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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED MARCH 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 0-17136
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BMC SOFTWARE, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 74-2126120
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
BMC SOFTWARE, INC.
2101 CITYWEST BOULEVARD
HOUSTON, TEXAS
(Address of principal executive offices)
77042-2827
(Zip code)
Registrant's telephone number, including area code: (713) 918-8800
Securities Registered Pursuant to Section 12(b) of the Act:
None
Securities Registered Pursuant to Section 12(g) of the Act:
Common Stock, par value $.01 per share
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 if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K 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. [ ]
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The aggregate market value of the registrant's voting stock held by
non-affiliates of the registrant, based upon the last reported sale price of the
registrant's Common Stock on June 24, 1998 was $10,865,264,452.
As of June 24, 1998, there were outstanding 214,514,461 shares of Common
Stock, par value $.01, of the registrant.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the following documents are incorporated by reference in this
report:
Definitive Proxy Statement to be filed in connection with the registrant's
Annual Meeting of Stockholders currently scheduled to be held on August 24,
1998 (Part III of this Report)
Such Proxy Statement shall be deemed to have been "filed" only to the extent
portions thereof are expressly incorporated by reference.
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This Annual 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 Act of 1934, as amended, which are identified by the use
of the words "believes," "expects", "anticipates," "will," "contemplates,"
"would" and similar expressions that contemplate future events. Numerous
important factors, risks and uncertainties affect the Company's operating
results, including without limitation those contained in this report, and could
cause the Company's actual results to differ materially from the results implied
by these or any other forward looking statements made by, or on behalf, of the
Company. There can be no assurance that future results will meet expectations.
Readers should pay particular attention to the important risk factors and
cautionary statements described in the section of this Report entitled
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Certain Risks and Uncertainties That Could Affect Future Operating
Results." Readers should also carefully review the cautionary statements
described in the other documents BMC files from time to time with the Securities
and Exchange Commission, specifically all Quarterly Reports on Form 10-Q and
Current Reports on Form 8-K filed by BMC.
PART I
ITEM 1. BUSINESS
OVERVIEW
BMC Software, Inc. ("BMC" or the "Company") is a leading global provider of
systems management software solutions for host mainframe and distributed
information systems. BMC provides over 200 software products designed to provide
major improvements to a customer's core information technology ("IT")
operations. These products are designed to ensure that a customer's software
applications and the software systems on which they run are available, have
optimal performance and can be recovered and restarted quickly and predictably
after failure. BMC also sells and provides maintenance, enhancement and support
services for its products. Founded in 1980, BMC first earned a position of
leadership in providing high performance software tools and utilities for the
mainframe computers on which large enterprises depend. BMC is now a major
provider of systems management solutions for distributed IT systems as well and
has established its PATROL(R) application availability and monitoring product
suite as a market leader. By providing solutions that address both mainframe and
all of the prevalent distributed environments, BMC enables customers to use the
latest technologies while preserving their substantial investments in legacy
hardware, applications and data. In executing its product strategies, BMC
emphasizes internal product development and innovation supplemented by
acquisitions of both emerging technologies and established software companies.
BMC's customers are transaction and information intensive enterprises that
rely heavily on their computing systems. They are typically Fortune 1000
industrial and service corporations and similarly sized organizations
worldwide. As BMC extends its distributed systems management product lines, the
number of potential customers for its products has greatly increased. BMC
markets and distributes its products primarily through its well-established
direct sales organization and also sells its distributed systems products
through an indirect sales network of value-added resellers and systems
integrators.
BMC's software products address the three predominant operating environments
of enterprise computing: 1) the International Business Machine ("IBM") OS/390
mainframe operating system; 2) the various UNIX operating systems employed by
leading hardware manufacturers such as Hewlett Packard Company ("HP"), Sun
Microsystems, Inc. ("Sun"), IBM and Digital Equipment Corporation and 3)
Microsoft Corporation's ("Microsoft or "MS") rapidly emerging MS Windows NT
operating system. BMC's core products address the performance, availability and
recovery of these operating systems and the most prevalent database management
systems ("DBMSs") used with them. DBMSs, when loaded with data, comprise the
databases that store all of the information an application generates and
requires. In addition to storing and organizing the data, the DBMSs allow an
application to access, retrieve, manipulate and analyze it. The primary DBMSs
employed in the three enterprise operating environments are: IBM's IMS and DB2
for the OS/390 platform; Oracle Corporation ("Oracle"), Informix Software, Inc.
("Informix"), Sybase, Inc. ("Sybase") and DB2/2 for the UNIX platform; and MS
SQL Server and Oracle for the Windows NT platform. The operating systems and
DBMSs form the backbone of the transaction intensive IT systems that are
critical to both the day-to-day operations and the long-term strategies of BMC's
customers. These IT systems are continuously growing in size and complexity.
Since BMC's inception, one of its key focuses and competencies has been
improving the performance, availability, reliability, recoverability and ease of
use of these DBMSs.
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Over the past four years, BMC has devoted significant resources to building
its distributed systems software products and sales channels. To date, these
efforts have centered around the PATROL application availability and monitoring
products. In fiscal 1998, PATROL application and other distributed systems
management products generated $192 million in revenues, representing an increase
of 87% over the prior fiscal year and 26% of total revenues. While building its
distributed systems management business, BMC has continued to invest in and
enhance its many products for the OS/390 mainframe platform. Of these, the most
important are the high performance utilities for the IMS and DB2 DBMSs and the
database administration products for DB2. The high performance utilities
maximize the availability of large IMS and DB2 databases by providing core
services, such as copying, loading, unloading and reorganizing a database, at
very high levels of performance and reliability. The administrative products for
DB2 include a DB2 performance monitor and the change management products for
DB2, which automate routine and repetitive tasks necessary to the operation of
large DB2 databases. The high performance utilities for IMS and DB2 and the
administrative products for DB2 generated approximately 58% of total revenues in
fiscal 1998.
BMC was organized as a Texas corporation in 1980 and was reincorporated in
Delaware in July 1988. Its principal corporate offices are located at 2101
CityWest Blvd., Houston, TX 77042-2827. Its telephone number is (713) 918-8800.
STRATEGY
BMC's focus is now evolving to the applications that are the ultimate purpose
of all IT systems. Organizations are requiring that their IT systems deliver
guaranteed levels of service to the end-user. IT systems must maximize an
application's availability by minimizing or eliminating the amount of time the
application is unavailable to users because of scheduled maintenance operations
or necessary changes and upgrades to the system. They must also deliver high
performance levels measured by minimized and consistent response times. Finally,
they must guarantee that an application and all of its underlying components can
be recovered quickly and with confidence and integrity from a system failure.
BMC's products can be critical to delivering targeted service levels because of
their orientation towards the highest levels of performance and reliability for
the DBMS and other critical software components that support the application.
This applications centric approach is the object of BMC's Application Service
Assurance(TM) ("ASA") product strategy, which is designed to allow enterprises
to achieve the desired states of key applications by maximizing their
availability, performance and recoverability.
The ASA strategy also encompasses BMC's early commitment to delivering third
party software tools for packaged enterprise resource planning applications
("ERPs"), which represent one of the most significant recent trends in
enterprise computing. ERP applications address the core business processes of
any business or other organization, such as accounting and financial reporting,
manufacturing and inventory management, human resources and payroll, and order
entry and tracking. The packaged ERP applications from vendors such as SAP
Corporation ("SAP"), Baan Company N.V. ("BAAN"), PeopleSoft, Inc. ("PeopleSoft")
and Oracle save an enterprise from the highly difficult and unpredictable task
of writing an application from scratch and, equally important, allow for the
standardization and integration of these business processes throughout an
organization. BMC's PATROL product family supports all of the leading ERP
applications as well as their key underlying components such as the UNIX and
Windows NT operating systems and the leading DBMSs. BMC is actively developing
ERP modules for its other distributed systems management products.
The underlying premise of BMC's strategy is that the productivity of any
enterprise today increasingly hinges on its business-critical applications.
These applications include ERPs, other off-the-shelf and custom manufacturing,
billing, shipping and payroll applications. Even seemingly pedestrian
applications such as e-mail or calendaring applications become business
critical when an organization depends on them for its day-to-day operations.
BMC's strategy is to provide enterprise systems management products that ensure
the availability, performance and recoverability of these key applications and
the DBMSs, operating systems and other software platforms on which they run in
the OS/390 mainframe and distributed environments.
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BMC believes the OS/390 mainframe platform will continue to be the preferred
system for large-scale IT systems for the foreseeable future. Contributing to
the ongoing viability of the OS/390 platform are enterprises' large investments
in their OS/390 applications and databases and the significant price reductions
and performance enhancements delivered by IBM and other mainframe hardware
vendors over the last five years. In addition, the OS/390 platform is generally
perceived as more stable and reliable than distributed systems alternatives, in
part because of its homogeneity and the many well established systems
management tools provided by IBM, BMC and other independent software vendors.
BMC's confidence in the OS/390's platform has been reinforced by the increased
demand for mainframe processing capacity over the past 36 months and projected
mainframe growth rates. The Meta Group, for example, estimates that mainframe
capacity as measured in millions of instructions per second will grow at an
annual rate of 33% through the year 2003. BMC intends to continue to enhance
its important tools and utilities for the IMS and DB2 DBMSs, as well as for
other OS/390 subsystems, and to develop new mainframe products.
In contrast with the OS/390 mainframe environment, distributed IT systems are
highly fragmented and characterized by multiple hardware, software and network
configurations. The applications and underlying IT infrastructure components
are provided by many different vendors. BMC is providing software solutions
designed to manage heterogeneous IT systems centered around its PATROL
applications management and monitoring product. It is highly desirable to be
able to monitor and manage these disparate IT system components from a single
point of control. PATROL achieves this, thereby delivering higher levels of
operating efficiency and performance management.
PATROL employs a modular architecture that allows support of many different IT
systems components (such as a DBMS or an ERP application) to be added relatively
quickly and without requiring changes to the underlying PATROL infrastructure.
BMC and third parties have written "knowledge modules" for all of the prevalent
applications, DBMSs, operating systems and other software components of a
distributed IT system. The knowledge modules encapsulate the information and
instruction sets necessary to the monitoring and management of the application
or other component. BMC's strategy is to support a broad range of distributed
systems components with PATROL, so that customers can maximize their investment
in PATROL by using it to manage their key systems components. PATROL is designed
as well to be complementary with the many available systems and network
management products, such as IBM's Tivoli, Computer Associates International,
Inc.'s ("Computer Associates") Unicenter TNG and HP's OpenView systems
management frameworks as well as domain specific management products such
Cabletron Systems, Inc.'s ("Cabletron") Spectrum and Sun's Solstice. BMC is
integrating PATROL with these other systems management products to maximize
PATROL's flexibility and usefulness to customers.
The following table sets forth the primary operating systems, DBMSs and
applications that PATROL manages and the various systems management tools with
which PATROL is integrated:
INTEGRATION WITH
OTHER SYSTEMS
MANAGEMENT
OPERATING SYSTEMS DBMSS APPLICATIONS MIDDLEWARE PRODUCTS
- ----------------- ------------ --------------- -------------- ----------
Netware ADABAS BAAN MQSeries Tivoli
OS/390 CA-Ingres Internet Servers MS MQ Unicenter TNG
OS/2 CA-Open Ingres MS Exchange Tuxedo HP OpenView
OpenVMS DB2 Universal Database Lotus Notes DCE Sun Solstice Domain Manager
UNIX DB2 for OS/390 Oracle Applications TX-Series Cabletron Spectrum
MS Windows NT IMS/DB PeopleSoft ENTIRE NET-WORK Remedy AR System
AS/400 IMS/Fast Path SAP R/3 Compaq Insight Manager
Informix
MS SQL Server
Oracle
PROGRESS
Sybase
PATROL also manages numerous other IT system components via third party
knowledge modules. BMC established in fiscal 1998 an active third party
development network and knowledge module certification program around PATROL.
This PATROL Developers Network ("PDN") is intended to stimulate and provide a
process for external development of products to extend PATROL's reach to
applications and systems software products that are important but do not appear
to represent a market opportunity large enough to be included in BMC's internal
software development plans. In its first year, the PDN has attracted over 185
development and/or distribution partners.
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In furtherance of its ASA strategy and to complement the PATROL product suite,
BMC acquired BGS Systems, Inc. ("BGS") in March 1998 in a $300 million
stock-for-stock merger. BGS is a leading vendor of software tools that collect
and analyze information about how a mainframe or distributed application and its
underlying components are performing. Using this performance data and analysis,
the BGS BEST/1(R) products can be used to tune the system and to predict how it
will behave under various scenarios, such as increased load, and BMC believes
the BEST/1 products have unique capabilities to analyze and predict the
performance of the various IT system components on an aggregated, holistic basis
and that these capabilities will represent a strong strategic fit with PATROL's
efficiency, quality and depth of data collection and broad platform support.
BMC intends to tightly integrate the BEST/1 and PATROL product families.
To extend its capabilities to back-up, recover and restore an application or
DBMS, BMC acquired in May 1997 DataTools, Inc. ("DataTools") in a $73 million
purchase. DataTools is a leading developer of back-up and recovery tools for the
Oracle, Sybase and MS SQL Server DBMSs. The DataTools products automate and
increase the speed for the many sequential steps and processes associated with
backing up and recovering a large database. They also allow a customer to
back-up a database incrementally, meaning that only changed data is copied and
backed-up, not the entire database. This greatly increases the speed and
frequency of back-ups. BMC is integrating the DataTools SQL-BackTrack(TM)
products with its PATROL Recovery Manager product line to enable users to
provide for and control multiple back-up and recovery scenarios from a single
point of control.
BMC's ASA strategy contemplates the development of solutions suites for an
ERP, DBMS or operating system that are designed to ensure its availability,
performance and recoverability. For example, the Oracle solutions suite would
include the PATROL Oracle Knowledge Module, the PATROL DB-Admin Knowledge
Module, the BEST/1 Oracle module, PATROL Recovery Manager for Oracle, SQL-
BackTrack for Oracle and PATROL-DB-Reorg. BMC intends to design these
integrated suites to provide customers with a common look and feel for all of
the management products as well as shared infrastructure components.
BMC's distribution strategy is based upon its well established direct sales
channel, which is concentrated on the 1,000 largest information technology
users worldwide. BMC is rapidly building its direct sales channel for its
distributed systems products. BMC hired 133 additional distributed systems
sales representatives and technical sales consultants in fiscal 1998 and
employed 250 distributed sales representatives and 177 technical sales
consultants at March 31, 1998. To assist customers in implementing its products
and to broaden its market coverage, BMC is: 1) opening supplemental field sales
offices in major cities that are staffed with both sales and pre-sales
technical support personnel, 2) building a product implementation services
capability and 3) establishing an indirect channel of value added resellers and
systems integrators. The PDN program is also designed to stimulate demand for
and acceptance of PATROL by encouraging third parties to build businesses
around PATROL.
PRODUCTS
Application Availability
BMC's application and data availability product line comprise its: 1) high
availability utilities and administrative tools for IMS and DB2 mainframe DBMSs,
2) PATROL applications management and monitoring product suite and 3) PATROL DB
administrative tools for distributed DBMSs. The Application Availability
solutions maximize availability of an IT system by minimizing unplanned
application outages and by reducing the number and length of necessary
scheduled outages.
The high availability utilities and administrative tools for IMS/DB and DB2
have historically been BMC's largest revenue source. Large enterprise DBMSs
require periodic maintenance in order to optimize performance and ensure data
integrity. These maintenance processes are time consuming and often render the
DBMS inaccessible to users, thus disrupting business operations. BMC's high
availability utilities dramatically increase the speed of these maintenance
processes and condense the number of steps required, resulting in higher DBMS
and application availability. The IMS and DB2 high availability utilities
automate and speed routine, required database maintenance tasks such as loading,
unloading, reorganizing and checking the integrity of the database. The
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database administration products for IBM's DB2 DBMS provide for the creation,
modification, migration and versioning of database schema and can initiate the
activities of the database utilities to provide maintenance functions and
increase performance. These products generated over 48%, 41% and 38% of total
revenues in fiscal 1996, 1997 and 1998, respectively, and higher percentages of
net earnings. In addition to the utilities and administrative tools for IMS and
DB2 discussed above, BMC offers high availability utilities for the IMS Fast
Path environment and enhancements to the IMS/TM environment. These products
contributed approximately 7%, 8% and 5% of total revenues for fiscal 1996, 1997
and 1998, respectively.
BMC's PATROL applications and data management product suite delivers solutions
that monitor the availability and performance of increasingly complex,
heterogeneous environments. PATROL uses a unique, three-tiered architecture
comprised of the: 1) console, 2) agent and 3) knowledge module. The console
graphically depicts all applications, operating systems, DBMSs and underlying IT
resources being monitored and managed by PATROL. The user may access this
information through the native PATROL console or use the PATROLVIEW integration
module to view performance and availability data through leading systems
management framework consoles such as OpenView from HP, Unicenter from Computer
Associates or Tivoli TME from IBM.
The autonomous, intelligent PATROL agent, which resides on the DBMS or
application server, is equipped to take corrective action on its own without
communication with the central console. By reducing the amount of communication
between the console and agent, network traffic is reduced. Exception reporting
and corrective actions are communicated to the console on an "as needed" basis
as defined by the user, improving PATROL's scalability and allowing it to manage
many servers concurrently.
The PATROL knowledge module component incorporates knowledge specific to
given operating systems, DBMSs and applications. The knowledge module
architecture, through the use of the PATROL Scripting Language, allows for rapid
extension and customization of PATROL's management capabilities to meet a
customer's individual requirements. Through the PDN, BMC licenses a knowledge
module development tool kit to third parties, allowing for external development
of knowledge modules to expand the breadth of systems managed by PATROL.
The PATROL application management product suite contributed 8%, 12% and 18%
of total revenues in fiscal 1996, 1997 and 1998, respectively.
The PATROL DB database administration product suite provides the change
management functions of the DB2 administrative tools for distributed DBMSs, and
most importantly the automation of changes to database schema. In keeping with
BMC's strategy of broad heterogeneous platform support, PATROL DB supports all
of the leading distributed DBMSs: Oracle, MS SQL Server, Sybase, Informix, DB2
Universal Database and DB2 for OS/390. The PATROL DB products generated less
than 5% of total revenues in fiscal 1996, 1997 and 1998.
Application Performance
BMC's application performance solutions address the quality of service an
application is providing to users when it is available. Examples include
optimizing the response time of an application, tracking and reporting its
service levels, detecting and analyzing performance bottlenecks and predicting
future performance and problems. The Application Performance products comprise:
1) the BGS BEST/1 performance assurance products acquired in March 1998, 2) the
network optimization product series and 3) the dynamic tuning and optimization
product series.
The BEST/1 performance assurance software products measure, analyze, trend,
predict and report the performance of a customer's computer system and network.
These software products enable customers to make more efficient use of their
existing hardware, software and computer personnel and to plan for the most
cost-effective expansion of their computer operations to meet increasing loads.
