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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, 1995
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)
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<S> <C>
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 77042-2827
(Address of principal executive offices) (Zip code)
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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.
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 26, 1995 was $1,928,398,938.
As of June 26, 1995, there were outstanding 25,228,286 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:
Annual Report for the Fiscal Year ended March 31, 1995 (Parts II and IV
of 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 28, 1995 (Part III of this Report)
Such Annual Report and Proxy Statement shall be deemed to have been
"filed" only to the extent portions thereof are expressly incorporated by
reference.
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PART I
ITEM 1. BUSINESS
OVERVIEW
BMC Software, Inc. ("BMC" or the "Company") designs, develops, markets and
provides maintenance and support services for systems software products that
improve the availability, reliability, accuracy and integrity of enterprise data
in IBM mainframe and open systems environments. BMC is a leading independent
vendor of administrative tools and utility products for the primary IBM
mainframe operating system, MVS, and the principal MVS-based database management
systems, IMS/DB and DB2. BMC is investing significant resources in its open
systems product initiatives, both in internal research and development and in
acquisitions, and its PATROL product line is a leading monitoring and event
management product for open systems databases and applications. BMC is also a
leading vendor of software products that provide performance and functional
enhancements for the key MVS-based network communications systems, CICS and
IMS/TM. BMC's customers are typically Fortune 500 industrial and service
corporations and similarly sized organizations worldwide. BMC was organized as a
Texas corporation in 1980 and was reincorporated in Delaware in July 1988. Its
principal corporate offices are in Houston, Texas.
BMC's most important product lines by revenue and earnings contribution are
its high performance utilities for IMS/DB and DB2 and its administrative
products for DB2. These database tools and utilities generated 71% of total
revenues and 73% of license revenues in fiscal 1995. IMS/DB and DB2 are the
predominant database management systems ("DBMSs") for IBM and IBM-compatible
mainframe computers. The DBMS enables a user to access stored data and to
manipulate, arrange and process large volumes of data by controlling the
organization, storage, retrieval, security and integrity of data stored in the
database. It is the critical link between an application and the data; when a
DBMS is down for maintenance operations or because of a failure, the application
and the data are unavailable to end-users. BMC's utility products minimize the
downtime of IMS/DB and DB2 databases by significantly reducing the time required
to perform routine but critical operations. Examples include loading large
volumes of data into a database, making back-up and other copies of a database,
recovering a database after an outage and reorganizing a database. The
administrative products include a DB2 performance monitor and the change
management products for DB2, which simplify and automate the synchronization of
changes to data structures as applications are distributed across multiple DB2
databases. The administrative products also include DB2 recovery products, which
automate the recovery of a DB2 database after an outage.
In January 1994, BMC acquired the PATROL monitoring and event management
software product for UNIX-based open systems. PATROL employs an intelligent
agent architecture to enable the command and control of multiple networked
servers and the data, DBMSs and applications on those servers from a central
control point. In May 1995, BMC introduced the first of its MetaSUITE-TM- line
of open systems products, which will improve open systems data management by
providing capabilities including database administration, advanced data
structure manipulation, data warehousing management, recovery management and
utility functions. The Meta products will share common graphical user interfaces
and will be designed to minimize the complexities presented by multiple database
types by supporting the leading open systems relational DBMSs in a database
independent manner. The initial three MetaSUITE-TM- products scheduled for
release in fiscal 1996, MetaDESK-TM-, MetaMANAGE-TM- and MetaCHANGE-TM-, will
provide a generalized facility for database administration activities having the
functionality of BMC's ALTER, CHANGE MANAGER and CATALOG MANANGER administrative
tools for DB2. BMC also has acquired the exclusive rights to distribute high
performace back-up and recovery utilities developed by DataTools, Inc. for the
Oracle and Sybase DBMSs and other high-speed database utilities developed by
DataTools, Inc. over the next three years.
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STRATEGY
BMC intends to continue to invest in its core mainframe product lines, both
by developing or acquiring additional new products and by continuing to provide
significant performance and functional enhancements to its existing portfolio of
67 mainframe products. The Company believes the mainframe computing model
remains effective for large, transaction-intensive information systems as
hardware prices have fallen and customers have begun to appreciate the true
costs and difficulties of large-scale open systems implementations. The Company
has continued to invest in internal development and acquisitions of new IMS
products and intends to introduce in fiscal 1996 a new line of entry level IMS
utilities for smaller customers and a new high-end product that will provide the
ability to reorganize an IMS database without taking it off-line. The Company is
also developing high-speed utility equivalents to its existing IMS and DB2
utilities for the new IBM CMOS mainframe computing architecture, which is
expected to gain acceptance over the next two years. The Company is also
continuing to invest in its tools and utilities for DB2.
BMC's open systems strategy is to remain focused upon the Company's core
competencies, application, data and database management. In addition to PATROL,
which provides system-wide monitoring and event management, BMC's strategy is to
provide equivalents to its DB2 utility and administrative products for open
systems. The MetaSUITE software products and the DataTools back-up and recovery
utilities are the first of these products.
BMC announced in March, 1995, its Cooperative Enterprise Management
Solutions strategy ("CEMS"), which embodies integration of PATROL and its other
open systems products with leading third-party system and network management
products. The Company is integrating PATROL with leading client/server system
and network management tools such as Hewlett-Packard's OpenView and Computer
Associates' CA-Unicenter to allow communication and cooperation between the
products. The Company is also implementing a Preferred Partners Program under
which it will grant distribution rights to PATROL and other open systems
products to leading hardware and software vendors, systems integrators and
consulting firms to increase account coverage and market acceptance of its
products and to defray first level support costs.
PRODUCTS
At March 31, 1995, BMC's product portfolio was comprised of 75 products in
ten product groups: (1) the Masterplan products for DB2, which increase the
performance and automate the administration of DB2; (2) the IMS Database
Utilities products, which reduce the time required to recover, reorganize and
maintain large IMS databases; (3) the IMS/TM Enhancements products, which expand
the capabilities of large IMS/TM-based networks and make possible routine
operations, such as adding terminals, without downtime; (4) the Network Series
of products, which provide for high performance communications between a host
mainframe computer and networked terminals; (5) the PATROL product suite, which
allows centralized control and management of open systems databases and
applications; (6) the DASD Data Compression products, which through data
compression techniques increase the capacity of data storage hardware; (7) the
TRIMAR Fast Path Series of products, which address the IMS/VS Fast Path DBMS for
high speed, high volume systems; (8) the CICS Integrity Series of products,
which provides data integrity and recovery functions for CICS/VSAM data; (9) the
IMS Application Enhancement products, which enhance the performance and
availability of IMS application programs; and (10) the VSE products, which
enhance certain operational characteristics of database and data communication
software running on IBM's VSE operating system.
MASTERPLAN PRODUCTS FOR DB2
The Masterplan products for DB2 generated approximately 33%, 33% and 34% of
the Company's total revenues in fiscal 1993, 1994 and 1995, respectively, and
42%, 39% and 39% of license revenues. The products are offered in the following
categories: (1) The ACTIVITY MANAGER family of performance products; (2)
administrative tools; (3) high speed utilities; (4) restart and recovery
management products; and (5) data compression products.
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The ACTIVITY MANAGER performance products help customers to maximize DB2
performance. Key product features include the abilities to quickly determine
problem resolution through detailed reporting, to dynamically modify system
parameters, to solve performance problems and to reduce input/output through
caching. These products can anticipate and prevent many performance problems by
taking action automatically when they sense that pre-set parameters are being
exceeded.
The administrative tools significantly increase productivity by automating
many necessary time-consuming and error-prone tasks. The administration tools
include CHANGE MANAGER for DB2, which was introduced in fiscal 1993 and is one
of BMC's most successful products. CHANGE MANAGER and its sister product, ALTER
for DB2, ensure that all the relational dependencies critical to DB2 are
identified and allow the synchronized propagation of changes to DB2 data
structures across multiple DB2 systems.
The DB2 utility tools provide greatly increased speed in DB2 maintenance
operations that are routine but time-critical, as the operations render the DB2
data unavailable until the operation is complete. Examples including loading,
copying and reorganizing a DB2 database.
The restart and recovery management products allow for high-speed and
coordinated system restarts and recoveries. In addition to providing increased
speed, the products allow for the automation of the recovery process and can
eliminate the need to re-run an entire application and instead restart it from
the last synchronization point.
IMS DATABASE UTILITIES
The Company's IMS Database Utilities contributed the largest percentage of
total revenues in each of the last three fiscal years. The IMS Database
Utilities provided 38% of total revenues and 35% of license revenues in fiscal
1993, 38% of total revenues and 35% of license revenues in fiscal 1994 and 37%
of total revenues and 34% of license revenues in fiscal 1995. The IMS Database
Utilities are offered in the following groups: (1) IMS backup and recovery
solutions; (2) IMS reorganization solutions; and (3) IMS integrity solutions.
For many organizations, IMS databases contain voluminous amounts of critical
data, such as customer or inventory records, that must be accessible 24 hours a
day. The backup and recovery solutions dramatically shorten the recovery process
after a system failure by making fast backups of data and by managing data sets.
The IMS reorganization solutions include LOADPLUS-Registered Trademark-, the
Company's most successful product, which contributed 10%, 9% and 9% of total
revenues in fiscal 1993, 1994 and 1995, respectively. Large IMS databases become
progressively disorganized as records are added and deleted, which degrades DBMS
performance. To maintain system performance the database must be periodically
reorganized, which involves numerous steps including loading the data into the
database. During the reorganization process, the system is unavailable to users.
BMC's IMS reorganization solutions dramatically increase the speed of the
reorganization process and condense the number of steps required.
The IMS integrity solutions check and ensure the integrity of the data and
help verify the accuracy of data. The products are designed to be fast and easy
to use.
IMS/TM ENHANCEMENTS
The IMS/TM Enhancement products automate many of the manual procedures
required to maintain IMS/TM networks. The tools increase IMS availability,
simplify system management and improve productivity. Included in this category
are products that allow organizations to restart the network after a system
failure and bring additional terminals online without downtime. The IMS/TM
Enhancement products accounted for 8%, 9% and 7% of the Company's total revenues
for fiscal 1993, 1994 and 1995, respectively.
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NETWORK SERIES
The Company's Network Series of products increase the performance of large,
mainframe-based networks. The products enable users to increase system
availability, enhance response time and improve throughput and accounted for 9%,
8% and 7% of the Company's total revenues in fiscal 1993, 1994 and 1995,
respectively.
The majority of the products in this series are optimization products that
minimize the number of characters, and thereby the time and hardware, necessary
to transmit data through telecommunications networks connecting a host mainframe
computer and IBM 3270-compatible terminals or personal computers. The products
significantly increase response times and can often postpone or obviate
expensive hardware and communication line upgrades. The Network Series also
includes OPERTUNE-Registered Trademark- for NCP, which dynamically tunes the
operating parameters of network controller hardware to increase performance
while achieving continuous availability.
PATROL
PATROL is a database monitoring and application management product and
architecture that allows users to centralize control and event management in
their distributed computing environments by using a graphical console,
intelligent agent technology and loadable libraries of system expertise. PATROL
currently supports numerous Unix and other open systems platforms, including the
predominant DBMSs, Oracle, Sybase and Informix, and most of the widely used
hardware platforms. BMC is extending PATROL to additional environments,
including Digital Equipment Corporation's VAX operating system and Microsoft
Corporation's Windows/NT operating system. BMC believes that PATROL will be a
key component of BMC's open systems solution for heterogenous client/server
systems. The PATROL product line accounted for 4% of the Company's total
revenues in fiscal 1995.
DASD DATA COMPRESSION
The DASD Data Compression products reduce the space required to store data
on direct access storage devices for IBM mainframe systems, which can eliminate
the need for additional disk drives. The products are available for a number of
MVS subsystems, including IMS, OS and VSAM. The products can also be used in
connection with data transmission between computers to decrease the need for
expensive communications hardware. The DASD Data Compression products accounted
for 5%, 5% and 4% of the Company's total revenues in fiscal 1993, 1994 and 1995,
respectively.
TRIMAR FAST PATH SERIES
The TRIMAR Fast Path Series of products significantly speeds and simplifies
IMS/VS Fast Path operations and maintenance while ensuring data integrity. The
IMS/VS Fast Path subsystem is used in very large, transaction-intensive data
centers. The TRIMAR Fast Path Series of products accounted for 3% of the
Company's total revenues in each of fiscal 1993, 1994 and 1995.
CICS INTEGRITY SERIES
The CICS Integrity products provide for fast recovery of CICS and VSAM file
systems. They cover the range of recovery needs from batch to online and offer
the ability to manage and speed recoveries. The CICS Integrity Series products
accounted for 3%, 2% and 2% of the Company's total revenues in fiscal 1993, 1994
and 1995, respectively.
IMS APPLICATION ENHANCEMENTS
The IMS Application Enhancement products improve the performance and
availability of IMS application programs by automating application restart and
batch processing. The IMS Application Enhancement Series accounted for 1%, 2%
and 1% of the Company's total revenues in fiscal 1993, 1994 and 1995,
respectively.
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VSE SERIES
The VSE products enhance certain operational characteristics of database and
data communication software running on IBM's VSE operating system. The VSE
Series products accounted for less than 1% in fiscal years 1993, 1994 and 1995.
SALES AND MARKETING
BMC sells its products primarily through its direct sales force based in
Houston, Texas. Since inception, the Company has relied on telephonic sales, or
"telesales," to sell its products and encourage prospects to test its products
on a free trial basis. As of March 31, 1995, the Company's direct sales force
employed 112 sales representatives in North America and 96 international sales
representatives.
The Company supplements its sales representatives with technically trained
sales support personnel, particularly in the DB2 and open systems markets. The
sales support consultants travel to a customer's location to assist in
installing the Company's products and conducting in-depth technical evaluations
of their performance and features. The Company has significantly expanded its
staff of sales support consultants as competition in the DB2 tools and utilities
markets has increased and the Company has invested in its sales and sales
support infrastructure for its open systems products. As of March 31, 1995, the
Company employed 48 sales support consultants.
The Company has opened field sales offices in Washington, D.C. and Los
Angeles, California to complement its telesales channel, which offices will
concentrate on open systems and DB2 products. To increase its coverage of open
systems markets, the Company intends to distribute and sell PATROL and other
products through leading software and hardware vendors under its Preferred
Partner Program. The Company has established a channels operations group to
promote, negotitiate and support such distribution arrangements and is
continuing to invest in its open systems sales and support infrastructure.
INTERNATIONAL OPERATIONS
Approximately 43%, 39% and 39% of the Company's total revenues in fiscal
1993, 1994 and 1995, respectively, was derived from business outside North
America.
The Company conducts its international sales, marketing and support
primarily through ten wholly owned subsidiaries in Europe, Japan and Australia.
These offices employ the same telesales and telephone support strategies the
Company employs in North America, although the international subsidiaries
typically conduct more frequent on-site sales and support calls because of
greater geographic proximity to customers and prospects. In addition to its
subsidiaries, the Company is represented by 37 independent agents worldwide.
Total revenues, operating profits and identifiable assets attributable to
the Company's North American, European and other international operations are
set forth in Footnote 10 to the Consolidated Financial Statements contained in
the Company's Annual Report for Fiscal 1995 (the "1995 Annual Report"). The
Company 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. Revenues from the Company's foreign
subsidiaries are denominated in local currencies, as are operating expenses
incurred in these locales. To date, the Company has not had any material foreign
exchange currency losses. For a discussion of the Company's currency hedging
program, 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 the Consolidated Financial Statements contained in the
1995 Annual Report. The Company 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.
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RESEARCH AND PRODUCT DEVELOPMENT
The Company continues to invest a significant percentage of its revenues in
its internal research and development operations. In fiscal 1995, the Company
hired 86 additional research and development personnel, over 60% of whom were
open systems specialists. The Company has increased its acquisitions of
products, technology and expertise in the last two fiscal years, particularly in
open systems. The Company intends to continue to increase its internal research
and development spending in line with revenue growth, and to pursue open systems
technology acquisitions where appropriate. New product development spending in
fiscal 1995 was approximately equally allocated between mainframe and open
systems products, and the Company is budgeting a similar allocation for fiscal
1996.
In fiscal 1995, the Company introduced 14 new internally generated products
and 30 significant enhancements of existingproducts. The Company's expenditures
on research and development and on product maintenance and support, including
amounts capitalized, in the last three fiscal years are discussed in the 1995
Annual Report 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."
The Company's research, development and support teams are organized around
BMC's product groups and are led by product authors, who are key developers that
receive incentive commissions on product sales. At March 31, 1995, the Company
employed 30 such product authors. The Company's research and development
organizations are based in Houston and Austin, Texas.
MAINTENANCE, ENHANCEMENT AND SUPPORT SERVICES
Revenues from the provision of maintenance, enhancement and support services
comprised 43%, 42% and 41% of total revenues in fiscal 1993, 1994 and 1995,
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 new versions of the operating systems and other
software supported by the product. Such maintenance fees are an important source
of recurring revenue to the Company, and the Company invests significant
resources in providing maintenance services and new product versions.
For the Company'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 20% of the then
current list perpetual license fee of the licensed product as adjusted for any
applicable discounts. For the Company's open systems products, the initial
maintenance period is shorter and the renewal fee varies depending on the level
of support selected by the licensee.
The Company believes it has developed the reputation for providing high
quality maintenance and support services. The Company's support strategy is
based on the employment of product support personnel who have a high degree of
technical skill and training and who are part of the research and development
groups. In many cases, these individuals were involved in the design and
development of the products they support. Problem resolution and installation
are handled over the phone with very few on-site visits. The Company believes
effective support of its customers and products has been a substantial factor in
product acceptance to date. The Company internally creates and produces all user
manuals, sales materials and other documentation related to its products.
PRODUCT PRICING AND LICENSING
The Company attempts to price its products based on the value to a customer.
Both the Company's mainframe and client/server products are generally 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
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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 the Company'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 19%, 27% and 25% of total revenues in fiscal years
1993, 1994 and 1995, 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. The Company maintains
various discount programs, including standard discounts for multiple copies of a
product, discounts for enterprise license transactions and discounts for its DB2
products.
BMC's products are 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 promptly. Consequently,
the Company does not have any material product backlog of undelivered products.
The Company 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 and
the underlying software products have been shipped. The Company recognizes all
maintenance revenue, 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 the Company's revenue recognition practices
for such components, see the 1995 Annual Report under the heading "Management's
Discussion and Analysis of Results of Operations and Financial Condition --
Operating Results -- Revenues -- License Revenues."
COMPETITION; SYSTEM DEPENDENCE
The Company's products run primarily with IBM's IMS/DB and DB2 database
management systems and IMS/TM, CICS and VTAM data communications systems.
Certain of the Company's products, including LOADPLUS-Registered Trademark- and
DELTA IMS-TM-, two of its largest selling products, are essentially improved
versions of system software utilities that are provided as part of these
integrated IBM system software products. IBM could improve or add to these
integrated software packages to include the various functions now provided by
the Company's products and could provide them at little or nominal additional
cost to the customer, which would adversely affect demand for new licenses and
recurring maintenance of the Company's competing products.
The systems software business is highly competitive. BMC's competitors
include IBM and several independent software vendors that have the ability to
develop and market products similar to, and competitive with, the Company's
products. The Company's Masterplan series of DB2 products is now the largest
contributor to license revenues. The market for DB2 tools and utilities is far
more competitive than the Company's traditional IMS markets and continues to
increase in competitiveness. Barriers to entry in these markets are low and new
competitors are likely to emerge over time. Product pricing is a key competitive
factor in the market for third-party tools and utilities for DB2 as the
Company's competitors are committing substantial resources to their DB2 research
and development programs and are rapidly improving their products' capabilities
and the breadth of their product lines.
IBM is by far the largest supplier of systems software for its mainframe
operating systems and is the primary manufacturer of the mainframe hardware used
by the Company's customers. From its inception, the Company has followed a
policy of maintaining substantial compatibility with IBM's primary operating
systems. IBM periodically enhances IMS, DB2 and its other MVS-based systems. The
Company has continually modified its software to maintain compatibility with new
IBM hardware and software. To maintain such compatibility and to develop and
test new products, the Company licenses IMS/DB, DB2, IMS/TM, CICS and other
software systems from IBM on similar terms as
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other IBM customers. If IBM were to terminate the current license arrangements
or otherwise deny the Company access to these systems, or if IBM adopts
technological changes that prevent or make more difficult access to the systems,
the Company would be adversely affected. Similarly, if the Company is unable to
aquire and maintain access to the major client/server relational DBMSs similar
to its access to DB2 and other IBM systems software, its development of
client/server products will be impeded.
The client/server systems management market is highly competitive. All of
the major mainframe systems software vendors have announced client/server
strategies that appear to overlap to varying degrees with PATROL and BMC's
client/server products under development. The relational DBMS vendors, such as
Oracle and Sybase, and hardware companies such as Hewlett-Packard and Sun
Microsystems, are also providing competing products. The Company expects the
client/server systems management market to be large and fragmented, but much
more competitive than the mainframe systems software markets.
The Company 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 price and the terms on which the product
is licensed; product quality and capability; 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. The
Company believes that it competes favorably with respect to all of these
factors.
INTELLECTUAL PROPERTY
The Company 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 the Company's
products restrict the customer's use to its own operations and prohibit
disclosure to third persons. Notwithstanding those restrictions, it is possible
for other persons to obtain copies of the Company's products in object code
form. The Company believes that obtaining such copies would have limited utility
without access to the product's source code, which the Company keeps highly
confidential. In addition, the Company'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, 1995, the Company had 1,185 full-time employees. The Company
believes that its continued success will depend in part on its ability to
attract and retain highly skilled technical, marketing and management personnel.
The Company considers its employee relations to be excellent.
ITEM 2. PROPERTIES
The Company's headquarters and principal sales and product development
operations are located in Houston, Texas, where the Company owns and occupies a
450,000 square foot office building. The Company leases its product development
offices in Austin, Texas and its marketing and support offices in Camberley,
England; Frankfurt, Germany; Milan, Italy; Paris, France; Tokyo, Japan; Madrid,
Spain; Melbourne, Australia; Copenhagen, Denmark; Nieuwegein, Netherlands; and
Brussels, Belgium. The Company leases its principal mainframe computers, an IBM
ES9000-952, an IBM 390 600S and a COMS-1, and its telecommunications equipment.
