The next three question use data from the BMC 3/31/2013 10-K, which can be viewed by clicking here.

You are doing a Comparable Companies analysis for BMC. After the Company issued its 10-K, the Company announced it is issuing new stock to fully repay its outstanding Term Loan. Ignoring transaction fees, what is the Company's Pro Forma Net Debt?

Hint: View the "Long-Term Borrowings" section of the 10-K to help you quickly find the relevant information.

• -48.7
• -251.4
• -451.4
• 1,130.5
• 1,330.5

10-K 1 d508475d10k.htm FORM 10-K Table of Contents UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K (Mark One) ! ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended March 31, 2013 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 incorporation or organization) (I.R.S. Employer 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 Securities registered pursuant to Section 12(b) of the Act: Title of each class Name of each exchange on which registered Common Stock, par value $.01 per share The NASDAQ Stock Market LLC Securities registered pursuant to section 12(g) of the Act: None Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ! No " Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes " No ! 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 ! No " Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ! No " Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. " Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b2 of the Exchange Act. Large accelerated filer ! Accelerated filer " Non-accelerated filer " (Do not check if a smaller reporting company) Smaller reporting company " Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes " No ! The aggregate market value of voting and non-voting common equity held by non-affiliates of the registrant was approximately $6,429,383,000 at September 30, 2012 based upon the closing sale price of the Common Stock on the NASDAQ Stock Market reported on such date. As of May 6, 2013, there were 143,973,000 outstanding shares of Common Stock, par value $.01, of the registrant. DOCUMENTS INCORPORATED BY REFERENCE: Portions of the registrant's Proxy Statement relating to its 2013 Annual Stockholders Meeting, to be filed subsequently, are incorporated by reference into Part III. Table of Contents TABLE OF CONTENTS Page PART I ITEM 1. Business 4 ITEM 1A. Risk Factors 9 ITEM 1B. Unresolved Staff Comments 19 ITEM 2. Properties 19 ITEM 3. Legal Proceedings 19 ITEM 4. (Removed and Reserved) 19 PART II ITEM 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities 20 ITEM 6. Selected Financial Data 22 ITEM 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 24 ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk 44 ITEM 8. Financial Statements and Supplementary Data 46 ITEM 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure 46 ITEM 9A. Controls and Procedures 47 ITEM 9B. Other Information 49 PART III ITEM 10. Directors, Executive Officers and Corporate Governance 49 ITEM 11. Executive Compensation 49 ITEM 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters 49 ITEM 13. Certain Relationships and Related Transactions, and Director Independence 49 ITEM 14. Principal Accountant Fees and Services 49 PART IV ITEM 15. Exhibits and Financial Statement Schedules 50 This Annual Report on Form 10-K (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," "estimate," "will," "contemplate," "would" and similar expressions that contemplate future events. Such forward-looking statements are based on management's reasonable current assumptions and expectations. Numerous important factors, risks and uncertainties, including, but not limited to, those contained in this Report, affect our operating results and could cause our actual results, levels of activity, performance or achievement to differ materially from the results expressed or 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 Risk Factors. You should also carefully review the cautionary statements described in the other documents we file from time to time with the Securities and Exchange Commission (SEC), specifically our Quarterly Reports on Form 10-Q and our Current Reports on Form 8-K. We undertake no obligation to update any forward-looking statements. Information contained on our website is not part of this Report. BMC, BMC Software and the BMC Software logo are the exclusive properties of BMC Software, Inc., are registered with the U.S. Patent and Trademark Office, and may be registered or pending registration in other countries. All other BMC trademarks, service marks and logos may be registered or pending registration in the U.S. or in other countries. All other trademarks or registered trademarks are the property of their respective owners. BladeLogic and the BladeLogic logo are the exclusive properties of BladeLogic, Inc. The BladeLogic trademark is registered with the U.S. Patent and Trademark Office, and may be registered or pending registration in other countries. All other BladeLogic trademarks, service marks and logos may be registered or pending registration in the U.S. or in other countries. All other trademarks or registered trademarks are the property of their respective owners. Numara, Numara Software, and the Numara Software logo are the exclusive properties of Numara Software, Inc. or its affiliates or subsidiaries, are registered with the U.S. Patent and Trademark Office, and may be registered or pending registration in other countries. All other Numara trademarks, service marks, and logos may be registered or pending registration in the U.S. or in other countries. All other trademarks or registered trademarks are the property of their respective owners. 2 Table of Contents ITIL is a registered trademark of the Cabinet Office. IT Infrastructure Library is a registered trademark of the Cabinet Office. DB2, IMS and IBM are trademarks or registered trademarks of International Business Machines Corporation in the United States, other countries or both. Oracle and Java are registered trademarks of Oracle and/or its affiliates. Other names may be trademarks of their respective owners. 3 Table of Contents PART I ITEM 1. Business Overview BMC Software, Inc. (collectively, we, us, our, the Company or BMC) is one of the world's largest software companies. We provide IT management solutions for large, mid-sized and small enterprises and public sector organizations around the world. Our extensive portfolio of IT management software solutions simplifies and automates the management of IT processes, mainframe, distributed, virtualized and cloud computing environments, as well as applications and databases. We also provide our customers with maintenance and support services for our products and assist customers with software implementation, integration, IT process and organizational transformation and education services. We were organized as a Texas corporation in 1980 and were reincorporated in Delaware in July 1988. Our principal corporate offices are located at 2101 CityWest Boulevard, Houston, Texas 77042-2827. Our main telephone number is (713) 918-8800, and our primary internet address is http://www.bmc.com. Our internet website and the information contained therein or connected thereto are not intended to be incorporated into this Annual Report on Form 10-K. We file annual, quarterly and current reports, proxy statements and other information with the SEC. These filings and all related amendments are available free of charge at http://investors.bmc.com. We post all of our SEC documents to our website as soon as reasonably practical after such material is electronically filed with, or furnished to, the SEC. Our corporate