The predictive capabilities of the BEST/1 performance assurance products are
designed to allow customers to anticipate system bottlenecks and performance
problems and take preventative corrective action. The BEST/1
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products support all of the major mainframe, midrange and workstation
platforms, including the OS/390, Unix and MS Windows NT operating environments.
BGS revenues, most of which relate to BEST/1, are included in BMC's financial
statements for only the last three business days of fiscal 1998. In its most
recently reported fiscal year ending January 31, 1997, BGS total revenues were
$48.6 million.
The network optimization products provide performance and availability
enhancements for mainframe networks. These products minimize the load
transmitted across telecommunications networks connecting host mainframe CPUs or
IP networks and end-user terminals or personal computers, thus increasing
response time and decreasing network traffic.
The dynamic tuning and optimization products provide transparent management of
enterprise data, resulting in increased availability and performance of the
operating systems, DBMSs and applications with which they operate. The DELTA IMS
line allows organizations to define IMS system components, expand user access
and increase the size of the network without extensive programming or impact to
IMS/DB application access. The data compression products for the OS/390-based
DBMSs and VSAM data sets deliver advanced compression techniques and options
that maximize storage and input/output performance. BMC's EXTENDED BUFFER
MANAGER ("XBM") products for IMS/DB and DB2 improve system performance by
greatly reducing the input/output needed to provide access to data frequently
used by one or more applications running in the same operating environment. When
coupled with BMC's IMAGE COPY PLUS or COPY PLUS for DB2 products, XBM allows for
the creation of DBMS backup copies with limited interruption of access to the
data stored within the DBMSs. The network optimization products and dynamic
tuning and optimization products generated approximately 12%, 12% and 11%
of total revenues in fiscal 1996, 1997 and 1998, respectively.
Application Recovery
Application Recovery solutions are designed to provide the ability to recover
an application and all of its underlying components to a consistent point in
time and restarting the application as quickly as possible after an outage.
These products provide a comprehensive approach across multiple platforms and
provide assurance that critical data is recoverable after both a local or
systems wide outage. They backup and restore files and databases, recover data,
databases and applications, coordinate point in time recoveries across multiple
data stores and restart applications to the point of failure. These products
eliminate manual, error prone steps, reduce redundant reprocessing work
following the outage and provide an audit of recoverability.
The Application Recovery solutions include the mainframe Recovery Manager
products for IMS and DB2 DBMSs and the PATROL Recovery Manager products for
distributed DBMSs, which support coordinated recovery between different DBMS,
thereby eliminating the need for individual DBMS recoveries, and the Application
Restart Control products, which provide the ability to resume processing of a
failed or interrupted batch application from the most recent successful
checkpoint rather than from the beginning of the job. This restart capability
eliminates wasted time and resources while improving data availability and
ensuring data integrity. The Recovery Manager, PATROL Recovery Manager and
Application Restart Control products generated approximately 21%, 23% and 20% of
total revenues in fiscal 1996, 1997 and 1998, respectively.
The Application Recovery solutions also include the DataTools SQL BackTrack
database backup and recovery products acquired in May 1997. Prior to acquiring
DataTools, BMC was the exclusive distributor of the SQL-BackTrack products.
The SQL-BackTrack products speed up and automate the complex sequential steps
that must be performed in order to backup or recover distributed systems
databases. BMC is continuing to market the SQL-BackTrack products as best of
breed stand alone solutions and is integrating them as well with its PATROL
Recovery Manager automated recovery solutions. The SQL-BackTrack products
generated 3% of total revenues in fiscal 1997 and 4% of total revenues in
fiscal 1998.
SALES AND MARKETING
BMC markets and sells its products principally through its direct sales
force. BMC employs a model of primary customer contact by telephone and other
telecommunications media, such as e-mail, combined with
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significant on-site sales and technical sales support activity. BMC also
emphasizes technical customer briefings at its Houston, Texas headquarters. BMC
provides many of its products on a free trial basis to facilitate the initial
sale. BMC's sales operations are organized into mainframe and distributed
systems groups, with the mainframe account representatives cooperating
extensively with the open systems representatives. BMC does not employ further
product specialization of its sales force, with the exception of dedicated
DataTools and BGS sales organizations. BMC employs technically trained software
consultants to provide specialized technical product knowledge to accounts.
These consultants assist in justifying BMC's products and conducting in-depth
technical evaluations of their performance and features. As of March 31, 1998,
BMC employed 397 sales representatives and software consultants in North America
and 336 internationally, including 245 in Europe and 91 in the Asia-Pacific
region. BMC is investing heavily in its distributed systems sales channel and
hired 133 distributed systems sales representatives and software consultants in
fiscal 1998.
BMC's North American sales force is primarily based in Houston, Texas. BMC
has opened field sales offices in Washington, D.C., Los Angeles and San
Francisco, California, Chicago, Illinois, New York, New York and other major
cities to increase its local presence in the regions surrounding those cities.
BMC conducts its international sales, marketing and support primarily through
17 wholly-owned subsidiaries worldwide.
As discussed under "Strategy" above, BMC is developing indirect channels for
its open systems products. BMC has established channels operations groups in
North America and Europe to promote, negotiate and support such distribution
arrangements and is continuing to invest in its channels infrastructure. BMC is
also represented by local agents in geographical territories in which it has
not established a direct sales presence. As of March 31, 1998, BMC was
distributing its products through over 175 indirect channel partners.
INTERNATIONAL OPERATIONS
Approximately 41%, 38% and 35% of BMC's total revenues in fiscal 1996, 1997
and 1998, respectively, was derived from business outside North America. BMC's
international operations provide sales, sales support, product support,
marketing and product distribution services for its customers located outside
of North America. BMC also conducts development activities in Singapore and
Frankfurt, Germany to provide local language support and integration with local-
market hardware and software systems vendors.
Total revenues, operating profits and identifiable assets attributable to
BMC's North American, European and other international operations (primarily in
the Pacific Rim) are set forth in Note 10 to the Consolidated Financial
Statements contained herein. BMC believes that its operations outside the
United States are located in countries that are politically stable and that
such operations are not exposed to any special or unusual risks. BMC's growth
prospects are highly dependent upon the continued growth of its international
license and software maintenance revenues. BMC's international license
revenues and expenses have been, however, somewhat unpredictable over the last
three fiscal years.
Revenues from BMC's foreign subsidiaries are denominated in local currencies,
as are operating expenses incurred in these locales. To date, BMC has not had
any material foreign exchange currency losses. For a discussion of BMC's
currency hedging program and the impact of currency fluctuations on
international license revenues in fiscal 1997 and 1998, see "Management's
Discussion and Analysis of Results of Operations and Financial Conditions --
Results of Operations -- Expenses -- Risk Management" and Note 1(g) of Notes to
Consolidated Financial Statements contained herein. BMC has not previously
experienced any difficulties in exporting its products, but no assurances can
be given that such difficulties will not occur in the future.
RESEARCH AND PRODUCT DEVELOPMENT
From inception, BMC has concentrated on internal software development. BMC
maintains a relatively high level of investment in its internal research and
development operations: in fiscal 1998, research and development spending
represented 13% of total revenues and 19% of total expenses. These costs
relate primarily to the compensation of research and development personnel.
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BMC's expenditures on research and development and on product maintenance and
support, including amounts capitalized, in the last three fiscal years are
discussed below under the headings, "Management's Discussion and Analysis of
Results of Operations and Financial Condition -- Expenses -- Research and
Development" and "-- Expenses -- Cost of Maintenance Services and Product
Licenses."
BMC's general product strategy is discussed under "Strategy" above. A major
focus of BMC's current product development efforts is the integration of the
acquired BEST/1 and DataTools products with the PATROL and PATROL Recovery
Manager products, respectively, and the development of a major new release of
PATROL designed to facilitate the interoperability of these and BMC's other
distributed systems management products. BMC is also concentrating its
development efforts on extensions of and enhancements to its core mainframe
product lines as customers continue to rely on them for their most critical IT
operations.
BMC's primary research and development activities are based in Houston and
Austin, Texas, Sunnyvale, California (DataTools) and Waltham, Massachusetts
(BGS). BMC internally creates and produces all user manuals, sales materials and
other documentation related to its products. Product manufacturing and
distribution is based in Houston, Texas, with European manufacturing and
distribution being based in Nieuwegein, The Netherlands.
MAINTENANCE, ENHANCEMENT AND SUPPORT SERVICES
Revenues from the provision of maintenance, enhancement and support services
comprised 37%, 32% and 30% of total revenues in fiscal 1996, 1997 and 1998,
respectively. Payment of maintenance, enhancement and support fees entitles a
company to telephone support and problem resolution services and enhanced
versions of a product released during the maintenance period, including new
versions necessary to run with the most current release of the operating
systems, databases and other software supported by the product. Such
maintenance fees are an important source of recurring revenue to BMC, and BMC
invests significant resources in providing maintenance services and new product
versions. These services are important to customers, particularly mainframe
customers, who require immediate problem resolution because of their dependence
on the products to run IT systems that are central to their enterprises. The
services are also necessary because customers require forward compatibility
when they install new versions of the software systems supported by a BMC
product.
For BMC's mainframe products, the fee for the first year of product
maintenance services is included in the perpetual license fee. Subsequently,
perpetual licensees may renew their maintenance agreements each year for an
annual fee. The annual fee for mainframe products is generally 18% to 20% of
the then current list perpetual license fee of the licensed product as adjusted
for any applicable discounts. For BMC's distributed systems products, the
initial maintenance period is shorter and the renewal fee varies depending on
the level of support selected by the licensee.
PRODUCT PRICING AND LICENSING
BMC's mainframe products have traditionally been priced and licensed on a
tiered pricing basis whereby the license fee for a product increases in relation
to the processing capacity of the CPU on which the product is installed. Under
tiered pricing, CPUs are classified by CPU tier according to their processing
power as measured in millions of instructions per second ("MIPS"). More powerful
CPUs fall into higher tiers and carry higher license fees. CPU upgrade fees are
charged if a product is installed on another CPU that falls in a higher CPU
group category. Under BMC's enterprise licensing program, customers may
alternatively license products on an enterprise wide basis, whereby the customer
can use the products on an unlimited number of CPUs of any size, subject to a
limit on the aggregate processing power of such CPUs as measured in MIPS. CPU
upgrade fees contributed 23%, 29% and 33% of total revenues in fiscal years
1996, 1997 and 1998, respectively. Because maintenance fees are based on the
license fee for the product as of the annual renewal date, maintenance fees
increase when a product is installed on a larger CPU.
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BMC maintains various discount programs for its mainframe and distributed
systems products, including standard discounts for multiple copies of a product
and volume discounts for enterprise license transactions.
BMC also prices and licenses PATROL on a CPU tier basis. Because PATROL is a
relatively new product and because many of its licensees are still in a pilot or
implementation phase of use, CPU upgrade fees from PATROL have been immaterial
to date. BMC expects that PATROL revenues will be predominately from additional
unit sales rather than CPU upgrade fees. Certain of BMC's other distributed
systems products are also licensed on a tiered basis, while those at lower price
points are licensed on a per unit basis.
BMC's products are generally marketed on a trial basis. When a customer
desires to license a trialed product, a permanent product copy or a coded
password to convert the trial tape to a permanent tape is provided.
Consequently, BMC does not have any material product backlog of undelivered
products. BMC licenses its software products almost exclusively on a perpetual
basis.
BMC recognizes revenues from perpetual licenses and upgrade fees when both
parties are legally obligated under the terms of the respective agreement, the
underlying software products have been delivered, collection is deemed probable
and there are no remaining material Company obligations. BMC recognizes
maintenance revenues, including maintenance bundled with perpetual license fees,
ratably over the maintenance period.
For a discussion of enterprise license transactions, the various components
of license and upgrade revenues and BMC's revenue recognition practices for
such components, see the discussion below under the heading "Management's
Discussion and Analysis of Results of Operations and Financial Condition --
Operating Results -- Revenues -- License Revenues" and Note 1(h) in Notes to
Consolidated Financial Statements.
COMPETITION; SYSTEM DEPENDENCE
The mainframe and distributed systems management software markets in which BMC
competes are highly competitive, as discussed below and in the "Management's
Discussion and Analysis of Results of Operations and Financial Condition"
section of this report under the heading "Certain Risks and Uncertainties
that Could Affect Future Operating Results."
BMC's mainframe products run primarily with IBM's IMS and DB2 DBMSs and
IMS/TM, CICS transaction managers and VTAM. Certain of these BMC products are
essentially improved versions of system software utilities that are provided as
part of these integrated IBM system software products. IBM continues to improve
or add to these integrated software packages as part of its strategic initiative
of reducing the overall software costs associated with its mainframe computers.
IBM also markets separately priced competing high performance utilities in
addition to its base utilities. If IBM is successful in duplicating BMC's
products, it would provide them at a much lower cost because of the different
economics of its mainframe business. This would likely have a material adverse
effect on demand for product licenses, license upgrades and recurring
maintenance of BMC's competing products. IBM is significantly increasing the
performance of its tools and utilities for the IMS and DB2 DBMSs, both through
internal development efforts and arrangements with third party software
developers.
The mainframe systems software business is highly competitive. BMC's
competitors include IBM as well as Platinum technologies, inc. ("Platinum"),
Innovative Designs, Inc., Neon Systems, Inc. and other independent software
vendors that have the ability to develop and market products similar to, and
competitive with, BMC's products. Product pricing is a key competitive factor
in the market for third-party tools and utilities for IMS and DB2, and BMC has
periodically adjusted its discount structures to reflect this competition.
The distributed systems markets that PATROL and BMC's other systems management
products address are also highly competitive. All of the major mainframe
systems software vendors have announced distributed systems management
strategies that overlap to varying degrees with PATROL. These competitors
include, to differing degrees, IBM's Tivoli subsidiary, Computer Associates,
Platinum, Compuware Corporation, Candle Corporation and Boole & Babbage, Inc.
The relational DBMS vendors, such as Oracle and Sybase, and
9
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hardware companies such as HP, Sun and Cabletron, are also providing competitive
or potentially competitive products for their respective platforms that are
relatively inexpensive. BMC's strategy is to complement these frameworks and
alternative systems management products by integrating with them. The network
and systems management framework providers are, however, attempting to extend
their products into PATROL's functional space. In addition, start up companies
continually enter the distributed systems management software markets, such as
NetIQ Corp. for MS Windows NT management. BMC intends to differentiate PATROL
from these other products in part by providing broader support of the many
different components of a distributed IT system, although there can be no
assurance whether this strategy will be successful. BMC expects these markets
to continue to increase in competitiveness.
BMC continually modifies its mainframe products to maintain compatibility with
new IBM hardware and software. To do so and to develop and test new products,
BMC licenses IMS/DB, DB2, IMS/TM, CICS and other software systems from IBM on
similar terms as other IBM customers. If IBM were to terminate the current
license arrangements or otherwise deny BMC access to these systems, or if IBM
adopts technological changes that prevent or make more difficult access to the
systems, BMC would be adversely affected. Similarly, if BMC is unable to acquire
and maintain access to the major ERP applications, distributed DBMSs and other
IT system components equivalent to its access to DB2 and other IBM systems
software, its development of client/server products would be impeded. Certain of
the leading distributed systems DBMS vendors are less cooperative in providing
technical assistance to independent systems software vendors.
BMC believes that the key criteria considered by potential purchasers of its
products are as follows: the operational advantages and cost savings provided
by a product; product quality and capability; product price and the terms on
which the product is licensed; ease of integration of the products with the
purchaser's existing systems; quality of support and product documentation; and
the experience and financial stability of the vendor.
CUSTOMERS
No individual customers accounted for a material portion of BMC's revenues
during any of the past three fiscal years. Because BMC's mainframe packages
are used with relatively expensive computer hardware, most of its revenues are
derived from companies that have the resources to make a substantial commitment
to data processing and their computer installations. Most of the world's major
companies use one or more of BMC's software packages. BMC's software products
are generally used in a broad range of industries, businesses and applications.
BMC's customers include manufacturers, telecommunications companies, financial
service providers, banks, insurance companies, educational institutions,
retailers, distributors, hospitals and value-added resellers.
INTELLECTUAL PROPERTY
BMC distributes its products in object code form and relies upon contract,
trade secret, copyright and patent laws to protect its intellectual property.
The license agreements under which customers use BMC's products restrict the
customer's use to its own operations and prohibit disclosure to third persons.
BMC now distributes certain of its distributed systems products on a shrink
wrap basis, and the enforceability of such restrictions in a shrink wrap license
is unproven in certain jurisdictions. Also, notwithstanding those restrictions,
it is possible for other persons to obtain copies of BMC's products in object
code form. BMC believes that obtaining such copies would have limited value
without access to the product's source code, which BMC keeps highly
confidential. In addition, BMC's products are generally encoded to run only on
a designated CPU, and trial tapes provided to potential customers generally
function only for a limited trial period.
EMPLOYEES
As of March 31, 1998, BMC had 2,777 full-time employees. BMC believes that
its continued success will depend in part on its ability to attract and retain
highly skilled technical, sales, marketing and management personnel.
Competition continues to increase for well qualified software sales,
development and consulting service personnel. BMC considers its employee
relations to be excellent.
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ITEM 2. PROPERTIES
BMC's headquarters and principal sales and product development operations are
located in Houston, Texas, where BMC owns and occupies two office buildings
totaling approximately 675,000 square feet. BMC also maintains a large
development organization in Austin, Texas, where it leases a 175,000 square foot
product development facility. The recently acquired BGS Systems operations
occupy an owned 80,000 square foot facility in Waltham, Massachusetts and
DataTools operations occupy a leased 50,000 square foot facility in Sunnyvale,
California. BMC occupies a 50,000 square foot leased sales and support facility
in Frankfurt, Germany, and smaller sales offices in other major cities around
the world. BMC leases its principal mainframe computers, an IBM 9672-RC5, an
IBM 9672-RY5 and an IBM 9672-R54, and its telecommunications equipment. See
Notes 1(e) and 9 of Notes to Consolidated Financial Statements below.
ITEM 3. LEGAL PROCEEDINGS
The Company filed a trade secret lawsuit styled BMC Software, Inc. vs.
Peregrine Systems, Inc. et al., Cause No. 91- 10161, in the 200th Judicial
District Court of Travis County, Texas, in August 1995. The lawsuit sought an
injunction prohibiting a group of former employees and their employer from
misappropriating and misusing certain of the Company's trade secrets. The
Company has settled the litigation as to certain individuals and claims and is
continuing to pursue its trade secret and other claims against the remaining and
additional defendants. These defendants are asserting counterclaims against the
Company for violations of the Texas Free Enterprise and Antitrust Act of 1983,
abuse of process, slander of title, tortious interference with contract and
tortious interference with advantageous and prospective business relationships.
These counterclaims seek compensatory, treble and exemplary damages, costs and
attorneys' fees and certain injunctive relief. Management believes the ultimate
resolution of the above matters will not be material to the Company's financial
condition.
The Company is subject to various other legal proceedings and claims, either
asserted or unasserted, which arise in the ordinary course of business.