See Notes 1(c) and 10 of Notes to the Consolidated Financial Statements
contained in the 1995 Annual Report.
ITEM 3. LEGAL PROCEEDINGS
None
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
Information relating to the market for registrant's Common Stock, the number
of holders of its Common Stock and payment of dividends is set forth under the
captions "Quarterly Results" on page 32 and "Stock Information," "Stock
Ownership" and "Dividends" on page 53 of the Company's Annual Report for fiscal
1995 (the "1995 Annual Report"), a copy of which is filed herewith as Exhibit
13.1. Such information is incorporated herein by reference in response to this
Item 5.
ITEM 6. SELECTED FINANCIAL DATA
Selected financial data for BMC for each of the last five fiscal years
appears in the table on page 1 of the 1995 Annual Report and is incorporated
herein by reference in response to this Item 6.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
"Management's Discussion and Analysis of Results of Operations and Financial
Condition," appearing on pages 25 through 34 of the 1995 Annual Report, is
incorporated herein by reference in response to this Item 7.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Reference is made to the financial statements and report thereon listed
under the heading "(a)(1) Financial Statements" of Item 14 herein, and to
"Management's Discussion and Analysis of Results of Operations and Financial
Condition -- Quarterly Results" appearing on page 32 of the 1995 Annual Report,
which are incorporated herein by reference in response to this Item 8.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
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 1995
Annual Meeting of Stockholders (the "1995 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, 1995, 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 1995
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 1995 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 1995 Proxy Statement under the caption "OTHER INFORMATION --
Related Transactions" and is incorporated herein by reference in response to
this Item 13.
9
<PAGE>
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 Report of
Independent Public Accountants thereon are included in the 1995 Annual Report
and are incorporated herein by reference to this Item 14:
<TABLE>
<CAPTION>
PAGE NO.
IN 1995
ANNUAL REPORT
-------------------
<S> <C>
Report of Independent Public Accountants........................................................... 35
Consolidated Balance Sheets as of March 31, 1994 and 1995.......................................... 36
Consolidated Statements of Earnings for the years ended March 31, 1993, 1994 and 1995.............. 38
Consolidated Statements of Stockholders' Equity for the years ended March 31, 1993, 1994 and
1995.............................................................................................. 39
Consolidated Statements of Cash Flows for the years ended March 31, 1993, 1994 and 1995............ 40
Notes to Consolidated Financial Statements......................................................... 42
</TABLE>
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.
3. The following Exhibits are filed with this Report or incorporated by
reference as set forth below.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER
- ----------------
<C> <C> <S>
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 -- 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, 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).
10.1 (a) -- Form of 1986 Stock Option Plan; incorporated by reference to Exhibit 10.4(a) to the S-1
Registration Statement.
10.1 (b) -- Form of 1986 Stock Option Agreement; incorporated by reference to Exhibit 10.4(b) to the
S-1 Registration Statement.
10.1 (c) -- Form of Amendment to 1986 Stock Option Agreement; incorporated by reference to Exhibit
10.4(c) to the S-1 Registration Statement.
10.1 (d) -- Form of Second Amendment to 1986 Stock Option Agreement; incorporated by reference to
Exhibit 10.4(d) to the S-1 Registration Statement.
</TABLE>
10
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER
- ----------------
10.2 (a) -- Form of 1988 Stock Option Plan; incorporated by reference to Exhibit 10.5(a) to the S-1
Registration Statement.
<C> <C> <S>
10.2 (b)(i) -- Form of 1988 Stock Option Agreement; incorporated by reference to Exhibit 10.5(b)(i) to the
S-1 Registration Statement.
10.2 (b)(ii) -- Form of 1988 Stock Option Agreement; incorporated by reference to Exhibit 10.5(b)(ii) to
the S-1 Registration Statement.
10.2 (c) -- Form of Amendment to 1988 Stock Option Agreement; incorporated by reference to Exhibit
10.5(c) to the S-1 Registration Statement.
10.3 (a) -- Form of 1989 Stock 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, 1990 (the "1990 10-K").
10.3 (b) -- Form of 1989 Stock Option Agreement; incorporated by reference to Exhibit 10.7(b) to the
Company's Annual Report on Form 10-K for the fiscal year ended March 31, 1989 (the "1989
10-K").
10.4 (a) -- Form of BMC Software, Inc. 1990 Non-employee Director Stock Option Plan; incorporated by
reference to Exhibit 10.8(a) to the 1990 10-K.
10.4 (b) -- Form of Stock Option Agreement under 1990 Non-employee Director Stock Option Plan;
incorporated by reference to Exhibit 10.8(b) to the Company's Annual Report on Form 10-K
for the fiscal year ended March 31, 1991 (the "1991 10-K").
10.5 -- Form of BMC Software, Inc. 1990 Stock and Incentive Plan; incorporated by reference to
Exhibit 10.9 to the 1991 10-K.
10.6 -- Form of Restricted Stock Agreement employed under the 1989 Stock Plan and the 1990 Stock
and Incentive Plan; incorporated by reference to Exhibit 10.7(c) to the 1990 10-K.
*10.7 (a) -- Form of BMC Software, Inc. 1994 Employee Incentive Plan.
*10.7 (b) -- Form of Stock Option Agreement employed under BMC Software, Inc. 1994 Employee Incentive
Plan.
*10.8 (a) -- Form of BMC Software, Inc. 1994 Non-employee Directors' Stock Option Plan.
*10.8 (b) -- Form of Stock Option Agreement employed under BMC Software, Inc. 1994 Nonemployee
Directors' Stock Option Plan.
10.9 -- 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.
10.10 (a) -- License Agreement with International Business Machines Corporation; incorporated by
reference to Exhibit 10.12 to the S-1 Registration Statement.
10.10 (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.
10.10 (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").
*10.11 -- Form of Indemnification Agreement among the Company and its directors.
10.11 (a) -- Term Lease Master Agreement dated April 28, 1984 between the Company and IBM Credit
Corporation; incorporated by reference to Exhibit 10.22(a) to the 1991 10-K.
</TABLE>
11
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER
- ----------------
10.11 (b) -- Term Lease Supplement dated November 28, 1990 between the Company and IBM Credit
Corporation; incorporated by reference to Exhibit 10.22(b) to the 1991 10-K.
<C> <C> <S>
10.11 (c) -- Term Lease Supplement dated March 25, 1993 between the Company and IBM Credit Corporation;
incorporated by reference to the Company's Annual Report on Form 10-K for the fiscal year
ended March 31, 1993.
*13.1 -- BMC Software, Inc. Annual Report for the fiscal year ended March 31, 1995.
*22.1 -- Subsidiaries of the Company.
*24.1 -- Consent of Arthur Andersen LLP, independent certified public accountants.
27 -- Financial Data Schedule
<FN>
- ------------------------
* Filed herewith.
</TABLE>
(b) Reports on Form 8-K
Current Report on Form 8-K dated May 2, 1995 reporting the Company's
adoption of a Stockholder's Rights Plan and declaration of a dividend of one
preferred share purchase right for each outstanding share of common stock, par
value $.01 per share, in connection therewith.
- ------------------------
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.
12
<PAGE>
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 28, 1995.
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 dates indicated.
SIGNATURES TITLE DATE
- ----------------------------------- ------------------------- ----------------
Chairman of the Board,
/s/ MAX P. WATSON JR. President and Chief
- ----------------------------------- Executive Officer
Max P. Watson Jr. (Principal Executive
Officer)
/s/ JOHN W. BARTER
- ----------------------------------- Director
John W. Barter
/s/ B. GARLAND CUPP
- ----------------------------------- Director
B. Garland Cupp
June 28, 1995
/s/ MELDON K. GAFNER
- ----------------------------------- Director
Meldon K. Gafner
/s/ L. W. GRAY
- ----------------------------------- Director
L. W. Gray
/s/ GEORGE F. RAYMOND
- ----------------------------------- Director
George F. Raymond
13
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
In connection with our audits of the consolidated financial statements of
BMC Software, Inc. and subsidiaries as of March 31, 1994 and 1995 and for each
of the three years in the period ended March 31, 1995, we have also audited the
data contained in Schedule II. Our audits of the consolidated financial
statements 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 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
April 27, 1995
<PAGE>
SCHEDULE II
BMC SOFTWARE, INC. AND SUBSIDIARIES
VALUATION ACCOUNT
YEARS ENDED MARCH 31, 1993, 1994 AND 1995
<TABLE>
<CAPTION>
ADDITIONS
--------------------------
BALANCE AT CHARGED CHARGED TO
BEGINNING OF (CREDITED) TO OTHER BALANCE AT
YEAR DESCRIPTION YEAR EXPENSES ACCOUNTS DEDUCTION END OF YEAR
- --------- --------------------------------- ------------- ------------- ----------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C>
1993 Allowance for doubtful
accounts......................... $ 714,500 $ 1,228,386 $ -- $ (87,047) $ 1,856,839
1994 Allowance for doubtful
accounts......................... 1,856,839 1,221,553 -- (843,929) 2,234,463
1995 Allowance for doubtful
accounts......................... 2,234,463 (723,279) -- -- 1,511,184
</TABLE>
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ---------------- -------------------------------------------------------------------------------------------
<C> <C> <S>
10.7 (a) -- Form of BMC Software, Inc. 1994 Employee Incentive Plan.
10.7 (b) -- Form of Stock Option Agreement employed under BMC Software, Inc. 1994 Employee Incentive
Plan.
10.8 (a) -- Form of BMC Software, Inc. 1994 Non-employee Directors' Stock Option Plan.
10.8 (b) -- Form of Stock Option Agreement employed under BMC Software, Inc. 1994 Nonemployee
Directors' Stock Option Plan.
10.11 -- Form of Indemnification Agreement among the Company and its directors.
13.1 -- BMC Software, Inc. Annual Report for the fiscal year ended March 31, 1995.
22.1 -- Subsidiaries of the Company.
24.1 -- Consent of Arthur Andersen LLP, independent certified public accountants.
27 -- Financial Data Schedule
</TABLE>
<PAGE>
EXHIBIT 10.7(a)
BMC SOFTWARE, INC.
1994 EMPLOYEE INCENTIVE PLAN
I. PURPOSE
The purpose of the BMC SOFTWARE, INC. 1994 EMPLOYEE INCENTIVE PLAN (the
"Plan") is to provide a means through which BMC SOFTWARE, INC., a Delaware
corporation (the "Company"), and its subsidiaries may attract able persons
to enter the employ of the Company and to provide a means whereby those
employees upon whom the responsibilities of the successful administration and
management of the Company rest, and whose present and potential contributions
to the welfare of the Company are of importance, can acquire and maintain
stock ownership, thereby strengthening their concern for the welfare of the
Company and their desire to remain in its employ. A further purpose of the
Plan is to provide such employees with additional incentive and reward
opportunities designed to enhance the profitable growth of the Company.
Accordingly, the Plan provides for granting Incentive Stock Options, options
which do not constitute Incentive Stock Options, Restricted Stock Awards, or
any combination of the foregoing, as is best suited to the circumstances of
the particular employee as provided herein.
II. DEFINITIONS
The following definitions shall be applicable throughout the Plan unless
specifically modified by any paragraph:
(a) "AWARD" means, individually or collectively, any Option or
Restricted Stock Award.
(b) "BOARD" means the Board of Directors of the Company.
(c) "CODE" means the Internal Revenue Code of 1986, as amended.
Reference in the Plan to any section of the Code shall be deemed to include
any amendments or successor provisions to such section and any regulations
under such section.
(d) "COMMITTEE" means not less than two members of the Board who are
selected by the Board as provided in Paragraph IV(a).
(e) "COMMON STOCK" means the common stock, par value $.01 per share, of
the Company
(f) "COMPANY" means BMC Software, Inc.
(g) "DIRECTOR" means an individual elected to the Board by the
stockholders of the Company or by the Board under applicable corporate law
who is serving on the Board on the date the Plan is adopted by the Board or
is elected to the Board after such date.
(h) An "EMPLOYEE" means any person (including a Director) in an
employment relationship with the Company or any parent or subsidiary
corporation (as defined in section 424 of the Code).
(i) "FAIR MARKET VALUE" means, as of any specified date, the mean of the
high and low sales prices of the Common Stock (i) reported by the
NASDAQ-National Market System on that date or (ii) if the Common Stock is
listed on a national stock exchange, reported on the stock exchange composite
tape on that date, or, in either case, if no prices are reported on that
date, on the last preceding date on which such prices of the Common Stock are
so reported. If the Common Stock is traded over the counter at the time a
determination of its fair market value is required to be made hereunder, its
fair market value shall be deemed to be equal to the average between the
reported high and low or closing bid and asked prices of Common Stock on the
most recent date on which Common Stock was publicly traded. In the event
Common Stock is not publicly traded at the time a determination of its value
is required to be made hereunder, the determination of its fair market value
shall be made by the Board in such manner as it deems appropriate.
(j) "HOLDER" means an employee who has been granted an Award.
(k) "INCENTIVE STOCK OPTION" means an incentive stock option within the
meaning of section 422 of the Code.
<PAGE>
(l) "1934 ACT" means the Securities Exchange Act of 1934, as amended.
(m) "OPTION" means an Award granted under Paragraph VII of the Plan and
includes both Incentive Stock Options to purchase Common Stock and Options
which do not constitute Incentive Stock Options to purchase Common Stock.
(n) "OPTION AGREEMENT" means a written agreement between the Company and
a Holder with respect to an Option.
(o) "PLAN" means the BMC Software, Inc. 1994 Employee Incentive Plan, as
amended from time to time.
(p) "RESTRICTED STOCK AGREEMENT" means a written agreement between the
Company and a Holder with respect to a Restricted Stock Award.
(q) "RESTRICTED STOCK AWARD" means an Award granted under Paragraph VIII
of the Plan.
(r) "RULE 16b-3" means SEC Rule 16b-3 promulgated under the 1934 Act, as
such may be amended from time to time, and any successor rule, regulation or
statute fulfilling the same or a similar function.
(s) "STOCK APPRECIATION RIGHT" shall have the meaning assigned to such
term in Paragraph VII(d) of the Plan.
III. EFFECTIVE DATE AND DURATION OF THE PLAN
The Plan shall become effective upon adoption by the Board, provided the
Plan is approved by the shareholders of the Company within twelve months
thereafter. Notwithstanding any provision in this Plan, in any Option
Agreement or in any Restricted Stock Agreement, no Option shall be
exercisable and no Restricted Stock Award shall vest prior to such
shareholder approval. No further Awards may be granted under the Plan after
ten years from the date the Plan is adopted by the Board. The Plan shall
remain in effect until all Awards granted under the Plan have been satisfied
or expired.
IV. ADMINISTRATION
(a) COMPOSITION OF COMMITTEE. The Plan shall be administered by a
committee which shall be (i) appointed by the Board, (ii) constituted so as
to permit the Plan to comply with Rule 16b-3, and (iii) constituted solely of
two or more "outside directors," within the meaning of section 162(m) of the
Code and applicable interpretive authority thereunder. No member of the
Committee shall be eligible to receive an Award under the Plan and no person
who has received an Award in the preceding year shall be eligible to serve on
the Committee.
(b) POWERS. Subject to the express provisions of the Plan, the Committee
shall have authority, in its discretion, to determine which employees shall
receive an Award, the time or times when such Award shall be made, whether an
Incentive Stock Option or nonqualified Option shall be granted, and the number
of shares to be subject to each Option or Restricted Stock Award. In making
such determinations the Committee shall take into account the nature of the
services rendered by the respective employees, their present and potential
contribution to the Company's success and such other factors as the Committee
in its discretion shall deem relevant.
(c) ADDITIONAL POWERS. The Committee shall have such additional powers as
are delegated to it by the other provisions of the Plan. Subject to the
express provisions of the Plan, this shall include the power to construe the
Plan and the respective agreements executed hereunder, to prescribe rules and
regulations relating to the Plan, and to determine the terms, restrictions
and provisions of the agreement relating to each Award, including such terms,
restrictions and provisions as shall be requisite in the judgment of the
Committee to cause designated Options to qualify as Incentive Stock Options,
and to make all other determinations necessary or advisable for administering
the Plan. The Committee may correct any defect or supply any omission or
reconcile and inconsistency in the Plan or in any agreement relating to an
Award in the manner and to the extent it shall deem expedient to
2
<PAGE>
carry it into effect. The determinations of the Committee on the matters
referred to in this Paragraph IV shall be conclusive.
V. GRANT OF OPTIONS AND RESTRICTED STOCK AWARDS;
SHARES SUBJECT TO THE PLAN
(a) STOCK GRANT AND AWARD LIMITS. The Committee may from time to time
grant Awards to one or more employees determined by it to be eligible for
participation in the Plan in accordance with the provisions of Paragraph VI.
Subject to Paragraph IX, the aggregate number of shares of Common Stock that
may be issued under the Plan shall not exceed 3,000,000 shares. Shares shall
be deemed to have been issued under the Plan only (i) to the extent actually
issued and delivered pursuant to an Award, or (ii) to the extent an Award is
settled in cash. To the extent that an Award lapses or the rights of its
Holder terminate, any shares of Common Stock subject to such Award shall
again be available for the grant of an Award to the extent permitted under
Rule 16b-3. Notwithstanding any provision in the Plan to the contrary, the
maximum number of shares of Common Stock that may be subject to Awards
granted to any one individual during the term of the Plan as provided in
Paragraph III hereof may not exceed 500,000 (subject to adjustment in the
same manner as provided in Paragraph IX hereof with respect to shares of
Common Stock subject to Awards then outstanding). The limitation set forth in
the preceding sentence shall be applied in a manner which will permit
compensation generated in connection with the exercise of Options and Stock
Appreciation Rights to constitute "performance-based" compensation for
purposes of section 162(m) of the Code, including, without limitation,
counting against such maximum number of shares, to the extent required under
section 162(m) of the Code and applicable interpretive authority thereunder
any shares subject to Options or Stock Appreciation Rights that are cancelled
or repriced.
(b) STOCK OFFERED. The stock to be offered pursuant to the grant of an
Award may be authorized but unissued Common Stock or Common Stock previously
issued and outstanding and reacquired by the Company.
VI. ELIGIBILITY
Awards may be granted only to persons who, at the time of grant, are
employees. Awards may be granted to any Director who is not an employee. An
Award may be granted on more than one occasion to the same person, and,
subject to the limitations set forth in the Plan, such Award may include an
Incentive Stock Option, an Option which is not an Incentive Stock Option, a
Restricted Stock Award, or any combination thereof.
VII. STOCK OPTION
(a) OPTION PERIOD. The term of each Option shall be as specified by the
Committee at the date of grant.
(b) LIMITATIONS ON EXERCISE OF OPTION. An Option shall be exercisable in
whole or in such installments and at such times as determined by the
Committee.
(c) SPECIAL LIMITATIONS ON INCENTIVE STOCK OPTIONS. To the extent that the
aggregate Fair Market Value (determined at the time the respective Incentive
Stock Option is granted) of Common Stock with respect to which Incentive
Stock Options granted after 1986 are exercisable for the first time by an
individual during any calendar year under all incentive stock option plans of
the Company and its parent and subsidiary corporations exceeds $100,000, such
Incentive Stock Options shall be treated as options which do not constitute
Incentive Stock Options. The Committee shall determine, in accordance with
applicable provisions of the Code, Treasury Regulations and other
administrative pronouncements, which of a Holder's Incentive Stock Options
will not constitute Incentive Stock Options because of such limitation and
shall notify the Holder of such determination as soon as practicable after
such determination. No Incentive Stock Option shall be granted to an
individual if, at the time the Option is granted, such individual owns stock
possessing more than 10% of the total
3
<PAGE>
combined voting power of all classes of stock of the Company or of its parent
or subsidiary corporation, within the meaning of section 422(b)(6) of the
Code, unless (i) at the time such Option is granted the option price is at
least 110% of the Fair Market Value of the Common Stock subject to the Option
and (ii) such Option by its terms is not exercisable after the expiration of
five years from the date of grant.
(d) OPTION AGREEMENT. Each Option shall be evidenced by an Option
Agreement in such form and containing such provisions not inconsistent with
the provisions of the Plan as the Committee from time to time shall approve,
including, without limitation, provisions to qualify an Incentive Stock
Option under section 422 of the Code. Each Option Agreement shall provide
that the Option may not be exercised, subject to Paragraph IX, earlier than
six months from the date of grant and shall specify the effect of termination
of employment on the exercisability of the Option. An Option Agreement may
provide for the payment of the option price, in whole or in part, by the
delivery of a number of shares of Common Stock (plus cash if necessary)
having a Fair Market Value equal to such option price. Moreover, an Option
Agreement may provide for a "cashless exercise" of the Option by establishing
procedures whereby the Holder, by a properly-executed written notice, directs
(i) an immediate market sale or margin loan respecting all or a part of the
shares of Common Stock to which he is entitled upon exercise pursuant to an
extension of credit by the Company to the Holder of the option price, (ii)
the delivery of the shares of Common Stock from the Company directly to a
brokerage firm, and (iii) the delivery of the option price from sale or
margin loan proceeds from the brokerage firm directly to the Company.
Further, an Option Agreement may provide for the surrender of the right to
purchase shares under the Option in return for a payment in cash or shares of
Common Stock or a combination of cash and shares of Common Stock equal in
value to the excess of the Fair Market Value of the shares with respect to
which the right to purchase is surrendered over the option price therefor
("Stock Appreciation Rights"), on such terms and conditions as the Committee
in its sole discretion may prescribe, provided, that with respect to Stock
Appreciation Rights granted to employees who are subject to Section 16 of
the 1934 Act, except as provided in Subparagraph IX(c) hereof, the Committee
shall retain final authority (i) to determine whether a Holder shall be
permitted, or (ii) to approve an election by a Holder, to receive cash in
full or partial settlement of Stock Appreciation Rights, In the case of any
such Stock Appreciation Right that is granted in connection with an Incentive
Stock Option, such right shall be exercisable only when the Fair Market Value
of the Common Stock exceeds the price specified therefor in the Option or the
portion thereof to be surrendered. The terms and conditions of the respective
Option Agreements need not be identical.
