in PATROL license revenues more than
offset increased license revenues for our Mainframe Data Management and MAINVIEW
products. The international license revenue decrease for the nine months was net
of a 5% increase due to foreign currency exchange rate changes during the
period, after giving effect to our foreign currency hedging program.
Maintenance, Enhancement and Support Revenues
Maintenance, enhancement and support revenues represent the ratable
recognition of fees to enroll licensed products in our software maintenance,
enhancement and support program. Maintenance, enhancement and support enrollment
entitles customers to product enhancements, technical support services and
ongoing compatibility with third-party operating systems, database management
systems, networks, storage systems and applications. Excluding Remedy, these
fees are generally charged annually and such annual fees have equaled 15% to 20%
of the discounted price of the product, prior to the program change in the
fourth quarter of fiscal 2002 discussed below. In addition, customers may be
entitled to reduced maintenance percentages for entering into long-term
maintenance contracts that include prepayment of the maintenance fees or that
are supported by a formal financing arrangement. Maintenance revenues also
include the ratable recognition of the bundled fees for any initial maintenance
services covered by the related perpetual license agreement. Remedy's
maintenance fees are generally charged annually and equal 15% to 22% of the list
price of the product. In addition, customers may be entitled to reduced
maintenance percentages for volume purchase agreements or for entering into
long-term maintenance contracts that include prepayment of the maintenance fees.
During the fourth quarter of fiscal 2002, we revised our maintenance
program to a single maintenance offering of 24x7 support
17
with a standard rate of 20% of the discounted price of the associated product.
In connection with this revision, we extended our standard warranty and initial
support period to one year for all our products, whereas prior to this revision
such periods were 90 days for distributed systems products and one year for
mainframe products. Because our maintenance revenues include the ratable
recognition of the bundled fees for any initial maintenance services covered by
the related perpetual license agreement, in certain new license transactions the
extension of the initial support period for distributed systems products will
cause us to recognize more maintenance revenues over time and less license
revenues when the transactions occur. While this change in our maintenance
program will not have a material effect on our total revenues over time, there
will be a negative short-term revenue impact.
Maintenance revenues increased 9% and 8% for the three months and nine
months ended December 31, 2002, respectively, over the comparable prior year
periods. Excluding the impact of the Remedy revenues subsequent to the
acquisition date, maintenance revenues increased 3% and 6%, respectively, for
the three months and nine months ended December 31, 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 in proportion to the aggregate
processing capacity on which the products are installed; consequently, we
receive higher absolute maintenance fees as customers install our products on
additional processing capacity. Due to the increased discounting for higher
levels of additional processing capacity, the maintenance fees on a per unit of
capacity basis are typically reduced in enterprise license agreements. These
discounts, combined with the reduced maintenance percentages for long-term
contracts discussed above and the recent decline in our license revenues, have
led to lower growth rates for our maintenance revenue. Further declines in our
license revenue and/or increased discounting would lead to declines in our
maintenance revenues excluding Remedy. Historically, our maintenance renewal
rates have been high, but economic pressures could cause customers to reduce
their licensed capacity and therefore the capacity upon which our maintenance,
enhancement and support fees are charged.
We expect Remedy maintenance revenues to increase over the next year.
As required by purchase accounting for the acquisition, the Remedy deferred
maintenance revenue at the acquisition date was written down to fair value, as
defined by US generally accepted accounting principles. As such, the amounts
recognized as maintenance revenue out of that acquisition date deferred revenue
balance will reflect this write-down. The vast majority of the acquisition-date
deferred revenue will be recognized during the following year. All maintenance
fees generated subsequent to the acquisition date will be deferred and
recognized over the maintenance period at full contractual amounts.
Product Line Revenues
<Table>
<Caption>
THREE MONTHS ENDED NINE MONTHS ENDED
DECEMBER 31, DECEMBER 31,
------------------- -------------------
2001 2002 CHANGE 2001 2002 CHANGE
-------- -------- -------- -------- --------- --------
(IN MILLIONS) (IN MILLIONS)
Enterprise Data Management:
Mainframe Data Management..................... $ 112.9 $ 114.1 1.1% $ 340.5 $ 315.7 (7.3)%
Distributed Systems Data Management........... 29.9 35.8 19.7% 94.3 97.9 (3.8)%
-------- -------- -------- --------
142.8 149.9 5.0% 434.8 413.6 (4.9)%
Enterprise Systems Management:
PATROL........................................ 60.7 59.0 (2.8)% 184.5 160.3 (13.1)%
MAINVIEW ..................................... 38.4 39.0 1.6% 115.8 120.5 4.1%
Scheduling & Output Management................ 33.1 35.5 7.3% 89.0 100.0 12.4%
-------- -------- -------- --------
132.2 133.5 1.0% 389.3 380.8 (2.2)%
Other Software:
High Potential product lines.................. 19.8 20.1 1.5% 59.6 64.7 8.6%
Other software................................ 3.8 0.2 (94.7)% 6.9 1.6 (76.8)%
-------- -------- -------- --------
23.6 20.3 (14.0)% 66.5 66.3 (0.3)%
-------- -------- -------- --------
298.6 303.7 1.7% 890.6 860.7 (3.4)%
-------- -------- -------- --------
Remedy........................................ -- 23.9 nm -- 23.9 nm
-------- -------- ------- --------
Total license & maintenance revenues... $ 298.6 $ 327.6 9.7% $ 890.6 $ 884.6 (0.7)%
======== ======== ======== ========
</Table>
We market software solutions designed to improve the availability,
performance and recoverability of enterprise applications, databases and other
IT systems components operating in mainframe, distributed computing and Internet
environments. Our recent acquisition of Remedy extends our solutions to include
products that automate service-related business processes through a complete
suite of service management applications. Our solutions are broadly divided into
three core business units and a fourth business unit geared towards high
potential solution areas. The Enterprise Data Management group includes products
designed for managing database management systems on mainframe and distributed
computing platforms. The Enterprise Systems Management group includes our
scheduling, output management and systems management and monitoring solutions.
The Remedy group includes our service management solutions. Our objective for
these three groups is to extend our core strengths in these markets. The High
18
Potential product lines encompass Storage Management, Security Management,
Enterprise Applications Management, Subscription Services and Linux Management.
Our objective for this group is to incubate businesses in markets that appear to
offer high growth opportunities. We evaluate our investments in these product
lines on an ongoing basis and will increase or decrease such investments as
necessary, based on our expectations of the products' future growth.
Our Enterprise Data Management solutions combined represented 48% and
46% of total software revenues for the three months ended December 31, 2001 and
2002, respectively, and 49% and 47% for the nine months ended December 31, 2001
and 2002, respectively. Total software revenues for this group increased 5% and
declined 5%, respectively, for the three months and nine months ended December
31, 2002, from the same periods in fiscal 2002. Maintenance revenue was down
slightly in both periods, primarily as a result of continued pricing pressure
for our mainframe data management products and slowing capacity growth, which
was not sufficient to offset these reduced prices. For the three months ended
December 31, 2002, license revenue increases for both our mainframe and
distributed systems data management products more than offset the maintenance
decline. For the nine months ended December 31, 2002, decreased license revenues
in the first quarter of fiscal 2003 were the primary contributor to the total
revenue decline due to smaller dollar transaction sizes as discussed above.