Management does not believe that the outcome of any of these legal matters will
have a material adverse effect on the Company's results of operations or
consolidated financial position.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not Applicable.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Since August 12, 1988, the Company's Common Stock has been traded in the
NASDAQ National Market System under the symbol "BMCS." At June 24, 1998,
the Company had 913 holders of record of Common Stock.
The following table sets forth the high and low bid quotations per share of
Common Stock for the periods indicated.
PRICE RANGE OF
COMMON STOCK
-------------------------
HIGH LOW
---------- ----------
FISCAL 1997
First Quarter ............ $ 16.94 $ 13.31
Second Quarter ........... 21.56 12.69
Third Quarter ............ 23.38 19.63
Fourth Quarter ........... 25.50 19.88
FISCAL 1998
First Quarter ............ $ 29.31 $ 19.81
Second Quarter ........... 34.75 26.56
Third Quarter ............ 35.63 27.38
Fourth Quarter ........... 42.13 29.25
The Company has not paid any dividends since 1988 and does not intend to pay
any cash dividends in the foreseeable future. The Company currently intends to
retain any future earnings otherwise available for cash dividends on the Common
Stock for use in its operations, for expansion and for stock repurchases. See
"Management's Discussion and Analysis of Results of Operations and Financial
Condition -- Liquidity and Capital Resources."
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ITEM 6. SELECTED FINANCIAL DATA
The following selected consolidated financial data presented under the
captions "Statement of Earnings Data" and "Balance Sheet Data" for, and as of
the end of, each of the years in the five-year period ended March 31, 1998, are
derived from the Consolidated Financial Statements of BMC Software, Inc. and
subsidiaries. The financial statements for all fiscal years presented have been
audited by Arthur Andersen LLP, independent public accountants. The selected
consolidated financial data should be read in conjunction with the Consolidated
Financial Statements as of March 31, 1997 and 1998, and for each of the three
years in the period ended March 31, 1998, the accompanying notes and the report
thereon, which are included elsewhere in this Form 10-K.
YEARS ENDED MARCH 31,
----------------------------------------------------------------------
1994 1995 1996 1997 1998
---------- ---------- ---------- ---------- ----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
STATEMENT OF EARNINGS DATA:
Revenues:
Licenses ............................. $ 167,176 $ 204,957 $ 269,022 $ 380,894 $ 513,947
Maintenance .......................... 121,324 140,043 159,828 182,316 216,687
---------- ---------- ---------- ---------- ----------
Total revenues ............... 288,500 345,000 428,850 563,210 730,634
Selling and marketing expenses ......... 75,198 89,724 116,724 154,829 205,219
Research and development expenses ...... 46,969 55,493 59,011 77,459 94,923
Cost of maintenance services and
product licenses ..................... 28,216 31,960 44,854 56,569 77,095
General and administrative
expenses ............................. 26,175 29,935 37,083 46,070 54,462
Acquired research and development
costs ................................ 32,038 29,260 23,589 11,259 65,473
Merger costs ........................... -- -- -- -- 7,305
---------- ---------- ---------- ---------- ----------
Operating income(2)(3)(4)(5) ........... 79,904 108,628 147,589 217,024 226,157
Other income ........................... 10,708 11,704 15,446 20,050 30,402
---------- ---------- ---------- ---------- ----------
Earnings before income
taxes(2)(3)(4)(5) .................... 90,612 120,332 163,035 237,074 256,559
Income taxes ........................... 34,123 42,815 57,464 73,202 90,705
---------- ---------- ---------- ---------- ----------
Net
earnings(2)(3)(4)(5) ....... $ 56,489 $ 77,517 $ 105,571 $ 163,872 $ 165,854
========== ========== ========== ========== ==========
Basic earnings per
share(1)(2)(3)(4)(5)(6) ................ $ 0.27 $ 0.38 $ 0.53 $ 0.82 $ 0.82
========== ========== ========== ========== ==========
Shares used in computing basic
earnings per share(1) ................. 208,452 202,048 200,658 201,016 203,488
========== ========== ========== ========== ==========
Diluted earnings per
share(1)(2)(3)(4)(5)(6) ................ $ 0.27 $ 0.38 $ 0.50 $ 0.76 $ 0.77
========== ========== ========== ========== ==========
Shares used in computing diluted
earnings per share(1) .................. 209,216 203,904 209,144 214,310 216,590
========== ========== ========== ========== ==========
AS OF MARCH 31,
----------------------------------------------------------------------
1994 1995 1996 1997 1998
---------- ---------- ---------- ---------- ----------
(IN THOUSANDS)
BALANCE SHEET DATA:
Cash and cash equivalents .............. $ 37,814 $ 39,494 $ 62,128 $ 79,794 $ 72,093
Working capital ........................ 29,429 35,166 43,775 58,512 38,344
Total assets ........................... 417,527 502,649 608,218 848,752 1,248,495
Long-term obligations, including
current portion(7) ................... -- -- -- -- --
Stockholders' equity ................... 250,400 306,154 383,708 546,212 759,157
- ---------------
(1) See Note 1(i) to Consolidated Financial Statements for the basis
of computing basic and diluted net earnings per share.
(2) Includes the impact of charges of $32,038,000 (pre-tax), or
$28,398,000 (net of tax), for the fiscal 1994 acquisition of Patrol
Software. Excluding these charges, fiscal 1994 earnings were
$84,887,000 or $0.41 per share. Operating income was $111,942,000.
Earnings before income taxes were $122,650,000.
(3) Includes the impact of charges, related to several fiscal 1995
transactions, of $29,260,000 (pre-tax), or $25,701,000 (net of tax).
Excluding these charges, fiscal 1995 earnings were $103,218,000 or
$0.51 per share. Operating income was $137,888,000. Earnings before
income taxes were $149,592,000.
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(4) Includes the impact of charges, related to several fiscal 1996
technology acquisitions, of $23,589,000 (pre- tax), or $22,831,000
(net of tax). Excluding these charges, fiscal 1996 earnings were
$128,402,000 or $0.61 per share. Operating income was $171,178,000.
Earnings before income taxes were $186,624,000.
(5) Includes the impact of charges, related to several fiscal 1997
technology acquisitions, of $11,259,000 (pre- tax), or $7,318,000 (net
of tax). Excluding these charges, fiscal 1997 earnings were
$171,190,000, or $0.80 per share. Operating income was $228,283,000.
Earnings before income taxes were $248,333,000.
(6) Includes the impact of charges, related to several fiscal 1998
technology acquisitions and a merger, of $72,778,000 (pre-tax), or
$66,446,000 (net of tax). Excluding these charges, fiscal 1998
earnings were $232,300,000, or $1.07 per share. Operating income was
$298,935,000. Earnings before income taxes were $329,337,000.
(7) Excludes deferred revenue.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
INTRODUCTION
This section of the Annual Report includes historical information for the
periods covered, certain forward looking information and the information
provided below under the heading "Certain Risks and Uncertainties That Could
Affect Future Operating Results" about certain risks and uncertainties that
could cause the Company's future operating results to differ from the results
indicated by any forward looking statements made by the Company or others. It
is important that the business discussion at Item 1 of this report and
historical discussion below be read together with the discussion of such risks
and uncertainties, and that these discussions are read in conjunction with the
accompanying audited financial statements and notes thereto.
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HISTORICAL INFORMATION
Results of Operations
The following table sets forth, for the fiscal years indicated, the
percentages that selected items in the Consolidated Statements of Earnings bear
to total revenues.
PERCENTAGE OF TOTAL REVENUES
YEARS ENDED MARCH 31,
1996 1997 1998
---------- ---------- ----------
Revenues
Licenses 62.7% 67.6% 70.3%
Maintenance 37.3 32.4 29.7
---------- ---------- ----------
Total revenues 100.0 100.0 100.0
Selling and marketing expenses 27.2 27.5 28.1
Research and development expenses 13.8 13.8 13.0
Cost of maintenance services and product licenses 10.5 10.0 10.6
General and administrative expenses 8.6 8.2 7.5
Acquired research and development costs 5.5 2.0 8.9
Merger costs -- -- .9
---------- ---------- ----------
Operating income 34.4 38.5 31.0
Interest and other income 3.6 3.6 4.1
---------- ---------- ----------
Earnings before income taxes 38.0 42.1 35.1
Income taxes 13.4 13.0 12.4
---------- ---------- ----------
Net earnings 24.6% 29.1% 22.7%
========== ========== ==========
Net earnings, excluding acquired research and development and
merger related costs 29.9% 30.4% 31.8%
========== ========== ==========
EARNINGS
Total revenues in fiscal 1998 were $730,634,000, a 30% increase over fiscal
1997 total revenues of $563,210,000. The increase was the result of a 43%
increase in North American product license revenues, a 22% increase in
international product license revenues and a 19% increase in worldwide
maintenance revenues. Over the three year period ending March 31, 1998, the
Company's operating expenses (excluding acquired research and development and
merger costs) remained at approximately 60% of total revenues. Net earnings in
fiscal 1998 were $232,300,000, excluding acquired research and development and
merger costs of $66,446,000 (net of income taxes.) These results represent a
36% increase over fiscal 1997 net earnings of $171,190,000, excluding charges of
$7,318,000 (net of income taxes) for acquired research and development in fiscal
1997. Giving effect to these charges, net earnings were $165,854,000 in fiscal
1998, a 1% increase over net earnings of $163,872,000 in fiscal 1997. Historical
performance should not be viewed as indicative of future operating margins, as
there can be no assurance that operating income or net earnings as a percentage
of revenues will be sustained at these levels. For a discussion of factors
affecting operating margins, see the discussions below under the heading
"Certain Risks and Uncertainties That Could Affect Future Operating Results."
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REVENUES
PERCENTAGE CHANGE
YEARS ENDED MARCH 31, -----------------
--------------------- 1997 1998
(IN THOUSANDS) COMPARED TO COMPARED TO
1996 1997 1998 1996 1997
---------- ---------- ---------- ---------- ----------
Perpetual licenses
North America $ 156,807 $ 234,535 $ 335,346 49.6% 43.0%
International 112,215 146,359 178,601 30.4% 22.0%
---------- ---------- ----------
Total perpetual licenses 269,022 380,894 513,947 41.6% 34.9%
Maintenance 159,828 182,316 216,687 14.1% 18.9%
---------- ---------- ----------
Total revenues $ 428,850 $ 563,210 $ 730,634 31.3% 29.7%
========== ========== ==========
The Company generates revenues from product license fees for its computer
software products and product maintenance fees for the associated maintenance,
enhancement and support of these products. The Company recognized revenues
through March 31, 1998 in accordance with Statement of Position (SOP) 91-1,
issued by the American Institute of Certified Public Accountants (AICPA).
Effective for transactions entered into subsequent to March 31, 1998, the
Company has adopted SOP 97-2, "Software Revenue Recognition," also issued by
the AICPA. For further discussion of the Company's revenue recognition
policies, refer to the discussion below and to Note 1(h) of Notes to
Consolidated Financial Statements.
Total revenue growth in fiscal 1997 and 1998 was derived from continued demand
for the Company's mainframe products for the IBM OS/390 operating system and IMS
and DB2 DBMSs, its expansion of its distributed systems product lines and sales
channels and, to a lesser extent, higher growth rates of product maintenance
fees. The growth in product license and maintenance fees was derived principally
from existing product lines in fiscal 1997 and 1998. As discussed below,
mainframe product revenue growth was generated primarily by customers' rapid
expansion of their mainframe-based IT systems. Distributed systems product
revenue growth was driven primarily by increased adoption of distributed IT
systems, by growing acceptance of the Company's PATROL application and data
management product suite and expansion of the distributed systems sales
channels. Product revenue growth was only nominally impacted by price increases
and inflation in fiscal 1997 and fiscal 1998.
The Company's customer base is diversified, with no single customer
representing greater than 10% of its total revenues in fiscal 1996, 1997 and
1998. This customer base is nonetheless concentrated in the top 1,000 IT
purchasers worldwide and, by industry, in the telecommunications, financial
services and other transaction-intensive sectors. The Company estimates that
sales to repeat customers represented over 90% of total license and maintenance
revenues in the periods presented.
PRODUCT LINE REVENUES
At March 31, 1998, the Company marketed over 200 software products designed
to improve the availability, performance and recoverability of enterprise
applications, databases and other IT systems components operating in host
mainframe and distributed computing environments. The Company's mainframe
products accounted for approximately 89%, 81% and 74% of total revenues for
fiscal years 1996, 1997 and 1998, respectively. Total revenues from mainframe
products grew 20% from fiscal 1996 to fiscal 1997 and 17% from fiscal 1997 to
fiscal 1998. The revenues from these products are driven largely by the growth
in customers' processing capacity, as discussed below.
The Company's mainframe revenues are concentrated in its high performance
utilities and administrative tools for IBM's IMS and DB2 database management
systems. The IMS Database Utilities product series contributed 33%, 32% and
26% of total revenues for fiscal years 1996, 1997 and 1998, respectively, and
the MASTERPLAN product series for DB2 contributed 36%, 31% and 32% of total
revenues for the same periods. Combined revenues for these product lines grew
19% from both fiscal 1996 to 1997 and from fiscal 1997 to 1998. The balance of
the Company's mainframe products represented 20%, 18% and 16% of total revenues
for fiscal years 1996, 1997 and
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1998, respectively. The declines in relative revenue contribution by the
mainframe product lines reflect the increased contribution by the Company's
distributed systems products in these periods.
Total revenues from distributed systems products grew 130% from 1996 to 1997
and 87% from 1997 to 1998. Distributed systems product revenue growth was
derived primarily from increased market acceptance of the PATROL application and
data management product suite, the Company's significant and growing investment
in its distributed systems direct and indirect sales channels and higher
distributed systems maintenance fees. The Company's principal distributed
systems management product lines are the PATROL application and management
suite, the BGS BEST/1 performance management products, the PATROL DB database
administration products and the DataTools SQL-Backtrack application and database
recovery products.
The PATROL application and data management products accounted for 8%, 12% and
18% of total revenues for fiscal years 1996, 1997 and 1998, respectively,
reflecting an 85% increase from fiscal 1996 to fiscal 1997 and a 95% increase
from fiscal 1997 to fiscal 1998. The BGS BEST/1 performance management products
were acquired in March 1998 and their revenues will be reflected in the
Company's financial statements throughout fiscal 1999. The PATROL DB database
administration product line, introduced in fiscal 1996, generated 3.5% and 4%
of total revenues in fiscal 1997 and 1998, respectively, reflecting a 47%
increase from fiscal 1997 to 1998. The Company's SQL-BackTrack database backup
and recovery products were originally sold by BMC through an exclusive
distributorship arrangement with DataTools beginning on March 31, 1995. In May
1997, the Company acquired all of the outstanding shares of DataTools and began
to more fully integrate the SQL-BackTrack products with its PATROL Recovery
Manager product lines. The SQL-BackTrack database backup and recovery products
generated 2.9% and 3.5% of total revenues in fiscal 1997 and 1998, respectively,
reflecting growth of 61%. The revenues from the Company's distributed systems
product offerings are dependent upon the continued market acceptance of the
Company's existing products and the Company's ability to successfully develop
and deliver additional products for the distributed systems environment. The
Company has experienced rapid growth in its distributed systems product lines
since their introduction in late fiscal 1994. The distributed systems market is
highly competitive and dynamic and there can be no assurance that this growth
will continue.
LICENSE REVENUES
The Company's license revenues include product license fees, capacity-based
license upgrade fees and restructuring fees. Product license fees are generated
from the initial licensing of a product and subsequent licenses purchased under
the Company's per copy, CPU tier-based licensing program. Capacity-based license
upgrade fees are charged when a customer acquires the right to run an already
licensed product on additional processing capacity, as measured by a CPU tier
or by the aggregate processing capacity measured in MIPS of all CPUs for which
the Company's products are licensed. These license upgrade fees include fees
associated with customers' purchasing the right to operate a product with
currently installed additional processing capacity and/or with anticipated
future processing capacity. Restructuring fees increase the discounts
associated with a customer's installed base of products, which, therefore,
reduce a customer's future maintenance charges and capacity based upgrade fees
pertaining to such installed products.
The Company's North American operations generated 58%, 62% and 65% of total
license revenues in fiscal 1996, 1997 and 1998, respectively. North American
license revenues increased by 50% from fiscal 1996 to fiscal 1997 and by 43%
from fiscal 1997 to fiscal 1998. Increased sales of the Company's distributed
systems products represented a significant part of North American license
revenue growth in both fiscal 1997 and 1998. From fiscal 1996 to fiscal 1997,
the largest single component of North American license revenue growth was
increased license upgrade fees associated with customers' future mainframe
processing capacity. Increased sales of distributed systems products and
license upgrade fees associated with current and future additional mainframe
capacity were the largest contributors to North American license revenue growth
in fiscal 1998.
International license revenues represented 42%, 38% and 35% of total license
revenues in fiscal 1996, 1997 and 1998, respectively. International license
revenues increased by 30% from fiscal 1996 to fiscal 1997 and by 22% from
fiscal 1997 to fiscal 1998. These performances were below the Company's
expectations. From fiscal 1996 to fiscal 1997, the principal contributors to
growth in international license revenues were mainframe product license
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fees and license upgrade fees associated with customers' currently required
additional mainframe processing capacity. From fiscal 1997 to fiscal 1998, the
largest single component of international license growth was increased sales of
the Company's distributed systems products, followed by license upgrade fees
associated with current and future additional mainframe capacity.
International license revenues were reduced by 2% and 4%, respectively, by the
strengthening of the dollar against local currencies from fiscal 1996 to fiscal
1997 and from fiscal 1997 to fiscal 1998, respectively, in both cases after
giving effect to foreign currency hedging gains.
License upgrade fees for current and future mainframe processing capacity
accounted for 23%, 29% and 33% of total revenues in fiscal years 1996, 1997 and
1998, respectively. The sustainability and growth of the Company's mainframe-
based license revenues are dependent upon these capacity-based upgrade fees,
particularly within its largest customer accounts. Most of the Company's
largest customers have entered into enterprise license agreements allowing them
to install the Company's products on an unspecified number of CPUs, subject to
a maximum limit on the aggregate power of the CPUs as measured in MIPS.
Additional fees are owed if this limit is exceeded. Substantially all of these
transactions include upgrade charges associated with additional processing
capacity beyond the customers' current usage level and/or a restructuring fee,
and some include license fees for additional products. In fiscal 1996, 1997
and 1998, the enterprise license fees for future additional processing capacity
and license restructurings comprised approximately 20%, 20% and 24% of total
revenues, respectively. The fees associated with future additional mainframe
processing capacity typically comprise from one-half to substantially all of
the license fees included in enterprise license transactions. The Company has
experienced a strong increase in demand from its largest customers for the right
to run its products on increased current and anticipated mainframe processing
capacity as enterprises invest heavily in their core OS/390 mainframe IT
systems. The Company expects that it will continue to be dependent upon these
capacity-related license revenue components. With the rapid advancement of
distributed systems technology and customers' needs for more functional and
open applications, such as pre-packaged ERP applications, to replace legacy
systems, there can be no assurance that the demand for mainframe processing
capacity or the higher operating efficiencies afforded by the Company's
products will continue at current levels. Should this trend slow dramatically
or reverse, it would adversely impact the Company's mainframe license revenues
and its operating results.