(e) OPTION PRICE AND PAYMENT. The price at which a share of Common Stock
may be purchased upon exercise of an Option shall be determined by the
committee but, subject to adjustment as provided in Paragraph IX, shall not
be less than the Fair Market Value of a share of Common Stock on the date
such Option is granted. The Option or portion thereof may be exercised by
delivery of an irrevocable notice of exercise to the Company. The purchase
price of the Option or portion thereof shall be paid in full in the manner
prescribed by the Committee. Separate stock certificates shall be issued by
the Company for those shares acquired pursuant to the exercise of an
Incentive Stock Option and for those shares acquired pursuant to the exercise
of any Option which does not constitute an Incentive Stock Option.
(f) SHAREHOLDER RIGHTS AND PRIVILEGES. The Holder shall be entitled to all
the privileges and rights of a shareholder only with respect to such shares
of Common Stock as have been purchased under the Option and for which
certificates of stock have been registered in the Holder's name.
(g) OPTIONS AND RIGHTS IN SUBSTITUTION FOR STOCK OPTIONS GRANTED BY OTHER
CORPORATIONS. Options and Stock Appreciation Rights may be granted under the
Plan from time to time in substitution for stock options held by individuals
employed by corporations who become employees as a result of a merger or
consolidation of the employing corporation with the Company or any
subsidiary, or the acquisition by the Company or a subsidiary of the assets
of the employing
4
<PAGE>
corporation, or the acquisition by the Company or a subsidiary of stock of
the employing corporation with the result that such employing corporation
becomes a subsidiary.
VIII. RESTRICTED STOCK AWARDS
(a) RESTRICTIONS TO BE ESTABLISHED BY THE COMMITTEE. Shares of Common
Stock that are the subject of a Restricted Stock Award shall be subject to
restrictions on disposition by the Holder and an obligation of the Holder to
forfeit and surrender the shares to the Company under certain circumstances
(the "Forfeiture Restrictions"). The Forfeiture Restrictions shall be
determined by the Committee in its sole discretion, and the Committee may
provide that the Forfeiture Restrictions shall lapse upon (i) the attainment
of targets established by the Committee that are based on (1) the price of a
share of Common Stock, (2) the Company's earnings per share, (3) the
Company's market share, (4) the market share of a business unit of the
Company designated by the Committee, (5) the Company's sales, (6) the sales
of a business unit of the Company designated by the Committee, or (7) the
return on stockholders' equity achieved by the Company, (ii) the Holder's
continued employment with the Company for a specified period of time, or
(iii) a combination of any two or more of the factors listed in clauses (i)
and (ii) of this sentence. Each Restricted Stock Award may have different
Forfeiture Restrictions, in the discretion of the Committee. The Forfeiture
Restrictions applicable to a particular Restricted Stock Award shall not be
changed except as permitted by Paragraph VIII(b) or Paragraph IX.
(b) OTHER TERMS AND CONDITIONS. Common Stock awarded pursuant to a
Restricted Stock Award shall be represented by a stock certificate registered
in the name of the Holder of such Restricted Stock Award. The Holder shall
have the right to receive dividends with respect to Common Stock subject to a
Restricted Stock Award, to vote Common Stock subject thereto and to enjoy all
other shareholder rights, except that (i) the Holder shall not be entitled to
delivery of the stock certificate until the Forfeiture Restrictions have
expired, (ii) the Company shall retain custody of the stock until the
Forfeiture Restrictions have expired (iii) the Holder may not sell, transfer,
pledge, exchange, hypothecate or otherwise dispose of the stock until the
Forfeiture Restrictions have expired, and (iv) a breach of the terms and
conditions established by the Committee pursuant to the Restricted Stock
Agreement, shall cause a forfeiture of the Restricted Stock Award. At the
time of such Award, the Committee may, in its sole discretion, prescribe
additional terms, conditions or restrictions relating to Restricted Stock
Awards, including but not limited to rules pertaining to the termination of
employment (by retirement, disability, death or otherwise) of a Holder prior
to expiration of the Forfeiture Restrictions. Such additional terms,
conditions or restrictions shall be set forth in a Restricted Stock Agreement
made in conjunction with the Award.
(c) PAYMENT FOR RESTRICTED STOCK. The Committee shall determine the
amount and form of any payment for Common Stock received pursuant to a
Restricted Stock Award, provided that in the absence of such a determination
a Holder shall not be required to make any payment for Common Stock received
pursuant to a Restricted Stock Award, except to the extent otherwise required
by law.
(d) AGREEMENTS. At any time any Award is made under this Paragraph
VIII, the Company and the Holder shall enter into a Restricted Stock
Agreement setting forth each of the matters contemplated hereby and such
other matters as the Committee may determine to be appropriate. The terms and
provisions of the respective Restricted Stock Agreements need not be
identical.
IX. RECAPITALIZATION OR REORGANIZATION
(a) The existence of the Plan and the Awards granted hereunder shall not
affect in any way the right or power of the Board or the shareholders of the
Company to make or authorize any adjustment, recapitalization, reorganization
or other change in the Company's capital structure or its business, any
merger or consolidation of the Company, any issue of debt or equity
securities ahead of or affecting Common Stock or the rights thereof, the
dissolution or liquidation of the Company or any
5
<PAGE>
sale, lease, exchange or other disposition of all or any part of its assets
or business or any other corporate act or proceeding.
(b) The shares with respect to which Options may be granted are shares
of Common Stock as presently constituted, but if, and whenever, prior to the
expiration of an Option theretofore granted, the Company shall effect a
subdivision or consolidation of shares of Common Stock or the payment of a
stock dividend on Common Stock without receipt of consideration by the
Company, the number of shares of Common Stock with respect to which such
Option may thereafter by exercised (i) in the event of an increase in the
number of outstanding shares shall be proportionately increased, and the
purchase price per share shall be proportionately reduced, and (ii) in the
event of a reduction in the number of outstanding shares shall be
proportionately reduced, and the purchase price per share shall be
proportionately increased.
(c) If the Company recapitalizes, reclassifies its capital stock, or
otherwise changes its capital structure (a "recapitalization"), the number
and class of shares of Common Stock covered by an Option theretofore granted
shall be adjusted so the such Option shall thereafter cover the number and
class of shares of stock and securities to which the Holder would have been
entitled pursuant to the terms of the recapitalization if, immediately prior
to the recapitalization, the Holder had been the holder of record of the
number of shares of Common Stock then covered by such Option. If (i) the
Company shall not be the surviving entity in any merger or consolidation (or
survives only as a subsidiary of an entity other than a previously wholly
owned subsidiary of the Company), (ii) the Company sells, leases or exchanges
or agrees to sell, lease or exchange all or substantially all of its assets
to any other person or entity (other than a wholly-owned subsidiary of the
Company), (iii) the Company is to be dissolved and liquidated, (iv) any
person or entity, including a "group" as contemplated by Section 13(d)(3) of
the 1934 Act, acquires or gains ownership or control (including, without
limitation, power to vote) of more than 50% of the outstanding shares of the
Company's voting stock (based upon voting power), or (v) as a result of or in
connection with a contested election of directors, the persons who were
directors of the Company before such election shall cease to constitute a
majority of the Board (each such event is referred to herein as a "Corporate
Change"), no later than (x) ten days after the approval by the shareholders
of the Company of such merger, consolidation, reorganization, sale, lease or
exchange of assets or dissolution or such election of directors or (y) thirty
days after a Corporate Change of the type described in clause (iv), the
Committee, acting in its sole discretion without the consent or approval of
any Holder, shall effect one or more of the following alternatives, which may
vary among individual Holders and which may vary among Options held by any
individual Holder: (1) accelerate the time at which Options then outstanding
may be exercised so that such Options may be exercised in full for a limited
period of time on or before a specified date (before or after such Corporate
Change) fixed by the Committee, after which specified date all unexercised
Options and all rights of Holders thereunder shall terminate, (2) require the
mandatory surrender to the Company by selected Holders of some or all of the
outstanding Options held by such Holders (irrespective of whether such
Options are then exercisable under the provisions of the Plan) as of a date,
before or after Corporate Change, specified by the Committee, in which event
the Committee shall thereupon cancel such Options and pay to each Holder an
amount of cash per share equal to the excess, if any, of the amount
calculated in Subparagraph (d) below (the "Change of Control Value") of the
shares subject to such Option over the exercise price(s) under such Options
for such shares (3) make such adjustments to Options then outstanding as the
committee deems appropriate to reflect such Corporate Change (provided,
however, that the Committee may determine in its sole discretion that no
adjustment is necessary to Options then outstanding) or (4) provide that the
number and class of shares of Common Stock covered by an Option theretofore
granted shall be adjusted so that such Option shall thereafter cover the
number and class of shares of stock or other securities or property
(including without limitation, cash) to which the Holder would have been
entitled pursuant to the terms of the agreement of merger, consolidation or
sale of assets and dissolution if, immediately prior to such merger,
consolidation or
6
<PAGE>
sale of assets and dissolution, the Holder had been the holder of record of
the number of shares of Common Stock then covered by such Option.
(d) For the purposed of clause (2) in Subparagraph (c) above, the
"Change of Control Value" shall equal the amount determined in clause (i),
(ii), or (iii), whichever is applicable, as follows: (i) the per share price
offered to shareholders of the Company in any such merger, consolidation,
sale of assets or dissolution transaction, (ii) the price per share offered
to shareholders of the Company in any tender offer or exchange offer whereby
a Corporate Change takes place, or (iii) if such Corporate Change occurs other
than pursuant to a tender or exchange offer, the fair market value per share
of the shares into which such Options being surrendered are exercisable, as
determined by the Committee as of the date determined by the Committee to be
the date of cancellation and surrender of such Options. In the event that the
consideration offered to shareholders of the Company in any transaction
described in this Subparagraph (d) or Subparagraph (c) above consists of
anything other than cash, the Committee shall determine the fair cash
equivalent of the portion of the consideration offered which is other than
cash.
(e) In the event of changes in the outstanding Common Stock by reason of
recapitalization, reorganization, mergers, consolidations, combinations,
exchanges or other relevant changes in capitalization occurring after the
date of the grant of any Award and not otherwise provided for by this
Paragraph IX, any outstanding Awards and any agreements evidencing such
Awards shall be subject to adjustment by the Committee at its discretion as
to the number and price of shares of Common Stock or other consideration
subject to such Awards. In the event of any such change in the outstanding
Common Stock, the aggregate number of shares available under the Plan may be
appropriately adjusted by the Committee, whose determination shall be
conclusive.
(f) Any adjustment provided for in the above Subparagraphs shall be
subject to any required shareholder action.
(g) Except as hereinbefore expressly provided, the issuance by the
Company of shares of stock of any class or securities convertible into shares
of stock of any class, for cash, property, labor or services, upon direct
sale, upon the exercise of rights or warrants to subscribe therefor, or upon
conversion of shares or obligations of the Company convertible into such
shares or other securities, and in any case whether or not for fair value,
shall not affect, and no adjustment by reason thereof shall be made with
respect to the number of shares of Common Stock subject to Awards theretofore
granted or the purchase price per share, if applicable.
(h) Plan provisions to the contrary notwithstanding, with respect to any
Restricted Stock Awards outstanding at the time a Corporate Change as
described in Subparagraph (c) above occurs, the Committee may, in its
discretion and as of a date determined by the Committee, fully vest any or
all Common Stock awarded to the Holder pursuant to such Restricted Stock
Award and then outstanding and, upon such vesting, all restrictions
applicable to such Restricted Stock Award shall terminate as of such date.
Any action by the Committee pursuant to this Subparagraph may vary among
individual Holders and may vary among the Restricted Stock Awards held by any
individual Holder.
X. AMENDMENT AND TERMINATION OF THE PLAN
The Board in its discretion may terminate the Plan at any time with
respect to any shares of Common Stock for which Awards have not theretofore
been granted. The Board shall have the right to alter or amend the Plan or
any part thereof from time to time, provided that no change in any Award
theretofore granted may be made which would impair the rights of the Holder
without the consent of the Holder, and provided, further, that the Board may
not, without approval of the shareholders, amend the Plan:
(a) increase the maximum number of shares of Common Stock which may
be issued on exercise or surrender of Options or pursuant to Restricted
Stock Awards, except as provided in Paragraph IX;
7
<PAGE>
(b) to change the minimum Option price;
(c) to change the class of employees eligible to receive Awards or
materially increase the benefits accruing to employees under the Plan;
(d) to extend the maximum period during which Awards may be granted
under the Plan;
(e) to modify materially the requirements as to eligibility for
participation in the Plan;
(f) to increase the maximum limit on shares issuable to an
individual employee under the Plan; or
(g) to decrease any authority granted to the Committee hereunder in
contravention of Rule 16b-3.
XI. MISCELLANEOUS
(a) NO RIGHT TO AN AWARD. Neither the adoption of the Plan nor any
action of the Board or of the Committee shall be deemed to give an employee
any right to be granted an Option, a right to a Restricted Stock Award, or
any other rights hereunder except as may be evidenced by an Option Agreement
or a Restricted Stock Agreement duly executed on behalf of the Company, and
then only to the extent and on the terms and conditions expressly set forth
therein. The Plan shall be unfunded. The Company shall not be required to
establish any special or separate fund or to make any other segregation of
funds or assets to assure the payment of any Award.
(b) NO EMPLOYMENT RIGHTS CONFERRED. Nothing contained in the Plan shall
(i) confer upon any employee any right with respect to continuation of
employment with the Company or any subsidiary or (ii) interfere in any way
with the right of the Company or any subsidiary to terminate his or her
employment at any time.
(c) OTHER LAWS; WITHHOLDING. The Company shall not be obligated to issue
any Common Stock pursuant to any Award granted under the Plan at any time
when the shares covered by such Award have not been registered under the
Securities Act of 1933 and such other state and federal laws, rules or
regulations as the Company or the Committee deems applicable and, in the
opinion of legal counsel for the Company, there is no exemption from the
registration requirements of such laws, rules or regulations available for
the issuance and sale of such shares. No fractional shares of Common Stock
shall be delivered, nor shall any cash in lieu of fractional shares be paid.
The Company shall have the right to deduct in connection with all Awards any
taxes required by law to be withheld and to require any payments required to
enable it to satisfy its withholding obligations.
(d) NO RESTRICTION ON CORPORATE ACTION. Nothing contained in the Plan
shall be construed to prevent the Company or any subsidiary from taking any
corporate action which is deemed by the Company or such subsidiary to be
appropriate or in its best interest, whether or not such action would have an
adverse effect on the Plan or any Award made under the Plan. No employee,
beneficiary or other person shall have any claim against the Company or any
subsidiary as a result of any such action.
(e) RESTRICTIONS ON TRANSFER. An Award shall not be transferable
otherwise than by will or the laws of descent and distribution or pursuant to
a qualified domestic relations order a defined by the Code or Title I of the
Employee Retirement Income Security Act of 1974, as amended, or the rules
thereunder. An Award shall be exercisable during the lifetime of a Holder
only by such Holder or the Holder's guardian or legal representative.
(f) RULE 16b-3. It is intended that the Plan and any grant of an Award
made to a person subject to Section 16 of the 1934 Act meet all of the
requirements of Rule 16b-3. If any provision of the Plan or any such Award
would disqualify the Plan or such Award under, or would otherwise not comply
with, Rule 16b-3, such provision or Award shall be construed or deemed
amended to conform to Rule 16b-3.
(g) SECTION 162(m). It is intended that the Plan comply fully with and
meet all the requirements of Section 162(m) of the Code so that the exercise
of Options and Stock Appreciation Rights
8
<PAGE>
granted hereunder with an exercise price not less than Fair Market Value of a
share of Common Stock on the date of grant give rise to "performance-based"
compensation within the meaning of such section. If any provision of the Plan
would disqualify the Plan or would not otherwise permit the Plan to comply
with Section 162(m) of the Code as so intended, such provision shall be
construed or deemed amended to conform to the requirements or provisions of
Section 162(m) of the Code; provided that no such construction or amendment
shall have an adverse effect on the economic value to a Holder of any Award
previously granted hereunder.
(h) GOVERNING LAW. THIS PLAN SHALL BE CONSTRUED IN ACCORDANCE WITH THE
LAWS OF THE STATE OF TEXAS, EXCEPT TO THE EXTENT THAT IT IMPLICATES MATTERS
WHICH ARE THE SUBJECT OF THE GENERAL CORPORATION LAW OF THE STATE OF DELAWARE
WHICH MATTERS SHALL BE GOVERNED BY THE LATTER LAW.
9
<PAGE>
EXHIBIT 10.7(b)
NONSTATUTORY STOCK OPTION AGREEMENT
AGREEMENT made as of the _____ day of _________________ 19__, between
BMC SOFTWARE, INC., a Delaware corporation (the "Company"), and ___________
____________________ ("Employee").
To carry out the purposes of the BMC SOFTWARE, INC. 1994 EMPLOYEE
INCENTIVE PLAN (the "Plan"), by affording Employee the opportunity to
purchase shares of common stock of the Company ("Stock"), and in
consideration of the mutual agreements and other matters set forth herein and
in the Plan, the Company and Employee hereby agree as follows:
1. GRANT OF OPTION. The Company hereby irrevocably grants to Employee
the right and option ("Option") to purchase all or any part of an aggregate
of __________________ shares of Stock, on the terms and conditions set forth
herein and in the Plan, which Plan is incorporated herein by reference as
part of this Agreement. This Option shall not be treated as an incentive
stock option within the meaning of section 422(b) of the Internal Revenue
Code of 1986, as amended (the "Code").
2. PURCHASE PRICE. The purchase price of Stock purchased pursuant to
the exercise of this Option shall be $________ per share, which has been
determined to be not less than the fair market value of the Stock at the date
of grant of this Option. For all purposes of this Agreement, fair market
value of Stock shall be determined in accordance with the provisions of the
Plan.
3. EXERCISE OF OPTION. Subject to the earlier expiration of this
Option as herein provided, this Option may be exercised, by written notice to
the Company at its principal executive office addressed to the attention of
the President, at any time and from time to time after the date which is six
months from the date of grant hereof (unless earlier exercise is permitted
pursuant to Paragraph IX(c) of the Plan), but, except as otherwise provided
below and in Paragraph IX(c) of the Plan, this Option shall not be exercisable
for more than a percentage of the aggregate number of shares offered by this
Option determined in accordance with the following schedule:
<TABLE>
<CAPTION>
PERCENTAGE OF SHARES
DATE THAT MAY BE PURCHASED
---- ---------------------
<S> <C>
On or prior to October 31, 1995 0%
From November 1, 1995 until October 31, 1996 20%
From November 1, 1996 until October 31, 1997 40%
From November 1, 1997 until October 31, 1998 60%
From November 1, 1998 until October 31, 1999 80%
On or after November 1, 1999 100%
</TABLE>
<PAGE>
Notwithstanding anything in this agreement to the contrary, (i) the Committee
appointed by the Board of Directors of the Company to administer the Plan
(the "Committee") may, in its sole discretion, waive the foregoing schedule
of vesting and permit Employee to exercise the Option in such amount or
amounts and at such time or times as the Committee shall determine and (ii)
if a Corporate Change (as such term is defined in Paragraph IX(c) of the
Plan) shall occur, then, effective as of the earlier of (1) the date of
approval by the stockholders of the Company of the event or transaction
constituting such Corporate Change or (2) the date of such Corporate Change,
this Option shall be exercisable in full.
This Option may be exercised only while Employee remains an employee of
the Company and will terminate and cease to be exercisable upon Employee's
termination of employment with the Company, except that:
(a) If Employee dies while in the employ of the Company, Employee's
estate, or the person who acquires this Option by will or the laws of
descent and distribution or otherwise by reason of the death of Employee,
may exercise this Option at any time during the period of one year
following the date of Employee's death as follows:
(i) if Employee shall have attained age 65 at the time of his
death, then this Option may be exercised in full; or
(ii) if Employee shall not have attained age 65 at the time of
his death, then this Option may be exercised only as to the number
of shares Employee was entitled to purchase hereunder upon exercise
of this Option as of the date of Employee's death.
(b) If Employee's employment with the Company terminates for any
reason other than as described in (a) above, unless Employee voluntarily
terminates without the prior written consent of the Company or is
terminated for cause, this Option may be exercised by Employee at any
time during the period of three months following such termination, or by
Employee's estate (or the person who acquires this Option by will or the
laws of descent and distribution or otherwise by reason of the death of
Employee) during a period of one year following Employee's death if
Employee dies during such three-month period, but in each case only as
to the number of shares Employee was entitled to purchase hereunder upon
exercise of this Option as of the date Employee's employment so
terminates. For purposes of this Agreement, "cause" shall mean Employee's
gross negligence or willful misconduct in performance of the duties of
Employee's employment, or Employee's final conviction of a felony or of
a misdemeanor involving moral turpitude.
This Option shall not be exercisable in any event after the expiration of ten
years from the date of grant hereof. Except as provided in Paragraph 4, the
purchase price of shares as to which this Option is exercised shall be paid
in full at the time of exercise (a) in cash (including check, bank draft or
money order payable to the order of the Company), or, if acceptable to the
Company, (b) by delivering to the Company shares of Stock having a fair
market value equal to the purchase price, or (c) any combination of cash or
Stock. No fraction of share of Stock
-2-
<PAGE>
shall be issued by the Company upon exercise of an Option or accepted by the
Company in payment of the purchase price thereof; rather, Employee shall
provide a cash payment for such amount as is necessary to effect the issuance
and acceptance of only whole shares of Stock. Unless and until a certificate
or certificates representing such shares shall have been issued by the
Company to Employee, Employee (or the person permitted to exercise this
Option in the event of Employee's death) shall not be or have any of the
rights or privileges of a shareholder of the Company with respect to shares
acquirable upon an exercise of this Option.
4. CASHLESS EXERCISE. Employee (or the person permitted to exercise
this Option in the event of Employee's death) may direct, in a properly
executed written notice, an immediate market sale or margin loan respecting
all or any part of the shares of Stock to which he is entitled upon exercise
of this Option pursuant to an extension of credit by the Company, on an
interest-free basis, to the Employee of the purchase price. In such event,
the Company shall deliver the specified number of shares of Stock directly to
the broker specified in the notice and shall accept payment of the purchase
price in cash or by check from such broker on behalf of the Employee and
shall take all action necessary to comply with the provisions of the
applicable regulations of the Securities Exchange Act of 1934 and with such
additional rules and regulations as may be applicable. Notwithstanding the
foregoing, the Company shall not be required to comply with, and may
unilaterally terminate, the provisions of this Paragraph 4 if, as a result of
a change in the accounting rules and regulations applicable to the Company,
or the interpretation thereof, compliance with the provisions of this
Paragraph 4 will result in the imposition of adverse financial reporting
requirements on the Company.