governance guidelines and the charters of the Board of Directors committees are also available at http://www.bmc.com, as is our Code of Conduct, as amended from time to time. Printed copies of each of these documents are available to stockholders upon request by contacting our investor relations department at (800) 841-2031 ext. 4525 or via email at i..r@bmc.com. Merger Agreement On May 6, 2013, BMC entered into an Agreement and Plan of Merger (the Merger Agreement) pursuant to which it will be acquired by Boxer Parent Company Inc. (Parent), a Delaware corporation formed by affiliates of investment funds advised by Bain Capital, LLC, Golden Gate Private Equity, Inc. and Insight Venture Management, LLC, and an entity affiliated with GIC Special Investments Pte Ltd (together, the Sponsors), through a merger of a wholly-owned subsidiary of Parent with and into the Company (the Merger). The Merger Agreement provides that, subject to the terms and conditions thereof, at the effective time of the Merger (the Effective Time), each outstanding share of common stock of the Company, other than certain excluded shares, will cease to be outstanding and will be converted into the right to receive $46.25 in cash, without interest (the Merger Consideration). BMC's stockholders will be asked to vote on the adoption of the Merger Agreement at a special stockholders meeting that will be held on a date to be announced. The closing of the Merger is subject to the adoption of the Merger Agreement by the affirmative vote of the holders of at least a majority of all outstanding shares of common stock of the Company (the Company Stockholder Approval). Consummation of the Merger is not subject to a financing condition, but is subject to a condition that the Company has a specified amount of cash available in the United States on the date of closing and certain customary conditions. Parent has obtained equity financing and debt financing commitments for the purpose of financing the transactions contemplated by the Merger Agreement and paying related fees and expenses, which, together with certain cash of BMC, will be sufficient for such purposes. The obligations of the lenders to provide debt financing under the debt commitments are subject to a number of customary conditions. BMC has made customary representations, warranties and covenants in the Merger Agreement, including, among others, covenants (1) to conduct its business in the ordinary course during the period between the execution of the Merger Agreement and the Effective Time, (2) not to engage in certain types of transactions during this period unless agreed to by Parent, (3) to convene and hold a meeting of its stockholders for the purpose of obtaining the Company Stockholder Approval and (4) subject to certain exceptions, not to withhold, withdraw or modify in a manner adverse to Parent the recommendation of the Board that the Company's stockholders approve the adoption of the Merger Agreement. The Merger Agreement provides that, during the period beginning on the date of the Merger Agreement and continuing until 11:59 p.m. (New York time) on June 5, 2013 (the Go-Shop Period End Date), the Company and its subsidiaries and their respective representatives may solicit, initiate and encourage any alternative acquisition proposals from third parties, provide nonpublic information to such third parties and participate in discussions and negotiations with such third parties regarding alternative acquisition proposals. The Merger Agreement contains certain termination rights for the Company and Parent, including the right of the Company to terminate the Merger Agreement to accept a superior proposal (as defined in the Merger Agreement) and for either party to terminate the Merger Agreement if the Merger is not consummated by November 6, 2013, which date will be extended to February 6, 2014 in the event that on November 6, 2013, all conditions to the closing of the Merger have been satisfied or waived other than the antitrust and governmental approvals. Additional information about the Merger Agreement is set forth in our Current Report on Form 8-K filed with the SEC on May 6, 2013. Strategy Our strategy is to be the leader in providing IT management solutions that simplify and automate complex IT functions and processes in order to improve IT efficiency and value. We believe that by helping our customers run their IT organizations smarter, faster and more intelligently, their businesses will thrive. Our solutions and services help businesses address key Chief Information Officer (CIO) initiatives such as cloud computing, mobility, the consumerization of IT and IT transformation. Responding to the needs of IT executives to optimize costs, increase business competitive advantage, improve service quality, manage risk and provide greater transparency, we provide solutions that enable IT to consumerize the front end of IT, while industrializing the back end. Our approach resonates powerfully with large enterprise customers and results in substantial savings and value created through improved IT operational efficiency, consistent service delivery and the ability to rapidly address changing business needs. We have developed our solutions so that they can be deployed at once as a full, comprehensive solution or over time as a series of modules. To accomplish this, we provide integrated products and solutions (see the Solutions and Products section below). Our offerings represent continued innovation from internal development, strategic acquisitions and by partnering with leading technology providers. We are committed to further enhancing our solutions in order to help our customers better manage IT complexity across diverse infrastructures and processes. We are also committed to providing customer choice by delivering our products and solutions through a combination of methods, including on-premise delivery and software-as-a-service (SaaS). We provide a family of shared foundational technologies called BMC Atrium that provides the enabling architecture to unify information and processes from disparate management tools and to allow IT teams to focus on delivering business services. One of the key components of BMC Atrium is the BMC Atrium Configuration Management Database (CMDB). The BMC Atrium CMDB is an open-architected, federated, intelligent data repository that simplifies the management of IT configurations and delivers accurate visibility into the dependencies between business services, users and IT infrastructure across cloud, virtual, mainframe and distributed environments. Along with other components of BMC Atrium, the BMC Atrium CMDB enables a Configuration Management System that ensures a consistent approach to managing IT processes such as incident management, problem management, change management, configuration management, asset management and event management. Our recently released BMC MyIT solution enables corporate IT departments to give employees personalized control over the delivery of the IT services and information they need from multiple devices. To help clients, we offer education and consulting services that include both industry best practices and our own best practices and are delivered through a comprehensive methodology that is focused on customer value realization. We provide services that assist our customers in defining, implementing and operating our solutions, including technology, process and organizational assessment, design and transformation services. Our solutions support best practices, including those found in IT Infrastructure Library (ITIL), the most widely adopted IT-related best practices framework, and we provide ITIL education and certification to customers and partners through our professional services organization. 