MAINTENANCE AND SUPPORT REVENUES
Maintenance and support revenues represent the ratable recognition of fees
to enroll licensed products in the Company's software maintenance, enhancement
and support program. Enrollment entitles customers to product enhancements,
technical support services and ongoing compatibility with third-party operating
systems, database management systems and applications. These fees are
generally incurred annually and equal 15% to 20% of the list price of the
product at the time of renewal, less any applicable discounts. Maintenance
revenues also include the ratable recognition of the bundled fees for any
first-year maintenance services covered by the related perpetual license
agreement. The Company continues to invest heavily in product maintenance and
support and believes that maintaining its reputation for superior product
support is a key component of its value pricing model.
Maintenance revenues have increased over 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 in proportion
to the processing capacity on which the products are installed; consequently,
the Company receives higher absolute maintenance fees as customers install its
products on additional processing capacity. Due to the increased discounting
for higher levels of additional processing capacity, the maintenance fees per
MIPS are typically reduced in enterprise license agreements. Historically, the
Company has enjoyed high maintenance renewal rates for its mainframe-based
products. Should customers migrate from their mainframe applications or find
alternatives to the Company's products, increased cancellations could adversely
impact the sustainability and growth of the Company's maintenance revenues. To
date, the Company has been successful in extending its traditional maintenance
and support pricing model to the distributed systems market. At this time,
there is insufficient historical data to determine whether customers will
continue to accept this pricing model and renew their maintenance and support
contracts at the levels experienced in the mainframe market.
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INTEREST AND OTHER INCOME
Interest and other income consists primarily of interest earned on cash and
cash equivalents, marketable securities and to a lesser degree, financed
receivables. Interest and other income increased by 30% from fiscal 1996 to
1997 and 52% from fiscal 1997 to 1998. This increase is primarily due to
higher interest income earned on larger invested cash balances.
EXPENSES
PERCENTAGE CHANGE
FISCAL YEARS ENDED MARCH 31, -----------------
---------------------------- 1997 1998
(IN THOUSANDS) COMPARED TO COMPARED TO
1996 1997 1998 1996 1997
---------- ---------- ---------- ---------- ----------
Selling and marketing $ 116,724 $ 154,829 $ 205,219 32.6% 32.5%
Research and development 59,011 77,459 94,923 31.3% 22.5%
Cost of maintenance services and product 44,854 56,569 77,095 26.1% 36.3%
licenses
General and administrative 37,083 46,070 54,462 24.2% 18.2%
Acquired research and development 23,589 11,259 65,473 (52.3%) 481.5%
Merger costs -- -- 7,305 N/A N/A
---------- ---------- ----------
Total operating expenses $ 281,261 $ 346,186 $ 504,477
========== ========== ==========
SELLING AND MARKETING
The Company's selling and marketing expenses include personnel and related
costs, sales commissions and costs associated with advertising, industry trade
shows and sales seminars. Personnel costs were the largest single contributor
to the expense growth in fiscal 1997 and fiscal 1998. Selling and marketing
year-end headcount increased by 26% from fiscal 1996 to fiscal 1997, and by 67%
from fiscal 1997 to fiscal 1998. The large increase during fiscal 1998 was
primarily attributable to significant increases in the Company's open systems
sales representatives and technical sales support consultants. Sales commissions
increased in fiscal 1997 and in fiscal 1998, as a result of the 42% and 35%
increases, respectively, in license revenues. Ongoing commission plan
adjustments held sales commission expense growth below license revenue growth in
both fiscal years. Marketing costs have continued to increase to meet the
requirements of marketing a greater number of increasingly complex distributed
systems products and of supporting a growing indirect distribution channel.
Other contributors to the increase were significantly higher levels of travel
and trade show activity, the accelerated depreciation of certain computer
equipment and the opening of additional field sales offices.
RESEARCH AND DEVELOPMENT
Research and development expenses mainly comprise personnel costs related to
software developers and development support personnel, including software
programmers, testing and quality assurance personnel and writers of technical
documentation such as product manuals and installation guides. These expenses
also include computer hardware/software costs and telecommunications expenses
necessary to maintain the Company's data processing center. Increases in the
Company's research and development expenses for fiscal 1997 and 1998, were the
result of increased compensation costs associated with both software developers
and development support personnel, as well as associated benefits and facilities
costs. The Company increased its headcount in the research and development
organization by 31% from fiscal 1996 to fiscal 1997 and by 50% from fiscal 1997
to fiscal 1998. The significant increase in headcount in fiscal 1998 resulted
primarily from the addition of research and development personnel during the
fiscal year. Research and development costs were reduced in all three fiscal
years by amounts capitalized in accordance with Statement of Financial
Accounting Standards (SFAS) No. 86. The Company capitalizes its software
development costs when the projects under development reach technological
feasibility as defined by SFAS No. 86. During fiscal 1996, 1997 and 1998, the
Company capitalized approximately $19,309,000, $21,945,000 and $40,407,000,
respectively, of software
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development costs. The growth in capitalized costs is primarily due to
increases in new distributed systems product development.
COST OF MAINTENANCE SERVICES AND PRODUCT LICENSES
Cost of maintenance services and product licenses consists of amortization of
purchased and internally developed software, costs associated with the
maintenance, enhancement and support of the Company's products and royalty
fees. Growth in the cost of maintenance services and product licenses from
fiscal 1996 to fiscal 1997 was primarily attributable to increases in customer
support employees and royalty fees, primarily those paid to DataTools. The
Company acquired DataTools in May of 1997 (refer to Note 2 of Notes to
Consolidated Financial Statements) and, therefore, reduced its royalty expense
significantly from fiscal 1997 to fiscal 1998. The increase in cost of
maintenance services and product licenses during fiscal 1998 is mainly due to
increases in the amortization of both purchased and internally developed
software and in maintenance, enhancement and support activities. Maintenance
costs are increasing as a percentage of maintenance fees as the Company's
revenue mix shifts to distributed systems. The Company amortized $8,667,000,
$8,299,000 and $20,086,000 in fiscal 1996, 1997 and 1998, respectively, of
capitalized software development costs pursuant to SFAS No. 86. In these
periods, the Company expensed $3,865,000, $3,694,000 and $12,016,000,
respectively, of capitalized software development costs to accelerate the
amortization of certain software products. These software products were not
expected to generate sufficient future revenues which would be required for the
Company to realize the carrying value of the assets. The Company expects its
cost of maintenance services and product licenses will continue to increase as
the Company capitalizes a higher level of software development costs and as the
Company builds its distributed systems product support organization, which is
less cost-effective than its mainframe support organization because of the
complexity and variability of the environments in which the products operate.
The distributed systems products operate in a high number of operating
environments, including operating systems, DBMSs and ERP applications and
require greater ongoing platform support development activity relative to the
Company's OS/390 mainframe products.
GENERAL AND ADMINISTRATIVE
General and administrative expenses are comprised primarily of compensation
and personnel costs within executive management, finance and accounting,
product distribution, facilities management and human resources. Other
expenses included in general and administrative expenses are fees paid for
legal and accounting services, consulting projects, insurance and costs of
managing the Company's foreign currency exposure. Growth in general and
administrative expenses from fiscal 1996 to fiscal 1997 was largely due to
increased personnel costs and higher costs associated with managing the
Company's foreign currency exposure. Growth in general and administrative
expenses from fiscal 1997 to fiscal 1998 was primarily attributable to
increased personnel and related infrastructure to support the Company's growth.
Fiscal year end headcount within the general and administrative organizations
grew by 4% from fiscal 1996 to fiscal 1997 and 34% from fiscal 1997 to fiscal
1998.
ACQUIRED RESEARCH AND DEVELOPMENT AND MERGER COSTS
On March 26, 1998, the Company completed the acquisition of BGS. The
Company exchanged 7,179,000 shares of its common stock for all of the
outstanding shares of BGS. The Company also converted BGS employee and
director options into options to purchase 746,000 shares of the Company's
stock. The Company accounted for the transaction as a pooling of interests, in
accordance with Accounting Principals Board (APB) Opinion No. 16, and recorded
a $5,798,000 charge, net of a $1,507,000 income tax benefit, for merger costs.
The Company did not restate its prior Consolidated Financial Statements because
the amounts of assets, revenues and income of BGS for the last three fiscal
years were not material.
During the quarter ended June 30, 1997, the Company completed two
acquisitions which included DataTools and another technology company for
an aggregate purchase price of approximately $80,700,000, including direct
acquisition costs. During the quarter ended September 30, 1997, the Company
completed another
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acquisition of a technology company for an aggregate purchase price of
approximately $6,995,000, including direct acquisition costs. The Company
funded these acquisitions primarily with cash and the assumption of existing
stock options held by certain DataTools employees. The Company accounted for
these transactions using the purchase method and recorded charges of
$60,648,000, net of $4,825,000 in income tax benefits, for acquired research
and development costs.
In the first quarter of fiscal 1997, the Company acquired certain technology
assets (and certain in-process technologies) for an aggregate purchase price of
$12,950,000, including direct acquisition costs. The Company funded these
acquisitions with cash. The Company accounted for these transactions using the
purchase method of accounting and recorded a $7,318,000 charge, net of a
$3,941,000 income tax benefit, for acquired research and development costs
during the first quarter.
The Company completed various technology acquisitions during fiscal 1996.
The aggregate purchase price for these transactions totaled $27,789,000,
including direct acquisition costs. The Company funded these acquisitions
primarily through the issuance of its common stock, and to a lesser extent,
with cash. The Company used the purchase method of accounting for these
technology acquisitions. The Company recorded a $22,831,000 charge, net of an
income tax benefit of $758,000, for acquired research and development costs
during fiscal 1996.
INCOME TAXES
The Company recorded income tax expense of $57,464,000, $73,202,000 and
$90,705,000 in fiscal 1996, 1997 and 1998, respectively. The Company's
effective tax rates were 35%, 31% and 35% for fiscal years ended 1996, 1997 and
1998, respectively. An analysis of the differences between the statutory and
effective income tax rates is provided in Note 6 of Notes to Consolidated
Financial Statements.
MARKET RISK MANAGEMENT
The Company is exposed to certain market risks in its normal course of
business operations related to foreign currency fluctuations as well as changes
in the value of its marketable securities.
FOREIGN CURRENCIES
For the fiscal years 1996, 1997 and 1998, 41%, 38% and 35%, respectively of
the Company's consolidated revenues were derived from customers outside of North
America, substantially all of which were billed and collected in foreign
currencies. Substantially all of the expenses of operating the Company's
foreign subsidiaries are similarly incurred in foreign currencies.
Consequently, the Company's reported financial results are affected by
fluctuations of those foreign currencies against the U.S. dollar.
The Company has adopted a foreign currency hedging program under which it
enters into foreign currency derivative contracts with the objective of
reducing its impact from exposure to foreign currency market fluctuations.
Foreign currency forward and option contracts are utilized to hedge firm
commitments and anticipated transactions, respectively. Principal currencies
hedged are the German deutschemark, the British pound and the French franc in
Europe; and, the Japanese yen and Australian dollar in the Pacific Rim region.
While the Company actively manages its foreign currency risks on an ongoing
basis, there can be no assurance that the hedges employed will substantially
offset negative impacts on its foreign denominated exposures.
Based on the Company's overall derivative exposure to foreign currency rate
movements, a near-term change in foreign currency rates, calculated using a
value at risk model with a 95% confidence interval, would not materially affect
its financial position, results of operations or cash flows for the year ended
March 31, 1998.
MARKETABLE SECURITIES
The Company adheres to a conservative investment policy, whereby its
principal concern is the preservation of liquid funds while maximizing its
yield on such assets. Cash, cash equivalents and marketable securities
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approximated $716 million on March 31, 1998, and were invested in different
types of investment-grade securities with the intent of holding these
securities to maturity. Although the Company's portfolio is subject to
fluctuations in interest rates and market conditions, no gain or loss on any
security would actually be realized unless the instrument was sold. The
Company's near-term market risk on marketable securities was deemed immaterial,
calculated using a value at risk model with a 95% confidence interval, as of
March 31, 1998.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
The AICPA issued SOP 97-2, "Software Revenue Recognition" in October 1997,
which replaces the previous revenue recognition rules provided by SOP 91-1.
SOP 97-2 is effective for transactions entered into in fiscal years beginning
after December 15, 1997, which, in the case of the Company, is April 1, 1998.
The adoption of this SOP is not expected have a material impact on the
Company's future Consolidated Financial Statements.
In March 1998, the AICPA issued SOP 98-1, "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use." This standard
requires that certain costs related to the development or purchase of
internal-use software be capitalized and amortized over the estimated useful
life of the software. This SOP also requires that costs related to the
preliminary project stage and the post-implementation/operations stage of an
internal-use computer software development project be expensed as incurred. SOP
98-1 is effective for financial statements issued for fiscal years beginning
after December 31, 1998, which, in the case of the Company is April 1, 1999. SOP
98-1 is not expected to have a material impact on the Company's Consolidated
Financial Statements.
In June 1997, SFAS No. 130, "Reporting Comprehensive Income" was issued.
Under SFAS No. 130, all items that meet the definition of comprehensive income
will be separately reported for the period in which they are recognized. The
only impact will be that comprehensive income, which will include changes in
the balances of items that are reported separately in the Stockholders' Equity
section of the Consolidated Balance Sheets, will be either reported in a
separate statement or at the bottom of the Consolidated Statements of Earnings.
This statement is effective for fiscal years beginning after December 15, 1997,
which, in the case of the Company, is April 1, 1998.
SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information" was issued in June 1997. SFAS No. 131 requires that a public
business enterprise report financial and descriptive information about its
reportable operating segments. Generally, financial information is required to
be reported on the basis used internally for evaluating segment performance and
resource allocation. SFAS No. 131 is effective for fiscal years beginning
after December 31, 1997, and disclosure is not required in interim financial
statements in the initial year of adoption. Accordingly, the Company will
reflect SFAS No. 131 information in its Consolidated Financial Statements for
the March 31, 1999, fiscal year. The Company is currently assessing the SFAS
No. 131 requirements.
QUARTERLY RESULTS
The following table sets forth certain unaudited quarterly financial data for
the fiscal years ended March 31, 1997 and 1998. This information has been
prepared on the same basis as the Consolidated Financial Statements and all
necessary adjustments have been included in the amounts stated below to present
fairly the selected quarterly information when read in conjunction with its
Consolidated Financial Statements and Notes thereto. The Company's quarterly
results are subject to seasonality and can be volatile and difficult to predict
accurately prior to a quarter's end as discussed under "Forward Looking
Information and Certain Risks and Uncertainties that Could Affect Future
Operating Results." Historical quarterly financial results and trends may not
be indicative of future results.
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Fiscal Quarter Ended
June 30, Sept. 30, Dec. 31, Mar. 31, June 30, Sept. 30, Dec. 31, Mar. 31,
1996 1996 1996 1997 1997 1997 1997 1998
---- ---- ---- ---- ---- ---- ---- ----
(In thousands, except per share data)
Total revenues $ 126,050 $ 126,500 $ 150,060 $ 160,600 $ 158,414 $ 162,709 $ 196,002 $ 213,509
Selling and marketing
expenses 37,526 35,735 40,094 41,474 47,401 46,737 52,836 58,245
Research and
development expense 17,859 19,833 20,056 19,711 20,769 23,281 27,152 23,721
Cost of maintenance
services and product
licenses 14,014 13,122 13,657 15,776 17,515 18,204 17,599 23,777
General and administrative
expenses 10,595 11,083 12,343 12,049 11,189 12,635 15,433 15,205
Acquired research and
development costs 11,259 -- -- -- 60,272 5,201 -- --
Merger related costs -- -- -- -- -- -- -- 7,305
--------- --------- --------- --------- --------- --------- --------- ---------
Operating income 34,797 46,727 63,910 71,590 1,268 56,651 82,982 85,256
--------- --------- --------- --------- --------- --------- --------- ---------
Net earnings $ 27,172 $ 35,186 $ 48,101 $ 53,413 $ (10,563) $ 44,922 $ 64,777 $ 66,718
========= ========= ========= ========= ========= ========= ========= =========
Basic earnings per share
(EPS) $ 0.14 $ 0.18 $ 0.24 $ 0.26 $ (0.05) $ 0.22 $ 0.32 $ 0.32
========= ========= ========= ========= ========= ========= ========= =========
Basic EPS, excluding
acquired R&D and
merger costs $ 0.17 $ 0.18 $ 0.24 $ 0.26 $ 0.23 $ 0.24 $ 0.32 $ 0.35
========= ========= ========= ========= ========= ========= ========= =========
Shares used in computing
basic EPS 200,316 200,712 201,766 201,662 202,078 202,816 203,120 205,596
========= ========= ========= ========= ========= ========= ========= =========
Diluted EPS $ 0.13 $ 0.16 $ 0.22 $ 0.25 $ (0.05) $ 0.21 $ 0.30 $ 0.31
========= ========= ========= ========= ========= ========= ========= =========
Diluted EPS, excluding
acquired R&D and
merger costs $ 0.16 $ 0.16 $ 0.22 $ 0.25 $ 0.22 $ 0.22 $ 0.30 $ 0.33
========= ========= ========= ========= ========= ========= ========= =========
Shares used in computing
diluted EPS 212,476 213,552 215,496 215,716 216,166 216,664 216,086 218,050
========= ========= ========= ========= ========= ========= ========= =========
In April 1998, the Company announced that its board of directors approved a
two-for-one stock split (in the form of a dividend) that was payable to
stockholders of record on May 1, 1998 and was effective May 15, 1998. Share and
per share data presented here and throughout the Consolidated Financial
Statements, have been adjusted to give effect to this two-for-one split.
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 1998, the Company's cash, cash equivalents and marketable
securities were $716,073,000, which represents a 32% increase over the March
31, 1997, balance. An important contributor to the increase is the Company's
software financing program, whereby interests in its trade receivables are
transferred to third party financial institutions in exchange for cash. The
Company's working capital as of March 31, 1998, was $38,344,000. The Company
continues to invest cash in securities with maturities beyond one year. While
yielding greater returns, this has the impact of reducing reported working
capital. The Company's securities are investment grade and highly liquid. The
Company had no debt as of March 31, 1998, other than normal trade payables,
accrued liabilities and deferred tax liabilities. Stockholders' equity as of
March 31, 1998, was $759,157,000.
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The Company continues to finance its growth through funds generated from
operations. For the year ended March 31, 1998, net cash provided by operating
activities was $328,205,000, which included an increase in deferred revenue of
approximately $95,617,000 (excluding acquired deferred revenue). Net cash used
in investing activities in fiscal 1998 was $361,892,000, primarily related to
the purchase of investment securities, acquisition of computers and related
equipment, construction of a new building and the technology acquisitions
discussed above. Net cash provided by financing activities in fiscal 1998 was
$26,709,000, which derived primarily from the income tax benefit associated
with the exercise of employee stock options. This benefit, together with stock
option proceeds, exceeded the funds used to acquire the Company's stock during
the fiscal year.