5. WITHHOLDING OF TAX. To the extent that the exercise of this Option
or the disposition of shares of Stock acquired by exercise of this Option
results in compensation income to Employee for federal or state income tax
purposes, Employee shall pay to the Company at the time of such exercise or
disposition such amount of money as the Company may require to meet its
obligation under applicable tax laws or regulations, and, if Employee fails
to do so, the Company is authorized to withhold from any cash or Stock
remuneration then or thereafter payable to Employee any tax required to be
withheld by reason of such resulting compensation income. Upon an exercise of
this Option, the Company is further authorized in its discretion to satisfy
any such withholding requirement out of any cash or shares of Stock
distributable to Employee upon such exercise.
6. STATUS OF STOCK. Until the shares of Stock acquirable upon the
exercise of the Option have been registered for issuance under the Securities
Act of 1933 (the "Act"), the Company will not issue such shares unless the
holder of the Option provides the Company with a written opinion of legal
counsel, who shall be satisfactory to the Company, addressed to the Company
and satisfactory in form and substance to the Company's counsel, to the
effect that the proposed issuance of such shares to such Option holder may
be made without registration under the Act. In the event exemption from
registration under the Act is available upon the exercise of this Option,
Employee (or the person permitted to exercise this Option in the event of
Employee's death), if requested by the Company to do so, will execute and
deliver to the Company in writing an agreement containing such provisions as
the Company may require to assure compliance with applicable securities laws.
-3-
<PAGE>
Employee agrees that the shares of Stock which Employee may acquire by
exercising this Option shall be acquired for investment without a view to
distribution, within the meaning of the Act, and shall not be sold,
transferred, assigned, pledged or hypothecated in the absence of an effective
registration statement for the shares under the Act and applicable state
securities laws or an applicable exemption from the registration requirements
of the Act and any applicable state securities laws. Employee also agrees
that the shares of Stock which Employee may acquire by exercising this Option
will not be sold or otherwise disposed of in any manner which would constitute
a violation of any applicable securities laws, whether federal or state.
In addition, Employee agrees (i) that the certificates representing the
shares of Stock purchased under this Option may bear such legend or legends
as the Committee deems appropriate in order to assure compliance with
applicable securities laws, (ii) that the Company may refuse to register the
transfer of the shares of Stock purchased under this Option on the stock
transfer records of the Company if such proposed transfer would in the
opinion of counsel satisfactory to the Company constitute a violation of any
applicable securities law, and (iii) that the Company may give related
instructions to its transfer agent, if any, to stop registration of the
transfer of the shares of Stock purchased under this Option.
7. EMPLOYMENT RELATIONSHIP. For purposes of this Agreement, Employee
shall be considered to be in the employment of the Company as long as
Employee remains an employee of either the Company, a parent or subsidiary
corporation (as defined in section 424 of the Code) of the Company, or a
corporation or a parent or subsidiary of such corporation assuming or
substituting a new option for this Option. Any question as to whether and
when there has been a termination of such employment, and the cause of such
termination, shall be determined by the Committee, and its determination
shall be final.
8. BINDING EFFECT. This Agreement shall be binding upon and inure to
the benefit of any successors to the Company and all persons lawfully
claiming under Employee.
9. GOVERNING LAW. This Agreement shall be governed by, and construed
in accordance with, the laws of the State of Texas.
-4-
<PAGE>
IN WITNESS WHEREOF, the Company has caused this Agreement to be duly
executed by its officer thereunto duly authorized, and Employee has executed
this Agreement, all as of the day and year first above written.
BMC SOFTWARE, INC.
By: ___________________________________
_______________________________________
Employee
-5-
<PAGE>
EXHIBIT 10.8(a)
BMC SOFTWARE, INC.
1994 NONEMPLOYEE DIRECTORS' STOCK OPTION PLAN
I. PURPOSE OF THE PLAN
The BMC SOFTWARE, INC. 1994 NONEMPLOYEE DIRECTORS' STOCK OPTION PLAN
(the "Plan") is intended to promote the interests of BMC SOFTWARE, INC., a
Delaware corporation (the "Company"), and its stockholders by helping to
award and retain highly-qualified independent directors, and allowing them to
develop a sense of proprietorship and personal involvement in the development
and financial success of the Company. Accordingly, the Company shall grant to
directors of the Company who are not employees of the Company or any of its
subsidiaries ("Nonemployee Directors") the option ("Option") to purchase
shares of the common stock of the Company ("Stock"), as hereinafter set
forth. Options granted under the Plan shall be options which do not
constitute incentive stock options, within the meaning of section 422(b) of
the Internal Revenue Code of 1986, as amended.
II. OPTION AGREEMENTS
Each Option shall be evidenced by a written agreement in the form
attached to the Plan.
III. ELIGIBILITY OF OPTIONEE
Options may be granted only to individuals who are Nonemployee Directors
of the Company. Each Nonemployee Director who is elected to the Board of
Directors of the Company (the "Board") for the first time after the effective
date of the Plan shall receive, as of the date of his or her election and
without the exercise of the discretion of any person or persons, an Option
exercisable for 20,000 shares of Stock (subject to adjustment in the same
manner as provided in Paragraph VII hereof with respect to shares of Stock
(subject to Options then outstanding). As of the date of the annual meeting
of the stockholders of the Company in each year that the Plan is in effect as
provided in Paragraph VI hereof, each Nonemployee Director then in office who
is not then entitled to receive an Option pursuant to the preceding sentence
shall receive, without the exercise of the discretion of any person or
persons, an Option exercisable for 5,000 shares of Stock (subject to
adjustment in the same manner as provided in Paragraph VII hereof with
respect to shares of Stock subject to Options then outstanding). If, as of
any date that the Plan is in effect, there are not sufficient shares of Stock
available under the Plan to allow for the grant to each Nonemployee director
of an Option for his or her pro-rata share of the total number of shares of
Stock then available under the Plan. All Options granted under the Plan shall
be at the Option price set forth in Paragraph V hereof and shall be subject
to adjustment as provided in Paragraph VII hereof.
IV. SHARES SUBJECT TO THE PLAN
The aggregate number of shares which may be issued under Options granted
under the Plan shall not exceed 200,000 shares of Stock. Such shares may
consist of authorized but unissued shares of Stock or previously issued
shares of Stock reacquired by the Company. Any of such shares which remain
unissued and which are not subject to outstanding Options at the termination
of the Plan shall cease to be subject to the Plan, but, until termination of
the Plan, the Company shall at all times make available a sufficient number
of shares to meet the requirements of the Plan. Should any Option hereunder
expire or terminate prior to its exercise in full, the shares theretofore
subject to such Option may again by subject to an Option granted under the
Plan. The aggregate number of shares which may be issued under the Plan shall
be subject to adjustment in the same manner as provided in Paragraph VII
hereof with respect to shares of Stock subject to Options then outstanding.
Exercise of an Option shall result in a decrease in the number of shares of
Stock which may thereafter be available, both for purposes of the Plan and
for sale to any one individual, by the number of shares as to which the
Option is exercised.
<PAGE>
V. OPTION PRICE
The purchase price of Stock issued under each Option shall be the fair
market value of Stock subject to the Option as of the date the Option is
granted. For all purposes under the Plan, the fair market value of a share of
Stock on a particular date shall be equal to the mean of the high and low
sales prices of the Stock (i) reported by the NASDAQ National Market System
on that date or (ii) of the Stock is listed on a national stock exchange,
reported on the stock exchange, reported on the stock exchange composite tape
on that date; or, in either case, if no prices are reported on that date, on
the last preceding date o which such prices of the Stock are so reported. If
the Stock is traded over the counter at the time a determination of its fair
market value is required to be made hereunder, its fair market value shall be
deemed to be equal to the average between the reported high and low or
closing bid and asked prices of Stock on the most recent date on which Stock
was publicly traded. In the event Stock is not publicly traded at the time a
determination of its value is required to be made hereunder, the determination
of its fair market value shall be made by the Board in such manner as its
deems appropriate.
VI. TERM OF PLAN
The Plan shall be effective on the date the Plan is approved by the
stockholders of the Company. Except with respect to Options then outstanding,
if not sooner terminated under the provisions of Paragraph VIII, the Plan
shall terminate upon and no further Options shall be granted after the
expiration of ten years from the date the Plan is approved by the
stockholders of the Company.
VII. RECAPITALIZATION OR REORGANIZATION
A. The existence of the Plan and the Options granted hereunder shall
not affect in any way the right or power of the Board or the stockholders of
the Company to make or authorize any adjustment, recapitalization,
reorganization or other change in the Company's capital structure or its
business, any merger or consolidation of the Company, any issue of debt or
equity securities, the dissolution or liquidation of the Company or any sale,
lease, exchange or other disposition of all or any part of its assets or
business or any other corporate act or proceeding.
B. The shares with respect to which Options may be granted are shares
of Stock as presently constituted, but if, and and whenever, prior to the
expiration of an Option theretofore granted, the Company shall effect a
subdivision or consolidation of shares of Stock or the payment of a stock
dividend on Stock without receipt of consideration by the Company, the number
of shares of Stock with respect to which such Option may thereafter be
exercised (i) in the event of an increase in the number of outstanding shares
shall be proportionately increased, and the purchase price per share shall be
proportionately reduced, and (ii) in the event of a reduction in the number
of outstanding shares shall be proportionately reduced, and the purchase
price per share shall be proportionately increased.
C. If the Company recapitalizes, reclassifies its capital stock, or
otherwise changes its capital structure (a "recapitalization"), the number
and class of shares of Stock covered by an Option theretofore granted shall
be adjusted so that such Option shall thereafter cover the number and class of
shares of stock and securities to which the optionee would have been entitled
pursuant to the terms of the recapitalization if, immediately prior to the
recapitalization, the optionee had been the holder of record of the number of
shares of Stock then covered by such Option.
D. Any adjustment provided for in Subparagraphs (b) or (c) above shall
be subject to any required stockholder action.
E. Except as hereinbefore expressly provided, the issuance by the
Company of shares of stock of any class or securities convertible into shares
of stock of any class, for cash, property, labor or services, upon direct
sale, upon the exercise of rights or warrants subscribe therefor, or upon
conversion of shares or obligations of the Company convertible into such
shares or other securities,
2
<PAGE>
and in any case whether or not for fair value, shall not affect, and no
adjustment by reason thereof shall be made with respect to, the number of
shares of Stock subject to Options theretofore granted or the purchase price
per share.
VIII. AMENDMENT OR TERMINATION OF THE PLAN
The Board in its discretion may terminate the Plan at any time with
respect to any shares for which Options have not theretofore been granted.
The Board shall have the right to alter or amend the Plan or any part thereof
from time to time; provided, that no change in any Option theretofore granted
may be made which would impair the rights of the optionee without the consent
of such optionee; and provided, further, that the Board may not make any
alternation or amendment which would materially increase the benefits
accruing the participating under the Plan, increase the aggregate number of
shares which may be issued pursuant to the provisions of the Plan, change the
class of individuals eligible to receive Options under the Plan or extend the
term of the Plan, without the approval of the stockholders of the Company.
IX. SECURITIES LAWS
A. The Company shall not be obligated to issue any Stock pursuant to
any Option granted under the Plan at any time when the offering of the shares
covered by such Option have not been registered under the Securities Act of
1933, as amended, and such other state and federal laws, rules or regulations
as the Company deems applicable and, in the opinion of legal counsel for the
Company, therein no exemption from the registration requirements of such
laws, rules or regulations available for the offering and sale of such shares.
B. It is intended that the Plan and any grant of an Option made to a
person subject to Section 16 of the Securities Exchange Act of 1934, as
amended (the "1934 Act"), meet all of the requirements of Rule 16b-3, as
currently in effect or as hereinafter modified or amended ("Rule 16b-3"),
promulgated under the 1934 Act. IF any provision of the Plan or any such
Option would disqualify the Plan or such Option under, or would otherwise not
comply with, Rule 16b-3, such provision or Option shall be construed or
deemed amended to conform to Rule 16b-3.
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<PAGE>
EXHIBIT 10.8(b)
NONEMPLOYEE DIRECT0R'S STOCK OPTION AGREEMENT
AGREEMENT made as of the ____ day of _________________, 19___, between BMC
SOFTWARE, INC., a Delaware corporation (the "Company"), and _________________
("Director").
To carry out the purposes of the BMC SOFTWARE, INC. 1994 NONEMPLOYEE
DIRECTORS' STOCK OPTION PLAN (the "Plan"), a copy of which is attached hereto
as Exhibit A, by affording Director the opportunity to purchase shares of
common stock of the Company ("Stock"), and in consideration of the mutual
agreements and other matters set forth herein and in the Plan, the Company
and Director hereby agree as follows:
1. GRANT OF OPTION. The Company hereby irrevocably grants to Director the
right and option ("Option") to purchase all or any part of an aggregate of
________ shares of Stock, on the terms and conditions set forth herein and in
the Plan, which Plan is incorporated herein by reference as a part of this
Agreement. This Option shall not be treated as an incentive stock option
within the meaning of section 422(b) of the Internal Revenue Code of 1986, as
amended (the "Code").
2. PURCHASE PRICE. The purchase price of Stock purchased pursuant to the
exercise of this Option shall be $________ per share, which has been
determined to be not less than the fair market value of the Stock at the date
of grant of this Option. For all purposes of this Agreement, fair market
value of Stock shall be determined in accordance with the provisions of the
Plan.
3. EXERCISE OF OPTION. Subject to the earlier expiration of this Option as
herein provided, this Option may be exercised, by written notice to the
Company at its principal executive office addressed to the attention of its
Chief Executive Officer, at any time and from time to time after the date of
grant hereof, but, except as otherwise provided below, this Option shall not be
exercisable for more than a percentage of the aggregate number of shares
offered by this Option determined by the number of full calendar months from
the first day of the calendar month coincident with or next following the
date of grant hereof to the date of such exercise, in accordance with the
following schedule:
<TABLE>
<CAPTION>
PERCENTAGES OF
NUMBER OF SHARES THAT
FULL CALENDAR MONTHS MAY BE PURCHASED
-------------------- ----------------
<S> <C>
Less than 3 months............................... 0.00%
3 months but less than 6 months.................. 6.25%
6 months but less than 9 months.................. 12.50%
9 months but less than 12 months................. 18.75%
12 months but less than 15 months................ 25.00%
15 months but less than 18 months................ 31.25%
18 months but less than 21 months................ 37.50%
21 months but less than 24 months................ 43.75%
24 months but less than 27 months................ 50.00%
27 months but less than 30 months................ 56.25%
30 months but less than 33 months................ 62.50%
33 months but less than 36 months................ 68.75%
36 months but less than 39 months................ 75.00%
39 months but less than 42 months................ 81.25%
42 months but less than 45 months................ 87.50%
48 months or more................................ 100.00%
</TABLE>
Notwithstanding the foregoing, if (i) the Company shall not be the
surviving entity in any merger, consolidation or other reorganization (or
survives only as a subsidiary of an entity other than a previously
wholly-owned subsidiary of the Company), (ii) the Company sells, leases or
exchanges or agrees to sell, lease or exchange all or substantially all of
its assets to any other person or entity (other than a wholly-owned subsidiary
of the Company), (iii) the Company is to be dissolved and liquidated, (iv)
any person or entity, including a "group" as contemplated by Section 13(d)(3)
of the Securities
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<PAGE>
Exchange Act of 1934, acquires or gains ownership or control (including,
without limitation, power to vote) of more than 50% of the outstanding shares
of the Company's voting stock (based upon voting power), or (v) as a result
of or in connection with a contested election of directors, the persons who
were directors of the Company before such election shall cease to constitute
a majority of the Board of Directors of the Company (each such event is
referred to herein as a "Corporate Change"), then effective as of the
earlier of (1) the date of approval by the stockholders of the Company of
such merger, consolidation, reorganization, sale, lease or exchange of assets
or dissolution or such election of directors or (2) the date of such
Corporate Change, this Option shall be exercisable in full.
This Option and all rights granted hereunder are not transferable by
Director other than by will or the laws of descent and distribution or
pursuant to a qualified domestic relations order as defined by the Code or
Title ! of the Employee Retirement Income Security Act of 1974, as amended,
or the rules thereunder, and may be exercised during Director's lifetime only
by Director or Director's guardian or legal representative. This Option may
be exercised only while Director remains a member of the Board of Directors
of the Company (the "Board") and will terminate and cease to be exercisable
upon Director's termination of membership on the Board, except that:
(a) If Director's membership on the Board terminates by reason of
disability, this Option may be exercised in full by Director (or Director's
estate or the person who acquires this Option by will or the laws of
descent and distribution or otherwise by reason of the death of Director)
at any time during the period of one year following such termination.
(b) If Director dies while a member of the Board, Director's estate, or
the person who acquires this Option by will or the laws of descent and
distribution or otherwise by reason of the death of Director, may exercise
this Option in full at any time during the period of one year following the
date of Director's death.
(c) If Director's membership on the Board terminates for any reason
other than as described in (a) or (b) above, this Option may be exercised by
Director at any time during the period of three months following such
termination, or by Director's estate (or the person who acquires this
Option by will or the laws of descent and distribution or otherwise by
reason of the death of Director) during a period of one year following
Director's death if Director dies during such three-month period, but in
each case only as to the number of shares Director was entitled to purchase
hereunder upon exercise of this Option as of the date Director's membership
on the Board so terminates.
This Option shall not be exercisable in any event after the expiration of ten
years from the date of grant hereof. The purchase price of shares as to which
this Option is exercised shall be paid in full at the time of exercise (A) in
cash (including check, bank draft or money order payable to the order of the
Company), (B) by delivering to the Company shares of Stock having a fair
market value equal to the purchase price, or (C) any combination of cash or
Stock. No fraction of a share of Stock shall be issued by the Company upon
exercise of an Option or accepted by the Company in payment of the purchase
price thereof; rather, Director shall provide a cash payment for such amount
as is necessary to effect the issuance and acceptance of only whole shares of
Stock. Unless and until a certificate or certificates representing such shares
shall have been issued by the Company to Director, Director (or the person
permitted to exercise this Option in the event of Director's death) shall not
be or have any of the rights or privileges of a stockholder of the Company
with respect to shares acquirable upon an exercise of this Option.
4. WITHHOLDING OF TAX. To the extent that the exercise of this Option or
the disposition of shares of Stock acquired by exercise of this Option
results in compensation income to Director for federal or state income tax
purposes, Director shall deliver to the Company at the time of such exercise
or disposition such amount of money or shares of Stock as the Company may
require to meet its obligation under applicable tax laws or regulations, and,
if Director fails to do so, the Company is authorized to withhold from any
cash or Stock remuneration then or thereafter payable to Director any tax
required to be withheld by reason of such resulting compensation income. Upon
an exercise
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<PAGE>
of this Option, the Company is further authorized in its discretion to
satisfy any such withholding requirement out of any cash or shares of Stock
distributable to Director upon such exercise.
5. STATUS OF STOCK. The Company intends to register for issuance under the
Securities Act of 1933, an amended (the "Act"), the shares of Stock
acquirable upon exercise of this option, and to keep such registration
effective throughout the period this Option is exercisable. In the absence of
such effective registration or an available exemption from registration under
the Act, issuance of shares of Stock acquirable upon exercise of this Option
will be delayed until registration of such shares is effective or an exemption
from registration under the Act is available. The Company intends to use its
best efforts to ensure that no such delay will occur. In the event exemption
from registration under the Act is available upon an exercise of this Option,
Director (or the person permitted to exercise this Option in the event of
Director's death or incapacity), if requested by the Company to do so, will
execute and deliver to the Company in writing an agreement containing such
provisions as the Company may require to assure compliance with applicable
securities laws.
Director agrees that the shares of Stock which Director may acquire by
exercising this Option will not be sold or otherwise disposed of in any
manner which would constitute a violation of any applicable federal or state
securities laws. Director also agrees (i) that the certificates representing
the shares of Stock purchased under this Option may bear such legend or
legends as the Company deems appropriate in order to assure compliance with
applicable securities laws, (ii) that the Company may refuse to register the
transfer of the shares of Stock purchased under this Option on the stock
transfer records of the Company if such proposed transfer would in the
opinion of counsel satisfactory to the Company constitute a violation of any
applicable securities law and (iii) that the Company may give related
instructions to its transfer agent, if any, to stop registration of the
transfer of the shares of Stock purchased under this Option.
6. BINDING EFFECT. This Agreement shall be binding upon and inure to the
benefit of any successors to the Company and all persons lawfully claiming
under Director.
7. GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY, AND CONSTRUED IN
ACCORDANCE WITH THE LAWS OF THE STATE OF TEXAS.
IN WITNESS WHEREOF, the Company has caused this Agreement to be duly
executed by its officer thereunto duly authorized, and Director has executed
this Agreement, all as of the day and year first above written.
BMC SOFTWARE, INC.
By: ____________________________________
________________________________________
Director
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<PAGE>
INDEMNIFICATION AGREEMENT
THIS INDEMNIFICATION AGREEMENT, dated as of this _____ day of _________,
1994 (this "Agreement"), is made and entered into by and between BMC
Software, Inc., a Delaware corporation (the "Company"), and _____________
____________ ("Indemnitee").
W I T N E S S E T H
WHEREAS, the Company and Indemnitee recognize that the Company desires to
be able to attract and retain qualified persons to act as directors and
officers of the Company and that such persons should be protected against
undue risk of personal liability when acting as directors and officers of the
Company.
WHEREAS, the bylaws of the Company require the Company to indemnify and
advance expenses to its directors and officers to the full extent permitted
by the Delaware General Corporation Law, as the same exists or may hereafter
be amended, and Indemnitee has been serving and continues to serve as a
director and or officer of the Company in part in reliance on such bylaws;
WHEREAS, in recognition of Indemnitee's need for substantial protection
against personal liability in order to enhance Indemnitee's continued service
to the Company in an effective manner, and Indemnitee's reliance on the
aforesaid bylaws, and in part to provide Indemnitee with specific contractual
assurance that the protection promised by such bylaws will be available to
Indemnitee (regardless of, among other things, any amendment to or
revocation of such bylaws or any change in the composition of the Company's
Board of Directors or acquisition transaction relating to the Company), the
Company wishes to provide in this Agreement for the indemnification and
advancement of expenses to Indemnitee to the fullest extent (whether partial
or complete) authorized or permitted by law and as set forth in this
Agreement, and, to the extent Insurance is maintained, for the continued
coverage of Indemnitee under the Company's directors' and officers' liability
insurance policies:
NOW, THEREFORE, in consideration of the premises and the covenants
contained herein, and of Indemnitee's continuing to serve the Company
directly or, at its request, another enterprise, and intending to be legally
bound hereby, the Company and Indemnitee do hereby covenant and agree as
follows:
SECTION 1. DEFINITIONS.