4 Table of Contents As part of our strategy, we also differentiate our approach by supporting mainframe environments. A substantial portion of the world's most valuable computer data resides on mainframes. Our ability to integrate the mainframe into a heterogeneous IT management system offers significant benefits to financial services, telecommunications, transportation and other industries. Mainframes remain important to our larger enterprise customers as they continue to be one of the most cost effective and scalable platforms for IT service delivery. With the acquisition of Numara Software Holdings, Inc. (Numara) in February 2012, we extended the power and benefits of BMC solutions to mid-sized and small business organizations. Anchored by Numara's IT service management and IT asset management solutions, BMC can position our network automation, discovery and dependency mapping and end user experience management solutions to meet the IT management needs of organizations of this size. Our strategy reflects the belief that one-size IT management offerings do not meet all customer needs, and BMC is committed to providing tailored solutions that address specific market requirements, including the need for ease of use and rapid time to value that is paramount to mid-sized and small business IT organizations. Solutions and Products During fiscal 2013, we were organized into two primary business units, Enterprise Service Management (ESM) and Mainframe Service Management (MSM). Beginning in the first quarter of fiscal 2013, we refined our ESM business unit to include two separate segments, ESM-Solutions and ESM-Services, consistent with the manner in which business segment performance is being assessed internally for evaluating performance and making resource allocation decisions. For financial information related to these segments, see Note 13 to the accompanying consolidated financial statements. During fiscal 2013, our ESM business unit consisted of the following solution suites and related professional services: BMC ProactiveNet Performance Management Our solution suite in this area manages IT functions and processes such as availability and performance management, event management, service impact management and capacity optimization and provides proactive analytics to help IT identify issues before end users are affected by performance problems. Our solutions prioritize IT events based on business impact and help determine and initiate corrective actions to quickly restore services to the business. We were one of the first IT management leaders to bring business relevance to IT component events in this important market segment for our business. The end user experience management solution from our April 2011 acquisition of Coradiant Inc. is included in this solution area. BMC BladeLogic Automation Our solution suite in this area manages IT functions and processes such as provisioning, configuration change and compliance automation for servers, networks, applications and databases. Our solutions help IT departments manage increasing complexity and support rapidly changing business needs, and include our Cloud Lifecycle Management solutions which are now in use by some of the world's largest public sector organizations and commercial enterprises, including service providers and telecommunications companies. This market segment continues to attract significant customer interest due to the pervasive need for organizations to automate manually-intensive and time-consuming processes in order to achieve greater operational efficiency. The application release process management technology from our September 2011 acquisition of StreamStep, Inc. is included in this solution area. In August, 2012 we acquired VaraLogix, Inc., an application release automation provider. With this acquisition, BMC has expanded its portfolio to make it easier for IT to more quickly and efficiently deliver cutting-edge applications. BMC Remedy IT Service Management, BMC Remedy OnDemand and BMC RemedyForce Our on-premise and SaaS offerings in this area manage IT functions and processes such as the service desk, incident management, service request management, problem management, asset management, service level management, change and release management and identity management. These solutions, built around BMC's market-leading Remedy brand and related intellectual property, manage and improve IT service as perceived by business end users. They drive improvements in efficiency through application of best practices (such as ITIL) and drive down costs by helping end users solve their own problems, reducing the number of calls to the service desk and tracking the status of IT requests. In this area, we also offer solutions to manage various business functions in IT such as financial planning and budgeting, demand and resource management, supplier management, service cost management and IT controls. In fiscal 2013, we demonstrated our continued growth as a SaaS solution provider and had over 600 SaaS customers at March 31, 2013. The mobile IT management capabilities from our June 2011 acquisition of Aeroprise, Inc. are included in this solution area. In addition, we consummated two acquisitions in fiscal 2012 that work with the Remedy product lines. Abydos Limited, acquired in April 2012, provided a drag-and-drop process design technology for Remedy workflows. my-eService, Inc., acquired in October 2012, provided virtual agent support technology for the Remedy product lines. 5 Table of Contents BMC FootPrints and BMC Track-It! Addressing the IT service management and IT asset management needs of mid-sized and small business organizations, we offer solutions designed specifically to address the functionality, ease of use and rapid time-tovalue requirements of these market segments. With a broad range of capabilities comparable to that of our enterprise Remedy offerings, BMC is positioned to provide the broadest range of solutions in this area to help IT organizations evolve their capabilities as they grow in size or complexity. These solutions were added to our portfolio through our February 2012 acquisition of Numara. BMC Atrium Our BMC Atrium offering provides a family of shared foundational technologies in each of our enterprise solution suites that unifies information and processes from disparate management tools and also discovers, models, visualizes and assigns priorities to business services. It includes our BMC Atrium CMDB, a widely implemented and industry-leading CMDB. Our BMC Atrium offering also includes comprehensive discovery and dependency mapping, process and task workflow orchestration, service level management, dashboard and analytic reporting and service catalog products and capabilities. ESM-Services Our professional services organization consists of a worldwide team of experienced software and education consultants who provide implementation, integration, IT process, organizational design, process re-engineering and education services related to our products and the IT functions and processes they help to manage. By easing the implementation of our products, these services help our customers realize value more quickly and sustainably. By improving the overall customer experience, we believe that these services also drive future software license transactions with customers. During fiscal 2013, our MSM business unit consisted of solutions that address IT requirements for mainframe data and performance management, middleware management and