During fiscal 1998, the Company repurchased 2,304,000 shares of its common
stock. The Company's board of directors terminated the share buy-back program,
prior to consummation of the BGS merger, in March 1998, consistent with the
pooling of interests accounting provisions. Prior to cancellation of the share
buy-back program, the Company was authorized to acquire 7,530,000 shares of
its common stock under its stock repurchase program. The Company continues to
evaluate business acquisition opportunities that complement the Company's
strategic plans. The Company believes that its existing cash balances and
funds generated from operations will be sufficient to meet its liquidity
requirements for the foreseeable future.
CERTAIN RISKS AND UNCERTAINTIES THAT COULD AFFECT FUTURE OPERATING RESULTS
This Annual Report and Management's Discussion and Analysis of Results of
Operations and Financial Condition contain certain forward looking statements
within the meaning of Sections 27A of the Securities Act of 1933, as amended,
and Section 21E of the Securities Act of 1934, as amended, which are identified
by the use of the words "believes," "expects", "anticipates," "will,"
"contemplates" and "would" and similar expressions that contemplate future
events. Numerous important factors, risks and uncertainties affect the Company's
operating results and could cause the Company's actual results to differ
materially from the results implied by these or any other forward looking
statements made by, or on behalf, of the Company. There can be no assurance that
future results will meet expectations. These important factors, risks and
uncertainties include, but are not limited to, those described in the following
paragraphs and in the discussion above under the heading "Business," including,
without limitation, the discussion under the subheading "Competition; System
Dependence."
The Company's stock price has been and is highly volatile. Future revenues,
earnings and stock prices may be subject to wide swings in response to
variations in operating and financial results, anticipated revenue and/or
earnings growth rates, competitive pressures and other factors. The stock price
of software companies in general, and the Company in particular, is based on
expectations of sustained future revenue and earnings growth rates. Any failure
to meet anticipated revenue and earnings levels in a period or any negative
change in the Company's perceived long-term growth prospects would likely have a
significant adverse effect on the Company's stock price. The growth rates of
the Company's license revenues, total revenues, net earnings and earnings per
share, excluding charges for acquired research and development and merger costs,
have accelerated over the last 24 months. The Company's current valuation
reflects expectations based on these higher rates of growth. The Company may not
achieve, in future periods, these relatively higher rates of growth.
The timing and amount of the Company's license revenues are subject to a
number of factors that make estimation of operating results prior to the end of
a quarter extremely uncertain. The Company generally operates with little or no
sales backlog and, as a result, license revenues in any quarter are dependent
upon contracts entered into or orders booked and shipped in that quarter. Most
of the Company's mainframe and distributed systems license sales are closed at
the end of each quarter, and there has been and continues to be a trend toward
larger enterprise license transactions, which can have sales cycles of up to a
year or more and require approval by a customer's upper management. These
transactions are typically difficult to manage and predict. Failure to close an
expected individually significant transaction could cause the Company's revenues
and earnings in a period to fall short of expectations. Other factors that may
cause significant fluctuations in the Company's quarterly revenues include
competition, industry or technological trends, customer budgetary decisions,
mainframe processing capacity growth, general economic conditions or
uncertainties, mainframe industry pricing and other trends, announcements of new
hardware or software products, the timing of price increases and the factors
described in this section of the Annual Report. The Company
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generally does not know whether revenues and earnings will meet expected
results until the final days or day of a quarter.
The Company derived approximately 74% of its total revenues in fiscal 1998
from software products for IBM and IBM- compatible mainframe computers;
approximately 58% of total revenues and a higher percentage of earnings were
contributed by the Company's high availability utilities for IMS and DB2
administration products. IBM continues to focus on reducing the overall
software costs associated with the OS/390 mainframe platform. Further, IBM
continues, directly and through third parties, to improve its base and enhanced
utilities for IMS and DB2 to provide lower cost alternatives to those provided
by the Company and other independent software vendors. IBM has significantly
increased its level of activity in the IMS and DB2 high speed utility markets
over the last twelve months. The Company has traditionally maintained
sufficient performance and functional advantages over IBM's base utilities to
justify its pricing differential although there can be no assurance that it will
continue to maintain such advantages.
Fees from enterprise license transactions remain fundamental components of
the Company's revenues and the primary source of mainframe revenues. These
revenues depend on the Company's customers' continuing to perceive an increasing
need to use the Company's existing software products on substantially greater
mainframe processing capacity in future periods. The Company believes that the
demand for enterprise licenses has been driven by customers' recommitment over
the last 24 to 36 months to the OS/390 mainframe platform for large scale,
transaction intensive information systems. Whether this trend will continue is
difficult to predict. If the Company's customers' processing capacity growth
were too slow and/or if such customers were to perceive less relative benefit
from the Company's current mainframe products, the Company's revenues would be
adversely affected.
Capacity-based upgrade fees associated with both current and future
processing capacity contributed 23%, 29% and 33% of total revenues in fiscal
years 1996, 1997 and 1998. The charging of upgrade fees based on CPU tier
classifications is standard among mainframe systems software vendors, including
IBM. While the Company believes its current pricing policies properly reflect
the value provided by its products, the pricing of mainframe systems software
is under constant pressure from customers and competitive vendors, including
IBM. IBM continues to reduce the costs of its mainframe systems software to
increase the overall cost competitiveness of its mainframe hardware and
software products. IBM also generally charges significantly less for its
software products. These actions continue to increase pricing pressures within
the mainframe systems software markets. The Company has continued to reduce
the cost of its mainframe tools and utilities in response to these and other
competitive pressures.
The Company's operating expenses are to a large extent fixed in the short
term so that the Company has very limited ability to adjust its planned
expenses if revenues fail to meet expectations. If near-term demand for the
Company's products weakens in a given quarter, there would likely be an
immediate, material adverse effect on net revenues and operating results and a
resultant drop in its stock price.
The Company's operating margins (exclusive of charges for acquired research
and development and merger costs) have ranged from 37% to 45% in recent
quarters, which is at the high-end of the range for peer companies. The Company
does not expect future margin expansion. Further, since research and
development, sales, support and distribution costs for distributed systems
software products are higher than for mainframe products, operating margins will
experience more pressure as the mix of the Company's business continues its
shift to distributed systems revenues.
The Company has historically realized greater revenues and net earnings in
the latter half of its fiscal year; the quarter ending December 31 coincides
with the end of customers' annual budgetary periods and the quarter ending
March 31 coincides with the end of the Company's annual sales plans and fiscal
year. For the same reasons, the Company has typically reported lower or flat
revenues in the first two quarters of a fiscal year than in the last two
quarters of the previous year, resulting in lower operating margins in the
first two quarters. The Company historically has generated greater revenues in
the third and fourth quarters while maintaining lower rates of expense growth
and expanded operating margins. Past financial performance is not a reliable
indicator of future performance, and there can be no assurance that this
pattern will be maintained.
Future operating results are also dependent on sustained performance
improvement by the Company's international offices, particularly its European
operations. Revenue growth by the Company's European operations has been
slower than revenue growth in North America, and in an effort to improve its
European performance, the Company has recently replaced the head of its
European operations. There can be no assurance that the Company will be
successful in accelerating the revenue growth of its European operations. The
Company's 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. Many systems and
applications software vendors are experiencing difficulties internationally.
In particular, the recent Asian economic crisis has resulted in customer
budget cuts and financial uncertainty. Less than 5% of the Company's revenues
are generated in the Pacific Rim region.
In fiscal 1998, the Company announced several executive management and
organizational changes involving its Chief Operating Officer, Senior Vice
President, Research and Development, and Senior Vice President, European Sales.
The Company may make other management and organizational changes in the future.
Organizational and management changes are intended to enhance competitiveness,
productivity and execution; however, there can be no assurance that they will
produce the desired results.
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The Company's growth prospects depend heavily on the continued success of its
existing distributed systems products, including PATROL, the recently acquired
BGS and DataTools products and those anticipated to be introduced in the future.
The distributed systems and application management markets in which the Company
operates are emerging, fragmented and highly competitive. The Company has
experienced long development cycles and product delays in the past, particularly
with certain of its distributed systems products, and expects to have delays in
the future. Delays in new mainframe or distributed systems product
introductions or less-than-anticipated market acceptance of these new products
are possible and would have an adverse affect on the Company's revenues and
earnings. New products or new versions of existing products may, despite
testing, contain undetected errors or bugs that will delay the introduction or
adversely affect commercial acceptance of such products. The enterprise systems
management market that the Company's distributed systems products address is
characterized by rapid change and intense competition that continues to increase
as vendors within the broader markets converge. Certain of the Company's
competitors and potential competitors have significantly greater financial,
technical, sales and marketing resources than the Company and greater experience
in distributed systems development and sales. A key factor in determining the
success of the Company's products, particularly its distributed systems
offerings, will be their ability to interoperate and perform well with existing
and future leading database management systems and other systems software
products supported by the Company's products. Maintaining this interoperability
has greatly increased the complexity and cost of the Company's product
development and support activities. While the Company believes its products that
address this market, including those under development, will compete
effectively, this market will be relatively unpredictable over the next few
years and there can be no assurance that anticipated results will be achieved.
Microsoft has continued its focus on developing operating systems, systems
management products and databases that will provide "business-critical" levels
of functionality and reliability. Specifically, Microsoft is aggressively
promoting its BackOffice family of software products, including its MS
Windows NT operating system and its SQL Server relational database management
system, as lower cost alternatives to the Unix operating systems coupled with
relational database management systems from Oracle, Sybase, Informix and other
vendors. Microsoft has significantly lower software price points in some of the
Company's markets, which could place additional pricing pressure on the Company.
Further, Microsoft could choose to develop competing products for use within MS
Windows NT environments. The Company has invested and intends to continue to
invest in the development of systems management products for MS Windows NT and
26
29
BackOffice environments, but there are numerous uncertainties associated with
the Company's ability to successfully execute this strategy.
Litigation seeking to enforce patents, copyrights and trade secrets is
increasing in the software industry. There can be no assurance that third
parties will not assert that their patent or other proprietary rights are
violated by products offered by the Company. Any such claims, with or without
merit, can be time consuming and expensive to defend and could have an adverse
effect on the Company's business, results of operations, financial position and
cash flows.
With the acquisitions of DataTools in May 1997 and BGS in March 1998, the
Company has initiated efforts to integrate the disparate cultures, employees,
systems and products. In both acquisitions, retention of key employees is
critical to ensure the continued advancement, development, support, sales and
marketing efforts pertaining to the acquired products. The Company has
implemented retention programs to keep many of the key technical, sales and
marketing employees. The Company has also elected to retain the principal
offices of both DataTools and BGS and has reorganized the management structure
at both of these locations. The Company has not historically managed
significant, fully staffed business units at locations different from the
Company's headquarters. As a result, the Company may experience additional
difficulties in integrating its management policies and practices into
DataTool's and BGS's operations. The Company has lost key employees that were
acquired in these acquisitions, especially at DataTools. The loss of the key
employees to date has not been detrimental to the Company's product integration
plans, although further losses could cause the product integrations to be
significantly delayed. Integration of DataTool's SQL-BackTrack products are
critical to the completion of the Company's backup, recovery, and restoration
strategy. Integration of BGS's BEST/1 products with PATROL is also critically
important to the ASA strategy. Successful integration of these complex software
products having difference origins is difficult to predict and achieve. There
can be no assurance that these product integrations will meet expectations or be
successful.
When the Company acquired BGS, it also announced its ASA strategy. The ASA
strategy contemplates the development of solutions suites that will ensure the
availability, performance and recoverability of an ERP, DBMS or operating
system. These solution suites will contain several of the Company's existing
products as well as those acquired in the BGS acquisition. The Company intends
to design these solution suites to provide customers with a common look and feel
for all included products. There can be no assurance that these integration
efforts involving separate and distinct products, including those acquired from
BGS, will be successful. Also, given the recent announcement of this strategy,
the Company cannot predict its acceptance by customers.
The Company recognizes the need to ensure its operations will not be
adversely impacted by the Year 2000. Software failures due to processing
errors potentially arising from calculating using the Year 2000 date are a
known risk. The Company is designing and testing the most current versions of
its products to process Year 2000 data without interruption or errors and
believes that these versions are substantially Year 2000 compliant. The
Company may experience migration costs for customers who are not running
current versions of its products. The Company is continually testing its
products to ensure Year 2000 support and compliance; there can be no assurance,
however, that despite such testing, undetected errors or defects will not exist
that could cause a product to fail to process Year 2000 data correctly. The
Company's products are typically used in high volume information systems that
are critical to a customer's operations, so that business interruptions, loss
or corruption of data or other major problems could have significant adverse
consequences to the customer. At this time, the Company is not aware of any
material operational issues or costs associated with Year 2000 compliance of
its own products.
The Company is also addressing the Year 2000 risk to the availability,
integrity and the reliability of its own internal information systems. The
Company has a low volume of transactions and operates within a modern
infrastructure. Accordingly, the Company does not believe that the cost of
Year 2000 remediation will have a material adverse effect on the Company's
results of operations or financial condition. There are no assurances,
however, that there will not be a delay in, or increased cost associated with,
the implementation of such changes, and the Company's inability to implement
such changes could have an adverse effect on future results of operations.
Factors that could cause unusual costs and delays include the availability and
cost of personnel trained in this area, the ability to locate and correct all
relevant computer code and other uncertainties.
The European Union's adoption of the euro single currency raises a variety of
issues associated with the Company's European operations. Although the
transition will be phased in over several years, the euro will become Europe's
single currency on January 1, 1999. The Company is assessing euro issues
related to its product pricing, contracts, treasury operations and accounting
systems. Although the evaluation of these items is still in process, the
Company believes that the hardware and software systems it uses internally will
accommodate this transition and any required policy or operating changes will
not have a material adverse effect on future results.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The response to this item is submitted as a separate section of this Annual
Report on Form 10-K. See Item 14.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
27
30
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information relating to the Company's directors and executive officers is
included in the Company's definitive Proxy Statement in connection with its
1998 Annual Meeting of Stockholders (the "1998 Proxy Statement"), which will be
filed with the Securities and Exchange Commission within 120 days after the end
of the fiscal year ended March 31, 1998, under the captions "ELECTION OF
DIRECTORS -- Nominees" and "OTHER INFORMATION -- Directors and Executive
Officers" and is incorporated herein by reference in response to this Item 10.
ITEM 11. EXECUTIVE COMPENSATION
Information relating to executive compensation is set forth in the 1998 Proxy
Statement under the captions "ELECTION OF DIRECTORS -- Compensation of
Directors" and "EXECUTIVE COMPENSATION" and is incorporated herein by reference
in response to this Item 11.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information relating to ownership of Registrant's Common Stock by management
and certain other beneficial owners is set forth in the 1998 Proxy Statement
under the caption "OTHER INFORMATION -- Certain Stockholders" and is
incorporated herein by reference in response to this Item 12.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information relating to certain relationships and related transactions is set
forth in the 1998 Proxy Statement under the caption "OTHER INFORMATION --
Related Transactions" and is incorporated herein by reference in response to
this Item 13.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Documents filed as a part of this Report.
1. The following financial statements of the Company and the related report
of independent public accountants are filed herewith:
PAGE
NUMBER
-------
Report of Independent Public Accountants ....................................... 30
Consolidated Financial Statements:
Balance Sheets as of March 31, 1997 and 1998 ................................. 31
Statements of Earnings for the years ended March 31, 1996, 1997 and
1998 ...................................................................... 32
Statements of Stockholders' Equity for the years ended March 31, 1996,
1997 and 1998 ............................................................. 33
Statements of Cash Flows for the years ended March 31, 1996, 1997 and
1998 ...................................................................... 35
Notes to Consolidated Financial Statements ................................... 36
2. The following financial statement schedule of the Company and the related
report of independent public accountants are filed herewith:
Schedule II -- Valuation Account
All other financial schedules are omitted because (i) such schedules are not
required or (ii) the information required has been presented in the
aforementioned financial statements.
28
31
3. The following Exhibits are filed with this Report or incorporated by
reference as set forth below.
EXHIBIT
NUMBER
- -------
3.1 -- Restated Certificate of Incorporation of the Company;
incorporated by reference to Exhibit 3.1 to the Company's
Registration Statement on Form S-1 (Registration No. 33-22892)
(the "S-1 Registration Statement").
3.2 -- Certificate of Amendment of Restated Certificate of
Incorporation; incorporated by reference to Exhibit 3.2 to the
Company's Annual Report for the fiscal year ended March 31, 1997
(the "1997 10-K").
3.2 -- Bylaws of the Company; incorporated by reference to Exhibit 3.2
to the S-1 Registration Statement.
4.1 -- Specimen Stock Certificate for the Common Stock of the Company;
incorporated by reference to Exhibit 4.1 to the S-1 Registration
Statement.
4.2 -- Rights Agreement, dated as of May 8, 1995, between the Company
and The First National Bank of Boston, as Rights Agent (the
"Rights Agreement"), specifying the terms of the Rights, which
includes the form of Certificate of Designation of Series A
Junior Participating Preferred Stock as Exhibit A, the form of
Right Certificate as Exhibit B and the form of the Summary of
Rights as Exhibit C (incorporated by reference to Exhibit 1 to
the registrant's Registration Statement on Form 8-A dated May 10,
1995).
4.3 -- Amendment to the Rights Agreement; incorporated by reference to
Exhibit 4.3 to the 1997 10-K.
10.1(a) -- Form of BMC Software, Inc. 1994 Employee Incentive Plan;
incorporated by reference to Exhibit 10.7(a) to the Company's
Annual Report on Form 10-K for the fiscal year ended March 31,
1995 (the "1995 10-K").
10.1(b) -- Form of Stock Option Agreement employed under BMC Software, Inc.
1994 Employee Incentive Plan; incorporated by reference to
Exhibit 10.7(b) to the 1995 10-K.
10.2(a) -- Form of BMC Software, Inc. 1994 Non-employee Directors' Stock
Option Plan; incorporated by reference to Exhibit 10.8(a) to the
1995 10-K.
10.2(b) -- Form of Stock Option Agreement employed under BMC Software, Inc.
1994 Nonemployee Directors' Stock Option Plan; incorporated by
reference to Exhibit 10.8(b) to the 1995 10-K.
10.3 -- Description of BMC Software, Inc. Executive Officer Annual
Incentive Plan; incorporated by reference to Exhibit 10.6 to the
Company's Annual Report on Form 10-K for the fiscal year ended
March 31, 1994.
*10.4 -- Form of Stock Option Agreement employed under BMC Software, Inc.
1994 Employee Incentive Plan for certain executive officers.
*10.5 -- Form of Restricted Stock Agreement employed under BMC Software
Inc. 1994 Employee Incentive Plan for certain executive officers.