(a) CLAIM: any threatened, pending or completed action, suit or
proceeding, whether civil, criminal, administrative, investigative or other,
or any inquiry or investigation, whether instituted by or in the name of the
Company or any other party, that Indemnitee in good faith believes might
lead to the institution of any such action, suit or proceeding.
<PAGE>
(b) EXPENSES: include without limitation attorneys' fees and all
other costs, expenses and obligations reasonably paid or incurred in
connection with investigating, defending, being a witness in or
participating in (including on appeal), or preparing to defend, be a
witness in or participate in, any Claim relating to any Indemnifiable Event.
(c) INDEMNIFIABLE EVENT: any event or occurrence related to the
fact that Indemnitee is or was a director, officer, employee or agent of the
Company, or is or was serving at the request of the Company as a director,
officer, employee, trustee, agent or fiduciary of another corporation,
partnership, joint venture, employee benefit plan, trust or other
enterprise, or occurring by reason of anything done or not done by
Indemnitee in any such capacity.
(d) INDEPENDENT LEGAL COUNSEL: a law firm or a member of a law
firm that neither is presently nor in the past five years has been retained
to represent: (i) the Company or Indemnitee in any matter material to either
such party (other than with respect to matters concerning the rights of
Indemnitee under this Agreement, or of other Indemnitees under similar
indemnity agreements), or (ii) any other party to the Claim giving rise to a
claim for indemnification hereunder. Notwithstanding the foregoing, the term
"Independent Legal Counsel" shall not include any person who, under the
applicable standards of professional conduct then prevailing, would have a
conflict of interest in representing either the Company or Indemnitee in an
action to determine Indemnitee's right to indemnification under this
Agreement.
(e) REVIEWING PARTY: any appropriate person or body consisting of
a member or members of the Company's Board of Directors or any other person
or body appointed by the Board of Directors who is not a party to the
particular Claim for which Indemnitee is seeking indemnification, the
stockholders of the Company, or Independent Legal Counsel.
SECTION 2. SERVICES BY INDEMNITEE. Indemnitee will serve as a director
and/or officer of the Company faithfully and to the best of his ability so
long as he is duly elected or qualified in accordance with the bylaws of the
Company or until such time as he tenders his resignation in writing.
Indemnitee may at any time and for any reason resign from such position
(subject to any other contractual obligation or any other obligation imposed
by operation of law), in which event the Company shall have no obligation
under this Agreement to continue Indemnitee in any such position; provided,
however, that the Company shall continue to be fully obligated hereunder.
Nothing in this Agreement shall confer upon the Indemnitee the right to
continue in the employ of the Company or affect the right of the Company to
terminate the Indemnitee's employment at any time in the sole discretion of
the Company, with or without cause.
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<PAGE>
SECTION 3. BASIC INDEMNIFICATION ARRANGEMENT.
(a) In the event Indemnitee was, is or becomes a party to or witness
or other participant in, or is threatened to be made a party to or witness
or other participant in, a Claim by reason of (or arising in part out of) an
Indemnifiable Event, the Company shall indemnify Indemnitee to the full
extent authorized or permitted by law as soon as practicable, but in any
event no later than 45 days after written demand is presented to the
Company, against any and all Expenses, judgments, fines, penalties, taxes
and any and all amounts paid in settlement (including all interest,
assessments and other charges paid or payable in connection with or in
respect of such Expenses, judgments, fines, penalties, taxes or amounts
paid in settlement) of such Claim. If so requested by Indemnitee, and in
accordance with Section 7 hereof, the Company shall advance any and all
reasonable Expenses to Indemnitee (an "Expense Advance").
(b) Notwithstanding paragraph (a) of this Section 3, the obligations
of the Company under this Section 3 shall be subject to the condition that
the Reviewing Party shall not have determined (in a written opinion, in any
case in which the Independent Legal Counsel is involved), no later than 45
days after written demand is presented to the Company in accordance with
paragraph (a) of this Section 3, that Indemnitee would not be permitted to
be indemnified under applicable law; provided, however, that if Indemnitee
has commenced or thereafter commences legal proceedings in a court of
competent jurisdiction to secure a determination that Indemnitee should be
indemnified under applicable law, any determination made by the Reviewing
Party that Indemnitee would not be permitted to be indemnified under
applicable law shall not be binding. If there has been no determination by
the Reviewing Party or if the Reviewing Party determines that Indemnitee
substantively would not be permitted to be indemnified in whole or in part
under applicable law. Indemnitee shall have the right to commence litigation
in any court in the State of Texas or the State of Delaware having subject
matter jurisdiction thereof and in which venue is proper seeking an initial
determination by the court or challenging any such determination by the
Reviewing Party or any aspect thereof, including the legal or factual bases
therefor, and the Company hereby consents to service of process and to
appear in any such proceeding. Alternatively, Indemnitee at his option may
seek an award in arbitration to be conducted by a single arbitrator pursuant
to the rules of the AMERICAN ARBITRATION ASSOCIATION, such award to be made
within sixty days following the filing of the demand for arbitration. The
Company shall not oppose Indemnitee's right to seek any such adjudication or
award in arbitration. Such judicial proceeding or arbitration shall be made
DE NOVO and Indemnitee shall not be prejudiced by reason of a determination
made or deemed to have been made pursuant to the terms of this Agreement
that the Indemnitee is not entitled to indemnification. The Company further
agrees to stipulate in any such court or before any such arbitrator that the
Company is bound by all the provisions of this Agreement and is precluded
from making any assertion to the contrary. If the court or arbitrator
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<PAGE>
shall determine that Indemnitee is entitled to any indemnification
hereunder, the Company shall pay all reasonable Expenses reasonably paid
or incurred by Indemnitee in connection with such adjudication or award in
arbitration (including, but not limited to, any appellate proceedings).
Any determination by the Reviewing Party otherwise shall be conclusive and
binding on the Company and Indemnitee.
SECTION 4. INDEMNIFICATION FOR COSTS, CHARGES AND EXPENSES OF SUCCESSFUL
PARTY. Notwithstanding the other provisions of this Agreement, to the extent
that Indemnitee has served as a witness on behalf of the Company or has been
successful, on the merits or otherwise, in defense of any or all Claims
relating in whole or in part to an Indemnifiable Event, or in defense of any
issue or matter therein, including, without limitation, dismissal without
prejudice, Indemnitee shall be indemnified against Expenses reasonably paid
or incurred by him or on his behalf in connection therewith.
SECTION 5. PARTIAL INDEMNIFICATION. If Indemnitee is entitled under any
provision of this Agreement to indemnification by the Company of some or a
portion of the Expenses, judgments, penalties, fines and amounts paid in
settlement of a Claim reasonably paid or incurred by him in connection with
the defense, investigation, settlement or appeal of any or all Claims
relating in whole or in part to an Indemnifiable Event, but not, however,
for the total amount thereof, the Company shall nevertheless indemnify
Indemnitee for the portion thereof incurred by him to which Indemnitee is
entitled.
SECTION 6. PRESUMPTIONS AND EFFECT OF CERTAIN PROCEEDINGS. Upon making a
written demand for indemnification hereunder it shall be presumed that
Indemnitee is entitled to such Indemnification and the Company shall have the
burden of proof in the making of any determination contrary to such
presumption. Neither the failure of the Reviewing Party to have made a
determination as to whether Indemnitee has met any particular standard of
conduct or had any particular belief, nor an actual determination by the
Reviewing Party that Indemnitee has not met such standard of conduct or did
not have such belief, prior to the commencement of proceedings by Indemnitee
to secure judicial determination or award in arbitration that Indemnitee
shall be indemnified under applicable law, shall be a defense to Indemnitee's
claim or create a presumption that Indemnitee has not met any particular
standard of conduct or did not have any particular belief. For purposes of
this Agreement, the termination of any claim, action, suit or proceeding, by
judgment, order, settlement or conviction, or upon a plea of NOLO CONTENDERE
or its equivalent, shall not, of itself: (a) create a presumption that
Indemnitee did not meet any particular standard of conduct or have any
particular belief or that a court has determined that indemnification is not
permitted by applicable law; or (b) otherwise adversely affect the rights of
Indemnitee to indemnification except as may be provided herein.
SECTION 7. ADVANCEMENT OF EXPENSES AND COSTS. All reasonable Expenses
incurred by Indemnitee shall be paid by the Company in advance of the final
disposition of such Claim at the request of Indemnitee within twenty days
after the receipt by the Company of a statement
-4-
<PAGE>
or statements from Indemnitee requesting such advance or advances from time
to time. Indemnitee's entitlement to such expenses shall include those
incurred in connection with any proceeding by Indemnitee seeking an
adjudication or award in arbitration pursuant to Section 3(b) of this
Agreement. Such statement or statements shall reasonably evidence the Expenses
incurred by Indemnitee in connection therewith and shall include or be
accompanied by an undertaking by or on behalf of Indemnitee to repay all such
amounts advanced if, and when, it is ultimately determined by a final
judicial or arbitration decision (as to which all rights of appeal therefrom
have been exhausted or lapsed) that Indemnitee is not entitled to be
indemnified against such Expenses by the Company as provided by this Agreement
or otherwise. Subject to the Indemnitee delivering the undertaking referred
to in the preceding sentence, the Company shall be required to pay Expenses
as provided in this Section 7 even if the claim to which they relate is a
matter as to which the Indemnitee would not be entitled to indemnification
hereunder if the allegations underlying such claim were true.
SECTION 8. NOTIFICATION AND DEFENSE OF CLAIM. Promptly after receipt by
Indemnitee of notice of the commencement of any Claim relating in whole or in
part to an Indemnifiable Event, Indemnitee will, if a claim in respect
thereof is to be made against the Company under this Agreement, notify the
Company in writing of the commencement thereof; but the omission to so notify
the Company will not relieve it from any liability that it may have to
Indemnitee otherwise under this Agreement. Notwithstanding any other
provision of this Agreement, with respect to any such Claim as to which
Indemnitee notifies the Company of the commencement thereof:
(a) The Company will be entitled to participate therein at its own
expense; and
(b) Except as otherwise provided in this Section 8(b), to the extent
that it may wish, the Company, jointly with any other indemnifying party
similarly notified, shall be entitled to assume the defense thereof, with
counsel satisfactory to Indemnitee. After notice from the Company to
Indemnitee of its election to so assume the defense thereof, the Company
shall not be liable to Indemnitee under this Agreement for any legal or
other expenses subsequently incurred by Indemnitee in connection with the
defense thereof other than reasonable costs of investigation or as
otherwise provided below. Indemnitee shall have the right to employ his own
counsel in such Claim, but the fees and expenses of such counsel incurred
after notice from the Company of its assumption of the defense thereof
shall be at the expense of Indemnitee unless (i) the employment of counsel
by Indemnitee has been authorized by the Company, (ii) Indemnitee shall
have reasonably concluded that there may be a conflict of interest between
the Company and Indemnitee in the conduct of the defense of such action or
(iii) the Company shall not in fact have employed counsel to assume the
defense of such Claim, in each of which cases the fees and expenses of
counsel shall be at the expense of the Company. The Company shall not be
entitled to assume the defense of any Claim brought by or on
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<PAGE>
behalf of the Company or as to which Indemnitee shall have made the
conclusion provided for in (ii) above.
(c) The Company shall not be liable to indemnify Indemnitee under
this Agreement for any amounts paid in settlement of any Claim effected
without its written consent. The Company shall not settle any Claim in any
manner that would impose any penalty or limitation on Indemnitee without
Indemnitee's written consent. Neither the Company nor Indemnitee will
unreasonably withhold their consent to any proposed settlement.
SECTION 9. OTHER RIGHTS TO INDEMNIFICATION. The rights of Indemnitee
hereunder shall be in addition to any other rights Indemnitee may have or
hereafter under any bylaw, agreement, vote of stockholders or disinterested
directors, provision of the Certificate of Incorporation (as amended from
time to time) of the Company, the Delaware General Corporation Law or
otherwise. To the extent that a change in the Delaware General Corporation
Law (whether by statute or judicial decision) permits greater indemnification
by agreement than would be afforded currently under the Company's bylaws and
this Agreement, it is the intent of the parties hereto that Indemnitee shall
enjoy by this Agreement the greater benefits so afforded by such change.
SECTION 10. ATTORNEYS' FEES AND OTHER EXPENSES TO ENFORCE AGREEMENT. In
the event that Indemnitee is subject to or intervenes in any proceeding in
which the validity or enforceability of this Agreement is at issue or seeks
an adjudication or award in arbitration to enforce his rights under, or to
recover damages for breach of, this Agreement, Indemnitee, if he prevails in
whole or in part in such action, shall be entitled to recover from the
Company and shall be indemnified by the Company against, any actual expense
for attorneys' fees and disbursements reasonably incurred by him.
SECTION 11. SEVERABILITY. The provisions of this Agreement shall be
severable in the event that any of the provisions hereof (including any
provision within a single section, paragraph or sentence) is held by a court
of competent jurisdiction to be invalid, void or otherwise unenforceable in
any respect, and the validity and enforceability of any such provision in
every other respect and all of the remaining provision hereof shall not be in
any way impaired and shall remain enforceable to the fullest extent permitted
by law.
SECTION 12. SAVINGS CLAUSE. If this Agreement or any portion hereof shall
be invalidated on any ground by any court of competent jurisdiction, then
the Company shall nevertheless indemnify Indemnitee as to any and all
Expenses, judgments, penalties, fines, taxes and any and all amounts paid in
settlement (including all interest, assessments and other charges paid or
payable in connection with or in respect of any of the foregoing) with
respect to any Claim to the full extent permitted by any applicable portion
of this Agreement that shall not
-6-
<PAGE>
have been invalidated or by any applicable provisions of the law of Delaware
or the law of any other jurisdiction.
SECTION 13. IDENTICAL COUNTERPARTS. This Agreement may be executed in
one or more counterparts, each of which shall for all purposes be deemed to
be an original but all of which together shall constitute one and the same
Agreement. Only one such counterpart signed by the party against whom
enforceability is sought needs to be produced to evidence the existence of
this Agreement.
SECTION 14. HEADINGS. The headings of the paragraphs of this Agreement
are inserted for convenience only and shall not be deemed to constitute part
of this Agreement or to affect the construction thereof.
SECTION 15. MODIFICATION AND WAIVER. No supplement, modification or
amendment of this Agreement shall be binding unless executed in writing by
both of the parties hereto. No waiver of any of the provisions of this
Agreement shall be deemed or shall constitute a waiver of any other
provisions hereof (whether or not similar) nor shall such waiver constitute a
continuing waiver.
SECTION 16. NOTICES. All notices, requests, demands and other
communications hereunder shall be in writing and shall be deemed to have been
duly given (i) if delivered by hand and receipted for by the party to whom
said notice or other communication shall have been directed or (ii) if mailed
by certified or registered mail with postage prepaid, on the third business
day after the date on which it is so mailed.
(a) If to Indemnitee, to:
_________________________
_________________________
_________________________
_________________________
(b) If to the Company, to:
BMC Software, Inc.
2101 CityWest Blvd.
Houston, TX 77042-2827
Attn: M. Brinkley Morse
-7-
<PAGE>
With a copy to:
Vinson & Elkins L.L.P.
1001 Fannin
3300 First City Tower
Houston, Texas 77002-6760
Attn: John S. Watson
or to such other address as may have been furnished to Indemnitee by the
Company or to the Company by Indemnitee, as the case may be.
SECTION 17. SUBROGATION. In the event of payment under this Agreement,
the Company shall be subrogated to the extent of such payment to all of the
rights of recovery of the Indemnitee, who shall execute all papers required
and shall do everything that may be necessary to secure such rights, including
the execution of such documents necessary to enable the Company effectively
to bring suit to enforce such rights.
SECTION 18. NO DUPLICATION OF PAYMENTS. The Company shall not be liable
under this Agreement to make any payment in connection with any Claim made
against Indemnitee to the extent Indemnitee has otherwise actually received
payment (under any insurance policy, bylaw or otherwise) of the amounts
otherwise indemnifiable hereunder.
SECTION 19. LIABILITY INSURANCE. To the extent the Company maintains an
insurance policy or policies providing directors' and officers' liability
insurance, Indemnitee shall be covered by such policy or policies, in
accordance with its or their terms, to the maximum extent of the coverage
available for any director or officer.
SECTION 20. BINDING EFFECT. This Agreement shall be binding upon and
inure to the benefit of and be enforceable by the parties hereto and their
respective successors, assigns, spouses, heirs, executors, personal and legal
representatives, including any direct or indirect successor by purchase,
merger, consolidation or otherwise to all or substantially all of the business
or assets of the Company. The Company shall require and cause any successor
(whether direct or indirect, by purchase, merger, consolidation or otherwise)
to all, substantially all or a substantial part of the business or assets of
the Company, by written agreement in form and substance satisfactory to
Indemnitee, expressly to assume and agree to perform this Agreement in the
same manner and to the same extent that the Company would be required to
perform if no such succession had taken place. This Agreement shall continue
in effect regardless of whether Indemnitee continues to serve as an officer,
director, employee or agent of the Company or of any other enterprise at the
Company's request.
SECTION 21. GOVERNING LAW. THE PARTIES AGREE THAT THIS AGREEMENT SHALL
BE GOVERNED BY, AND CONSTRUED AND ENFORCED IN ACCORDANCE
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<PAGE>
WITH, THE LAWS OF THE STATE OF DELAWARE APPLICABLE TO CONTRACTS MADE AND TO
BE PERFORMED IN SUCH STATE WITHOUT GIVING EFFECT TO THE PRINCIPLES OF
CONFLICTS OF LAWS.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement on the
day and year first above written.
ATTEST: BMC SOFTWARE, INC.
By: ___________________________ By: __________________________
INDEMNITEE
______________________________
(Name)
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<PAGE>
EXHIBIT 13.1
FINANCIAL HIGHLIGHTS
Strong revenues in North America, improved results in international
operations, favorable response to the open systems strategy and renewed
investment in mainframe computing resulted in a 20% increase in revenue for
BMC Software.
Net earnings increased 37% over fiscal 1994 and earnings per share increased
41%. This was accomplished while we invested in building the infrastructure
that will support BMC as we pursue the open systems market.
Revenues from BMC Software's core products for IMS and DB2 databases
increased 20% over fiscal 1994. In fiscal 1995, the company introduced the
greatest number of new mainframe products in its history.
PATROL had the highest sales in its first full year of any product in BMC
Software history, with over $15 million in total revenues and a 115% increase
in revenues from the third to fourth quarter.
<TABLE>
<CAPTION>
IN THOUSANDS, EXCEPT PER SHARE AMOUNTS
FOR THE YEAR ENDED MARCH 31, 1995 1994 1993 1992 1991
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Total Revenues $345,000 $288,500 $238,500 $184,607 $128,179
Operating Income $108,628* $ 79,904** $ 86,085 $ 62,394 $ 32,423
Net Earnings $ 77,517* $ 56,489** $ 65,386 $ 46,184 $ 24,352
Earnings Per Share $ 3.04* $ 2.16** $ 2.50 $ 1.79 $ 0.97
Shares Used In Computing EPS 25,488 26,152 26,177 25,843 25,106
Working Capital $ 35,166 $ 29,429 $ 74,449 $108,038 $ 62,551
Total Assets $502,649 $417,527 $378,652 $246,249 $151,353
Stockholders' Equity $306,154 $250,400 $223,386 $140,891 $ 79,728
<FN>
* Includes the impact of a one-time charge related to several fourth quarter
transactions of $29,260,000 (pre-tax), or $25,701,000 (net of tax).
Excluding this one-time charge, fiscal 1995 earnings were $103,218,000 or
$4.05 per share. Operating income was $137,888,000.
** Includes the impact of a one-time charge of $32,038,000 (pre-tax), or
$29,398,000 (net of tax), for the acquisition of Patrol Software.
Excluding this one-time charge, fiscal 1994 earnings were $84,887,000 or
$3.25 per share. Operating income was $111,942,000.
</TABLE>
1
<PAGE>
BMC SOFTWARE, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL
CONDITION
OVERVIEW
The Company designs, develops, markets and maintains systems software
products that facilitate data and database management for large enterprises.
The Company's core business is the provision of these products and related
maintenance services for use with IBM and IBM-compatible mainframe computer
systems, with a major emphasis on products that enhance the predominant
database management subsystems, IMS and DB2. The Company is also a leading
provider of database and application monitoring and management software for
client/server networks. In each of the last three fiscal years, the Company's
administrative tools and utility products for IMS and DB2 contributed
approximately 70% of total revenues. The administrative tools increase
productivity by facilitating database management operations. The utility
products increase data availability and reduce system downtime by
dramatically reducing the time necessary to perform time-critical operations
such as loading, copying or reorganizing an IMS or DB2 database. The Company
is also a leading provider of performance and function enhancements for the
key IBM mainframe-based network communications subsystems CICS and IMS/TM.
The Company has invested significantly in the development and acquisition
of systems software products for the rapidly emerging client/server systems,
which require major functional and performance enhancements to support
mission-critical applications. The Company's strategy is to build upon its
core competencies of managing and administering large databases by developing
and acquiring products that address open systems relational databases and
operating systems. Since January 1994, the Company has invested over
$65,000,000 in its client/server product strategy, in both internal research
and development and technology acquisitions. In January 1994, the Company
acquired the PATROL monitoring and event-management software product for
client/server systems. In the fourth quarter of fiscal 1995, the Company
acquired a suite of cross platform, open systems development tools, which
include sophisticated graphical user interfaces, communications layers and
database management capabilities. The Company also acquired in the fourth
quarter of fiscal 1995 distribution rights to current and future high speed
utilities developed by DataTools, Inc. and an option to acquire the company.