Our Enterprise Systems Management solutions combined contributed 44%
and 41% of total software revenues for the three months ended December 31, 2001
and 2002, respectively, and 44% and 43% for the nine months ended December 31,
2001 and 2002, respectively. Total software revenues for this group increased 1%
and decreased 2% for the three months and nine months ended December 31, 2002,
respectively, from the same periods in fiscal 2002. Maintenance revenue
increased and license revenue decreased for the three months and nine months
ended December 31, 2002. The license revenue decreases in both periods are
primarily due to the continued weakness in IT spending and a reduction in Unix
shipments from hardware manufacturers such as Sun Microsystems, Hewlett-Packard,
and IBM. For the nine-month period these external factors, coupled with delays
in customer purchase decisions resulting from delays in our release of
significant enhancements to components of the PATROL product line, had a direct
negative impact on PATROL license revenues, more than offsetting license revenue
increases for the MAINVIEW and Scheduling & Output Management product lines and
maintenance revenue increases across the Enterprise Systems Management
solutions. The remaining key PATROL enhancements were delivered at the end of
the third quarter of fiscal 2003. Though PATROL license revenues were down for
the three months ended December 31, 2002, compared to the same period in fiscal
2002, they increased 53% compared to the immediately preceding quarter ended
September 30, 2002. This increase was due, in part, to sales from the
newly-introduced agentless monitoring product, PATROL(R) Express.
Our High Potential product lines contributed 7% and 6% of total
software revenues for the three months ended December 31, 2001 and 2002,
respectively, and 7% for the nine months ended December 31, 2001 and 2002. Total
software revenues for this group grew 2% and 9%, respectively, for the three
months and nine months ended December 31, 2002, from the same periods in fiscal
2002. Though we continue to expect high growth in the markets these products
address, total license revenue for our High Potential products declined in both
periods. We evaluate our investments in these product lines on an ongoing basis
and will increase or decrease such investments as necessary, based on our
expectations of the products' future growth. We have decided, from both an
organizational and go-to-market perspective, to make changes to one of the High
Potential product lines. As of April 1, 2003, the storage management product
group will be combined into our core business units. Our mainframe storage
management and storage device knowledge modules remain strategic, however, we
have decided to limit our future investment in PATROL Storage Manager to
support. This decision is based on our focus on improving profit margins and
allocating resources to more attractive opportunities. The primary contributor
to the total revenue growth in the three months ended December 31, 2002, was
maintenance revenue increases across most of the High Potential product lines,
which more than offset declines in Storage Management and Security license
revenue. For the nine months ended December 31, 2002, a license revenue increase
for our Storage Management products and maintenance revenue increases across
all High Potential product lines more than offset a decline in Enterprise
Applications Management license revenue.
Revenues from our Remedy products for the period from the acquisition
date of November 20, 2002 through December 31, 2002, contributed 7% and 3% of
total software revenues for the three months and nine months ended December 31,
2002, respectively.
19
Professional Services Revenues
Professional services revenues, representing fees from implementation,
integration and education services performed during the period and sales of
third-party software products, net of commissions, decreased 2% and 8% during
the three months and nine months ended December 31, 2002, respectively, over the
comparable prior year periods. Excluding the impact of the Remedy revenues
subsequent to the acquisition date, professional services revenues decreased 7%
and 9%, respectively, for the three months and nine months ended December 31,
2002. This decline is the result of the decline in our software license revenue
during fiscal 2003, especially within the PATROL product line, as this results
in less demand for our implementation and integration services. Our professional
services headcount has decreased to accommodate the lower license revenue
levels.
EXPENSES
Beginning in fiscal 2002, we increased our focus on expense control to
better align our cost structure with the realities of a more difficult revenue
environment. This initiative included headcount reductions across all divisions
and geographies, office consolidations, elimination of certain product lines and
reductions in discretionary spending on items such as travel, consulting fees
and equipment. We were able to reduce these costs significantly while
maintaining our industry-leading product quality, customer support and sales
relationships.
<Table>
<Caption>
THREE MONTHS ENDED NINE MONTHS ENDED
DECEMBER 31, DECEMBER 31,
-------------------- ------------------
2001 2002 CHANGE 2001 2002 CHANGE
------- --------- --------- ------- ------- --------
(IN MILLIONS) (IN MILLIONS)
Selling and marketing................................ $ 128.4 $ 129.4 0.8% $ 414.1 $ 361.6 (12.7)%
Research and development............................. 137.2 120.5 (12.2)% 356.0 351.1 (1.4)%
Cost of professional services........................ 22.7 22.3 (1.8)% 74.7 64.6 (13.5)%
General and administrative........................... 36.1 41.1 13.9% 118.2 112.5 (4.8)%
Acquired research and development.................... -- 12.0 nm -- 12.0 nm
Amortization and impairment of acquired technology,
goodwill and intangibles......................... 103.9 17.8 (82.9)% 200.6 42.6 (78.8)%
Restructuring costs.................................. 8.2 (0.3) (103.7)% 52.9 (0.1) (100.2)%
Merger-related costs and compensation charges........ 5.8 -- (100.0)% 11.6 0.6 (94.8)%
----------- ------------ --------- -------
Total operating expenses................... $ 442.3 $ 342.8 (22.5)% $ 1,228.1 $ 944.9 (23.1)%
========== ========== ========= =======
</Table>
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 1% and decreased 13%, respectively, for the three months and nine
months ended December 31, 2002, compared to the same periods in fiscal 2002.
Excluding the impact of Remedy expenses subsequent to the acquisition date,
selling and marketing expenses decreased 4% and 14%, respectively, for the three
months and nine months ended December 31, 2002. Contributing to the change in
selling and marketing expenses for the three months ended December 31, 2002,
were increases in salaries, severance, and travel and entertainment costs which
were more than offset by decreases in sales commissions and bad debt expense on
license billings. For the nine months ended December 31, 2002, the primary
expense decreases were in personnel costs and sales commissions, travel and
entertainment, marketing and bad debt expense on 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.
20
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. The following table summarizes the amounts capitalized and
amortized for the three months and nine months ended December 31, 2001 and 2002.
Amortization for these periods includes amounts accelerated for certain software
products that were not expected to generate sufficient future revenues to
realize the carrying value of the assets.
<Table>
<Caption>
THREE MONTHS ENDED NINE MONTHS ENDED
DECEMBER 31, DECEMBER 31,
------------ ------------
2001 2002 2001 2002
---------- ---------- ---------- -------
(IN MILLIONS)
Software development and purchased software costs
capitalized.......................................... $ (18.1) $ (32.4) $ (85.4) $ (66.3)
Total amortization..................................... 38.7 34.6 83.7 74.5
-------- -------- -------- --------
Net increase (decrease) in research and development
expense.......................................... $ 20.6 $ 2.2 $ (1.7) $ 8.2
======== ======== ======== ========
Accelerated amortization included in total amortization
above................................................ $ 24.2 $ 22.3 $ 40.3 $ 40.3
</Table>
The increase in capitalized costs for the three months ended December
31, 2002, is primarily due to distributed systems data management and PATROL
projects that have recently reached technological feasibility. The decrease in
capitalized costs for the nine months ended December 31, 2002, is primarily due
to an overall reduction in the number of current development projects which
qualify for capitalization under SFAS No. 86 during that period. The reduction
in capitalizable projects and the acceleration of amortization in prior periods
has resulted in a decline in amortization expense for the three months and nine
months ended December 31, 2002, compared to the same periods in fiscal 2002.
During the quarter ended September 30, 2001, we also wrote off software assets
totaling $14.9 million associated with certain business information integration
products that were discontinued during that quarter. This charge is included in
restructuring costs in the accompanying Statement of Operations and
Comprehensive Income (Loss) for the nine months ended December 31, 2001.
