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