Fiscal 1995's total revenues of $345,000,000 were 20% higher than fiscal
1994 total revenues. The increase was the result of a 22% increase in North
American product license revenues, a 24% increase in international product
license revenues and a 15% increase in worldwide maintenance revenues. Net
earnings in fiscal 1995 were $103,218,000, excluding a one-time write-off of
$25,701,000 (net of income taxes) related to fourth quarter acquisitions of
technology and a purchase option to acquire DataTools, Inc. These results
represent a 22% increase over fiscal 1994 net earnings of $84,887,000
(excluding the acquired research and development charge related to PATROL).
Increased net earnings were attributable to the 20% total revenue growth;
operating income as a percentage of revenues ("Operating Margins") remained
relatively unchanged from fiscal 1994 to 1995. Since the Company's costs,
however, are to a large extent fixed in the short term, failure to achieve
planned revenue growth in a period would likely have a material adverse
effect on Operating Margins and net earnings. The Company intends to increase
its research and development and marketing spending significantly in fiscal
1996, which will place additional pressure on its Operating Margins if
revenue expectations are not met, particularly by its new client/server
products. Sales, support and distribution costs for client/server software
products may be higher, as a percentage of sales, than for mainframe
products, because of lower unit prices and more widely dispersed customers
and prospects. The Company intends to complement its direct sales force by
distributing its client/server products through large hardware and software
vendors. This strategy is designed to increase the Company's geographic
presence and to provide the
25
<PAGE>
increased levels of sales and support contact with customers and prospects
necessary to succeed in the open systems markets on a cost-effective basis
relative to a purely direct sales and distribution channel. There can be no
assurance that this strategy will be effective, however. If the Company's
direct sales force is the primary channel for its client/server products, its
cost of sales will likely increase and Operating Margins could be reduced.
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 and the percentage changes of such items as compared
to the indicated prior fiscal year. The year-to-year comparisons of financial
results are not necessarily indicative of future results.
<TABLE>
<CAPTION>
PERCENTAGE OF PERCENTAGE CHANGES
TOTAL REVENUES -------------------
YEARS ENDED MARCH 31, 1994 1995
--------------------- COMPARED COMPARED
1993 1994 1995 TO 1993 TO 1994
---- ---- ---- -------- --------
<S> <C> <C> <C> <C> <C>
REVENUES:
Licenses 57.4% 57.9% 59.4% 22.1% 22.6%
Maintenance 42.6 42.1 40.6 19.4 15.4
----- ----- -----
Total revenues 100.0 100.0 100.0 21.0 19.6
----- ----- -----
Selling and marketing expenses 28.2 26.0 26.0 11.8 19.3
Research and development expenses 16.0 16.3 16.1 23.2 18.1
Cost of maintenance services and
product licenses 9.8 9.8 9.3 21.2 13.3
General and administrative expenses 10.0 9.1 8.6 10.3 14.4
Acquired research and development costs -- 11.1 8.5 N/A (8.7)
----- ----- -----
Operating income 36.0 27.7 31.5 (7.2) 35.9
Other income 3.1 3.7 3.4 46.2 9.3
----- ----- -----
Earnings before income taxes 39.1 31.4 34.9 (3.0) 32.8
Income taxes 11.7 11.8 12.4 21.8 25.5
----- ----- -----
Net earnings 27.4% 19.6% 22.5% (13.6)% 37.2%
===== ===== =====
Net earnings, excluding acquired R&D costs 27.4% 29.4% 29.9% 29.8% 21.6%
===== ===== =====
</TABLE>
REVENUES
The Company generates revenues from the licensing of its 75 computer
software products and fees for its associated software maintenance,
enhancement and support services. In fiscal 1995, revenues totaled
$345,000,000, a 20% increase over fiscal 1994 revenues of $288,500,000. From
fiscal 1993 to fiscal 1994, total revenues increased 21% from $238,500,000.
The Company's North American operations generated approximately 57% of total
revenues in fiscal 1993 and approximately 61% of total revenues in fiscal
1994 and 1995, while international operations contributed approximately 43%
of total revenues in fiscal 1993 and 39% in fiscal 1994 and 1995. License
revenues comprised 57%, 58% and 59% of total revenues in fiscal 1993, 1994
and 1995, while maintenance revenues for the same years contributed 43%, 42%
and 41%, respectively. The Company has increased its product list prices by
approximately 5% in each of the last three fiscal years. Although the Company
expects revenues to continue to grow in fiscal 1996 and beyond, there can be
no assurance that such growth will be achieved or that growth rates in the
future will be comparable to those in prior years.
26
<PAGE>
LICENSE REVENUES
License revenues comprise two categories: product license fees and product
upgrade fees. Product license fees consist of the fees paid when customers
initially license a copy of a product and of fees customers pay to
restructure their existing licenses to increase the discounts used in
calculating future upgrade and maintenance charges for their installed
products. Product upgrade fees are charged when a customer acquires the right
to run an already licensed product on additional processing capacity, which
may be measured traditionally by central processing unit ("CPU") tier or by
millions of instructions per second ("MIPS"). The product upgrade fee
category includes upgrade fees for current and for future additional
processing capacity. All license and upgrade fees are recognized as revenue
when the license is executed and the applicable products have been delivered
in accordance with the Company's standard revenue recognition policies.
License revenues in fiscal 1995 increased by 23% to $204,957,000 from
$167,176,000. This license revenue growth was derived from increased product
upgrade fees for future additional processing capacity and increased
restructuring fees, primarily as components of enterprise license
transactions, from new license sales of the PATROL product line and, to a
lesser extent, from new license sales of mainframe software products
introduced in fiscal 1995. Product upgrade fees for future additional
processing capacity and restructuring charges comprised 19% of the Company's
total revenues for fiscal 1995 compared to 13% of total fiscal 1994 revenues.
Total product upgrade fees for both current and future additional processing
capacity were 25% of total revenues in fiscal 1995, as compared to 27% in
fiscal 1994 and 19% in fiscal 1993. Higher product upgrade fees, for both
current and future additional processing capacity, and to a lesser extent,
restructuring fees, were the primary contributors to fiscal 1994's license
revenue growth of 22% over fiscal 1993 license revenues of $136,901,000. The
continuing trend towards large, enterprise-wide license transactions was the
primary contributor to North American license revenue growth of 35% from
$75,464,000 in fiscal 1993 to $101,959,000 in fiscal 1994 and of 22% to
$124,382,000 in fiscal 1995 over fiscal 1994. International license revenues
increased 6% from $61,437,000 in fiscal 1993 to $65,217,000 in 1994.
International license revenue growth in fiscal 1994 was adversely impacted by
weak economic conditions, internal execution issues and, to a lesser extent,
foreign currency fluctuations. From fiscal 1994 to fiscal 1995, international
license revenues grew 24% to $80,575,000. Of the 24% increase in
international license revenue in fiscal 1995, 8% is attributed to changes in
foreign currency exchange rates from fiscal 1994. As in North America,
enterprise license transactions contributed significantly to this growth, as
well as new license sales from the Company's PATROL software products.
Operations in Germany and the United Kingdom contributed a substantial
portion of the international license revenue growth in fiscal 1995, and the
French, Italian and Japanese operations showed strong percentage gains in
fiscal 1995 over their performances in fiscal 1994.
License fees from enterprise license transactions have been and continue
to be a significant component of the Company's license and total revenues.
The Company introduced its enterprise licensing policy in fiscal 1993 in
response to industry trends and its largest customers' requirements for a
more flexible alternative to CPU-dependent pricing. An enterprise license
allows the customer to run an unlimited number of copies of a product on its
CPUs without regard to their size, subject to a maximum limit on the
aggregate power of the CPUs as measured in MIPS. An enterprise license
transaction may include license fees for new products and/or additional
copies of products already licensed, an upgrade fee for additional processing
capacity beyond the customer's current usage level and/or a restructuring
fee. Enterprise licenses are limited in duration, generally do not cover the
Company's full product lines and do not include products that are not
generally available on the date of the transaction. The upgrade fee for
future processing capacity typically represents from over half to
substantially all of the
27
<PAGE>
total license fees included in an enterprise license transaction. Enterprise
licenses do not protect a licensee from incurring additional charges if the
licensee exceeds the stipulated processing capacity level. At the end of the
term, and in many cases annually during the term, additional fees are owed if
the customer exceeds the processing capacity level.
MAINTENANCE REVENUES
Maintenance revenues represent annual maintenance fees charged to
perpetual license customers entitling them to product enhancements, technical
support services and ongoing compatibility with third-party operating
systems. Maintenance charges are generally 15% to 20% of the license fee for
the product at the time of renewal, reduced by applicable discounts.
Maintenance revenues also include the bundled fees for the initial
maintenance period covered by the related perpetual license agreement.
Maintenance revenues for fiscal 1994 were $121,324,000, a 19% increase over
fiscal 1993 maintenance revenues of $101,599,000. Fiscal 1995 maintenance
revenues of $140,043,000 represented a 15% increase over fiscal 1994. The
Company intends to continue 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 increased over the last three fiscal years because of
continued growth in the base of installed products and high maintenance
renewal rates. Also, maintenance fees are based on a product's current list
price which varies depending on the size of the CPU on which the product is
installed. The Company thus receives higher maintenance fees under its tiered
pricing policy when customers install products on larger CPUs. Maintenance
revenues in a particular year are impacted by the level of license revenue in
the preceding years, the bundled fees for the initial maintenance period and
by enterprise license transactions. As discussed above, customers can
acquire, through payment of restructuring fees, higher volume-based discounts
that apply to future maintenance and other charges. The reduction in the rate
of maintenance revenue growth from fiscal 1994 to fiscal 1995 is primarily
attributable to these discounts.
PRODUCTS
At fiscal year end, the Company marketed 75 products comprising ten
product groups. In fiscal years 1993, 1994 and 1995, the IMS Database
Utilities series contributed 39%, 38% and 37% of total revenues and 35%, 35%
and 34% of license revenues. The Company believes that the majority of
enterprise data remains stored in IMS databases, which will help maintain the
long-term viability of IMS. The Company thus anticipates that revenue from
its IMS-based products will continue to be a significant source of revenue.
The IMS product group includes the Company's most successful product,
LOADPLUS-TM-, which accounted for 10% of total revenues in fiscal 1993 and 9%
of total revenues in fiscal years 1994 and 1995. No other product represented
10% or more of total revenues in the fiscal years represented.
Total revenues from the Masterplan for DB2 product series grew at a
slightly higher rate than overall revenues in fiscal 1995. This product group
represented 33% of total revenues in fiscal years 1993 and 1994 and 34% of
total revenues in fiscal 1995. The Masterplan for DB2 products contributed
42% of license revenues in fiscal 1993 and 39% of license revenues in fiscal
years 1994 and 1995. The Company has targeted the high-end, intensive DB2
users as its market segment and competes primarily on the functionality,
integrity, quality and value of its products. The Company believes it
competes effectively on this basis and expects the DB2 product line to
increase its percentage contribution to total revenues as the Company
develops additional DB2 products and large data processing operations
continue to implement new DB2 applications. The market for DB2 tools and
utilities, however, is far more competitive than the markets for the
Company's other mainframe product lines. The Company expects the DB2 market
will continue to be highly competitive as other independent software vendors
develop, enhance and aggressively price their DB2 product offerings.
28
<PAGE>
Through fiscal 1995, the PATROL software product line represented the
Company's only nonmainframe product family. During fiscal 1995, total
revenues from the PATROL products generated $15,106,000, or 4% of total
revenues, as compared to revenues of approximately $1,000,000 in fiscal 1994.
The Company will continue to invest heavily in the development and
enhancement of the PATROL product family as well as other client/server
products. While the Company expects significant growth from these products
over the long term, the market for client/server software products is not as
mature as the mainframe market in which the Company has historically
generated its revenues. The client/server systems software market is also
substantially more competitive than the Company's traditional markets, as
both large, integrated software and hardware providers and smaller, more
specialized vendors have targeted, and invested heavily in entering, these
markets. There can be no assurance that the market acceptance and resulting
revenue growth from its client/server products will meet the Company's
expectations.
OTHER INCOME
Other income was approximately 3%, 4% and 3% of total revenues in fiscal
years 1993, 1994 and 1995, respectively. Other income consists primarily of
interest earned on cash and cash equivalents, financed receivables and
marketable securities. Other income increased by 46% from fiscal 1993 to
fiscal 1994 and by 9% from fiscal 1994 to 1995. The increase in interest
income is due to larger invested cash balances in 1995 than in 1994, as well
as to higher interest rates and financing income. While the Company achieved
higher rates of return in fiscal year 1995, the rate of growth in interest
income from fiscal year 1994 to fiscal year 1995 was slowed due to the use of
funds in connection with the Company's stock repurchase program, technology
acquisitions and federal income tax payments.
EXPENSES
SELLING AND MARKETING
Selling and marketing expenses increased 19%, to $89,724,000, in fiscal
1995 as compared to fiscal 1994 and 12%, to $75,198,000, in fiscal 1994 as
compared to fiscal 1993. As a percentage of total revenues, selling and
marketing expenses represented 28%, 26% and 26% in fiscal 1993, 1994 and
1995, respectively. Marketing support, sales salaries, sales commissions and
fringe benefits comprise the majority of selling and marketing expenses.
Other principal components are costs of trade publication advertisements,
printing and mailing brochures, worldwide Company-sponsored technical
seminars, occupancy costs and telecommunications expenses. During fiscal
1995, the Company increased its investment within the marketing organization
through personnel additions and increases in amounts spent for advertising
and marketing programs. Total expenses related to the Company's marketing
organization increased 36% from fiscal 1994 to fiscal 1995. The Company plans
to continue to strengthen its marketing function in the next fiscal year.
Also, sales commissions, which is the largest component of selling and
marketing expenses, increased 36%. The increase in sales commissions is
primarily attributable to increased overall sales and to an increase in sales
by various agents of the Company that operate in countries where the Company
does not have offices. Contributing to the increase in selling and marketing
expenses in fiscal 1994 over fiscal 1993 was the worldwide increase in sales
force headcount in fiscal 1994.
RESEARCH AND DEVELOPMENT
Research and development expenses increased 18%, to $55,493,000, in fiscal
1995 from fiscal 1994 and increased 23%, to $46,969,000 in fiscal 1994 from
fiscal 1993. As a percentage of total revenues, research and development
expenses were 16% for fiscal 1993, 1994 and 1995. In the most recent two
fiscal years, the Company has increased the number of product development and
quality assurance personnel in the client/server area. During fiscal 1995,
the Company more than doubled its
29
<PAGE>
expenditures in this area compared to the prior fiscal year. The Company has
also continued to expand the number of developers and quality assurance
personnel in the Masterplan for DB2, IMS Database Utilities and Network
product groups. The reduction in the growth rate of research and development
expenses from fiscal 1994 to fiscal 1995 was due to a reduction in the hiring
rate. Research and development expenses also include computer hardware and
software costs and telecommunications expenses necessary to maintain the
Company's data processing center, which have also increased over the
three-year period. The Company expects research and development costs to
continue to increase in fiscal 1996 as the Company increases the depth and
breadth of most of its product lines.
COST OF MAINTENANCE SERVICES AND PRODUCT LICENSES
Cost of maintenance services and product licenses increased 13% in fiscal
1995 as compared to fiscal 1994 and increased 21% in fiscal 1994 as compared
to fiscal 1993. These expenses represented 10% of total revenues in fiscal
1993 and 1994, and 9% of total revenues in fiscal 1995. Cost of maintenance
services and product licenses consist of compensation of technical employees
providing customer support and amortization of both purchased and internally
developed software.
During fiscal 1993, 1994 and 1995, the Company capitalized approximately
$4,986,000, $4,771,000 and $6,883,000, respectively, of software development
costs. Also, pursuant to Statement of Financial Accounting Standards (SFAS)
No. 86, the Company recorded applicable amortization of capitalized software
development costs of approximately $4,074,000, $4,771,000 and $5,134,000 in
fiscal 1993, 1994 and 1995, respectively. During fiscal 1993, 1994 and 1995,
the Company accelerated amortization of certain older products, which
contributed to the increase in all years.
GENERAL AND ADMINISTRATIVE
General and administrative expenses increased 14%, to $29,935,000 in
fiscal 1995 as compared to fiscal 1994 and increased 10%, to $26,175,000 in
fiscal 1994 from fiscal 1993. General and administrative expenses represented
10%, 9% and 9% of total revenues for fiscal 1993, 1994 and 1995,
respectively. General and administrative expenses primarily include the
compensation of employees in finance and accounting, word processing, product
distribution, human resources and other administrative functions. Other
expenses include legal, insurance, tax and accounting expenses and costs of
managing the Company's foreign currency exposure. The increase in the rate of
growth from fiscal 1994 to fiscal 1995 is due to, among other factors, the
Company's addition of a new chief operating officer and an overall increase
in administrative and clerical personnel necessary to keep pace with the
growth of the Company's operations.
ACQUIRED RESEARCH & DEVELOPMENT COSTS
During the fourth quarter of fiscal 1995, the Company completed the
acquisitions of stock and assets (including in-process research and
development) of several technology companies for an aggregate purchase price
of $24,485,000, including warrants to purchase the Company's stock valued at
approximately $3,280,000 and direct acquisition and integration costs. Also,
as of March 31, 1995, the Company purchased product distribution rights and a
purchase option from DataTools, Inc. for $10,000,000. The Company's right to
exercise its purchase option commences March 31, 1996 and expires on March
31, 1998. As part of this transaction, the Company secured exclusive
distribution rights for all software products owned, purchased or developed
by DataTools, Inc. These rights expire on March 31, 1998, if the Company does
not exercise its purchase option.
The Company accounted for all of the acquisition transactions discussed
above using the purchase method and recorded a $25,701,000 charge, net of an
income tax benefit of $3,559,000, for acquired research and development costs
during the fourth quarter of fiscal 1995.
In fiscal 1994, the Company acquired Patrol Software Pty. Ltd., an
Australian corporation and Patrol Software, Inc., a California corporation.
The aggregate cost to the
30
<PAGE>
Company was approximately $36,412,000, including direct acquisition and
integration costs, and was paid primarily in cash, with approximately
$4,400,000 of the purchase price represented by options in the Company's
common stock. The Company used the purchase method of accounting for the
acquisition and recorded a charge for acquired research and development costs
of $28,398,000, net of an income tax benefit of $3,640,000, in the fourth
quarter of fiscal 1994.
INCOME TAXES
The Company recorded income tax expense of $28,022,000, $34,123,000 and
$42,815,000 in fiscal 1993, 1994 and 1995, respectively. The Company's
effective tax rates were 30%, 37.7% and 35.6% for fiscal years ended 1993,
1994 and 1995, respectively. An analysis of the differences between the
statutory and effective income tax rates is provided in Note 6 of the Notes
to Consolidated Financial Statements.
FOREIGN CURRENCY RATE FLUCTUATIONS
For the fiscal years ended March 31, 1995 and 1994, approximately 39% of
the Company's consolidated revenues was derived from customers outside North
America. Substantially all of the Company's sales outside North America are
billed and collected in foreign currencies. Substantially all the expenses of
operating the Company's foreign subsidiaries and compensating its independent
agents 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 strategy designed to reduce its foreign currency transaction
exposures. For the years ended March 31, 1993, 1994 and 1995 currency rate
fluctuations did not have a material effect on the Company's financial
position, results of operations or cash flows.
RISK MANAGEMENT
The functional currency for most of the Company's international
subsidiaries is the local currency of the subsidiary. Changes in exchange
rates between these currencies and the U.S. dollar may negatively affect the
Company's sales (as expressed in U.S. dollars) and gross profit margins from
the international operations. The Company monitors this currency risk and
attempts to mitigate the exposure through hedging transactions involving
financial instruments. Specifically, with respect to future revenues, the
Company utilizes put options to protect the majority of anticipated foreign
exchange denominated revenues (primarily in Deutsche marks and British
pounds). The term of the option contracts is rarely more than one year. The
Company does not hold or issue derivative financial instruments for trading
purposes.
The Company also enters into forward exchange contracts to hedge firm
commitments, specifically, accounts receivable, intercompany transactions,
cash balances and certain liabilities. The term of the forward contracts is
generally 30 days. The currencies hedged include primarily the major European
currencies, as well as the Japanese yen and Australian dollar.
Pursuant to SFAS No. 52, SFAS No. 80 and related literature, the Company
applies hedge accounting treatment to all of its hedging transactions (i.e.,
instruments are effective as and are designated hedge instruments).
Specifically, gains and losses on forward contracts are recognized at each
month-end in connection with the translation of the related hedged exposure
into U.S. dollars. Gains and premiums associated with purchased put options
are deferred until their maturity or until they are exercised or when a
hedged transaction is no longer expected to occur. All gains and losses
attributable to the Company's current hedging strategy are expected to occur
within one year from the reporting date.
The Company is exposed to credit-related losses in the event of
non-performance by counterparties to financial instruments, but it does not
expect any such counterparties to fail to meet their obligations.
31
<PAGE>
QUARTERLY RESULTS
The following table sets forth certain unaudited quarterly financial data
for the fiscal years ended March 31, 1994 and 1995. This information has been
prepared on the same basis as the Consolidated Financial Statements and all
necessary adjustments (consisting only of normal recurring 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.