Research and development expenses decreased 12% and 1% for the three
months and nine months ended December 31, 2002, respectively, compared to the
same periods in fiscal 2002. Excluding the impact of Remedy expenses subsequent
to the acquisition date, research and development expenses decreased 16% and 3%,
respectively, for the three months and nine months ended December 31, 2002. For
the three-months, this decrease was primarily due to the net expense effect of
software cost capitalization and amortization detailed above and a $5.0 million
write-off during the comparable prior year period of prepaid royalties and other
assets related to technology that was no longer to be utilized. For the nine
months ended December 31, 2002, decreases in personnel, facilities, professional
fees and royalty costs were partially offset by the net expense effect of
software cost capitalization and amortization detailed above.
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. Cost of professional services declined 2% and 14% for the three months
and nine months ended December 31, 2002, respectively, compared to the same
periods in fiscal 2002. Excluding the impact of Remedy expenses subsequent to
the acquisition date, these costs decreased 6% and 15%, respectively, for the
three months and nine months ended December 31, 2002. These declines resulted
primarily from the declines in professional services revenues and the related
headcount reductions, particularly within PATROL solutions, during these
periods. For the nine-month period, the decline also includes decreases in
external consulting fees.
General and Administrative
General and administrative expenses are comprised primarily of
compensation and personnel costs within executive management, finance and
accounting, facilities management and human resources. Other costs included in
general and administrative expenses are fees paid for legal and accounting
services, consulting projects, insurance, costs of managing our foreign currency
exposure and bad debt expense related to maintenance billings. General and
administrative expenses increased 14% and decreased 5% for the three months and
nine months ended December 31, 2002, respectively, compared to the same periods
in fiscal 2002. Excluding the impact of Remedy expenses subsequent to the
acquisition date, these costs increased 3% and decreased 8%, respectively, for
the three months and nine months ended December 31, 2002. The increase for the
three-month period is primarily the result of increased personnel costs,
insurance costs and travel costs, which more than offset a decrease in bad debt
expense related to maintenance billings. The decrease in general and
administrative expenses for the nine months ended December 31, 2002 was
primarily attributable to decreased legal and other professional fees, shipping
costs and bad debt expense, partially offset by higher personnel, travel and
insurance costs.
21
Acquired Research and Development
On November 20, 2002, we acquired the assets of Remedy from Peregrine
Systems, Inc. (Peregrine) for $355 million in cash plus the assumption of
certain liabilities of Remedy. In accordance with the purchase agreement, the
cash purchase price is subject to adjustment and this purchase price adjustment
has not yet been finalized. The aggregate purchase price prior to adjustment was
$363.4 million, including the cash consideration and direct costs of the
transaction. The allocation of the purchase price to specific assets and
liabilities was based, in part, upon outside appraisals of the fair value of
certain assets of Remedy. The following table summarizes the estimated fair
values of the assets acquired and liabilities assumed at the date of
acquisition. We are in the process of determining the fair values of certain
assets and liabilities; thus, the allocation of the purchase price is subject to
refinement.
<Table>
<Caption>
NOVEMBER 20,
2002
------------
(IN MILLIONS)
Current assets $ 32.3
Property and equipment and other long-term assets 28.1
Intangible assets 176.0
Goodwill 196.3
---------
Total assets acquired 432.7
---------
Current liabilities (69.3)
---------
Net assets acquired $ 363.4
=========
</Table>
Of the $176.0 million of acquired intangible assets, we allocated $12.0
million of the purchase price to in-process research and development (IPR&D)
projects. The amount allocated represents the estimated fair value, based on
risk-adjusted cash flows and historical costs expended, related to Remedy's
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.
At the acquisition date, Remedy was conducting design, development,
engineering and testing activities associated with the completion of
next-generation core and application technologies that are expected to address
emerging market demands in the service management market. At the acquisition
date, the technologies under development were approximately 25%-35% complete
based on engineering man-month data and technological progress. Remedy had
incurred nearly $6 million on the in-process projects, and expected to spend
approximately $16 million to complete all phases of the research and
development. Anticipated completion dates ranged from 3 to 12 months, at which
times we expect to begin benefiting from the developed technologies.
In making the purchase price allocation to IPR&D for the Remedy
acquisition, we considered present value calculations of income, an analysis of
project accomplishments and remaining outstanding items, an assessment of
overall contributions, as well as project risks. The value assigned to purchased
in-process technology was 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 projection used to value the in-process research and
development was 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. The resulting net cash flows
from such projects are based on the Company's estimates of cost of sales,
operating expenses and income taxes from such projects.
In the present value calculations, aggregate revenues for the
developed, in-process and future Remedy products were estimated to grow at a
compounded annual growth rate of approximately 15% from fiscal 2003 to fiscal
2006, 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 the
acquisition and then decline 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 forecast and the risks associated with the projected growth and
profitability of the developmental projects, discount rates of 40% to 45% were
considered appropriate for the IPR&D. These discount rates were commensurate
with Remedy's stage of development and the uncertainties in the economic
estimates described above.
22
The estimates used in valuing IPR&D were based upon assumptions
believed to be reasonable but which are inherently uncertain and unpredictable.
Assumptions may be incomplete or inaccurate, and unanticipated events and
circumstances may occur. Accordingly, actual results may differ from the
projected results used to determine fair value.
Amortization and Impairment 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, software and other
intangible assets. Prior to April 1, 2002, we were amortizing all of these
intangibles over three to five-year periods, which reflected the estimated
useful lives of the respective assets. As of April 1, 2002, we adopted SFAS No.
142, "Goodwill and Other Intangible Assets." In accordance with this Statement,
goodwill and those intangible assets with indefinite lives are no longer
amortized, but rather are tested for impairment annually and when events or
circumstances indicate that their fair value has been reduced below carrying
value. Acquired technology continues to be amortized under SFAS No. 86. See Note
6 to the condensed consolidated financial statements contained herein for a
reconciliation of our reported net earnings (loss) and earnings (loss) per share
to those amounts that would have resulted had there been no amortization of
goodwill and intangible assets with indefinite lives for all periods presented.
As discussed in Note 3 to the condensed consolidated financial
statements, we acquired Remedy during the quarter ended December 31, 2002.
Amortization expense during that quarter includes the amortization of Remedy
acquired technology and customer relationships. During the quarter ended
December 31, 2001, we performed an assessment of the carrying values of our
acquired technology, goodwill and intangibles recorded in connection with
various acquisitions. The assessment was performed because sustained negative
economic conditions impacted our operations and expected future revenues, and
economic indicators suggested that these conditions might continue for the
foreseeable future. As a result, we recorded impairment charges of $15.5 million
related to acquired technology to reflect these assets at their estimated net
realizable values and $47.8 million related to goodwill to reflect these assets
at their estimated fair values. These charges are reflected together with
amortization expense in the accompanying Consolidated Statements of Operations
and Comprehensive Income (Loss) for the three months and nine months ended
December 31, 2001, as amortization and impairment of acquired technology,
goodwill and intangibles.
Restructuring Costs
During the nine months ended December 31, 2001, we implemented a
restructuring plan to better align our cost structure with prevailing market
conditions. The plan included the involuntary termination of 1,260 employees
during those quarters. These actions were across all divisions and geographies
and the affected employees received cash severance packages. During the quarter
ended December 31, 2001, the Company also discontinued certain business
information integration products and announced the closure of certain locations
throughout the world. A charge of $52.9 million was recorded during the nine
months ended December 31, 2001, for employee severance of $35.1 million, the
$14.7 million write-off of software assets related to discontinued products, net
of proceeds from the sale of a portion of the related technology, and office
closures of $3.1 million. The $0.1 million credit to restructuring costs
recorded during the first nine months of fiscal 2003 is primarily related to the
adjustment of facilities and severance accruals initially recorded during fiscal
2002.