enterprise workload automation. These solutions, many of which are integrated with the BMC Atrium CMDB, help our customers consistently meet service objectives while lowering the cost of mainframe, middleware and workload operations by: (i) increasing the availability of their critical business applications; (ii) reducing their hardware resource requirements; (iii) managing ever increasing data, transaction and task volumes with the same or reduced number of staff and (iv) mitigating the risk and cost associated with regulatory compliance issues facing mainframe, middleware and workload automation organizations. Our MSM solutions were organized into two areas: Data and Performance Management Our mainframe data and performance management solutions ensure the availability and reliability of the business critical data, applications and systems that support mission critical business processes for many of the largest companies worldwide. These solutions help customers optimize the performance, facilitate the administration and enhance the recoverability of the corporate data housed in IBM 's DB2 and IMS databases. Our MainView product line delivers business-centric systems management, intelligent optimization and capacity management for an extensive array of mainframe infrastructure components. Our MainView AutoOperator products enable automation of comprehensive monitoring, problem diagnosis and resolution through real-time execution of pre-defined tasks. The MainView architecture facilitates seamless integration of the entire product line for faster problem resolution. The solutions acquired in our December 2011 acquisition of I/O Concepts Software Corporation are included in this solution area. BMC Middleware Management helps our customers improve the management of the application middleware layer and related application transactions. Tight integration of these offerings with BMC Atrium ensures the mainframe is managed in accordance with business service priorities. Enterprise Workload Automation Our Control-M product line provides a comprehensive set of features which enable data centers to automate their increasingly complex workloads and mission critical business processes. This product line orchestrates and optimizes dispersed and disparate management processes across multiple locations, platforms and applications, and provides the capabilities to centrally monitor and manage workload elements required to support the batch portion of the organization's business services across physical, virtual and cloud computing environments. Our Control-M Output Management solution automates the difficult task of managing the life cycle of mainframe output reports with capabilities which include report decollation, distribution, bundling, viewing, archival and deletion. Sales and Marketing We market and sell our products in most major world markets directly through our sales force and indirectly through channel partners including resellers, distributors, original equipment manufacturers (OEMs), alliance partners and systems integrators. Our sales force also includes an inside sales division that provides a channel for additional sales to existing customers and the expansion of our customer base. 6 Table of Contents International Operations We are a global company that conducts sales, sales support, professional services, product development and support, marketing and product distribution services from numerous international offices. In addition to our sales offices located in major economic centers around the world, we also conduct development activities in the United States, India and Israel, as well as in small offices in other locations. Our product manufacturing and distribution operations are based in Houston, Texas, and Dublin, Ireland. We regularly seek out opportunities to efficiently expand our operations in international locations that offer highly talented resources as a way to maximize our global competitiveness. Software Licenses We license our software under both perpetual and term license models for customer on-premise use. Under perpetual license arrangements, our customers receive the perpetual license right to use our software in conjunction with related maintenance and support services that are generally purchased on an annual or multi-year basis. Under term license arrangements, our customers receive license rights to use our software along with bundled maintenance and support services for the term of the contract. The majority of our contracts provide customers with the right to use one or more of our products up to a specific license capacity. Capacity can be measured in many ways, including mainframe computing capacity, number of servers, number of users or number of gigabytes, among others. Certain of our enterprise license agreements stipulate that customers can exceed pre-determined base capacity levels, in which case additional fees are specified in the license agreement. Such fees are typically paid on an annual basis in the form of an incremental "true-up" payment. In the absence of such an arrangement, customers are not entitled to exceed the capacity levels in the original license rights. For qualifying transactions we offer extended payment terms for our solutions under a financing program. We believe that by offering such financing we allow our customers to better manage their IT expenditures and cash flows. Our financing program is discussed in further detail below under Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations Liquidity and Capital Resources. License revenue comprised 38.1%, 40.4% and 41.8% of our total revenue in fiscal 2013, 2012 and 2011, respectively. For a discussion of our revenue recognition policies and the impact of our licensing models on revenue, see Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations Critical Accounting Policies and Estimates Revenue Recognition and Note 1 to the accompanying consolidated financial statements. Maintenance and Support Services Maintenance and support enrollment entitles software license customers to technical support services, including telephone and internet support and problem resolution services, and the right to receive unspecified product upgrades, maintenance releases and patches released during the term of the support period on a when-and-if-available basis. Maintenance and support service fees are an important source of recurring revenue, and we invest significant resources in providing maintenance and support services. Revenue from maintenance and support services comprised 51.7%, 49.8% and 49.6% of our total revenue in fiscal 2013, 2012 and 2011, respectively. Software-as-a-Service We also provide on-demand SaaS offerings for certain of our products. These offerings, the first of which we introduced to the market in late fiscal 2010, provide management solutions through a hosted service rather than a traditional on-premise license model and allow our customers to obtain the benefits of these solutions with reduced infrastructure and setup requirements and faster deployment. These offerings are sold as either annual or multi-year subscriptions with pricing generally based on the number of users. We also offer customer on-boarding and other related services for these offerings. SaaS subscription revenue is recorded within maintenance revenue in our consolidated financial statements and to date has not represented a significant percentage of our total revenue. Revenue from our SaaS offerings was $27.9 million and $9.7 million in fiscal 2013 and 2012, respectively, and was a nominal amount in fiscal 2011. Professional Services Our professional services group consists of a worldwide team of experienced software and education consultants who provide implementation, integration, IT process, organizational design, process re-engineering and education services related to our products. By easing the implementation of our products, these services help our customers accelerate the time-to-value. By improving the overall customer experience, we believe that these services also drive future software license transactions with customers. Revenue from professional services comprised 10.2%, 9.8% and 8.6% of our total revenue in fiscal 2013, 2012 and 2011, respectively. 