<TABLE>
<CAPTION>
(IN THOUSANDS, EXCEPT PER SHARE DATA)
FISCAL QUARTER ENDED JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31,
1993 1993 1993 1994 1994 1994 1994 1995
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Total revenues $65,000 $68,000 $75,500 $80,000 $78,000 $80,000 $90,700 $96,300
Selling and marketing expenses 16,706 18,450 20,000 20,042 20,468 20,181 23,875 25,200
Research and development expenses 11,934 10,801 11,272 12,962 13,919 12,996 13,716 14,862
Cost of maintenance services and
product licenses 6,591 6,526 6,728 8,371 8,189 7,023 7,977 8,771
General and administrative expenses 6,312 5,784 6,800 7,279 6,194 7,507 7,950 8,284
Acquired R&D costs -- -- -- 32,038 -- -- -- 29,260
------- ------- ------- ------- ------- ------- ------- -------
Operating income (loss) 23,457 26,439 30,700 (692) 29,230 32,293 37,182 9,923
------- ------- ------- ------- ------- ------- ------- -------
Net earnings (loss) $18,201 $20,193 $23,080 $(4,985) $22,101 $24,283 $27,708 $ 3,425
======= ======= ======= ======= ======= ======= ======= =======
Earnings per share (EPS) $ 0.69 $ 0.77 $ 0.89 $ (0.19) $ 0.86 $ 0.96 $ 1.10 $ 0.13
======= ======= ======= ======= ======= ======= ======= =======
EPS, excluding acquired R&D costs $ 0.69 $ 0.77 $ 0.89 $ 0.90 $ 0.86 $ 0.96 $ 1.10 $ 1.13
======= ======= ======= ======= ======= ======= ======= =======
Shares used in computing earnings
per share 26,379 26,354 25,931 26,015 25,698 25,295 25,185 25,775
======= ======= ======= ======= ======= ======= ======= =======
Common stock price (1)
High $ 58.50 $ 63.25 $ 60.00 $ 71.00 $ 66.50 $ 55.00 $ 57.50 $ 69.75
Low 38.75 50.00 45.00 46.50 41.75 40.13 40.25 54.00
<FN>
(1) Bid quotations as reported by NASDAQ
</TABLE>
On a relative basis, the Company has historically realized greater
revenues and net earnings in the latter half of its fiscal year. In addition,
the Company has historically realized sequentially lower revenues and net
earnings in the first quarter of its fiscal year than in the last quarter of
the prior fiscal year. The Company's largest expense component is
compensation and related fringe benefits, which are fixed in the short term
except for commissions and bonuses, which were 12% of operating expenses in
fiscal 1995. The costs of the Company's data center, office equipment and
facilities also are essentially fixed. Numerous factors may cause significant
fluctuations in the Company's quarterly revenues, including competition,
industry or technological trends, customer budgetary decisions, general
economic conditions or uncertainties, the timing of closing of individually
significant sales, mainframe industry pricing and other trends, announcements
of new hardware or software products and the timing of price increases.
Because such a high percentage of expenses are fixed, any such fluctuations
in revenues will also significantly affect net earnings and any shortfall in
revenues in a period would have an immediate and material adverse effect on
earnings.
32
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 1995, the Company's cash, cash equivalents and marketable
securities were $273,833,000. The Company's working capital as of March 31,
1995, was $35,166,000. The Company continues to invest cash in securities
with longer maturities yielding greater returns. This has the impact of
reducing working capital. The Company's securities are investment grade and
liquid. The Company had no debt as of March 31, 1995, other than normal trade
payables and a $4,590,000 payable relating to the fourth quarter transactions
discussed under "Acquired Research and Development Costs" above.
Stockholders' equity as of March 31, 1995, was $306,154,000.
The Company continues to finance its growth through funds generated from
operations. For the year ended March 31, 1995, net cash provided by operating
activities was $143,210,000. Net cash used in investing activities in fiscal
1995 was $101,314,000, primarily related to the acquisition of computers and
related equipment, the purchase of investment securities and the technology
acquisitions discussed above. Net cash flows used in financing activities in
fiscal 1995 were $40,845,000. The primary use of cash pertained to the
Company's stock repurchase program.
The Company's 1995 stock repurchase program authorized the purchase of up
to 1,000,000 shares. As of March 31, 1995, the Company had acquired 271,000
of such shares and was authorized to acquire up to 729,000 remaining shares.
In addition, 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.
FACTORS THAT MAY AFFECT FUTURE RESULTS
Numerous factors affect the Company's operating results, including general
economic conditions, market acceptance of its products and competitive
pressures. The Company derives over 95% of its revenues from software
products for IBM and IBM-compatible mainframe computers. CPU upgrade fees and
enterprise license transactions are an integral component of the Company's
mainframe business and the percentage of license revenues contributed by
enterprise license transactions has increased over the last two fiscal years.
See "Results of Operations-Revenues-License Revenues" above. The Company
believes that, over the past two years, this business has been driven by an
increase in customers' long term investments in their mainframe systems and
processing capacity as hardware costs have declined dramatically and the
efficacy of the mainframe platform was reaffirmed for large enterprises. The
Company's future operating results are dependent upon customers' continued
requirements for, and investment in, their mainframe systems software. Future
operating results are also dependent on the continued improved results of the
Company's international operations.
The Company's stock price has been highly volatile over the last several
years. Future revenues, earnings and stock prices may be subject to wide
swings, particularly on a quarterly basis. The stock price of software
companies in general, and of the Company in particular, is primarily based on
expectations of future revenue and earnings growth. Any failure of revenues
or earnings to meet expected levels in a period would likely have an
immediate and significantly adverse effect on the Company's stock price. A
high percentage of the Company's sales is closed at the end of each quarter,
and there has been and continues to be a trend toward larger single sales
transactions, which can have extended sales cycles and are less predictable.
The Company may not know whether revenues and earnings will meet expected
results until the end of a quarter.
The Company's ability to sustain growth depends in part on the timely
development or acquisition of successful new and updated products. The
Company is investing heavily in the development of new products for the
rapidly growing client/server market and for its existing mainframe market.
The Company believes it has the resources to compete effectively in these
markets.
33
<PAGE>
Software development is, however, a complex and creative process that can be
difficult to accurately schedule and predict, and the Company has experienced
long development cycles for certain of its products. As is typical in its
industry, the Company has experienced product delays in the past and may have
delays in the future. Delays in new product introductions or
less-than-anticipated market acceptance of these new products could have an
adverse effect on the Company's revenues and earnings. Further, the Company's
strategic plans contemplate significant revenue growth from its client/server
product families. This market is highly dynamic and is characterized by rapid
change and intense competition. 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.
CPU upgrade fees have contributed between 19% and 27% of total revenues
over the last three fiscal years. The charging of upgrade fees based on CPU
tier classifications is standard among mainframe systems software vendors,
including IBM. The pricing of mainframe systems software, including the
charging of tier-based upgrade fees, is under continued pressure from
customers. Although the Company has adopted MIPS-based pricing for large
enterprise licenses, it has not significantly changed its effective charges
for its products. The Company believes its current pricing policies most
properly reflect the value provided by its products. IBM's announcement last
year of alternatives to tier-based pricing with respect to its large
mainframe CPU's has, however, increased the pricing pressures within the
mainframe systems software markets. If future changes in the competition were
to result in significant price decreases that were not offset by sales volume
increases, the Company's business and financial results would be adversely
affected.
34
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
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, 1994
and 1995, and the related consolidated statements of earnings, stockholders'
equity and cash flows for each of the three years in the period ended March
31, 1995. 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, 1994 and 1995, and the
results of their operations and their cash flows for each of the three years
in the period ended March 31, 1995, in conformity with generally accepted
accounting principles.
ARTHUR ANDERSEN LLP
Houston, Texas
April 27, 1995
35
<PAGE>
BMC SOFTWARE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
(IN THOUSANDS)
MARCH 31, 1994 1995
- ---------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 37,814 $ 39,494
Securities held to maturity 42,455 54,330
Accounts receivable:
Trade, less allowance for doubtful accounts of $2,234
and $1,511 51,594 47,333
Trade finance receivables, current 6,117 17,408
-------- --------
Total accounts receivable 57,711 64,741
-------- --------
Interest and employee receivables 3,479 5,641
Prepaid expenses and other 2,688 6,432
Deferred income and other taxes 12,412 12,262
-------- --------
Total current assets 156,559 182,900
-------- --------
Property and equipment, net 93,155 101,288
Software development costs, net of accumulated amortization of
$14,519 and $19,653 14,750 16,499
Purchased software and related assets, net of accumulated
amortization of $9,984 and $12,628 8,230 11,118
Securities held to maturity 138,654 180,009
Trade finance receivables, long-term 4,140 8,047
Deferred charges and other assets 2,039 2,788
-------- --------
$417,527 $502,649
======== ========
</TABLE>
36
<PAGE>
<TABLE>
<CAPTION>
(IN THOUSANDS)
MARCH 31, 1994 1995
- ---------------------------------------------------------------------------------------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Trade accounts payable $ 7,626 $ 11,344
Treasury stock payable 12,181 --
Accrued purchase price payable 5,410 14,867
Accrued commissions payable 8,401 7,612
Accrued liabilities and other 10,235 13,085
Taxes payable 3,990 3,427
Current portion of deferred revenue 79,287 97,399
-------- --------
Total current liabilities 127,130 147,734
-------- --------
Deferred revenue and other 39,997 48,761
-------- --------
Total liabilities 167,127 196,495
Commitments
Stockholders' equity:
Preferred stock, $.01 par value, 1,000,000 shares authorized, none
issued and outstanding -- --
Common stock, $.01 par value, 90,000,000 shares authorized,
26,260,000 shares issued 262 262
Additional paid-in capital 68,115 67,864
Retained earnings 218,950 296,467
Foreign currency translation adjustment (911) (282)
-------- --------
286,416 364,311
Less treasury stock, at cost (516,000 and 1,010,000 shares,
respectively) 31,306 54,694
Less unearned portion of restricted stock compensation 4,710 3,463
-------- --------
Total stockholders' equity 250,400 306,154
-------- --------
$417,527 $502,649
======== ========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
37
<PAGE>
BMC SOFTWARE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
<TABLE>
<CAPTION>
(IN THOUSANDS, EXCEPT PER SHARE DATA)
YEARS ENDED MARCH 31, 1993 1994 1995
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenues:
Licenses $136,901 $167,176 $204,957
Maintenance 101,599 121,324 140,043
-------- -------- --------
Total revenues 238,500 288,500 345,000
Selling and marketing expenses 67,263 75,198 89,724
Research and development expenses 38,131 46,969 55,493
Cost of maintenance services and product licenses 23,289 28,216 31,960
General and administrative expenses 23,732 26,175 29,935
Acquired research and development costs -- 32,038 29,260
-------- -------- --------
Operating income 86,085 79,904 108,628
Other income 7,323 10,708 11,704
-------- -------- --------
Earnings before income taxes 93,408 90,612 120,332
Income taxes 28,022 34,123 42,815
-------- -------- --------
Net earnings $ 65,386 $ 56,489 $ 77,517
======== ======== ========
Earnings per share $ 2.50 $ 2.16 $ 3.04
======== ======== ========
Shares used in computing earnings per share 26,177 26,152 25,488
======== ======== ========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
38
<PAGE>
BMC SOFTWARE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
FOREIGN UNEARNED
ADDITIONAL CURRENCY PORTION OF TOTAL
(IN THOUSANDS) COMMON PAID-IN RETAINED TRANSLATION TREASURY RESTRICTED STOCK STOCKHOLDERS'
YEARS ENDED MARCH 31, 1993, 1994 AND 1995 STOCK CAPITAL EARNINGS ADJUSTMENT STOCK COMPENSATION EQUITY
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, March 31, 1992 $256 $50,241 $ 97,075 $(137) $ -- $(6,544) $140,891
Net earnings -- -- 65,386 -- -- -- 65,386
Foreign currency translation adjustment -- -- -- (81) -- -- (81)
Treasury stock purchased -- -- -- -- (2,254) -- (2,254)
Stock options exercised 6 2,370 -- -- 1,968 -- 4,344
Income tax benefit from stock
options exercised -- 13,577 -- -- -- -- 13,577
Restricted shares forfeited -- (615) -- -- -- 615 --
Earned portion of restricted stock
compensation -- -- -- -- -- 1,523 1,523
---- ------- -------- ----- -------- ------- --------
Balance, March 31, 1993 262 65,573 162,461 (218) (286) (4,406) 223,386
Net earnings -- -- 56,489 -- -- -- 56,489
Foreign currency translation adjustment -- -- -- (693) -- -- (693)
Treasury stock purchased -- -- -- -- (40,672) -- (40,672)
Stock options exercised and restricted
shares issued 1 (3,769) -- -- 9,652 (3,181) 2,703
Income tax benefit from stock
options exercised -- 2,655 -- -- -- -- 2,655
Restricted shares forfeited -- (745) -- -- -- 745 --
Earned portion of restricted stock
compensation -- -- -- -- -- 2,132 2,132
Issuance of stock options pursuant to
acquisition of Patrol Software -- 4,400 -- -- -- -- 4,400
Retirement of restricted shares (1) 1 -- -- -- -- --
---- ------- -------- ----- -------- ------- --------
Balance, March 31, 1994 262 68,115 218,950 (911) (31,306) (4,710) 250,400
Net earnings -- -- 77,517 -- -- -- 77,517
Foreign currency translation adjustment -- -- -- 629 -- -- 629
Treasury stock purchased -- -- -- -- (32,001) -- (32,001)
Stock options exercised and restricted
shares issued -- (4,121) -- -- 9,394 (2,599) 2,674
Income tax benefit from stock
options exercised -- 663 -- -- -- -- 663
Restricted shares forfeited -- (73) -- -- (781) 854 --
Earned portion of restricted stock
compensation -- -- -- -- -- 2,992 2,992
Issuance of stock warrants in association
with certain acquired technology -- 3,280 -- -- -- -- 3,280
---- ------- -------- ----- -------- ------- --------
Balance, March 31, 1995 $262 $67,864 $296,467 $(282) $(54,694) $(3,463) $306,154
==== ======= ======== ===== ======== ======= ========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
39
<PAGE>
BMC SOFTWARE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
(IN THOUSANDS)
YEARS ENDED MARCH 31, 1993 1994 1995
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings $ 65,386 $ 56,489 $ 77,517
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Acquired research and development costs -- 32,038 29,260
Depreciation and amortization 10,871 14,401 18,791
Change in allowance for doubtful accounts 1,142 377 (523)
Change in deferred income and other taxes 4,940 (3,545) 150
Earned portion of restricted stock compensation 1,523 2,132 2,992
Changes in operating assets and liabilities:
Increase in accounts receivable (13,108) (8,794) (10,414)
Increase in interest and employee receivables (1,930) (708) (2,162)
Increase in prepaid expenses and other (235) (337) (3,744)
(Increase) decrease in deferred charges and
other assets (144) 139 (749)
Increase (decrease) in trade accounts payable (4,780) 2,042 3,718
Increase (decrease) in accrued commissions payable 3,702 405 (789)
Increase (decrease) in accrued liabilities and other 1,824 (422) 2,850
Increase (decrease) in taxes payable (6,788) 2,256 (563)
Increase in current and long-term deferred revenue
and other 19,950 22,299 26,876
-------- -------- --------
Total adjustments 16,967 62,283 66,693
-------- -------- --------
Net cash provided by operating activities 82,353 118,772 143,210
-------- -------- --------
Cash flows from investing activities:
Cash paid for technology acquisitions -- (23,691) (22,055)
Proceeds from sales of fixed assets -- -- 1,104
Capital expenditures (39,556) (38,124) (20,150)
Capitalization of software development costs (4,986) (4,771) (6,883)
Purchased software and related assets -- (746) --
Purchase of marketable securities (182,512) (111,330) (101,060)
Maturities of marketable securities -- 112,733 47,830
-------- -------- --------
Net cash used in investing activities (227,054) (65,929) (101,314)
-------- -------- --------
</TABLE>
40
<PAGE>
<TABLE>
<CAPTION>
(IN THOUSANDS)
YEARS ENDED MARCH 31, 1993 1994 1995
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from financing activities:
Stock options exercised 4,344 2,703 2,674
Income tax benefit from stock options exercised 13,577 2,655 663
Treasury stock purchased (2,254) (28,491) (44,182)
Net borrowings under (payments on) note payable with bank 36,000 (36,000) --
-------- -------- --------
Net cash provided by (used in) financing
activities 51,667 (59,133) (40,845)
-------- -------- --------
Effect of translation exchange rate changes on cash (81) (693) 629
-------- -------- --------
Net change in cash and cash equivalents (93,115) (6,983) 1,680
Cash and cash equivalents at beginning of year 137,912 44,797 37,814
-------- -------- --------
Cash and cash equivalents at end of year $ 44,797 $ 37,814 $ 39,494
======== ======== ========
Supplemental disclosures of cash flow information --
Cash paid during the year for:
Income taxes $ 11,052 $ 31,409 $ 40,236
======== ======== ========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
41
<PAGE>
BMC SOFTWARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Basis of Presentation: The accompanying consolidated financial
statements include the accounts of BMC Software, Inc. and its wholly-owned
subsidiaries (collectively, the Company). All significant intercompany
balances and transactions have been eliminated in consolidation.
(b) Cash Equivalents: The Company considers investments with a maturity of
three months or less when purchased to be cash equivalents. As of March 31,
1994 and 1995, the Company's cash equivalents were comprised primarily of
money market mutual funds 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.
(c) Property and Equipment: Property and equipment are stated at cost.
Property and equipment under capital leases are stated at the lower of the
present value of minimum lease payments at the beginning of the lease term or
fair value at the inception of the lease.
Depreciation on property and equipment is calculated on the straight-line
method over the estimated useful lives of the assets which range from three
to five years. Property and equipment held under capital leases and leasehold
improvements are amortized on the straight-line method over the shorter of
the lease term or the estimated useful life of the asset.
A summary of property and equipment is as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS)
MARCH 31, 1994 1995
- ---------------------------------------------------------------------
<S> <C> <C>
Land $ 9,100 $ 9,100
Building 64,662 66,693
Computer and other equipment 24,269 33,191
Furniture and fixtures 8,519 10,240
Transportation equipment 5,285 6,437
Leasehold improvements 1,430 2,187
-------- --------
113,265 127,848
Less accumulated depreciation and amortization (20,110) (26,560)
-------- --------
Net property and equipment $ 93,155 $101,288
======== ========
</TABLE>
(d) Software Development Costs: Costs of internally developed software are
expensed until the technological feasibility of the software has been
established. Thereafter, all 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 lesser of the
products' estimated useful lives or five years. During the years ended March
31, 1993, 1994 and 1995, $4,986,000, $4,771,000 and $6,883,000, respectively,
of software development costs were capitalized. Amortization for the years
ended March 31, 1993, 1994 and 1995 was $4,074,000, $4,771,000 and
$5,134,000, respectively, which amounts were reported as cost of maintenance
services and product licenses in the accompanying consolidated statements of
earnings.
(e) Purchased Software and Related Assets: Purchased software and related
assets are recorded at cost. Amortization is calculated on the straight-line
method over the estimated lives of the products, which is typically five
years. The portion of a purchase which pertains to research and development
is expensed in the period of the acquisition.
42
<PAGE>
(f) 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.
(g) Foreign Currency Translation and Risk Management: The Company operates
internationally, giving rise to significant exposure to market risks from
changes in foreign exchange rates. Financial instruments are utilized by the
Company to reduce those risks, as explained below. The Company does not hold
or issue financial instruments for trading purposes.
The Company enters into various types of foreign exchange contracts in
managing its foreign exchange risk, as indicated in the following table
(represents fair value based on dealer quoted prices).
<TABLE>
<CAPTION>
(IN THOUSANDS)
MARCH 31, 1994 1995
- -----------------------------------------------------------------------------
<S> <C> <C>
Forwards $40,890 $36,703
Purchase options -- 1,035
</TABLE>
The Company enters into forward exchange contracts to hedge firm
commitments that subject the Company to transaction risk. Specifically, the
Company hedges accounts receivables, intercompany transactions, cash balances
and certain liabilities denominated in currencies other than the functional
currency. The term of the forward contracts is generally 30 days. The
currencies hedged include primarily the European currencies, as well as the
Japanese yen and Australian dollar. The Company also enters into standard
European purchase currency options to hedge particular anticipated but not
yet committed sales transactions. The term of the option contracts is rarely
more than one year. The purpose of the Company's foreign currency hedging
activities is to protect the Company from the risk that the eventual dollar
net cash inflows resulting from the sale of products to foreign customers
will be adversely affected by changes in exchange rates.
The table below summarizes by regional currency the contractual amounts of
the Company's forward exchange and option contracts in U.S. dollars. Foreign
currency amounts are translated at rates current at the reporting date. The
"buy" amounts represent the U.S. dollar equivalent of commitments to purchase
foreign currencies and the "sell" amounts represent the U.S. dollar
equivalent of commitments to sell foreign currencies.
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS)
MARCH 31, 1994 1995
BUY SELL BUY SELL
- --------------------------------------------------------------------
<S> <C> <C> <C> <C>
Europe $571 $35,545 $706 $78,619
Other -- 5,916 -- 6,944
---- ------- ---- -------
$571 $41,461 $706 $85,563
==== ======= ==== =======
</TABLE>
The functional currency for most of the Company's foreign enterprises is
the local currency of the foreign enterprise. Financial statements of these
foreign operations are translated into U.S. dollars using the current rate
method in accordance with Statement of Financial Accounting Standards (SFAS)
No. 52, "Foreign Currency Translation."
Pursuant to SFAS No. 52, SFAS No. 80 and related literature, hedge
accounting is being applied (i.e., instruments are effective as and are
designated hedge instruments). Specifically, gains and losses on forward
contracts
43
<PAGE>
are recognized at each month-end in connection with the translation of the
related hedged exposure into U.S. dollars. Gains and premiums associated with
purchased put options are deferred until their maturity or until they are
exercised or when a hedged transaction is no longer expected to occur. All
gains and losses attributable to the Company's current hedging strategy are
expected to occur within one year from the reporting date.
As stated above, the Company designates purchased currency options as
hedge instruments. The Company believes that the anticipated but not yet
committed sales transactions being hedged are probable and are directly
correlated with the hedge instruments. The Company prepares semi-annual sales
forecasts. Probability weightings are then applied to the forecasted
quarterly sales amounts. Each month, the Company reviews its hedging strategy
against updated forecasts in order to ascertain whether the hedge remains
highly correlated with expected future sales. In the event the hedge ceases
to be effective, any unamortized premium costs or deferred gains are charged
or credited to the statement of earnings.
The Company is 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.
During fiscal 1993, 1994 and 1995, respectively, included in general and
administrative expenses on the Consolidated Statements of Earnings were net
foreign exchange losses of $1,322,000, $323,000 and $848,000.
(h) Revenue Recognition: The Company licenses its software products under
perpetual, annual and monthly licenses. Perpetual licenses generally include
maintenance and enhancements for a specified period of time not to exceed one
year. The portion of the license fee associated with maintenance and
enhancements is unbundled and recognized ratably as maintenance revenue.
Maintenance contracts on perpetual licenses are available annually
thereafter. The Company also generates upgrade revenues when customers
acquire the right to install and use a licensed product on more powerful
computers, whether measured by CPU tier or millions of instructions per
second. 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
have been shipped. Maintenance revenue is recognized ratably over the term of
the underlying maintenance agreement.