Merger-Related Costs and Compensation Charges
Merger-related compensation charges of $5.8 million and $11.6 million
for the three months and nine months ended December 31, 2001, respectively, and
$0.6 million for the nine months ended December 31, 2002 are 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.
Vesting was complete during the first quarter of fiscal 2003.
OTHER INCOME, NET
For the three months and nine months ended December 31, 2002, other
income, net was $11.7 million and $38.3 million, respectively, reflecting a
decrease of 21% and 8% from the same periods of fiscal 2002. Other income, net
consists primarily of interest earned on cash, cash equivalents, marketable
securities and finance receivables and gains and losses on marketable securities
and other investments. The decrease in other income, net for the three months
and nine months is primarily due to a $4.5 million impairment of a partnership
investment and lower interest income resulting from lower interest rates and the
decline in our total cash and cash equivalents balance as a result of funding
the Remedy acquisition. In the quarters ended June 30, 2001 and 2002, we wrote
off $7.4 million and $6.3 million, respectively, of marketable securities.
23
INCOME TAX PROVISION (BENEFIT)
For the three months and nine months ended December 31, 2002, income
tax expense was $6.4 million and $12.0 million, respectively, compared to income
tax benefits of $11.9 million and $47.0 million for the same periods in fiscal
2002. The increase in income tax expense is directly attributable to the
increase in pre-tax earnings discussed above. Our effective tax rate was 35% and
30% for the three months and nine months ended December 31, 2002, respectively,
compared to 11.2% and 20.5% for the same periods of fiscal 2002. The effective
rates are lower as a result of non-deductible amortization expense.
As previously disclosed in our Form 10-Q for the quarter ended
September 30, 2002, we received a Revenue Agent's Report ("RAR") from the
Internal Revenue Service ("IRS") on August 26, 2002, related to the examination
of our U.S. corporate income tax returns for the fiscal years ended March 31,
1998 and 1999. The RAR is not a Statutory Notice of Deficiency, and we are
protesting the findings in the RAR. The report proposes tax increases resulting
from adjustments to the transfer pricing arrangement we have with one of our
foreign subsidiaries. The IRS claims in the report that our U.S. operations have
not been adequately compensated by the foreign subsidiary for the right to
distribute our technology in a specific territory. We believe that we have
meritorious defenses to the proposed adjustments and that adequate provisions
for income taxes have been made, and therefore we believe that the ultimate
resolution of the issues will not have a material adverse impact on our
consolidated financial position or results of operations.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
As of April 1, 2002, we adopted SFAS No. 142, "Goodwill and Other
Intangible Assets." SFAS No. 142 addresses financial accounting and reporting at
the point of acquisition for intangible assets acquired individually or with a
group of other assets, other than those acquired in a business combination, and
the financial accounting and reporting for goodwill and other intangible assets
subsequent to their acquisition. Under this Statement, all goodwill and those
intangible assets with indefinite useful lives are not amortized, but rather are
tested for impairment annually and when events and circumstances indicate that
their fair value has been reduced below carrying value. Intangible assets with
finite useful lives are amortized over those useful lives. We assigned our
goodwill to our applicable reporting units and tested the goodwill for
impairment as of April 1, 2002 in accordance with SFAS No. 142. The fair value
of each of our reporting units with goodwill assigned exceeded the respective
carrying value of the reporting unit's net assets, including goodwill, and
therefore no goodwill was considered impaired as of April 1, 2002. As such, the
primary impact of adopting this Statement is the elimination of amortization
expense related to our goodwill and intangible assets with indefinite lives from
our Consolidated Statements of Operations and Comprehensive Income (Loss). See
Note 6 to the Condensed Consolidated Financial Statements contained herein for a
reconciliation of our reported net earnings (loss) and earnings (loss) per share
to those amounts that would have resulted had there been no amortization of
goodwill and intangible assets with indefinite lives for all periods presented.
In April 2002, the Financial Accounting Standards Board (FASB) issued
SFAS No. 145, "Rescission of FASB Statements No. 4, 44, and 64, Amendment of
FASB Statement No. 13, and Technical Corrections." SFAS No. 145 rescinds various
other statements that required extraordinary treatment for the early
extinguishment of debt. This pronouncement allows extraordinary treatment of
gains or losses associated with extinguishment of debt when the criteria under
Accounting Principles Board Opinion No. 30, "Reporting the Results of Operations
- -- Reporting the Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual and Infrequently Occurring Events and Transactions" are
met. SFAS No. 145 also amends SFAS No. 13, "Accounting for Leases," such that
lease modifications which have economic effects similar to sale-leaseback
transactions are now required to be accounted for in the same manner as
sale-leasebacks. The portion of SFAS No. 145 relating to treatment of early
extinguishment of debt is effective for fiscal years beginning after May 15,
2002, while the other provisions of this statement are effective either for
transactions occurring after that date or for financial statements issued after
that date. We believe that adoption of SFAS No. 145 will not have a material
effect on our financial position or results of operations.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities," which nullifies Emerging Issues
Task Force Issue No. 94-3, "Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit an Activity (including Certain
Costs Incurred in a Restructuring)." SFAS No. 146 generally requires that the
liability for a cost associated with an exit or disposal activity be recognized
and measured initially at its fair value in the period in which the liability is
incurred. The provisions of this Statement are effective for exit or disposal
activities initiated after December 31, 2002. We believe that adoption of SFAS
No. 146 will not have a material effect on our financial position or results of
operations.
24
In December 2002, the FASB issued SFAS No. 148, "Accounting for
Stock-Based Compensation - Transition and Disclosure - An Amendment of FASB
Statement No. 123." This Statement provides alternative methods of transition
for a voluntary change to the fair value based method of accounting for
stock-based employee compensation and requires prominent disclosures in both
annual and interim financial statements about the method of accounting for
stock-based employee compensation and the effect of the method used on reported
results. We have elected not to adopt the recognition and measurement provisions
of SFAS No. 123 and continue to account for our stock-based employee
compensation plans under APB Opinion No. 25 and related interpretations and
therefore the transition provisions will not have an impact on our financial
position or results of operations. We have provided the required expanded
disclosures in Note 5 to the accompanying condensed consolidated financial
statements.
In November 2002, the FASB issued Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others" (FIN 45). FIN 45 requires certain
guarantees to be recorded at fair value and requires a guarantor to make
disclosures, even when the likelihood of making any payments under the guarantee
is remote. The initial recognition and initial measurement provisions are
applicable on a prospective basis to guarantees issued or modified after
December 31, 2002, and the disclosure requirements are effective for financial
statements of interim or annual periods ending after December 15, 2002. We
believe that adoption of FIN 45 will not have a material effect on our financial
position or results of operations.