7 Table of Contents Research and Development We conduct research and development activities in various locations throughout the world. During fiscal 2013, 2012 and 2011, we incurred research and development expenses of $174.6 million, $165.2 million and $181.6 million, respectively. These costs relate primarily to personnel and related costs incurred to conduct product development activities. Although we develop many of our products internally, we may acquire technology through business combinations or through licensing from third parties when appropriate. Our expenditures on research and development activities during the last three fiscal years are further discussed under Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations Research and Development Expenses. Seasonality We tend to experience a higher volume of transactions and associated revenue in the quarter ended December 31, which is our third fiscal quarter, and the quarter ended March 31, which is our fourth fiscal quarter, as a result of our customers' spending patterns and our annual sales quota incentives. As a result of this seasonality for license transactions and timing of related payments, we tend to have greater operating cash flow in our fourth fiscal quarter. However, general economic conditions also have an impact on our business and financial results. Competition The enterprise management software business is highly competitive. Both our ESM and MSM businesses compete against a number of enterprises, including large vendors who compete with us at a strategic solution level and across multiple product lines as well as smaller, niche companies who compete against individual products of ours. Our largest competitors are International Business Machines Corporation (IBM), CA, Inc. (CA) and Hewlett-Packard Company (HP). There are also more than 50 smaller companies that we consider to be directly competitive with one or more of our software solutions. Some of these companies have substantially larger operations than ours in the specific markets in which we compete. In addition, the software industry is experiencing continued consolidation which may change both the number of and specific companies with which we compete. Customers Our solutions are used by some of the largest, most demanding IT organizations in the world. The Company's customer base includes more than 24,000 companies, representing 100% of the Forbes Global 100. Our software products are widely deployed by IT departments across a broad range of industries, businesses and applications worldwide. Our most significant customers include banks and financial service providers, government agencies and other service providers. Our customer base also includes major telecommunication companies, manufacturers, educational institutions, retailers, distributors, hospitals and other industries, as well as channel partners including resellers, distributors and systems integrators. Our ten largest customers comprised 20% or less of our total revenue in each of fiscal 2013, 2012 and 2011. No single customer accounted for a material portion of our revenue during any of the past three fiscal years. Intellectual Property We primarily distribute our products in object code form and rely upon contract, trade secret, copyright and patent laws to protect our intellectual property. The license agreements under which customers use our products restrict the customer's use to its own operations and prohibit disclosure to third parties. We distribute certain of our products on a shrink-wrap basis and the enforceability of such restrictions in a shrink-wrap license is unproven in certain jurisdictions. Also, notwithstanding these restrictions, it is possible for other persons to obtain copies of our products in object code form. We expect that obtaining such copies would have limited value without access to the product's source code, which we keep highly confidential. In addition, for certain of our solutions, we employ protective measures such as CPU-dependent passwords, expiring passwords and time-based software trials. Employees At March 31, 2013, we had approximately 6,700 full-time employees. 8 Table of Contents ITEM 1A. Risk Factors We operate in a dynamic environment that involves numerous risks and uncertainties. The following section describes some of the risks that may adversely affect our business, financial condition, operating results and cash flows; these are not necessarily listed in terms of their importance or level of risk. The announcement and pendency of our proposed Merger could adversely affect our business, financial results and operations. The announcement and pendency of the proposed Merger could cause disruptions in and create uncertainty surrounding our business, including affecting our relationships with our existing and future customers, suppliers and employees, which could have an adverse effect on our business, financial results and operations, regardless of whether the Merger is completed. In particular, we could potentially lose important personnel as a result of the departure of employees who decide to pursue other opportunities in light of the proposed transaction. We could also potentially lose customers or suppliers, new customer or supplier contracts could be delayed or decreased and we may have difficulty in hiring new key employees. In addition, we have diverted, and will continue to divert, significant management resources towards the completion of the transaction, which could adversely affect our business and results of operations. We are also subject to restrictions, without the consent of Parent, on the conduct of our business prior to the consummation of the Merger as provided in the Merger Agreement, including, among other things, certain restrictions on our ability to make certain capital expenditures, investments and acquisitions, sell, transfer or dispose of our assets, amend our organizational documents and incur indebtedness. These restrictions could prevent us from pursuing otherwise attractive business opportunities, result in our inability to respond effectively to competitive pressures, industry developments and future opportunities and may otherwise harm our business, financial results and operations. Failure to complete the proposed Merger could adversely affect our business and the market price of our common stock. There is no assurance that the closing of the Merger will occur. Consummation of the Merger is subject to various conditions, including the adoption of the Merger Agreement by the holders of a majority of our outstanding shares of common stock, and certain other conditions, including, among other things, the absence of laws or judgments prohibiting or restraining the Merger and the receipt of certain regulatory approvals. We cannot predict with certainty whether and when any of these conditions will be satisfied. In addition, the Merger Agreement may be terminated under certain specified circumstances, including, but not limited to, a change in the recommendation of