10.5(a) -- License Agreement with International Business Machines
Corporation; incorporated by reference to Exhibit 10.12 to the
S-1 Registration Statement.
10.5(b) -- License Agreements for Use and Marketing of Program Materials
dated May 13, 1986, with International Business Machines
Corporation; incorporated by reference to Exhibit 10.13 to the
S-1 Registration Statement.
10.5(c) -- Customer Agreement with International Business Machines
Corporation dated April 10, 1991; incorporated by reference to
Exhibit 10.15 to the Company's Annual Report on Form 10-K for the
fiscal year ended March 31, 1992 (the "1992 10-K").
10.6 -- Form of Indemnification Agreement among the Company and its
directors and executive officers; incorporated by reference to
Exhibit 10.11 to the 1995 10-K.
*22.1 -- Subsidiaries of the Company.
*23.1 -- Consent of Arthur Andersen LLP, independent public accountants.
*27 -- Financial Data Schedule
- -------------
* Filed herewith.
(b) Reports on Form 8-K
None.
BMC Software is a registered U.S. trademark of BMC Software, Inc. DB2 and IBM
are registered trademarks of International Business Machines Corporation. All
other products and tradenames mentioned herein are trademarks, registered
trademarks or service marks of their respective companies.
29
32
BMC SOFTWARE, INC. AND SUBSIDIARIES
To The Board of Directors of
BMC Software, Inc.
We have audited the accompanying consolidated balance sheets of BMC Software,
Inc. (a Delaware corporation) and subsidiaries as of March 31, 1997 and 1998,
and the related consolidated statements of earnings, stockholders' equity and
cash flows for each of the three years in the period ended March 31, 1998.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of BMC Software, Inc.
and subsidiaries as of March 31, 1997 and 1998, and the results of their
operations and their cash flows for each of the three years in the period ended
March 31, 1998, in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Houston, Texas
May 1, 1998
30
33
BMC SOFTWARE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
MARCH 31,
---------
1997 1998
---- ----
(IN THOUSANDS, EXCEPT SHARE DATA)
ASSETS
Current assets:
Cash and cash equivalents $ 79,794 $ 72,093
Marketable Securities 59,159 56,174
Accounts receivable:
Trade, net of allowance for doubtful accounts of $4,277 and $5,606 77,428 139,844
Trade finance receivables, current 10,148 30,934
----------- -----------
Total accounts receivable 87,576 170,778
Income tax receivable -- 40,805
Other current assets 26,446 34,028
----------- -----------
Total current assets 252,975 373,878
Property and equipment, net of accumulated depreciation and amortization of
$49,364 and $75,776 116,296 162,996
Software development costs, net of accumulated amortization of $19,207 and $39,293 39,486 63,475
Purchased software and related assets, net of accumulated amortization of $22,746
and $31,667 19,735 32,063
Marketable Securities 402,742 587,806
Other long-term assets 17,518 28,277
----------- -----------
$ 848,752 $ 1,248,495
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Trade accounts payable $ 9,439 $ 11,361
Accrued commissions payable 10,983 13,894
Accrued liabilities and other 28,842 67,458
Current portion of deferred revenue 145,199 242,821
----------- -----------
Total current liabilities 194,463 335,534
Deferred revenue and other 93,284 110,350
Deferred tax liability 14,793 43,454
----------- -----------
Total liabilities 302,540 489,338
Commitments and contingencies
Stockholders' equity:
Preferred stock, $.01 par value, 1,000,000 shares authorized, none issued and
outstanding -- --
Common stock, $.01 par value, 300,000,000 shares authorized, 210,080,000 shares
issued 2,101 2,101
Additional paid-in capital 82,391 129,098
Retained earnings 564,071 729,925
Cumulative foreign currency translation adjustment (820) (1,543)
Unrealized gain (loss) on securities available for sale (750) 3,179
----------- -----------
646,993 862,760
Less treasury stock, at cost 9,754,000 and 3,752,000 shares 96,901 99,513
Less unearned portion of restricted stock compensation 3,880 4,090
----------- -----------
Total stockholders' equity 546,212 759,157
----------- -----------
$ 848,752 $ 1,248,495
=========== ===========
The accompanying notes are an integral part of these
Consolidated Financial Statements
31
34
BMC SOFTWARE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
YEARS ENDED MARCH 31,
---------------------
1996 1997 1998
---- ---- ----
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Revenues:
Licenses $269,022 $380,894 $513,947
Maintenance 159,828 182,316 216,687
-------- -------- --------
Total revenues 428,850 563,210 730,634
Selling and marketing expenses 116,724 154,829 205,219
Research and development expenses 59,011 77,459 94,923
Cost of maintenance services and product licenses 44,854 56,569 77,095
General and administrative expenses 37,083 46,070 54,462
Acquired research and development costs 23,589 11,259 65,473
Merger costs -- -- 7,305
-------- -------- --------
Operating income 147,589 217,024 226,157
Interest and other income 15,446 20,050 30,402
-------- -------- --------
Earnings before income taxes 163,035 237,074 256,559
Income taxes 57,464 73,202 90,705
-------- -------- --------
Net earnings $105,571 $163,872 $165,854
======== ======== ========
Basic earnings per share $ 0.53 $ 0.82 $ 0.82
======== ======== ========
Shares used in computing basic earnings per share 200,658 201,016 203,488
======== ======== ========
Diluted earnings per share $ 0.50 $ 0.76 $ 0.77
======== ======== ========
Shares used in computing diluted earnings per share 209,144 214,310 216,590
======== ======== ========
The accompanying notes are an integral part of these
Consolidated Financial Statements.
32
35
BMC SOFTWARE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED MARCH 31, 1996, 1997 AND 1998
(IN THOUSANDS)
COMMON ADDITIONAL RETAINED FOREIGN UNREALIZED TREASURY UNEARNED TOTAL
STOCK PAID-IN EARNINGS CURRENCY GAIN (LOSS) STOCK PORTION OF STOCKHOLDERS'
CAPITAL TRANSLATION ON SECURITIES RESTRICTED EQUITY
ADJUSTMENT AVAILABLE FOR STOCK
SALE COMPENSATION
Balance,
March 31, 1995 $ 2,101 $ 67,864 $ 294,628 $ (282) $ -- $ (54,694) $ (3,463) $ 306,154
Net earnings -- -- 105,571 -- -- -- -- 105,571
Foreign currency
translation
adjustment -- -- -- 364 -- -- -- 364
Treasury stock
purchased -- -- -- -- -- (64,816) -- (64,816)
Stock options
exercised and
restricted shares
issued -- (4,838) -- -- -- 35,030 (55) 30,137
Income tax benefit
from stock
options exercised -- 4,862 -- -- -- -- -- 4,862
Unrealized gain on
securities
available for sale -- -- -- -- 82 -- -- 82
Earned portion of
restricted stock
compensation -- -- -- -- -- -- 1,354 1,354
--------- --------- --------- --------- --------- --------- --------- ---------
Balance, 2,101 67,888 400,199 82 82 (84,480) (2,164) 383,708
March 31, 1996
Net earnings -- -- 163,872 -- -- -- -- 163,872
Foreign currency
translation
adjustment -- -- -- (902) -- -- -- (902)
Treasury stock
purchased -- -- -- -- -- (31,460) -- (31,460)
Stock options
exercised and
restricted shares
issued -- 2,033 -- -- -- 19,039 (3,441) 17,631
Income tax benefit
from stock
options exercised -- 12,470 -- -- -- -- -- 12,470
Unrealized loss on
securities
available for sale -- -- -- -- (832) -- -- (832)
Earned portion of
restricted stock
compensation -- -- -- -- -- -- 1,725 1,725
--------- --------- --------- --------- --------- --------- --------- ---------
Balance,
March 31, 1997 $ 2,101 $ 82,391 $ 564,071 $ (820) $ (750) $ (96,901) $ (3,880) $ 546,212
(continued)
33
36
BMC SOFTWARE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED MARCH 31, 1996, 1997 AND 1998
(IN THOUSANDS)
(continued)
COMMON ADDITIONAL RETAINED FOREIGN UNREALIZED TREASURY UNEARNED TOTAL
STOCK PAID-IN EARNINGS CURRENCY GAIN (LOSS) STOCK PORTION OF STOCKHOLDERS'
CAPITAL TRANSLATION ON SECURITIES RESTRICTED EQUITY
ADJUSTMENT AVAILABLE FOR STOCK
SALE COMPENSATION
Balance,
March 31, 1997 $ 2,101 $ 82,391 $ 564,071 $ (820) $ (750) $ (96,901) $ (3,880) $ 546,212
Net earnings -- -- 165,854 -- -- -- -- 165,854
Foreign currency
translation
adjustment -- -- -- (723) -- -- -- (723)
Treasury stock
purchased -- -- -- -- -- (70,923) -- (70,923)
Common stock and
options issued in
connection with
merger and
acquisitions -- 15,695 -- -- -- -- -- 15,695
Stock options
exercised and
restricted shares
issued and
forfeited -- (27,250) -- -- -- 68,311 (1,691) 39,370
Income tax benefit from
stock options exercised
and restricted shares
issued -- 58,262 -- -- -- -- -- 58,262
Unrealized gain on
securities available
for sale -- -- -- -- 3,929 -- -- 3,929
Earned portion of
restricted stock
compensation -- -- -- -- -- -- 1,481 1,481
--------- --------- --------- --------- --------- --------- --------- ---------
Balance,
March 31, 1998 $ 2,101 $ 129,098 $ 729,925 $ (1,543) $ 3,179 $ (99,513) $ (4,090) $ 759,157
========= ========= ========= ========= ========= ========= ========= =========
The accompanying notes are an integral part of these
Consolidated Financial Statements.
34
37
BMC SOFTWARE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED MARCH 31,
---------------------
1996 1997 1998
---- ---- ----
(IN THOUSANDS)
Cash flows from operating activities:
Net earnings $ 105,571 $ 163,872 $ 165,854
Adjustments to reconcile net earnings to net cash provided by
operating activities:
Acquired research and development and merger costs 23,589 11,259 72,778
Depreciation and amortization 28,354 32,523 58,029
Loss on sale of fixed assets -- -- 2,388
Change in allowance for doubtful accounts 426 2,344 964
Deferred income tax provision 7,392 15,070 24,559
Earned portion of restricted stock compensation 1,354 1,725 1,481
Changes in operating assets and liabilities:
Increase in accounts receivable (14,258) (10,621) (70,346)
Increase in income tax receivable -- -- (40,805)
Increase in other current assets (2,564) (3,338) (1,703)
Increase in other long-term assets (3,680) (7,453) (7,501)
Increase (decrease) in trade accounts payable (3,306) 1,022 (237)
Increase in accrued commissions payable 3,236 135 2,911
Increase in accrued liabilities and other 6,138 3,375 24,216
Increase (decrease) in taxes payable 13,168 (16,595) --
Increase in current and long-term deferred revenue and other 774 91,529 95,617
---------- ---------- ----------
Total adjustments 60,623 120,975 162,351
---------- ---------- ----------
Net cash provided by operating activities 166,194 284,847 328,205
---------- ---------- ----------
Cash flows from investing activities:
Cash paid for technology acquisitions, net of cash acquired (18,510) (14,719) (64,367)
Purchases of marketable securities (101,050) (259,682) (258,151)
Maturities of marketable securities 64,897 67,523 82,761
Proceeds from sales of fixed assets 1,072 -- 1,522
Capital expenditures (21,586) (26,803) (66,980)
Capitalization of software development costs (19,309) (21,945) (40,407)
Purchased software and related assets (2,911) (9,043) (2,449)
(Increase) decrease in long-term financed receivables 3,901 (251) (13,821)
---------- ---------- ----------
Net cash used in investing activities (93,496) (264,920) (361,892)
---------- ---------- ----------
Cash flows from financing activities:
Treasury stock purchased (64,816) (31,460) (70,923)
Stock options exercised 9,526 17,631 39,370
Income tax benefit from stock options exercised 4,862 12,470 58,262
---------- ---------- ----------
Net cash provided by (used in) financing activities (50,428) (1,359) 26,709
Effect of translation exchange rate changes on cash 364 (902) (723)
---------- ---------- ----------
Net change in cash and cash equivalents 22,634 17,666 (7,701)
Cash and cash equivalents at beginning of year 39,494 62,128 79,794
---------- ---------- ----------
Cash and cash equivalents at end of year $ 62,128 $ 79,794 $ 72,093
========== ========== ==========
Supplementary disclosures of cash flow information:
Cash paid during the year for income taxes $ 30,102 $ 63,247 $ 41,678
Noncash consideration in acquisitions $ 20,611 $ -- $ 8,573
The accompanying notes are an integral part of these
Consolidated Financial Statements.
35
38
BMC SOFTWARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Nature of Operations
BMC Software, Inc. and its wholly-owned subsidiaries (collectively, the
Company or BMC) develops software solutions for automating application and
data management processes across host-based and distributed systems
environments. BMC markets, sells and supports its solutions primarily through
its sales offices around the world, as well as through its relationships with
independent partners. Numerous factors affect the Company's operating results,
including general economic conditions, market acceptance and demand for its
products, its ability to develop new products, rapidly changing technologies and
competition. For a discussion of certain of these important factors, see the
discussion in Management's Discussion and Analysis of Results of Operations and
Financial Condition under the heading "Certain Risks and Uncertainties That
Could Affect Future Operating Results."
(b) Use of Estimates
The Company's management makes estimates and assumptions in the
preparation of its Consolidated Financial Statements in conformity with
generally accepted accounting principles. These estimates and assumptions may
affect the reported amounts of assets and liabilities, the disclosure of
contingent assets and liabilities as of the date of the Consolidated Financial
Statements and the reported amounts of revenues and expenses during the
respective reporting periods. Actual results could differ from those results
implicit in the estimates and assumptions.
(c ) Basis of Presentation
The accompanying Consolidated Financial Statements include the accounts
of the Company. All significant intercompany balances and transactions have
been eliminated in consolidation. Certain amounts previously reported have been
reclassified in order to ensure comparability among the years reported.
(d) Cash Equivalents
The Company considers investments with a maturity of three months or
less when purchased to be cash equivalents. As of March 31, 1997 and 1998, the
Company's cash equivalents were comprised primarily of money market funds,
commercial paper and repurchase agreements. The Company's cash and cash
equivalents are subject to potential credit risk. The Company's cash
management and investment policies restrict investments to investment quality,
highly liquid securities.
(e) Long Lived Assets
Property and Equipment -
Property and equipment are stated at cost. Depreciation on all
property and equipment, with the exception of building and leasehold
improvements, is calculated using the straight-line method over the estimated
useful lives of the assets which range from three to five years. Depreciation
on the building is calculated using the straight-line method over the useful
lives of the components of the building (twenty years for the infrastructure
and thirty years for the shell). Leasehold improvements are amortized using
the straight-line method over the shorter of the lease term or the estimated
useful life of the assets which range from two to seven years.
36
39
A summary of property and equipment is as follows:
MARCH 31,
---------
1997 1998
---- ----
(IN THOUSANDS)
Land $ 9,100 $ 16,366
Building and leasehold improvements 71,672 82,092
Construction in progress 1,976 28,260
Computers, furniture and equipment 82,912 112,054
----------- -----------
165,660 238,772
Less accumulated depreciation and amortization (49,364) (75,776)
----------- -----------
Net property and equipment $ 116,296 $ 162,996
=========== ===========
In March 1998, the American Institute of Certified Public Accountants
(AICPA) issued Statement of Position (SOP) 98-1, "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use." This standard
requires that certain costs related to the development or purchase of
internal-use software be capitalized and amortized over the estimated useful
life of the software. This SOP also requires that costs related to the
preliminary project stage, data conversion and the post-implementation/operation
stage of an internal-use computer software development project be expensed as
incurred. SOP 98-1 is effective for financial statements issued for fiscal
years beginning after December 31, 1998, which, in the case of the Company is
April 1, 1999. SOP 98-1 is not expected to have a material impact on the
Company's Consolidated Financial Statements.
Software Development Costs -
Costs of internally developed software for resale are expensed until
the technological feasibility of the software product has been established.
Thereafter, software development costs are capitalized and subsequently reported
at the lower of unamortized cost or net realizable value. The cost of
capitalized software is amortized over the products' estimated useful lives,
which is typically five years. During the years ended March 31, 1996, 1997 and
1998, $19,309,000, $21,945,000 and $40,407,000, respectively, of software
development costs were capitalized. Amortization for the years ended March 31,
1996, 1997 and 1998 was $8,667,000, $8,299,000 and $20,086,000, respectively.
These expenses were reported as cost of maintenance services and product
licenses in the accompanying Consolidated Statements of Earnings.
Purchased Software and Related Costs -
Purchased software and related assets are recorded at cost.
Amortization is calculated on the straight-line method over the estimated
useful lives of the products, which is typically five years. The portion of a
purchase which pertains to in-process research and development is expensed in
the period of the acquisition. Amortization for the years ended March 31,
1996, 1997 and 1998 was $5,742,000, $5,805,000 and $8,921,000, respectively.
These expenses were reported as cost of maintenance services and product
licenses in the accompanying Consolidated Statements of Earnings.
The Company has adopted Statement of Financial Accounting Standards
(SFAS) No. 121, "Accounting for the Impairment of Long-lived Assets and for
Long-lived Assets to be Disposed Of." SFAS No. 121 requires that long-lived
assets and certain identifiable intangibles to be held and used by an entity be
reviewed for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable. If the sum of the
expected future cash flows from the use of the asset and its eventual
disposition is less than the carrying amount of the asset, an impairment loss
is recognized based on the fair value of the asset.
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(f) Foreign Currency Translation and Risk Management
The Company operates globally and the functional currency for most of
its non U.S. enterprises is the local currency. Financial statements of these
foreign operations are translated into U.S. dollars using the current rate
method in accordance with SFAS No. 52, "Foreign Currency Translation." As a
result, the Company's U.S. dollar net cash flows from international operations
may be adversely affected by changes in foreign currency exchange rates. To
minimize the Company's risk from changes in foreign currency exchange rates,
the Company utilizes certain derivative financial instruments.
The Company utilizes two types of derivative financial instruments in
managing its foreign currency exchange risk, forward exchange contracts and
purchased option contracts. Forward exchange contracts are used to hedge firm
commitments that subject the Company to transaction risk. Such commitments
include accounts receivable, intercompany receivables/payables, cash balances
and certain liabilities of foreign operations. The terms of forward exchange
contracts are generally one month or less.
Purchased option contracts are used by the Company to hedge
anticipated, but not firmly committed, sales transactions. The Company
believes that the anticipated, but not yet committed, sales transactions are
probable and are highly correlated with the hedge instruments. Probability
weightings are applied to the forecasted quarterly sales amounts and option
contracts are purchased to hedge the foreign currency exchange risk on the
forecasted quarterly sales amounts. Each month, the Company compares its
dollar amount of purchased option contracts to sales forecasts in order to
ascertain whether the hedge remains highly correlated. In the event the hedge
ceases to be effective or if the derivative is sold or the Company discontinues
hedging operations, any unamortized premium costs or deferred gains will be
recognized in that period. The terms of purchased option contracts are
typically one year or less.