In January 2003, the FASB issued Interpretation No. 46, "Consolidation
of Variable Interest Entities" (FIN 46). This interpretation of Accounting
Research Bulletin No. 51, "Consolidated Financial Statements," addresses
consolidation by business enterprises of variable interest entities for which
(1) the equity investment at risk is not sufficient to permit the entity to
finance its activities without additional subordinated financial support from
other parties, which is provided through other interests that will absorb some
or all of the expected losses of the entity, and/or (2) the equity investors
lack one or more of the essential characteristics of a controlling financial
interest. FIN 46 requires variable interest entities to be consolidated by their
primary beneficiaries if the entities do not effectively disperse risks among
the parties involved. Variable interest entities that effectively disperse risks
are not consolidated unless a single party holds an interest or combination of
interests that effectively recombines risks that were previously dispersed. The
consolidation requirements of FIN 46 apply immediately to variable interest
entities created after January 31, 2003. The consolidation requirements apply to
older entities in the first fiscal year or interim period beginning after June
15, 2003. We believe that adoption of FIN 46 will not have a material effect on
our financial position or results of operations.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 2002, our cash, cash equivalents and marketable
securities were $899.5 million, a $204.2 million or 19% decrease from the March
31, 2002 balance. As discussed in more detail below, this decline is primarily
due to cash funding for the Remedy acquisition and treasury stock purchases
which more than offset positive operating cash flow. A portion of the $899.5
million of cash, cash equivalents and marketable securities at December 31, 2002
is held in international locations and was largely generated from our
international operations. Our international operations have generated
approximately $679 million of earnings for which U.S. income taxes have not been
recorded. These earnings would be subject to U.S. income tax if repatriated to
the United States. The potential deferred tax liability for these earnings is
approximately $237 million; however, we have not provided a deferred tax
liability on any portion of the $679 million as we plan to utilize our cash in
international locations for foreign investment purposes. During the quarter
ended December 31, 2002, we utilized cash held in international locations to
fund a portion of the Remedy purchase price based upon the valuation of the
foreign assets of Remedy acquired.
Our working capital as of December 31, 2002, was $110.4 million,
reflecting a decrease of $205.8 million from the March 31, 2002 balance of
$316.2 million due primarily to cash funding for the Remedy acquisition and
treasury stock purchases which more than offset positive operating cash flow. A
significant dollar portion of our marketable securities is invested in
securities with maturities beyond one year, and while typically yielding greater
returns, investing in such securities reduces reported working capital. Our
marketable securities are primarily investment grade and highly liquid. Because
of current economic trends, we have begun investing in securities with shorter
original maturities. On December 31, 2002, we reclassified our held-to-maturity
portfolio to the available-for-sale portfolio. The amortized cost of the
transferred securities was $396.1 million at the date of reclassification. When
the securities were transferred to the available-for-sale portfolio, a net
unrealized gain of $15.8 million was recorded as a component of accumulated
other comprehensive income (loss). The transfer of securities from the
held-to-maturity portfolio was made to increase our flexibility to react to the
unprecedented volatility in the debt securities markets that developed over the
quarters preceding the date of transfer. Stockholders' equity as of December 31,
2002, was $1.4 billion.
25
We continue to primarily finance our operations through funds generated
from operations. For the nine months ended December 31, 2002, net cash provided
by operating activities was $380.1 million. Our primary source of cash is the
sale of our software licenses, software maintenance and professional services.
We provide financing on a portion of these sales transactions to customers that
meet our specified standards of creditworthiness. We participate in established
programs with third-party financing institutions to securitize or sell a
significant portion of our finance receivables. We utilize certain wholly-owned,
fully consolidated special-purpose entities in these transfers. We securitize
finance receivables from customers with investment-grade credit ratings through
two special-purpose entities sponsored by third-party financial institutions.
The entities sponsored by third-party financial institutions are multi-seller
conduits with access to commercial paper markets, that purchase interests in
similar receivables from numerous other companies unrelated to us. We have no
ownership in either of the third-party financial institution sponsored entities
and have no voting influence over either of these entities' operating and
financial decisions. As a result, we do not consolidate the third-party
financial institution sponsored entities. When we sell receivables in
securitizations of software installment contracts, we retain a beneficial
interest in the securitized receivables, which is subordinate to the interests
of the entities sponsored by the third-party financial institutions. The
subordinate interests are measured and recorded at fair value based on the
present value of future expected cash flows estimated using our best estimates
of the key assumptions, including expected credit losses and discount rates
commensurate with the risks involved. We periodically review the key assumptions
and estimates used in determining the fair value of the retained interests. The
financing institutions have no recourse to our other assets for failure of
debtors to pay when due. Our retained interests are subordinate to the
investors' interests and the value of the retained interests is subject to
credit and interest rate risks on the transferred financial assets. At December
31, 2002, our retained interest was $22.2 million and is included in long-term
finance receivables in the accompanying Condensed Consolidated Balance Sheet as
of that date. Other finance receivables are sold to third-party financial
institutions on a non-recourse basis. We record such transfers of beneficial
interests in finance receivables to third-party financial institutions as sales
of such finance receivables when we have surrendered control of such
receivables, including determining that such assets have been isolated beyond
our reach and the reach of our creditors. We have not guaranteed the transferred
receivables and have no obligation upon default. During the nine months ended
December 31, 2001 and 2002, we transferred a total of $215.2 million and $291.7
million, respectively, of such receivables through these programs. The high
credit quality of our finance receivables and the existence of these third-party
facilities extend our ability to offer financing to qualifying customers on an
ongoing basis without a negative impact on our cash flow .
Beginning in the quarter ended December 31, 2002, the change in
long-term finance receivables has been reported as a component of cash flows
from operating activities, whereas this was previously reported as a component
of cash flows from investing activities. All periods presented have been
reclassified for consistency. For the nine months ended December 31, 2001 and
2002, the change in long-term finance receivables increased net cash provided by
operations by $59.9 million and decreased net cash provided by operations by
$48.3 million, respectively. Finance receivables are typically transferred to
the third-party financial institutions in the quarter after the software
contracts are executed. This was true for the finance receivables generated in
the quarter ended December 31, 2002, unlike in the quarter ended March 31, 2002,
when certain finance receivables were generated and transferred within that
quarter resulting in a lower finance receivable balance at quarter end. This was
the primary cause of the increase in finance receivables from March 31, 2002 to
December 31, 2002. Shifts in various market factors have made the transfer of
certain of our finance receivables more difficult and/or less cost effective,
including changes in the overall capacity of the market for such receivables, in
customers' credit quality, in the credit risk that third-party financial
institutions are willing to accept and in the documentation requirements of the
third-party financial institutions. These factors may impact our ability to
transfer finance receivables in the future.
Net cash used in investing activities in the nine months ended December
31, 2002 was $274.1 million, primarily related to the acquisition of Remedy, as
discussed in Note 3 to the accompanying condensed consolidated financial
statements, partially offset by proceeds from maturities of marketable debt
securities during the period. Net cash used in financing activities in the nine
months ended December 31, 2002 was $139.2 million, which primarily related to
purchases of our common stock. On April 24, 2000, the board of directors
authorized the purchase of up to $500.0 million of our common stock. During the
nine months ended December 31, 2002 we purchased 10.6 million shares for $158.8
million. Since the inception of the repurchase plan, we have purchased 26.8
million shares for $469.0 million. During the quarter ended September 30, 2002,
the board of directors authorized the purchase of an additional $500.0 million
of our common stock. We plan to continue to buy our common stock from time to
time, depending on market conditions and other possible uses of our cash. We
have no short-term or long-term debt outstanding.
We believe that our existing cash balances and funds generated from
operations will be sufficient to meet our liquidity requirements for the
foreseeable future.
26
B. CERTAIN RISKS AND UNCERTAINTIES
Our Stock Price is Volatile.
Our stock price has been and is highly volatile. Our stock price is
highly influenced by current expectations of future revenue, earnings and cash
flows. Any failure to meet anticipated revenue, earnings and cash flow levels in
a period or any negative change in our perceived long-term growth prospects
would likely have a significant adverse effect on our stock price. Our
historical financial results are not necessarily indicative of future results.
The Timing, Type and Size of License Contracts Could Cause Our Quarterly
Revenues and Earnings to Fluctuate.