the board of directors of the Company or a termination of the Merger Agreement by the Company to enter into an agreement for a superior proposal, as defined in the Merger Agreement. If the Merger is not consummated, and there are no other parties willing and able to acquire us at a price of $46.25 per share or higher and on other terms acceptable to us, our stock price will likely decline as our stock has recently traded at prices based on speculation regarding a potential acquisition of the Company and more recently based on the proposed per share price for the Merger. Additionally, our costs of accessing funds in the debt and capital markets may continue for some period to be higher than before execution of the Merger Agreement as a result of credit rating downgrades that could occur after the announcement of the transaction. We have incurred, and will continue to incur, significant costs, expenses and fees for professional services and other transaction costs in connection with the proposed Merger, as well as the diversion of management resources, for which we will have received little or no benefit if the closing of the Merger does not occur. Many of the fees and costs will be payable by us even if the Merger is not completed and may relate to activities that we would not have undertaken other than to consummate the Merger. A failed transaction may result in negative publicity and a negative impression of us in the investment community. If the Merger Agreement is not adopted by our stockholders, or if the Merger is not consummated for any other reason, there can be no assurance that any other transaction acceptable to us will be offered or that our business, prospects or results of operations will not be adversely affected. Upon termination of the Merger Agreement by the Company or Parent under specified conditions, our remedy may be limited to receipt of a termination fee of $420 million from Parent, and under some circumstances, we would not be entitled to receive any termination fee. The occurrence of any of these events individually or in combination could have a material adverse impact on our results of operations and our stock price. The Merger Agreement contains provisions that could discourage or make it difficult for a third party to acquire us prior to the completion of the proposed Merger. The Merger Agreement contains provisions that restrict our ability to entertain a third party proposal to acquire us. These provisions include the general prohibition after the Go-Shop Period End Date on our soliciting or engaging in discussions or negotiations regarding any alternative acquisition proposal, subject to certain exceptions, and the requirement that we pay a termination fee of $210 million (which amount is reduced to $140 million under specified conditions) if the Merger Agreement is terminated in specified circumstances. These provisions might discourage an otherwise-interested third party from considering or proposing to acquire us, even one that may be deemed of greater value than the proposed Merger to our stockholders. Furthermore, even if a third party elects to propose an acquisition, the concept of a termination fee may result in that third party offering a lower value to our stockholders than such third party might otherwise have offered. If the Merger is not completed or we are not otherwise acquired, we may consider other strategic alternatives which are subject to risks and uncertainties. If the Merger is not completed, the Board of Directors will review and consider various alternatives available to us, including, among others, continuing as a public company with no material changes to our business or capital structure, returning capital to stockholders, seeking a minority investment from a strategic or financial partner or attempting to implement a sale to either a financial or strategic buyer. These alternative transactions may involve various additional risks to our business, including, among others, distraction of our management team and associated expenses as described above in connection with the proposed Merger, our ability to consummate any such alternative transaction, the valuation assigned to our business in any such alternative transaction, our ability or a potential buyer's ability to access capital on acceptable terms or at all and other variables which may adversely affect our operations. Weakened economic conditions and uncertainty could adversely affect our operating results. Our overall performance depends in part on worldwide economic conditions. As a result of continued sluggishness of major global economies, the United States and other key international regions continue to experience significant economic and financial market uncertainty, including concerns over sovereign debt levels, uncertainty about certain governments' ability to repay such debt or address certain fiscal issues (such as the "sequestration" in the United States), significant unemployment, volatility in commodity prices and levels of inflation. The severity or length of time these economic and financial market concerns may persist is unknown. During challenging and uncertain economic times as well as periods of financial market instability and tight credit markets, many customers may delay or reduce technology purchases. Contract negotiations may become more protracted or difficult if customers institute additional internal approvals for software purchases or require more negotiation of contract terms and conditions. These economic conditions could result in reductions in sales of our products, longer sales cycles, difficulties in collection of accounts receivable or delayed payments, slower adoption of new technologies and increased price competition. In addition, deterioration of the global credit markets could adversely impact our ability to complete sales of our solutions and services, including maintenance and support renewals, or the value of our financial assets. Any of these events would likely harm our business, financial condition, operating results and cash flows. We may announce lower than expected revenue, bookings, earnings or operating cash flows due to inaccurate forecasts of sales or other trends in our business. If we fail to meet the expectations of analysts or investors, our stock price could decline substantially. Our ability to accurately and consistently predict revenue, bookings, earnings and operating cash flows within narrow ranges is weakened by two principal factors: first, a significant portion of our transactions close during the final days of each quarter; this pattern is evident across product lines and among all sales channels; and second, even after contracts have been executed, extensive analysis is required before the timing of revenue recognition can be reliably determined; this timing reflects both the complexity of the revenue recognition rules applicable to software and the effect that the various license types and other terms and conditions can have when these rules are applied. Numerous other factors, some listed below, also have the potential to adversely affect our financial results: customers may defer or limit purchases as a result of reduced information technology budgets or reduced data processing capacity demand; customers may require additional levels of internal approval prior to finalizing software purchases or renewals, which could lengthen the sales cycle and delay bookings and the resultant cash flows; we may lose customers to our competitors or due to customer consolidation; we may be required to defer more license revenue than we anticipate if our mix of complex transactions