The table below summarizes the contractual amounts of the Company's
financial instruments in U.S. dollars. The Company's foreign exchange
financial instruments are primarily denominated in the major European
currencies, particularly the German deutschemark and the British pound, as well
as the Japanese yen and Australian dollar. The "Buy" amounts in the table
below represent the U.S. dollar equivalent of commitments to purchase foreign
currencies and the "Sell" amounts represent the U.S. dollar equivalent of the
Company's right (with respect to purchased option contracts) and its commitment
(with respect to foreign currency forwards) to sell foreign currencies.
MARCH 31
--------
1997 1998
---- ----
(IN THOUSANDS)
Buy Sell Buy Sell
--- ---- --- ----
Options $ -- $ 60,264 $ -- $ 162,347
Forwards (Europe) -- 71,499 -- 98,637
Forwards (Other) 45 7,980 681 7,838
---------- ---------- ---------- ----------
$ 45 $ 139,743 $ 681 $ 268,822
========== ========== ========== ==========
Gains and losses on forward exchange contracts are recorded as the
contracts expire (typically each month). Premiums from forward exchange
contracts are netted against the related gains and losses. Gains and premiums
associated with purchased option contracts are deferred until the underlying
hedged transactions occur or earlier if a hedged transaction is no longer
expected to occur. As of March 31, 1997 and 1998, the Company had recorded
unamortized premium costs totaling $1,075,000 and $3,226,000, respectively.
Also, as of March 31, 1997 and 1998, the Company had net unrecorded deferred
gains (losses) of $1,478,000 and ($78,000), respectively.
The Company's exposure to credit-related losses from its financial
instruments is minimal. Exposure from the Company's forward exchange contracts
could occur if the Company's foreign customers default on their trade payable
obligations with the Company. The Company has not experienced and does not
expect to experience any significant defaults by its foreign customers. Also,
exposure from the Company's purchased option contracts is limited to the
premium costs associated with buying the instruments. The Company is not
obligated to exercise its
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41
purchased option contracts. The Company is also exposed to credit-related
losses in the event of non-performance by counterparties to financial
instruments, but it does not expect any counterparties to fail to meet their
obligations, given their high credit ratings. In addition, the Company
diversifies this risk across several counterparties.
During fiscal 1996, 1997 and 1998, general and administrative expenses
included net foreign exchange expenses of $1,725,000, $2,297,000 and
$1,853,000, respectively. The net cash flows from the Company's foreign
exchange financial instruments are netted with the currency gain or loss of the
hedged item in the Company's Consolidated Statements of Cash Flows.
(g) Deferred Revenue
Deferred revenue is comprised primarily of deferred license revenue,
maintenance revenue and other services. Deferred license and maintenance
revenue which has not been collected is eliminated in consolidation. The
principal components of deferred revenue are as follows:
MARCH 31,
1997 1998
---- ----
(IN THOUSANDS)
Current:
Maintenance $ 124,052 $ 159,774
Licenses 16,570 73,838
Other 4,577 9,209
---------- ----------
Total Current Deferred Revenue 145,199 242,821
Long-Term:
Maintenance 87,712 104,986
Other 5,572 5,364
---------- ----------
Total Long-Term Deferred Revenue 93,284 110,350
---------- ----------
Total Deferred Revenue $ 238,483 $ 353,171
========== ==========
(h) Revenue Recognition
The Company licenses its software products under perpetual, annual and
monthly licenses. Perpetual licenses include maintenance and enhancements for
either a 90 day period or a one year period. For those licenses which provide
maintenance and enhancements for a one year period, the portion of the license
fee associated with maintenance and enhancements is unbundled and recognized
ratably as maintenance revenue. Maintenance contracts are available annually
thereafter and are generally based on the value (as defined) of the licensed
software products. The Company also generates upgrade revenues as a result of
a customer's migration, or a customer's anticipated migration to more powerful
central processing units.
Revenue from the licensing of software, including upgrade revenue, is
recognized when both the Company and the customer are legally obligated under
the terms of the respective agreement and the underlying software products (if
any in the case of upgrade transactions) have been delivered. Maintenance
revenue is recognized ratably over the term of the underlying maintenance
agreement. Revenues from license and maintenance transactions which are
financed are generally recognized in the same manner as those requiring current
payment. The Company has an established business practice of offering
installment contracts to customers and has a history of successfully enforcing
original payment terms without making concessions. Further, the payment
obligations are unrelated to product implementation or any other
post-transaction activity. In all cases, revenue is recognized only if no
significant Company obligations remain and collection of the resulting
receivable is deemed probable.
The AICPA issued SOP 97-2, "Software Revenue Recognition" in October 1997,
which replaces the previous revenue recognition rules provided by SOP 91-1.
SOP 97-2 is effective for transactions entered into in fiscal years
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42
beginning after December 15, 1997, which, in the case of the Company, is April
1, 1998. The adoption of this SOP is not expected have a material impact on
the Company's future Consolidated Financial Statements.
(i) Earnings Per Share
The Financial Accounting Standards Board (FASB) issued SFAS No. 128,
"Earnings Per Share" in February 1997. Implementation of SFAS No. 128 is
required for periods ending after December 15, 1997. SFAS No. 128 requires
dual presentation of earnings per share (EPS); basic EPS and diluted EPS.
Basic EPS excludes dilution and is computed by dividing net income by the
weighted average number of common shares outstanding for the period. Diluted
EPS reflects the potential dilution that could occur if securities or other
contracts to issue common stock were exercised or converted into common stock.
For purposes of this calculation, outstanding stock options and unearned
restricted stock are considered common stock equivalents using the treasury
stock method. The following table summarizes the basic EPS and diluted EPS
computations for the years ended March 31, 1996, 1997 and 1998 (in thousands,
except per share amounts):
YEARS ENDED MARCH 31,
1996 1997 1998
---- ---- ----
Basic earnings per share:
Net earnings $ 105,571 $ 163,872 $ 165,854
---------- ---------- ----------
Weighted average number of common shares 200,658 201,016 203,488
---------- ---------- ----------
Basic earnings per share $ 0.53 $ 0.82 $ 0.82
========== ========== ==========
Diluted earnings per share:
Net earnings $ 105,571 $ 163,872 $ 165,854
---------- ---------- ----------
Weighted average number of common shares 200,658 201,016 203,488
Incremental shares from assumed conversions of
stock options and other 8,486 13,294 13,102
---------- ---------- ----------
Adjusted weighted average number of common
shares 209,144 214,310 216,590
---------- ---------- ----------
Diluted earnings per share $ 0.50 $ 0.76 $ 0.77
========== ========== ==========
(j) Stock Splits
On July 16, 1995, October 24, 1996 and April 20, 1998, the Company's
board of directors declared two-for-one stock splits. These stock splits were
effected in the form of stock dividends. In each case, stockholders of record
received one share of common stock for each share held. All stock related data
in the consolidated financial statements and related notes reflects these stock
splits for all periods presented.
(k) Treasury Stock
Under a stock repurchase program, the Company repurchased 6,692,000,
1,385,000 and 2,304,000 shares of its common stock on the open market for
aggregate purchase prices of $63,472,000, $30,581,000 and $69,752,000, in the
fiscal years ended March 31, 1996, 1997 and 1998, respectively. The Company's
board of directors terminated the share buy-back program, prior to consummation
of the BGS Systems, Inc. (BGS) merger, in March 1998, consistent with the
pooling of interests accounting provisions.
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43
(l) Comprehensive Income
In June 1997, SFAS No. 130, "Reporting Comprehensive Income" was
issued. Under SFAS No. 130, all items that meet the definition of
comprehensive income will be separately reported for the period in which they
are recognized. The only impact will be that comprehensive income, which will
include changes in the balances of items that are reported separately in the
Stockholders' Equity section of the Consolidated Balance Sheets, will be either
reported in a separate statement or at the bottom of the Consolidated
Statements of Earnings. This statement is effective for fiscal years beginning
after December 15, 1997, which, in the case of the Company, is April 1, 1998.
(2) TECHNOLOGY ACQUISITIONS
During fiscal 1996 and 1997, the Company completed acquisitions of
stock and assets (including in process research and development) of several
technology companies. These acquisitions were funded through the issuance of
the Company's common stock and cash. All of the acquisitions completed during
fiscal 1996 and 1997 were accounted for using the purchase method. The
aggregate purchase price for the acquired companies was $27,789,000 and
$12,950,000 during fiscal 1996 and 1997, respectively. In connection with
these acquisitions, the Company recorded charges of $22,831,000 and $7,318,000
for acquired research and development expenses, net of $758,000 and $3,941,000
in income tax benefits for fiscal 1996 and 1997, respectively.
During fiscal 1998, the Company completed several additional
acquisitions, including the purchase of DataTools, Inc. (DataTools) and BGS.
The Company's acquisition of DataTools was completed in May 1997 and was the
result of a purchase option exercised by the Company. The Company funded the
$73,000,000 aggregate purchase price with cash, and to a lesser extent, debt
forgiveness and options to purchase the Company's common stock. The Company
accounted for this transaction as a purchase, and recorded a charge of
$51,572,000 net of a $2,800,000 income tax benefit, for acquired research and
development costs.
In addition to the DataTools acquisition, the Company completed
additional acquisitions accounted for as purchases. The aggregate purchase
price for these transactions was $14,695,000. The Company recorded a
$9,076,000 charge, net of a $2,025,000 income tax benefit for acquired research
and development.
During March 1998, the Company completed the acquisition of BGS. This
acquisition was accounted for as a pooling of interests in accordance with
Accounting Principals Board (APB) Opinion No. 16. The Company recorded a
$5,798,000 charge, net of a $1,507,000 income tax benefit for merger costs.
The Company exchanged a total of 7,179,000 shares of its common stock for all
of the outstanding shares of BGS. The Company also converted BGS employee
owned options into options to purchase 746,000 shares of the Company's stock.
The Company did not restate its prior Consolidated Financial Statements because
the amounts of assets, revenues and income of BGS for the last three fiscal
years were not material.
In the above-mentioned acquisitions accounted for as purchases,
purchase prices were allocated to identifiable tangible and intangible assets
acquired and liabilities assumed based on their estimated fair values. Amounts
allocated to acquired, in-process research and development costs were expensed
at the time of acquisition. To determine the fair market value of the acquired
net assets and in-process technology, the Company relied primarily on the income
approach, whereupon fair market value is a function of the future revenues
expected to be generated by an asset, net of all allocable expenses and charges
for the use of contributory assets. The future net revenue stream is discounted
to present value based upon the specific level of risk associated with achieving
the forecasted asset earnings. Discount rates utilized ranged from 20% to 30%.
The income approach focuses on the income producing capability of the acquired
assets and best represents the present value of the future economic benefits
expected to be derived from these assets.
The Company determined that the acquired in-process technologies had
not reached technological feasibility based on the status of design and
development activities which required further refinement, integration and
testing. The development activities required to complete the acquired
in-process technologies included additional coding, cross- platform porting and
validation, quality assurance procedures and customer beta testing.
41
44
The acquired technologies represent unique and emerging technologies, the
application of which is limited to the Company's software strategy.
Accordingly, these acquired technologies have no alternative future use.
(3) FINANCIAL INSTRUMENTS
Management determines the appropriate classification of debt and
equity securities at the time of purchase and re-evaluates such designation as
of each subsequent balance sheet date. The Company has the ability and intent
to hold most of its investment securities to maturity and thus has classified
these securities as "held to maturity" pursuant to SFAS No. 115, "Accounting
for Certain Investments in Debt and Equity Securities." These securities have
been recorded at amortized cost in the Company's Consolidated Balance Sheets.
Securities classified as "available for sale" are recorded at fair value. The
resulting net unrealized gains or losses are recorded as an increase or
decrease to stockholders' equity. The Company holds no securities classified
as "trading securities". Gains and losses, realized and unrealized, are
calculated using the specific identification method. The table below
summarizes the Company's total investment securities portfolio as of March 31,
1997 and 1998.
HELD TO MATURITY SECURITIES
GROSS GROSS
UNREALIZED UNREALIZED AMORTIZED
FAIR VALUE GAINS LOSSES COSTS
---------- ----- ------ -----
(IN THOUSANDS)
1997
Maturities Within 1 Year
Municipal Securities $ 32,901 $ 92 $ (4) $ 32,813
Corporate Bonds 16,030 144 -- 15,886
Euro Bonds and other 2,028 1 -- 2,027
---------- ---------- ---------- ----------
Total maturities within 1 year $ 50,959 $ 237 $ (4) $ 50,726
========== ========== ========== ==========
Maturities From 1-5 Years
Municipal Securities $ 210,754 $ 736 $ (1,145) $ 211,163
Corporate Bonds 34,125 48 (305) 34,382
Euro Bonds and other 15,607 193 (50) 15,464
Mortgage securities 11,353 2 (611) 11,962
---------- ---------- ---------- ----------
Total maturities from 1-5 years $ 271,839 $ 979 $ (2,111) $ 272,971
========== ========== ========== ==========
Maturities From 6-10 Years
Corporate Bonds $ 2,955 $ -- $ (68) $ 3,023
Euro Bonds 3,019 -- (59) 3,078
Mortgage Securities 4,789 -- (146) 4,935
Municipal Bonds 34,377 -- (326) 34,703
---------- ---------- ---------- ----------
Total maturities from 6-10 years $ 45,140 $ -- $ (599) $ 45,739
========== ========== ========== ==========
1998
Maturities Within 1 Year
Municipal Securities $ 31,779 $ 214 $ -- $ 31,565
Corporate Bonds 9,924 45 (5) 9,884
Euro Bonds and other 4,126 40 -- 4,086
---------- ---------- ---------- ----------
Total maturities within 1 year $ 45,829 $ 299 $ (5) $ 45,535
========== ========== ========== ==========
Maturities From 1-5 Years
Municipal Securities $ 307,651 $ 3,584 $ (501) $ 304,568
Corporate Bonds 38,949 568 (38) 38,419
Mortgage Securities 11,544 30 (67) 11,580
Euro Bonds and other 35,594 104 (178) 35,668
---------- ---------- ---------- ----------
Total maturities from 1-5 years $ 393,738 $ 4,286 $ (784) $ 390,235
========== ========== ========== ==========
Maturities From 6-10 Years
Corporate Bonds $ 6,296 $ -- $ (83) $ 6,379
Euro Bonds 11,158 -- (57) 11,216
Mortgage Securities 1,645 -- (16) 1,661
Municipal Bonds 33,165 98 (91) 33,158
---------- ---------- ---------- ----------
Total maturities from 6-10 years $ 52,264 $ 98 $ (247) $ 52,414
========== ========== ========== ==========
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AVAILABLE FOR SALE SECURITIES
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED
COST GAINS LOSSES FAIR VALUE
---- ----- ------ ----------
(IN THOUSANDS)
1997
Maturities Within 1 Year
Municipal Securities $ 8,375 $ 58 $ -- $ 8,433
---------- ---------- ---------- ----------
Total maturities within 1 year $ 8,375 $ 58 $ -- $ 8,433
========== ========== ========== ==========
Maturities From 1-5 Years
Municipal Securities $ 43,176 $ 71 $ (281) $ 42,966
Euro Bonds 13,743 -- (159) 13,584
Corporate Bonds 6,686 -- (86) 6,600
Mortgage Securities and Other 9,340 -- (1) 9,339
---------- ---------- ---------- ----------
Total maturities from 1-5 years $ 72,945 $ 71 $ (527) $ 72,489
========== ========== ========== ==========
1998
Maturities Within 1 Year
Municipal Securities $ 10,196 $ 455 $ (12) $ 10,639
---------- ---------- ---------- ----------
Total maturities within 1 year $ 10,196 $ 455 $ (12) $ 10,639
========== ========== ========== ==========
Maturities From 1-5 Years
Municipal Securities $ 54,513 $ 460 $ (41) $ 54,932
Corporate Bonds 12,208 141 (16) 12,333
Euro Bonds 28,510 69 (147) 28,432
Other 8,753 2,452 -- 11,205
---------- ---------- ---------- ----------
Total maturities from 1-5 years $ 103,984 $ 3,122 $ (204) $ 106,902
========== ========== ========== ==========
Maturities From 6-10 Years
Municipal Securities $ 34,939 $ 49 $ (232) $ 34,756
Mortgage Securities and other 3,498 28 (27) 3,499
---------- ---------- ---------- ----------
Total maturities from 6-10 years $ 38,437 $ 77 $ (259) $ 38,255
========== ========== ========== ==========
The Company's mortgage securities are classified according to the stated
maturities of the securities.
(4) TRADE FINANCE RECEIVABLES
Trade finance receivables arise in the ordinary course of business to
accommodate customers' cash flow objectives. Most of the trade finance
receivables entered into by the Company are transferred to financing
institutions on a non-recourse basis. The Company records such transfers as
sales of the related accounts receivable when it is considered to have
surrendered control of such receivables under provisions of SFAS No. 125,
"Accounting for Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities." Such receivables which have not yet been transferred are
classified as trade finance receivables in the accompanying Consolidated
Balance Sheets. The Company adopted SFAS No. 125 effective April 1, 1997.
During fiscal 1998, the Company transferred a total of $147,022,000, which
approximated fair value, to financing institutions on a non-recourse basis. As
of March 31, 1998, trade finance receivables which have been transferred to
financing institutions, which remain outstanding, totaled approximately
$228,270,000.
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(5) COST OF MAINTENANCE SERVICES AND PRODUCT LICENSES
The components of cost of maintenance services and product licenses
for the years ended March 31, 1996, 1997 and 1998 are as follows:
1996 1997 1998
---- ---- ----
(IN THOUSANDS)
Cost of maintenance services $ 27,185 $ 33,763 $ 41,485
Amortization of software development costs 8,667 8,299 20,086
Amortization of purchased software 5,742 5,805 8,921
Royalties 3,260 8,702 6,603
---------- ---------- ----------
$ 44,854 $ 56,569 $ 77,095
========== ========== ==========
(6) INCOME TAXES
Deferred income taxes are recognized for income and expense items that
are reported for financial reporting purposes in a different year than for
income tax purposes. Research and development tax credits are accounted for as
a reduction of income tax expense in the year realized. The income tax benefit
from nonqualified stock options exercised, wherein the fair market value at
date of issuance is less than that at date of exercise, is credited to
additional paid-in capital.
The provision for income taxes in the years ended March 31, 1996, 1997
and 1998, consisted of the following:
1996 1997 1998
---- ---- ----
(IN THOUSANDS)
Current:
Federal $ 40,804 $ 49,263 $ 52,617
Foreign 9,268 8,869 13,529
---------- ---------- ----------
Total current 50,072 58,132 66,146
Deferred:
Federal 7,392 15,070 24,559
---------- ---------- ----------
Total deferred 7,392 15,070 24,559
---------- ---------- ----------
$ 57,464 $ 73,202 $ 90,705
========== ========== ==========
The foreign provision for income taxes is based on foreign pre-tax
earnings of $46,474,000 for fiscal 1996, $67,571,000 for fiscal 1997 and
$88,114,000 for fiscal 1998.