Our revenues and results of operations are difficult to predict and may
fluctuate substantially quarter to quarter. The timing, type and amount of our
license revenues are subject to a number of factors that make estimation of
operating results prior to the end of a quarter extremely uncertain. We
generally operate with little or no sales backlog and, as a result, license
revenues in any quarter are dependent upon contracts entered into or orders
booked and shipped in that quarter. We are also executing a larger number of
license transactions where the contract terms and conditions require us to defer
the license revenue. We provide targets for the change in our deferred license
revenue balance along with targets for revenues, earnings and cash flows. A
significant amount of our license transactions are completed during the final
weeks and days of the quarter, and therefore we generally do not know whether
revenues, earnings, cash flows and/or changes to the deferred license revenue
balances will meet expectations until the first few days of the following
quarter.
We have a High Degree of Operating Leverage.
Our business model is characterized by a very high degree of operating
leverage. A substantial portion of our operating expenses consists of employee
and facility-related costs, which are relatively fixed over the short term. In
addition, our expense levels and hiring plans are based substantially on our
projections of future revenues. If near term demand weakens in a given quarter
or if current weak global economic conditions continue, then we may find it
difficult to meet our revenue expectations and there may be a material adverse
effect on our operating results and a resultant drop in our stock price.
We May Have Difficulty Achieving our Cash Flow from Operations Goal.
Our cash flow is and has been volatile. If our cash generated from
operations proved in some future period to be materially less than we currently
expect, our stock price could decline. Factors that could adversely affect the
cash flow from operations in the future include: reduced net earnings; increased
time required for the collection cycle of accounts receivable; an increase in
uncollectible accounts receivable; a significant shift from multi-year committed
contracts to short-term contracts; a reduced ability to securitize and sell
finance receivables; reduced renewal rates for maintenance; and a reduced
average yield from marketable securities and cash and cash equivalents balances.
Decreasing Demand for Enterprise License Transactions Could Adversely Affect
Revenues.
Fees from enterprise license transactions have historically been a
fundamental component of our revenues. These revenues depend on our customers
planning to grow their computer processing capacity and continuing to perceive
an increasing need to use our existing software products on substantially
greater processing capacity in future periods. Prior to 2000, we licensed many
of our larger customers to operate our mainframe products on significant levels
of processing capacity in excess of their then current mainframe processing
capacity. During the past several years, we also entered into many enterprise
license agreements with our larger customers to operate our distributed systems
products on significant levels of processing capacity in excess of their then
current distributed processing capacity. In a weak economy, these customers may
elect not to license our products for additional processing capacity until their
actual processing capacity or expected future processing capacity exceeds the
capacity they have already licensed from us. If economic conditions weaken
further, demand for data processing capacity could decline. In addition, the
uncertain economic environment has reduced customers' expectations of future
capacity growth, thus lessening demand for licensing excess processing capacity
in anticipation of future growth. If our customers who have entered into
multi-year capacity-based licenses for excess processing capacity do not
increase their processing capacity beyond the levels previously licensed from us
or license additional processing capacity in anticipation of future growth, then
our license revenues may not grow and our earnings could be adversely affected.
27
Increased Competition and Pricing Pressures Could Adversely Affect Our Earnings.
The market for systems management software has been increasingly
competitive for the past number of years. We compete with a variety of software
vendors including IBM and Computer Associates (CA). We derived over half of our
total revenues in fiscal 2002 from software products for IBM and IBM-compatible
mainframe computers. IBM continues, directly and through third parties, to
enhance and market its utilities for IMS and DB2 as lower cost alternatives to
the solutions provided by us and other independent software vendors. Although
such utilities are currently less functional than our solutions, IBM has begun
to invest more heavily in the IMS and DB2 utility market and appears to be
committed to competing in these markets. If IBM is successful with its efforts
to achieve performance and functional equivalence with our IMS, DB2 and other
products at a lower cost, our business may be materially adversely affected. CA
is also competing with us in these markets. Competition has led to increased
pricing pressures within the mainframe systems software markets. We continue to
reduce the cost to our customers of our mainframe tools and utilities in
response to such competitive pressures. Microsoft entered the distributed
systems monitoring and management market and is now competing with us in the
market for management tools for the Windows environment. We also face
competition from several niche software vendors, particularly for our
distributed systems product lines. In addition, the software industry is
experiencing continued consolidation. There is a risk that some of our
competitors may combine and consolidate market positions or combine technology,
making them stronger competitors.
Our Products Must Remain Compatible with Ever-changing Operating and Database
Environments.
IBM, HP, Sun, Microsoft and Oracle are by far the largest suppliers of
systems and database software and, in many cases, are the manufacturers of the
computer hardware systems used by most of our customers. Historically, operating
and database system developers have modified or introduced new operating
systems, database systems, systems software and computer hardware. Such new
products could incorporate features which perform functions currently performed
by our products or could require substantial modification of our products to
maintain compatibility with these companies' hardware or software. Although we
have to date been able to adapt our products and our business to changes
introduced by hardware manufacturers and operating and database system software
developers, there can be no assurance that we will be able to do so in the
future. Failure to adapt our products in a timely manner to such changes or
customer decisions to forego the use of our products in favor of those with
comparable functionality contained either in the hardware or operating system
could have a material adverse effect on our business, financial condition and
operating results.
Future Product Development is Dependent Upon Access to Third-party Source Code.
In the past, licensees using proprietary operating systems were
furnished with "source code," which makes the operating system generally
understandable to programmers, and "object code," which directly controls the
hardware and other technical documentation. Since the availability of source
code facilitated the development of systems and applications software which must
interface with the operating systems, independent software vendors such as BMC
were able to develop and market compatible software. IBM and other hardware
vendors have a policy of restricting the use or availability of the source code
for some of their operating systems. To date, this policy has not had a material
effect on us. Some companies, however, may adopt more restrictive policies in
the future or impose unfavorable terms and conditions for such access. These
restrictions may, in the future, result in higher research and development costs
for us in connection with the enhancement and modification of our existing
products and the development of new products. Although we do not expect that
such restrictions will have this adverse effect, there can be no assurances that
such restrictions or other restrictions will not have a material adverse effect
on our business, financial condition and operating results.
Future Product Development is Dependent Upon Early Access to Third-party
Operating and Database Systems.
Operating and database system software developers have in the past
provided us with early access to pre-generally available (GA) versions of their
software in order to have input into the functionality and to ensure that we can
adapt our software to exploit new functionality in these systems. Some
companies, however, may adopt more restrictive policies in the future or impose
unfavorable terms and conditions for such access. These restrictions may result
in higher research and development costs for us in connection with the
enhancement and modification of our existing products and the development of new
products. Although we do not expect that such restrictions will have this
adverse effect, there can be no assurances that such restrictions or other
restrictions will not have a material adverse effect on our business, financial
condition and operating results.
28
Failure to Adapt to Technological Change Could Adversely Affect Our Earnings.
If we fail to keep pace with technological change in our industry, such
failure would have an adverse effect on our revenues and earnings. We operate in
a highly competitive industry characterized by rapid technological change,
evolving industry standards, changes in customer requirements and frequent new
product introductions and enhancements. During the past several years, many new
technological advancements and competing products entered the marketplace. The
distributed systems and application management markets in which we operate are
far more crowded and competitive than our traditional mainframe systems
management markets. Our ability to compete effectively and our growth prospects
depend upon many factors, including the success of our existing distributed
systems products, the timely introduction and success of future software
products, and the ability of our products to interoperate and perform well with
existing and future leading databases and other platforms supported by our
products. We have experienced long development cycles and product delays in the
past, particularly with some of our distributed systems products, and expect to
have delays in the future. Delays in new product introductions or
less-than-anticipated market acceptance of these new products are possible and
would have an adverse effect on our revenues and earnings. New products or new
versions of existing products may, despite testing, contain undetected errors or
bugs that could delay the introduction or adversely affect commercial acceptance
of such products.