or contracts with terms and conditions requiring deferral of license revenue is greater than we plan for; we may be unable to adapt our solutions to customers' needs in a market space defined by constant technological change; we may be unable to satisfy increased customer demands for our technical support services which may adversely affect our relationships with our customers; the timing of orders and delivery of products to our customers and channel partners is uncertain; we may experience losses on investments, foreign currency exchange contracts or other losses from financial instruments we hold that are exposed to market losses; we may experience unexpected changes or significant fluctuations in foreign currency exchange rates; 9 Table of Contents tax rates in jurisdictions in which we operate may change; we may experience higher than expected operating expenses; weighted average shares outstanding may increase unexpectedly due to much higher than expected exercises of stock options or a sudden and significant increase in our stock price causing our fully diluted weighted average shares outstanding to increase, either of which could cause reported earnings per share to decline; we may be affected by the timing of large, multi-product transactions or become dependent upon such transactions; our pricing and distribution terms and/or those of our competitors may change; and our business may 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 proportionally reduce our operating expenses for that quarter in response to such a shortfall. Therefore, any significant shortfall in revenue will likely have an immediate adverse effect on our operating results for that quarter and could cause our stock price to decline. In addition, our ability to maintain or expand our operating margins may be limited given economic and competitive conditions, and we therefore could be reliant upon our ability to continually identify and implement operational improvements in order to maintain or reduce expense levels. There can be no assurance that we will be able to maintain or expand our current operating margins in the future. Our cloud and SaaS offerings bring new business and operational risks. We have introduced multiple new products and technology initiatives to provide systems management solutions in the emerging area of cloud computing. We include in this category our SaaS offerings. Our SaaS offerings provide our customers with existing and new software management through a hosted service as opposed to traditional software deployments. There can be no assurance that SaaS revenue will be significant in the future despite our levels of investment. There is a risk that our SaaS offerings may reduce demand for licenses and maintenance of our traditional software products which could impact our revenue. Additionally, margins associated with our SaaS offerings are generally lower than margins associated with our on-premise solutions. Our customers may not renew their subscriptions after the expiration of their subscription agreements and in fact, some customers elect not to do so. In addition, our customers may opt for a lower-priced edition of our offerings or for fewer subscriptions. We have limited historical data with respect to rates of customer subscription renewals, so we cannot accurately predict customer renewal rates. Our customers' renewal rates may decline or fluctuate as a result of a number of factors, including their level of satisfaction with our services and their ability to continue their operations and spending levels. If we experience a decline in the renewal rates for our customers or they opt for lower-priced editions of our offerings or fewer subscriptions, our operating results may be adversely impacted. There is also a risk that our internal development and customer support teams could find it difficult or costly to support both traditional software installed by customers and software delivered as a service. To the extent that our new SaaS offerings are defective or there are disruptions to our services, demand for our SaaS offerings could diminish and we could be subject to substantial liability. In addition, interruptions or delays in service from our third party service delivery hosts could impair the delivery of our services and harm our business. If we or our third party service delivery hosts experience security breaches and unauthorized access is obtained to a customer's data or our data, our services may be perceived as not being secure, customers may curtail or stop using our services and we may incur significant legal and financial exposure and liabilities. Our success in the emerging area of cloud computing depends on organizations and customers perceiving technological and operational benefits and cost savings associated with the increasing adoption of virtual infrastructure solutions for on-premise data centers as well as for cloud computing and end user computing. Concerns about security, privacy, availability, data integrity, retention and ownership may negatively impact the rate of adoption of cloud computing. Cloud computing environments are complex and the deployment of our systems management solutions in the cloud may require additional professional services and implementation services for which we may not have the ability to provide at an appropriate margin. In the cloud, our products are dependent upon third party hardware, software and cloud hosting vendors, all of which must interoperate for end users to achieve their computing goals. Since the cloud computing market is in the early stages of development, we expect other companies to enter this market and to introduce their own initiatives that may compete with, or not be compatible with, our cloud solutions. Additionally, operating margins on our new initiatives may be lower than those we have achieved in our more mature product markets, and our new initiatives may not generate sufficient revenue to recoup our investments in them. If any of these events were to occur, it could adversely affect our business, results of operations and financial condition. 10 Table of Contents We may have difficulty achieving our cash flow from operations goals. Our quarterly cash flow from operations is and has been volatile. If our cash generated from operations in some future period is materially less than the market expects, our stock price could decline. Factors that could adversely affect our cash flow from operations in the future include: lengthening sales cycles; a reduction in the size of transactions; the timing of transaction completion, billings and associated cash collections within a particular period; longer customer payment terms; an increase in late payments by customers; an increase in uncollectible accounts receivable; increased expenses; reduced net earnings; a significant shift from multi-year committed contracts to short-term contracts; a reduced ability to transfer finance receivables to third parties; an increase in contracts where internal costs such as sales commissions are paid upfront but payments from customers are collected over time; reduced renewal rates for maintenance; an increase in cash taxes; payments for legal actions, costs, fees or settlements; restructuring payments; the impact of changing foreign currency exchange rates; and reduced yields on investments and cash equivalents. Maintenance revenue could decline. Maintenance revenue is an important source of recurring revenue, and we invest significant resources to provide maintenance and support services to our customers. Maintenance fees generally increase as the licensed capacity increases; consequently, we