The income tax expense of $57,464,000 for fiscal 1996, $73,202,000 for
fiscal 1997 and $90,705,000 for fiscal 1998 differs from the amount computed by
applying the statutory federal income tax rate of 35% to consolidated earnings
before income taxes as follows:
1996 1997 1998
---- ---- ----
(IN THOUSANDS)
Expense computed at statutory rate $ 57,062 $ 82,976 $ 89,796
Increase (reduction) resulting from:
Foreign tax effect, net (4,339) (11,543) (17,710)
Tax benefit from foreign sales corporation (777) (610) (737)
Income not subject to tax (2,908) (2,685) (5,657)
Other 2,403 4,520 8,234
---------- ---------- ----------
Subtotal 51,441 72,658 73,926
Non-deductible charge for acquired research and development 6,023 544 16,779
---------- ---------- ----------
$ 57,464 $ 73,202 $ 90,705
========== ========== ==========
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Aggregate unremitted earnings of foreign subsidiaries for which U.S.
Federal income taxes have not been provided, totaled approximately $155,973,000
at March 31, 1998. Deferred income taxes have not been provided on these
earnings because the Company considers them to be indefinitely reinvested.
Deferred income taxes reflect the impact of temporary differences
between the amount of assets and liabilities recognized for financial reporting
purposes and such amounts recognized for tax purposes. The tax effects of the
temporary differences as of March 31, 1997 and 1998 are presented as follows:
1997 1998
---- ----
(IN THOUSANDS)
Deferred Tax Assets:
Deferred revenue $ 17,014 $ 8,495
Acquired research and development 5,513 4,942
Deferred compensation plan 1,821 2,802
Accruals not currently deductible 403 1,805
Other 4,499 5,458
---------- ----------
Total deferred tax asset 29,250 23,502
---------- ----------
Deferred Tax Liabilities:
Software capitalization, net (13,820) (21,075)
Book/tax difference on assets (3,499) (3,405)
Stock compensation plans (2,130) (1,370)
Foreign earnings and other (20,001) (32,411)
---------- ----------
Total deferred tax liability (39,450) (58,261)
---------- ----------
Net deferred tax liability $ (10,200) $ (34,759)
========== ==========
As reported:
Net current deferred tax asset (included in prepaid expenses and other) $ 4,593 $ 8,695
========== ==========
Net long-term deferred tax liability $ (14,793) $ (43,454)
========== ==========
(7) STOCK INCENTIVE PLANS
The Company has adopted numerous stock plans that provide for the
grant of options and restricted stock to employees and directors of the
Company. Under these plans, all options have been granted at fair market value
as of the date of grant and have a ten year term. All grants under these plans
vest over terms of either three, four or five years. The restricted stock is
subject to transfer restrictions that lapse over five years. Under these
plans, the Company was authorized to grant a total of 17,870,000 shares as of
March 31, 1998.
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The following is a summary of the stock option activity for the years
ended March 31, 1996, 1997 and 1998 (in thousands, except price per share
amounts):
1996 1997 1998
---- ---- ----
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
------ ----- ------ ----- ------ -----
Options outstanding at
beginning of year 24,866 $ 5 26,033 $ 6 25,892 $ 8
Options granted 4,137 $ 10 3,397 $ 22 5,808 $ 30
BGS Merger -- -- -- -- 746 $ 17
Options exercised (2,528) $ 4 (2,944) $ 6 (6,542) $ 6
Options forfeited or canceled (442) $ 7 (594) $ 8 (1,684) $ 8
----------- ----------- -----------
Options outstanding at end of
year 26,033 $ 6 25,892 $ 8 24,220 $ 14
=========== =========== ===========
Option price range per share $0.09-10.85 $0.32-24.19 $0.48-33.47
=========== =========== ===========
Options exercisable 5,139 $ 4 6,906 $ 5 6,447 $ 8
=========== =========== ===========
The following is a summary of the restricted stock activity for the
years ended March 31, 1996, 1997 and 1998:
1996 1997 1998
---- ---- ----
(IN THOUSANDS)
Shares granted and unearned at beginning of year 520 327 294
Shares granted 7 169 82
Shares earned (200) (202) (45)
Shares forfeited -- -- (120)
-------- -------- --------
Shares granted and unearned at end of year 327 294 211
======== ======== ========
In fiscal 1997, the Company adopted the BMC Software, Inc. 1996
Employee Stock Purchase Plan (the Purchase Plan). A total of 1,000,000 shares
of common stock may be issued under the Purchase Plan to participating
employees. Purchase rights under the Purchase Plan are granted at 85% of the
lesser of the market value at the offering date or on the exercise date. During
fiscal 1997 and 1998, 98,000 and 171,000 shares of stock, respectively, were
issued pursuant to this plan. The Purchase Plan terminates in the year 2006.
In October 1995, the FASB issued SFAS No. 123 "Accounting for
Stock-Based Compensation," which allows the Company to account for its employee
stock-based compensation plans under Accounting Principles Board Opinion (APB)
No. 25 and the related interpretations. According to APB No. 25, deferred
compensation is recorded for stock-based 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 over the vesting period
of each unit of stock-based compensation grant. If the exercise price of the
stock-based compensation grants is equal to the market price of the Company's
stock on the date of grant, no compensation expense is recorded.
For fiscal years ended March 31, 1996, 1997 and 1998, the Company has
recorded compensation expense of $1,354,000, $1,725,000 and $1,481,000,
respectively for restricted stock grants. The Company was not required under
APB No. 25 and SFAS No. 123 to record compensation expense for stock option
grants during the same period.
46
49
Had the compensation cost for these plans been determined pursuant to
the alternative method permitted under SFAS No. 123, the Company's net income
and diluted earnings per share would have been reduced to the following pro
forma amounts (in thousands, except per share amounts):
1996 1997 1998
---- ---- ----
Net Income: As Reported $ 105,571 $ 163,872 $ 165,854
Pro Forma $ 104,890 $ 160,251 $ 156,641
Diluted EPS: As Reported $ 0.50 $ 0.76 $ 0.77
Pro Forma $ 0.50 $ 0.75 $ 0.73
In computing the above disclosure, the fair values of each option
grant and the Purchase Plan discounts are estimated using the Black-Scholes
option pricing model with the following weighted average assumptions used for
grants in both 1997 and 1998: risk-free interest rate of 6 percent, expected
life of 5 years for options and restricted stock, expected life of 6 months for
Purchase Plan shares, expected volatility of 40 percent and no expected
dividend yields. The weighted average fair value of options granted in fiscal
1996, 1997 and 1998 was $4.24, $9.63 and $13.36, respectively.
Because the SFAS No. 123 alternative method of accounting has not been
applied to options granted prior to April 1, 1995, the resulting pro forma
compensation cost may not be representative of that to be expected in future
years. Additionally, the 1997 and 1998 pro forma amounts include $403,000 and
$771,000, respectively, related to the purchase discount offered under the
Purchase Plan. The weighted average fair value of shares purchased by
employees in fiscal 1997 and 1998 was $4.53 and $23.61, respectively.
The Company's outstanding options as of March 31, 1998, are segregated
into the following three categories in accordance with SFAS No. 123 (in
thousands, except per share and year amounts):
WEIGHTED AVERAGE
OUTSTANDING EXERCISABLE RANGE OF WEIGHTED AVERAGE REMAINING
SHARES SHARES EXERCISE PRICE EXERCISE PRICE CONTRACTUAL LIFE
------ ------ -------------- -------------- ----------------
10,806 4,516 $0.48-6.09 $ 5.46 6.41
5,118 1,446 $6.25-17.06 $10.26 7.34
8,296 485 $19.84-33.47 $28.43 9.32
(8) RETIREMENT PLAN
The Company maintains a salary reduction profit sharing plan or 401(k)
plan ("the Plan") available to all domestic employees. The Plan is based on a
calendar year end and allows employees to contribute up to 15% of their annual
compensation with a maximum contribution of $9,240 in calendar year 1995 and
$9,500 in calendar years 1996 and 1997. In each of the calendar years 1995,
1996 and 1997, the board of directors authorized contributions to the Plan that
would match the employee's contribution up to a maximum of $5,000. The costs
of these contributions to the Company amounted to $3,211,000, $3,956,000 and
$6,556,000 for the fiscal years ended March 31, 1995, 1996 and 1997,
respectively. The Company contributions vest to the employee in increments of
20% per year beginning with the third year of employment and ending with the
seventh.
47
50
In addition to the Company's 401(k) plan, the Company maintains a
deferred compensation plan for certain employees of the Company. At March 31,
1998, a total of approximately $9,975,000 is included in long term securities,
with a corresponding aggregate amount included in accrued liabilities and
unrealized gain on securities available for sale. Employees participating in
this plan may receive their respective amounts upon request.
(9) COMMITMENTS AND CONTINGENCIES
The Company has several noncancelable operating leases for office
space, computer equipment and software. Rent expense for office space is
recognized equally over the lease term. Total expenses incurred under these
leases during the years ended March 31, 1996, 1997 and 1998, were approximately
$13,715,000, $14,946,000 and $15,085,000, respectively.
Future minimum lease payments under noncancelable operating leases as
of March 31, 1998 are:
FISCAL YEARS ENDING MARCH 31,
-----------------------------
(IN THOUSANDS)
1999 $ 15,425
2000 12,832
2001 7,903
2002 3,825
2003 2,295
2004 and thereafter 2,773
--------
Total minimum lease payments $ 45,053
========
The Company filed a trade secret lawsuit styled BMC Software, Inc. vs.
Peregrine Systems, Inc. et al., Cause No. 91- 10161, in the 200th Judicial
District Court of Travis County, Texas, in August 1995. The lawsuit sought an
injunction prohibiting a group of former employees and their employer from
misappropriating and misusing certain of the Company's trade secrets. The
Company has settled the litigation as to certain individuals and claims and is
continuing to pursue its trade secret and other claims against the remaining and
additional defendants. These defendants are asserting counterclaims against the
Company for violations of the Texas Free Enterprise and Antitrust Act of 1983,
abuse of process, slander of title, tortious interference with contract and
tortious interference with advantageous and prospective business relationships.
These counterclaims seek compensatory, treble and exemplary damages, costs and
attorneys' fees and certain injunctive relief. Management believes the ultimate
resolution of the above matters will not be material to the Company's financial
condition.
The Company is subject to various other legal proceedings and claims, either
asserted or unasserted, which arise in the ordinary course of business.
Management does not believe that the outcome of any of these legal matters will
have a material adverse effect on the Company's results of operations or
consolidated financial position.
48
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(10) FOREIGN OPERATIONS
The table below summarizes selected financial information with respect
to the Company's operations by geographic locations. Within the European
marketplace, the Company's German operations are the most significant with
total revenues accounting for over 33% of total European revenues in each of
the three fiscal years presented.
YEARS ENDED MARCH 31,
---------------------
1996 1997 1998
---- ---- ----
(IN THOUSANDS)
REVENUES
North America $ 253,593 $ 346,875 $ 472,455
Europe 143,630 180,303 221,156
Pacific Rim and Other 31,627 36,032 37,023
------------ ------------ ------------
Consolidated $ 428,850 $ 563,210 $ 730,634
============ ============ ============
OPERATING PROFITS*
North America $ 49,310 $ 90,468 $ 87,075
Europe 84,802 108,207 132,852
Pacific Rim and Other 13,477 18,349 6,230
------------ ------------ ------------
Consolidated $ 147,589 $ 217,024 $ 226,157
============ ============ ============
IDENTIFIABLE ASSETS
North America $ 462,946 $ 660,607 $ 976,843
Europe 120,319 73,712 106,270
Pacific Rim and Other 24,953 114,433 165,382
------------ ------------ ------------
Consolidated $ 608,218 $ 848,752 $ 1,248,495
============ ============ ============
* Substantially all of the Company's product research and development is
conducted in North America which has the effect of reducing the
reported North American operating profits.
SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information" was issued in June 1997. SFAS No. 131 requires that a public
business enterprise report financial and descriptive information about its
reportable operating segments. Generally, financial information is required to
be reported on the basis used internally for evaluating segment performance and
resource allocation. SFAS No. 131 is effective for fiscal years beginning after
December 31, 1997, however, disclosure is not required in interim financial
statements in the initial year of adoption. Accordingly, the Company will
reflect SFAS No. 131 in its Consolidated Financial Statements for the March 31,
1999, fiscal year. The Company is currently assessing the SFAS No. 131
requirements.
49
52
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
We have audited in accordance with generally accepted auditing standards, the
consolidated financial statements of BMC Software, Inc. and subsidiaries
included in this Form 10-K and have issued our report thereon dated May 1,
1998. Our audits were made for the purpose of forming an opinion on the basic
consolidated financial statements taken as a whole. This Schedule is the
responsibility of the Company's management and is presented for purposes of
complying with the Securities and Exchange Commission's rules and is not part
of the basic consolidated financial statements. This Schedule has been
subjected to the auditing procedures applied in the audits of the basic
consolidated financial statements and, in our opinion, fairly states in all
material respects the financial data required to be set forth therein in
relation to the basic consolidated financial statements taken as a whole.
ARTHUR ANDERSEN LLP
Houston, Texas
May 1, 1998
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53
SCHEDULE II
BMC SOFTWARE, INC. AND SUBSIDIARIES
VALUATION ACCOUNT
YEARS ENDED MARCH 31, 1996, 1997 AND 1998
(IN THOUSANDS)
BALANCE AT CHARGED CHARGED TO
BEGINNING OF (CREDIT) TO OTHER BALANCE AT
YEAR DESCRIPTION YEAR EXPENSES ACCOUNTS DEDUCTION END OF YEAR
---- ------------------- ----------- ---------- ---------- --------- -----------
1996 Allowance for doubtful $ 1,511 776 -- (354) $ 1,933
accounts
1997 Allowance for doubtful $ 1,933 2,344 -- -- $ 4,277
accounts
1998 Allowance for doubtful $ 4,277 1,489 -- (160) $ 5,606
accounts
51
54
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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, on June 22, 1998.
BMC SOFTWARE, INC.
By: /s/ MAX P. WATSON JR.
- -------------------------
Max P. Watson Jr.
Chairman of the Board, President
and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons on behalf of the Registrant and
in the capacities and on the dated indicated.
SIGNATURES TITLE DATE
- ------------------------ --------------------- -----------
/s/ MAX P. WATSON JR. Chairman of the Board,
- --------------------- President and Chief Executive Officer
Max P. Watson Jr. (Principal Executive Officer)
/s/ WILLIAM M. AUSTIN Senior Vice President and
- --------------------- Chief Financial Officer
William M. Austin
/s/ JOHN W. BARTER Director
- ------------------
John W. Barter
/s/ B. GARLAND CUPP Director
- -------------------
B. Garland Cupp
/s/ MELDON K. GAFNER Director
- --------------------
Meldon K. Gafner
/s/ L. W. GRAY Director
- --------------
L. W. Gray
/s/ KEVIN M. KLAUSMEYER Vice President, Controller
- ----------------------- (Chief Accounting Officer)
Kevin M. Klausmeyer
/s/ GEORGE F. RAYMOND Director
- ---------------------
George F. Raymond
/s/ TOM C. TINSLEY Director
- ------------------
Tom C. Tinsley
52
55
EXHIBIT INDEX
EXHIBIT
NUMBER
- -------
3.1 -- Restated Certificate of Incorporation of the Company;
incorporated by reference to Exhibit 3.1 to the Company's
Registration Statement on Form S-1 (Registration No. 33-22892)
(the "S-1 Registration Statement").
3.2 -- Certificate of Amendment of Restated Certificate of
Incorporation; incorporated by reference to Exhibit 3.2 to the
Company's Annual Report for the fiscal year ended March 31, 1997
(the "1997 10-K").
3.2 -- Bylaws of the Company; incorporated by reference to Exhibit 3.2
to the S-1 Registration Statement.
4.1 -- Specimen Stock Certificate for the Common Stock of the Company;
incorporated by reference to Exhibit 4.1 to the S-1 Registration
Statement.
4.2 -- Rights Agreement, dated as of May 8, 1995, between the Company
and The First National Bank of Boston, as Rights Agent (the
"Rights Agreement"), specifying the terms of the Rights, which
includes the form of Certificate of Designation of Series A
Junior Participating Preferred Stock as Exhibit A, the form of
Right Certificate as Exhibit B and the form of the Summary of
Rights as Exhibit C (incorporated by reference to Exhibit 1 to
the registrant's Registration Statement on Form 8-A dated May 10,
1995).
4.3 -- Amendment to the Rights Agreement; incorporated by reference to
Exhibit 4.3 to the 1997 10-K.
10.1(a) -- Form of BMC Software, Inc. 1994 Employee Incentive Plan;
incorporated by reference to Exhibit 10.7(a) to the Company's
Annual Report on Form 10-K for the fiscal year ended March 31,
1995 (the "1995 10-K").
10.1(b) -- Form of Stock Option Agreement employed under BMC Software, Inc.
1994 Employee Incentive Plan; incorporated by reference to
Exhibit 10.7(b) to the 1995 10-K.
10.2(a) -- Form of BMC Software, Inc. 1994 Non-employee Directors' Stock
Option Plan; incorporated by reference to Exhibit 10.8(a) to the
1995 10-K.
10.2(b) -- Form of Stock Option Agreement employed under BMC Software, Inc.
1994 Nonemployee Directors' Stock Option Plan; incorporated by
reference to Exhibit 10.8(b) to the 1995 10-K.
10.3 -- Description of BMC Software, Inc. Executive Officer Annual
Incentive Plan; incorporated by reference to Exhibit 10.6 to
the Company's Annual Report on Form 10-K for the fiscal year
ended March 31, 1994.
*10.4 -- Form of Stock Option Agreement employed under BMC Software, Inc.
1994 Employee Incentive Plan for certain executive officers.
*10.5 -- Form of Restricted Stock Agreement employed under BMC Software
Inc. 1994 Employee Incentive Plan for certain executive officers.
10.5(a) -- License Agreement with International Business Machines
Corporation; incorporated by reference to Exhibit 10.12 to the
S-1 Registration Statement.
10.5(b) -- License Agreements for Use and Marketing of Program Materials
dated May 13, 1986, with International Business Machines
Corporation; incorporated by reference to Exhibit 10.13 to the
S-1 Registration Statement.
10.5(c) -- Customer Agreement with International Business Machines
Corporation dated April 10, 1991; incorporated by reference to
Exhibit 10.15 to the Company's Annual Report on Form 10-K for the
fiscal year ended March 31, 1992 (the "1992 10-K").
10.6 -- Form of Indemnification Agreement among the Company and its
directors and executive officers; incorporated by reference to
Exhibit 10.11 to the 1995 10-K.
*22.1 -- Subsidiaries of the Company.
*23.1 -- Consent of Arthur Andersen LLP, independent public accountants.
*27 -- Financial Data Schedule
- -------------
* Filed herewith.