Maintenance Revenue Could Decline.
Maintenance revenues have increased in each of the last three fiscal
years as a result of the continuing growth in the base of installed products and
the processing capacity on which they run. Maintenance fees increase as the
processing capacity on which the products are installed increases; consequently,
we receive higher absolute maintenance fees as customers install our products on
additional processing capacity. Due to increased discounting for higher levels
of additional processing capacity, the maintenance fees on a per unit of
capacity basis are typically reduced in enterprise license agreements for our
mainframe products. In addition, customers may be entitled to reduced
maintenance percentages for entering into long-term maintenance contracts that
include prepayment of the maintenance fees or that are supported by a formal
financing arrangement. These discounts, combined with reduced maintenance
percentages for long-term contracts and the recent decline in our license
revenues, have led to lower growth rates for our maintenance revenue. Further
declines in our license revenue and/or increased discounting would lead to
declines in our maintenance revenues. Although renewal rates remain high, should
customers migrate from their mainframe applications or find alternatives to our
products, increased cancellations could lead to declines in our maintenance
revenue.
Changes in Pricing Practices Could Adversely Affect Revenues and Earnings.
We may choose in fiscal 2003 or a future fiscal year to make changes to
our product packaging, pricing or licensing programs. If made, such changes may
have a material adverse impact on revenues or earnings. During the fourth
quarter of fiscal 2002, we revised our maintenance program to a single
maintenance offering of 24x7 support at a standard rate of 20% of the discounted
price of the associated product. In connection with this revision, we have
extended our standard warranty and initial support period to one year for all
our products, whereas prior to this revision such periods were 90 days for
distributed systems products and one year for mainframe products. Because our
maintenance revenues include the ratable recognition of the bundled fees for any
initial maintenance services covered by the related perpetual license agreement,
in certain new license transactions the extension of the initial support period
for distributed systems products will cause us to recognize more maintenance
revenues over time and less license revenues when the transactions occur. While
this change in our maintenance program will not have a material effect on our
total revenues over time, there will be a negative short-term revenue impact,
which we have considered in determining our estimates of future revenues. In
addition, there is a risk that our revenues could be negatively impacted if
customers do not accept these changes to the maintenance program and choose to
license competing products instead.
Our Customers May Not Accept our Product Strategies.
Historically, we have focused on selling software products to address
specific customer problems associated with their applications. We are now
integrating multiple software products and offering packaged solutions for
customers' systems. There can be no assurance that customers will perceive a
need for such solutions. In addition, there may be technical difficulties in
integrating individual products into a combined solution that may delay the
introduction of such solutions to the market or adversely affect the demand for
such solutions. We may also adopt different sales strategies for marketing our
products, and there can be no assurance that our strategies for selling
solutions will be successful.
29
Risks Related to Business Combinations.
As part of our overall strategy, we have acquired or invested in, and
plan to continue to acquire or invest in, complementary companies, products, and
technologies and to enter into joint ventures and strategic alliances with other
companies. Risks commonly encountered in such transactions include: the
difficulty of assimilating the operations and personnel of the combined
companies; the risk that we may not be able to integrate the acquired
technologies or products with our current products and technologies; the
potential disruption of our ongoing business; the inability to retain key
technical, sales and managerial personnel; the inability of management to
maximize our financial and strategic position through the successful integration
of acquired businesses; the risk that revenues from acquired companies, products
and technologies do not meet expectations; and decreases in reported earnings as
a result of charges for in-process research and development and amortization of
acquired intangible assets.
In order for us to maximize the return on our investments in acquired
companies, the products of these entities must be integrated with our existing
products. These integrations can be difficult and unpredictable, especially
given the complexity of software and that acquired technology is typically
developed independently and designed with no regard to integration. The
difficulties are compounded when the products involved are well established
because compatibility with the existing base of installed products must be
preserved. Successful integration also requires coordination of different
development and engineering teams. This too can be difficult and unpredictable
because of possible cultural conflicts and different opinions on technical
decisions and product roadmaps. There can be no assurance that we will be
successful in our product integration efforts or that we will realize the
expected benefits.
With each of our acquisitions, we have initiated efforts to integrate
the disparate cultures, employees, systems and products of these companies.
Retention of key employees is critical to ensure the continued advancement,
development, support, sales and marketing efforts pertaining to the acquired
products. We have implemented retention programs to keep many of the key
technical, sales and marketing employees; nonetheless, we have lost some key
employees and may lose others in the future.
Enforcement of Our Intellectual Property Rights.
We rely on a combination of copyright, patent, trademark, trade
secrets, confidentiality procedures and contractual procedures to protect our
intellectual property rights. Despite our efforts to protect our intellectual
property rights, it may be possible for unauthorized third parties to copy
certain portions of our products or to reverse engineer or obtain and use
technology or other information that we regard as proprietary. There can also be
no assurance that our intellectual property rights would survive a legal
challenge to their validity or provide significant protection for us. In
addition, the laws of certain countries do not protect our proprietary rights to
the same extent as do the laws of the United States. Accordingly, there can be
no assurance that we will be able to protect our proprietary technology against
unauthorized third party copying or use, which could adversely affect our
competitive position.
Possibility of Infringement Claims.
From time to time, we receive notices from third parties claiming
infringement by our products of patent and other intellectual property rights.
We expect that software products will increasingly be subject to such claims as
the number of products and competitors in our industry segments grow and the
functionality of products overlap. In addition, we may receive more patent
infringement claims as companies increasingly seek to patent their software and
business methods and enforce such patents, especially given the increase in
software and business method patents issued during the past several years.
Regardless of its merit, responding to any such claim could be time-consuming,
result in costly litigation and require us to enter into royalty and licensing
agreements which may not be offered or available on terms acceptable to us. If a
successful claim is made against us and we fail to develop or license a
substitute technology, our business, results of operations or financial position
could be materially adversely affected.
Risks Related to International Operations.
We have committed, and expect to continue to commit, substantial
resources and funding to build our international service and support
infrastructure. Operating costs in many countries, including many of those in
which we operate, are higher than in the United States. In order to increase
international sales in fiscal 2003 and subsequent periods, we must continue to
globalize our software product lines; expand existing and establish additional
foreign operations; hire additional personnel; identify suitable locations for
sales, marketing, customer service and development; and recruit international
distributors and resellers in selected territories. Future operating results are
dependent on sustained performance improvement by our international offices,
particularly our European operations. Our operations and financial results
internationally could be significantly adversely affected by several risks such
as changes in foreign currency exchange rates, sluggish regional economic
conditions and difficulties in staffing and managing
30
international operations. Generally, our foreign sales are denominated in our
foreign subsidiaries' local currencies. If these foreign currency exchange rates
change unexpectedly, we could have significant gains or losses. Many systems and
applications software vendors are experiencing difficulties internationally.
We maintain a software development office in India which operates as an
extension of our primary development offices and we contract with third-party
developers in India. As other software companies have done and are continuing to
do, we are shifting certain development and information technology resources to
India with the expectation of achieving significant efficiencies, including
reducing operational costs and permitting an around-the-clock development cycle.
We plan on increasing our presence in India over time as we continue to drive
efficiency throughout the organization. To date, the dispute between India and
Pakistan involving the Kashmir region has not adversely affected our operations
in India. Should we be unable to conduct operations in India in the future, we
believe that our business could be adversely affected.
Conditions in Israel.