generally receive higher absolute maintenance fees with new license and maintenance agreements and as existing customers license our products for additional processing capacity. Price competition on enterprise transactions can lead to increased discounting for higher levels of supplemental processing capacity; the maintenance fees on a per unit of capacity basis are typically reduced in enterprise license agreements. In addition, customers are generally entitled to reduced annual maintenance fees for entering into long-term maintenance contracts. Declines in our license bookings, increases in the proportion of long-term maintenance contracts and/or increased discounting could lead to declines in our maintenance revenue growth rates. Should customers migrate from systems and applications which our products support, utilize alternatives to our products, including maintenance-free solutions such as on demand, or become dissatisfied with our maintenance services, increased cancellations could lead to declines in our maintenance revenue. As maintenance revenue makes up a substantial portion of our total revenue, any decline in our maintenance revenue could have a material adverse effect on our business, financial condition, operating results and cash flows. Our professional services business is growing but could impact our overall margins. Our professional services business has been growing as our overall bookings have grown and customers have contracted with us to provide implementation and other value-adding services. There are a number of risks associated with our professional services business which could impact our ability to deliver high quality services and which could impact our overall profit margin. These include the availability and our ability to engage quality labor resources, both as employees and as third party contractors, incremental costs associated with third party contractors, the complexity of services engagements, contractual risks, pricing and bidding risks and potential cost overruns. If we are not able to effectively manage the growth of our professional services business, it could have a material adverse effect on our reputation and our operating results, including our profit margin. Competition from large, powerful multi-line and small, agile single-line competitors could have a negative impact on our business and financial results. Some of our largest competitors, including IBM, CA and HP, have significant scale advantages. With scale comes a large installed base of customers in particular market niches, as well as the ability to develop and market software competitive with ours. Some of these competitors can also bundle hardware, software and services together, which is a disadvantage for us since we are not a hardware provider and have fewer services offerings. Competitive products are also offered by numerous independent software companies that specialize in specific aspects of the highly fragmented software industry. Some, like Microsoft Corporation (Microsoft), Oracle Corporation (Oracle), and SAP AG (SAP) are the leading developers and vendors in their specialized markets. In addition, new companies enter the market on a frequent and regular basis, offering products that compete with some individual products offered by us. Market entrants utilizing alternative business models such as SaaS, cloud computing or open source software also compete against us. As the use of open source software becomes more widespread, certain open source technology could become competitive with our proprietary technology, which could cause sales of our products to decline or force us to reduce the fees we charge for our products. Other data center vendors may expand into systems management to complement their existing offerings. Additionally, many customers historically have developed their own products that compete with those offered by us. Competition from any of these sources can result in price reductions or displacement of our products, which could have a material adverse effect on our business, financial condition, operating results and cash flows. 11 Table of Contents Industry consolidation could affect prices or demand for our products. The IT industry and the market for our systems management products are very competitive due to a variety of factors. As the enterprise systems software market matures, it is consolidating. This trend could create opportunities for larger companies, such as IBM, HP, Microsoft, Oracle and other large enterprise software and hardware companies, to increase their market share through the acquisition of companies that dominate certain lucrative market niches or that have loyal installed customer bases. In doing so, these competitors may be able to reduce prices on software that competes with our solutions, in part by leveraging their larger economies of scale. Consolidation also may permit competitors to offer a broader suite of products and more comprehensive bundled solutions, including hardware, software and services. We expect this trend towards consolidation to continue as companies attempt to maintain or extend their market and competitive positions in the rapidly changing software industry and as companies are acquired or are unable to continue operations. This industry consolidation may result in stronger competitors that are better able to compete as sole-source vendors for customers. This could lead to more variability in our operating results due to lengthening of the customer evaluation process, increased pricing pressure and/or loss of business to these larger competitors, which may materially and adversely affect our business, financial condition, operating results and cash flows. 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 some 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. There can be no assurance that we will be able to adapt our products and our business to changes introduced by hardware manufacturers and operating and database system software developers. Operating and database system software developers have in the past provided us with early access to versions of their software, before making such software generally available, 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. Failure to adapt our products in a timely manner to changes in operating and database systems, or any product quality and performance issues with the underlying databases or operating systems resulting in degradation of our products' quality and performance, could influence customer decisions to forego the use of our products in favor of those with comparable functionality offered by competitors or within the operating system and database functionality itself which could result in a material adverse effect on our business, financial condition, operating results and cash flows. Future product development is dependent upon access to and reliability of third party software products and open source software. Certain of our software products contain components developed and maintained by third party software vendors. We expect that we may have to incorporate software from third party vendors in our future products. We also incorporate open source software in certain of our software products. We may not be able to replace the functionality provided by the third party or open source software currently offered with our products if that software becomes obsolete, defective, non-compliant with third party patent restrictions or incompatible with future versions of our products or is not adequately maintained or updated, or if our relationship with the third party vendor terminates. In add