Our scheduling, security, output management and Enterprise Applications
Management (EAM) development operations are conducted primarily in Israel and,
accordingly, we are directly affected by economic, political and military
conditions in Israel. Any major hostilities involving Israel or the interruption
or curtailment of trade between Israel and its present trading partners could
materially adversely affect our business, operating results and financial
condition. Since the establishment of the State of Israel in 1948, a state of
hostility has existed, varying in degree and intensity, between Israel and the
Palestinian people and the Arab countries. In addition, Israel and companies
doing business with Israel have been the subject of an economic boycott by the
Arab countries since Israel's establishment. Although Israel has entered into
various agreements with certain Arab countries and the Palestinian Authority,
and various declarations have been signed in connection with efforts to resolve
some of the economic and political problems in the Middle East, we cannot
predict whether or in what manner these problems will be resolved. We maintain
comprehensive contingency and business continuity plans, and to date, the
current conflict in the region and hostilities within Israel have not caused
disruption of our operations located in Israel.
In addition, certain of our Israeli employees are currently obligated
to perform annual reserve duty in the Israel Defense Forces and are subject to
being called for active military duty at any time. Although our businesses
located in Israel have historically operated effectively under these
requirements, we cannot predict the effect of these obligations on our
operations in the future.
Possible Adverse Impact Of Interpretations of Existing Accounting
Pronouncements.
On April 1, 1998 and 1999 we adopted AICPA SOP 97-2, "Software Revenue
Recognition," and SOP 98-9 "Modification of SOP 97-2, Software Revenue
Recognition, With Respect to Certain Transactions," respectively. The adoption
of these standards did not have a material impact on our financial position or
results of operations. Based on our reading and interpretation of these SOPs, we
believe that our current sales contract terms and business arrangements have
been properly reported. However, the AICPA and its Software Revenue Recognition
Task Force continue to issue interpretations and guidance for applying the
relevant standards to a wide range of sales contract terms and business
arrangements that are prevalent in the software industry. Also, the SEC has
issued Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial
Statements," which provides guidance related to revenue recognition based on
interpretations and practices followed by the SEC. Future interpretations of
existing accounting standards or changes in our business practices could result
in future changes in our revenue accounting policies that could have a material
adverse effect on our business, financial condition and results of operations.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to a variety of risks, including foreign currency
exchange rate fluctuations and changes in the market value of our investments in
marketable securities. In the normal course of business, we employ established
policies and procedures to manage these risks including the use of derivative
instruments. There have been no material changes in our foreign exchange risk
management strategy or our marketable securities subsequent to March 31, 2002,
therefore our market risk sensitive instruments remain substantially unchanged
from the description in our Annual Report on Form 10-K for the year ended March
31, 2002.
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ITEM 4. CONTROLS AND PROCEDURES
Within 90 days prior to the date of this report, we carried out an
evaluation, under the supervision and with the participation of our Chief
Executive Officer and Chief Financial Officer, of the effectiveness of the
design and operation of our disclosure controls and procedures pursuant to
Exchange Act Rule 13a-14. Based upon this evaluation, our Chief Executive
Officer and Chief Financial Officer concluded that our disclosure controls and
procedures are effective in timely alerting them to material information
relating to the Company (including its consolidated subsidiaries) required to be
included in our periodic SEC filings. It should be noted that the design of any
system of controls is based in part upon certain assumptions about the
likelihood of future events, and there can be no assurance that any design will
succeed in achieving its stated goals under all potential future conditions,
regardless of how remote.
There were no significant changes in our internal controls or in other
factors that could significantly affect these controls subsequent to the date we
carried out our evaluation.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
On January 29, 2003, we filed a complaint against NetIQ Corporation
(NetIQ) in the United States District Court of the Southern District of Texas,
Houston Division, alleging that NetIQ's AppManager software products and their
use infringe a valid U.S. patent held by the Company. The Company seeks to
enjoin NetIQ's current and future infringement of the Company's patent and to
recover compensatory damages and punitive damages, interest, costs and fees.
We are subject to various legal proceedings and claims, either asserted
or unasserted, which arise in the ordinary course of business. Management does
not believe that the outcome of any of these legal matters will have a material
adverse effect on our financial position or results of operations.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
None.
(b) Reports on Form 8-K.
On December 4, 2002, the Company filed a Current Report on Form 8-K,
dated November 20, 2002, reporting under Item 2 the Company's acquisition of
Remedy from Peregrine Systems, Inc.
32
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, 2003
By: /s/ JOHN W. COX
-----------------------------------
John W. Cox
Vice President, Chief Financial
Officer and Chief Accounting Officer
February 14, 2003
33
CERTIFICATIONS
I, Robert E. Beauchamp, certify that:
1. I have reviewed this quarterly report on Form 10-Q of BMC
Software, Inc. (the "registrant");
2. Based on my knowledge, this quarterly report does not contain
any untrue statement of a material fact or omit to state a
material fact necessary to make the statements made, in light
of the circumstances under which such statements were made,
not misleading with respect to the period covered by this
quarterly report;
3. Based on my knowledge, the financial statements, and other
financial information included in this quarterly report,
fairly present in all material respects the financial
condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are
responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act Rules
13a-14 and 15d-14) for the registrant and we have:
a. designed such disclosure controls and procedures to
ensure that material information relating to the
registrant, including its consolidated subsidiaries,
is made known to us by others within those entities,
particularly during the period in which this
quarterly report is being prepared;
b. evaluated the effectiveness of the registrant's
disclosure controls and procedures as of a date
within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c. presented in this quarterly report our conclusions
about the effectiveness of the disclosure controls
and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have
disclosed, based on our most recent evaluation, to the
registrant's auditors and the audit committee of registrant's
board of directors (or persons performing the equivalent
function):
a. all significant deficiencies in the design or
operation of internal controls which could adversely
affect the registrant's ability to record, process,
summarize and report financial data and have
identified for the registrant's auditors any material
weaknesses in internal controls; and
b. any fraud, whether or not material, that involves
management or other employees who have a significant
role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have
indicated in this quarterly report whether or not there were
significant changes in internal controls or in other factors
that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and
material weaknesses.
Date: February 14, 2003
By: /s/ ROBERT E. BEAUCHAMP
--------------------------------
Robert E. Beauchamp
Chief Executive Officer
34
I, John W. Cox, certify that:
1. I have reviewed this quarterly report on Form 10-Q of BMC
Software, Inc. (the "registrant");
2. Based on my knowledge, this quarterly report does not contain
any untrue statement of a material fact or omit to state a
material fact necessary to make the statements made, in light
of the circumstances under which such statements were made,
not misleading with respect to the period covered by this
quarterly report;
3. Based on my knowledge, the financial statements, and other
financial information included in this quarterly report,
fairly present in all material respects the financial
condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are
responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act Rules
13a-14 and 15d-14) for the registrant and we have:
a. designed such disclosure controls and procedures to
ensure that material information relating to the
registrant, including its consolidated subsidiaries,
is made known to us by others within those entities,
particularly during the period in which this
quarterly report is being prepared;
b. evaluated the effectiveness of the registrant's
disclosure controls and procedures as of a date
within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c. presented in this quarterly report our conclusions
about the effectiveness of the disclosure controls
and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have
disclosed, based on our most recent evaluation, to the
registrant's auditors and the audit committee of registrant's
board of directors (or persons performing the equivalent
function):
a. all significant deficiencies in the design or
operation of internal controls which could adversely
affect the registrant's ability to record, process,
summarize and report financial data and have
identified for the registrant's auditors any material
weaknesses in internal controls; and
b. any fraud, whether or not material, that involves
management or other employees who have a significant
role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have
indicated in this quarterly report whether or not there were
significant changes in internal controls or in other factors
that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and
material weaknesses.
Date: February 14, 2003
By: /s/ JOHN W. COX
--------------------------------
John W. Cox
Chief Financial Officer
35