(i) Earnings Per Share: Earnings per share is based on the weighted
average number of common shares and common stock equivalents outstanding for
the period. For purposes of this calculation, outstanding stock options and
unearned restricted stock shares are considered common stock equivalents
using the treasury stock method. Fully diluted earnings per share is the same
as, or not materially different from, primary earnings per share and,
accordingly, is not presented.
(2) TECHNOLOGY ACQUISITIONS
During the fourth quarter of fiscal year 1995, the Company completed
various technology acquisitions for an aggregate purchase price of
$24,485,000, including direct acquisition and integration costs. As of March
31, 1995, approximately $4,590,000 of such consideration and direct costs had
not been paid and was included in accrued liabilities.
Also, effective March 31, 1995, the Company purchased, for $10,000,000, an
option to acquire DataTools, Inc. (DataTools), a developer of data management
and recovery software products for the open systems market. The purchase
option allows the Company an exclusive right to purchase for either,
$15,000,000 in cash or approximately 330,000 shares of BMC Common Stock (the
choice of consideration belongs to DataTools). This purchase option can be
exercised from March 31, 1996 through March 31, 1998. In connection with this
transaction, the Company entered into an exclusive right to distribute, sell,
and maintain all software products owned, purchased, or developed by
DataTools. If the Company elects not to exercise its purchase option, the
royalty commission percentage associated with the distribution agreement
would be retroactively increased from 50% of
44
<PAGE>
license revenue up to a maximum of 85% for calendar years 1995, 1996 and 1997.
As a result of the various technology acquisitions and the purchase option
transactions completed in fiscal 1995, the Company recorded a $25,701,000
charge, net of a $3,559,000 income tax benefit for acquired research and
development costs.
On January 17, 1994 the Company completed the acquisition of all the stock
of Patrol Software, Inc. and Patrol Software Pty, Ltd. (collectively Patrol
Software) for approximately $36,412,000, including direct acquisition and
integration costs. The purchase price was comprised of $29,340,000 in cash,
and options to purchase the Company's common stock which were valued at
$4,400,000 (see Note 7). Approximately $5,410,000 of the purchase price was
paid in fiscal year 1995, and was included in accrued liabilities at March
31, 1994. The acquisition was accounted for under the purchase method and,
accordingly, the operating results of Patrol Software have been included in
the consolidated operating results since the date of acquisition. In applying
the purchase method, the Company recorded a software asset of $4,900,000, and
recorded a $28,398,000 charge, net of income taxes, for acquired research and
development costs. Patrol Software is a developer of software products that
provide centralized management and control of complex open systems
environments.
(3) FINANCIAL INSTRUMENTS
The Company's investment portfolio consists primarily of debt securities
and equity securities with readily determinable fair values. These
investments are classified as held-to-maturity and are recorded at amortized
cost in accordance with SFAS No. 115, "Accounting for Certain Investments in
Debt and Equity Securities." Adoption of SFAS No. 115 had no effect on the
Company's results of operations. The Company's investment portfolio is
diversified and consists of AA or better rated securities. The following
table summarizes the amortized cost amount and fair market value of the
Company's marketable securities as of March 31, 1995:
<TABLE>
<CAPTION>
(IN THOUSANDS)
HELD TO MATURITY FAIR AMORTIZED
MARKETABLE SECURITIES (MATURITY WITHIN 1 YEAR) MARKET VALUE COST BASIS
- -----------------------------------------------------------------------------
<S> <C> <C>
Municipal Securities $ 32,583 $ 32,652
Preferred Stock 19,050 19,050
Corporate Notes and Bonds and other 2,572 2,628
-------- --------
$ 54,205 $ 54,330
-------- --------
</TABLE>
<TABLE>
<CAPTION>
MARKETABLE SECURITIES (MATURITY FROM 1-5 YEARS)
- -----------------------------------------------------------------------------
<S> <C> <C>
Municipal Securities $121,586 $122,212
Corporate Notes and Bonds 47,574 47,722
Preferred Stock 8,900 8,900
Mutual Funds and Equity Securities 1,175 1,175
-------- --------
$179,235 $180,009
-------- --------
$233,440 $234,339
======== ========
</TABLE>
(4) TRADE FINANCE RECEIVABLES
Trade finance receivables arise in the ordinary course of business and are
the result of the Company's decision to hold low risk customer obligations at
interest rates which are attractive to the Company. Customers that finance
their software purchases typically do so for internal budget and cash flow
management purposes. The terms of these financings range from six months to
five years. Interest rates attached to these financings vary depending on
several factors including terms and
45
<PAGE>
credit worthiness of the customer. In each case involving a Company-financed
software acquisition, the customer must meet various financial and other
criteria established by the Company.
(5) COST OF MAINTENANCE SERVICES AND PRODUCT LICENSES
The components of cost of maintenance services and product licenses for
the years ended March 31, 1993, 1994 and 1995 are as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS)
1993 1994 1995
- ---------------------------------------------------------------------------
<S> <C> <C> <C>
Cost of maintenance services $16,702 $20,623 $24,182
Amortization of software development costs 4,074 4,771 5,134
Amortization of purchased software 2,513 2,822 2,644
------- ------- -------
$23,289 $28,216 $31,960
======= ======= =======
</TABLE>
(6) INCOME TAXES
The provision for income taxes for the years ended March 31, 1993, 1994
and 1995 consisted of the following:
<TABLE>
<CAPTION>
(IN THOUSANDS)
1993 1994 1995
- ---------------------------------------------------------------------------
<S> <C> <C> <C>
Current:
Federal $16,998 $31,926 $37,480
Foreign 5,058 5,745 5,185
State 1,009 -- --
------- ------- -------
Total current 23,065 37,671 42,665
------- ------- -------
Deferred:
Federal 4,957 (3,548) (4)
Foreign -- -- 154
------- ------- -------
Total deferred 4,957 (3,548) 150
------- ------- -------
$28,022 $34,123 $42,815
======= ======= =======
</TABLE>
46
<PAGE>
The foreign provision for income taxes is based on foreign pretax earnings
of $17,739,000 for fiscal 1993, $18,645,000 for fiscal 1994 and $29,290,000
for fiscal 1995.
The income tax expense of $28,022,000 for fiscal 1993, $34,123,000 for
fiscal 1994 and $42,815,000 for fiscal 1995 differs from the amount computed
by applying the statutory federal income tax rate of 34%, 35% and 35%,
respectively, to consolidated earnings before income taxes as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS)
1993 1994 1995
- ---------------------------------------------------------------------------
<S> <C> <C> <C>
Expense computed at statutory rate $31,759 $31,714 $42,116
Increase (reduction) resulting from:
Research and development tax credits (560) (1,080) --
Foreign tax effect, net (1,628) (1,187) (4,701)
Tax benefit from foreign sales corporation (301) (294) (176)
State taxes, net of federal income tax benefit 666 -- --
Income not subject to tax (1,669) (2,326) (2,511)
Other (245) (264) 2,529
------- ------- -------
Subtotal 28,022 26,563 37,257
======= ======= =======
Non-deductible charge for purchased research
and development -- 7,560 5,558
------- ------- -------
$28,022 $34,123 $42,815
======= ======= =======
</TABLE>
Aggregate unremitted earnings of foreign subsidiaries for which U.S.
Federal income taxes have not been provided totaled approximately $27,000,000
at March 31, 1995. Deferred income taxes have not been provided on these
earnings because the Company considers them to be indefinitely reinvested.
The Company adopted Statement of Financial Accounting Standards (SFAS) No.
109, "Accounting for Income Taxes," as of April 1, 1993. For fiscal years
1993 and 1994, the Company accounted for income taxes under the provisions of
APB 11. Adoption of SFAS No. 109 was immaterial to the consolidated financial
statements and no cumulative adjustment was required. Deferred income taxes
for 1995 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.
47
<PAGE>
The tax effects of the temporary differences that give rise to the
significant portions of the deferred tax assets and liabilities as of March
31, 1994 and March 31, 1995 are presented below:
<TABLE>
<CAPTION>
(IN THOUSANDS)
1994 1995
- -------------------------------------------------------------------
<S> <C> <C>
Deferred Tax Assets:
Deferred revenue $18,686 $21,425
Patrol Software integration costs 765 252
Deferred bonuses 1,175 324
Accrued liabilities 450 521
Acquired Research and Development 57 3,328
Other 46 270
------- -------
Total deferred tax asset 21,595 25,920
Deferred Tax Liabilities:
Software capitalization, net (5,163) (5,775)
Stock compensation plans (2,432) (3,731)
Book/tax difference on assets (977) (2,475)
Other (611) (1,677)
------- -------
Total deferred tax liability (9,183) (13,658)
------- -------
Net deferred tax asset $12,412 $12,262
======= =======
</TABLE>
(7) STOCK INCENTIVE PLANS
In 1986, the Company adopted the BMC Software, Inc. 1986 Stock Option
Plan. This plan provides for the grant of options to purchase up to 2,812,500
shares of the Company's common stock to employees of the Company upon terms
and conditions determined by the Compensation Committee of the Board of
Directors (the Compensation Committee), which administers the plan. This plan
terminates in 1996.
In 1988, the Company adopted the BMC Software, Inc. 1988 Stock Option
Plan. This plan provides for the grant of options to purchase up to 1,417,500
shares of the Company's common stock to employees of the Company upon terms
and conditions determined by the Compensation Committee. This plan terminates
in 1998.
In 1989, the Company adopted the BMC Software, Inc. 1989 Stock Plan, which
provides for the issuance of stock options and shares of restricted stock. A
total of 1,050,000 shares may be issued under the 1989 Stock Plan to
employees as determined by the Compensation Committee. This plan terminates
in the year 1999.
In 1990, the Company adopted the BMC Software, Inc. 1990 Nonemployee
Director Stock Option Plan, which provides for automatic grants of stock
options to the Company's outside directors. Under the plan, a new director
receives an option to purchase 20,000 shares of common stock when first
elected to the Board and options to purchase an additional 5,000 shares on
each of his third and fifth anniversaries as a director. A maximum of 150,000
shares are issuable under the plan.
48
<PAGE>
The plan terminated in 1994, when it was replaced by the 1994 Nonemployee
Director Stock Option Plan discussed below.
In 1990, the Company also adopted the BMC Software, Inc. 1990 Stock and
Incentive Plan, which provides for grants of options, restricted stock and
other incentive stock and performance based awards. A maximum of 1,500,000
shares are issuable under the plan, and the maximum number of shares issuable
under awards granted in a single year is 300,000. The plan is administered by
the Compensation Committee and has a term of five years. The plan terminates
in October 1995.
In 1994, the Company adopted the BMC Software, Inc. 1994 Employee
Incentive Plan and the BMC Software, Inc. 1994 Nonemployee Director Stock
Option Plan. The 1994 Employee Incentive Plan provides for the issuance of
stock options and shares of restricted stock. A total of 3,000,000 shares may
be issued under the 1994 Employee Incentive Plan to employees of the Company
upon terms and conditions determined by the Compensation Committee. This plan
will terminate in the year 2004. The 1994 Nonemployee Director Stock Option
Plan is a formula plan that provides for automatic grants of stock options to
the Company's outside directors. Under the plan, any director first elected
following the August 29, 1994 effective date of such plan receives options to
acquire 20,000 shares of common stock when elected. Directors receive an
annual grant of 5,000 shares each on the date of his or her re-election to
the board. The plan supercedes the 1990 Nonemployee Director Stock Option
Plan. A total of 200,000 shares may be issued under the plan, which
terminates in the year 2004.
Under all seven plans, all options have been granted at fair market value
as of the date of grant and have a ten year term. All options granted under
the seven plans vest over terms ranging from four years to five years.
The following is a summary of the stock option activity for the years
ended March 31, 1993, 1994 and 1995:
<TABLE>
<CAPTION>
1993 1994 1995
- ---------------------------------------------------------------------------------
<S> <C> <C> <C>
Options outstanding at beginning of year 1,467,999 1,081,781 1,205,789
Options granted 291,335 335,628 2,467,200
Options exercised (662,799) (170,797) (120,936)
Options forfeited/cancelled (14,754) (40,823) (443,740)
------------ ------------ ------------
Options outstanding at end of year 1,081,781 1,205,789 3,108,313
============ ============ ============
Option price range per share $0.67-66.875 $0.67-66.875 $0.67-66.875
============ ============ ============
Options exercisable 506,240 631,902 512,320
============ ============ ============
</TABLE>
Included in options granted during 1994 are options to acquire 90,228
shares of common stock issued in connection with the Company's acquisition of
Patrol Software. These options have exercise prices ranging from $1.50 to
$15.01 per share and have a ten-year term. These options, which are fully
vested, were valued at $4,400,000 on the date of grant.
In October 1990, the Company granted shares of restricted stock to certain
executive officers under the 1989 Stock Plan. The transfer restrictions lapse
on those shares if the Company
49
<PAGE>
achieves certain objectives for earnings per share growth in fiscal 1993,
1994 and 1995 or, alternatively, 10 years after the grant date if the grantee
is still an employee of the Company. The Company achieved the objectives in
fiscal 1993 through fiscal 1995. In January 1990, May 1991, April and
December of 1993, and April and June of 1994, the Company made restricted
stock grants to certain executive officers pursuant to the 1990 Stock and
Incentive Plan on terms similar to the other grants. Shares under the 1990
Stock and Incentive Plan are subject to transfer restrictions that will lapse
in various prescribed increments when the Company achieves certain objectives
for earnings per share in fiscal 1994 through fiscal 1998.
The following is a summary of the restricted stock share activity for the
years ended March 31, 1993, 1994 and 1995:
<TABLE>
<CAPTION>
1993 1994 1995
- -----------------------------------------------------------------------------
<S> <C> <C> <C>
Shares granted and unearned at beginning of year 336,500 237,800 178,000
Shares granted -- 65,000 45,000
Shares earned (65,700) (84,800) (136,125)
Shares forfeited (33,000) (40,000) (21,875)
------- ------- --------
Shares unearned at end of year 237,800 178,000 65,000
======= ======= ========
</TABLE>
(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 $8,728, $8,994 and $9,240
for calendar years 1992, 1993 and 1994, respectively. In each of the calendar
years 1992, 1993 and 1994, 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
$1,705,000, $2,480,000 and $2,769,000 for the fiscal years ended March 31,
1993, 1994 and 1995, respectively. The Company contributions vest to the
employees at 20% per year beginning with the third year of employment and
ending with the seventh.
(9) COMMITMENTS
The Company has several noncancelable operating leases for office space
and computer equipment that expire through 1998 and thereafter, and provide
for various renewal options. Rent expense for office space is recognized
equally over the lease term. Total rent expense incurred during the years
ended March 31, 1993, 1994 and 1995 was approximately $14,192,000,
$16,443,000 and $16,595,000, respectively.
Future minimum lease payments under noncancelable operating leases as of
March 31, 1995 are:
<TABLE>
<CAPTION>
YEAR ENDING MARCH 31,
- ----------------------------------------------------
<S> <C>
1996 $ 9,455
1997 3,493
1998 3,135
1999 2,532
2000 1,194
Thereafter 493
-------
Total minimum lease payments $20,302
=======
</TABLE>
50
<PAGE>
(10) FOREIGN OPERATIONS AND SIGNIFICANT CUSTOMERS
The following table summarizes selected financial information of the
Company's operations by geographic location:
<TABLE>
<CAPTION>
(IN THOUSANDS)
YEARS ENDED MARCH 31, 1993 1994 1995
- ---------------------------------------------------------------------
<S> <C> <C> <C>
Revenues:
North America $137,228 $176,936 $209,504
Europe 85,770 92,464 113,760
Other 15,502 19,100 21,736
-------- -------- --------
Consolidated $238,500 $288,500 $345,000
======== ======== ========
Operating profits:
North America $ 27,917 $ 11,036* $ 28,008*
Europe 50,658 61,432 74,974
Other 7,510 7,436 5,646
-------- -------- --------
Consolidated $ 86,085 $ 79,904 $108,628
======== ======== ========
Identifiable assets:
North America $324,693 $338,282 $391,026
Europe 42,625 65,433 88,257
Other 11,334 13,812 23,366
-------- -------- --------
Consolidated $378,652 $417,527 $502,649
======== ======== ========
<FN>
*Net of acquired research and development costs of $32,038,000 and $29,260,000
in fiscal 1994 and fiscal 1995, respectively.
</TABLE>
No customer accounted for more than 5% of consolidated revenues in the
years ended March 31, 1993, 1994 and 1995.
51
<PAGE>
BMC SOFTWARE, INC. AND SUBSIDIARIES
DIRECTORS AND OFFICERS
<TABLE>
<CAPTION>
BOARD OF DIRECTORS CORPORATE OFFICERS
- ------------------ ------------------
<S> <C>
Max P. Watson Jr. Max P. Watson Jr.
CHAIRMAN OF THE BOARD, PRESIDENT AND CHAIRMAN OF THE BOARD, PRESIDENT AND
CHIEF EXECUTIVE OFFICER, BMC SOFTWARE, INC. CHIEF EXECUTIVE OFFICER
John W. Barter Douglas J. Erwin
EXECUTIVE VICE PRESIDENT, ALLIED SIGNAL, INC.; EXECUTIVE VICE PRESIDENT, CHIEF OPERATING
PRESIDENT, ALLIED SIGNAL AUTOMOTIVE, INC. OFFICER
B. Garland Cupp Richard P. Gardner
PRIVATE INVESTOR SENIOR VICE PRESIDENT, NORTH AMERICAN SALES
Meldon K. Gafner James E. Juracek
VICE CHAIRMAN, COMSTREAM CORPORATION SENIOR VICE PRESIDENT, RESEARCH & DEVELOPMENT
L.W. Gray Gerd A. Ordelheide
PRIVATE INVESTOR SENIOR VICE PRESIDENT, EUROPEAN OPERATIONS
George F. Raymond M. Brinkley Morse
PRIVATE INVESTOR VICE PRESIDENT, GENERAL COUNSEL AND SECRETARY
Leland D. Putterman
VICE PRESIDENT, WORLDWIDE MARKETING
Theodore W. Van Duyn
CHIEF TECHNOLOGY OFFICER
Stephen B. Solcher
TREASURER
</TABLE>
52
<PAGE>
CORPORATE INFORMATION
STOCKHOLDER CONTACT
Stockholders are encouraged to contact the Company with questions or
requests for information. Inquiries should be directed to:
John W. Cox
Director of Investor Relations
BMC Software, Inc.
2101 CityWest Boulevard
Houston, Texas 77042-2827
(713) 918-8800
STOCK INFORMATION
BMC Software, Inc. common stock is traded on the NASDAQ National Market
System under the symbol BMCS.
High and low prices of BMC's common stock traded in fiscal years 1994
and 1995 are included in the Quarterly Results data table on page 32.
STOCK OWNERSHIP
As of June 9, 1995, there were approximately 271 record holders of the
Company's common stock, and approximately 17,500 stockholders.
DIVIDENDS
The Company has not paid any dividends in the last five fiscal years and
currently intends to retain earnings for use in its business.
INDEPENDENT AUDITORS
Arthur Andersen LLP
711 Louisiana
Houston, Texas 77002
FORM 10-K
A copy of the Company's Annual Report on Form 10-K for the fiscal year
ended March 31, 1995, as filed with the Securities and Exchange Commission,
will be sent to stockholders free of charge upon written request to:
John W. Cox
Director of Investor Relations
BMC Software, Inc.
2101 CityWest Boulevard
Houston, Texas 77042-2827
Stockholders who wish to be placed on the Company's mailing list to
receive news releases on earnings and other significant events should request
so in writing to the Director of Investor Relations.
TRANSFER AGENT
Communications regarding change of address, transfer of stock ownership
or lost stock certificates should be directed to:
The First National Bank of Boston
Securities Division
P.O. Box 1666
Boston, Massachusetts 02102
ANNUAL MEETING
The annual meeting of stockholders will be held on August 28, 1995, at
2101 CityWest Boulevard, Houston, Texas, beginning at 10:00 a.m. CDT.
Stockholders of record as of July 5, 1995, shall be entitled to vote. All
stockholders and others interested in the company are invited to attend.
53
<PAGE>
INTERNATIONAL OFFICES
BMC Software International offices are located in Australia, Belgium,
Canada, Denmark, France, Germany, Italy, Japan, Netherlands, Spain and the
United Kingdom.
SOFTWARE AGENTS
BMC Software agents are located in Argentina, Australia, Belgium,
Brazil, Chile, Czech Republic, France, Greece, Hong Kong, Israel, Malaysia,
Mexico, Peru, Philippines, Republic of Korea, Saudi Arabia, Singapore,
Slovenia, South Africa, Switzerland, Taiwan, Turkey, United Kingdom, Uruguay
and Venezuela.
FORE MORE INFORMATION
For more information on BMC Software products call 713-918-8800 or
800-841-2031.
CORPORATE HEADQUARTERS
BMC Software, Inc.
2101 CityWest Boulevard
Houston, Texas 77042-2827
BMC SOFTWARE, THE BMC SOFTWARE LOGO AND ALL OTHER PRODUCT OR SERVICE NAMES
ARE REGISTERED TRADEMARKS OR TRADEMARKS OF BMC SOFTWARE, INC. IN THE USA AND
IN OTHER SELECT COUNTRIES. -REGISTERED TRADEMARK- AND -FM- INDICATE USA
REGISTRATION OR USA TRADEMARK. *IBM AND DB2, DATATOOLS AND SQL-BACKTRACK,
INFORMIX, COMPUTER ASSOCIATES AND CA-OPENINGRES, ORACLE, SEQUENT AND SUN, ARE
TRADEMARKS OR REGISTERED TRADEMARKS OF, RESPECTIVELY, INTERNATIONAL BUSINESS
MACHINES CORP., DATATOOLS, INC., INFORMIX SOFTWARE, INC., COMPUTER ASSOCIATES
INTERNATIONAL, INC., ORACLE CORP., SEQUENT COMPUTER SYSTEMS, INC. AND SUN
MICROSYSTEMS, INC. OTHER LOGOS AND PRODUCT/TRADE NAMES ARE REGISTERED
TRADEMARKS OR TRADEMARKS OF THEIR RESPECTIVE COMPANIES.
BMC SOFTWARE IS AN EQUAL OPPORTUNITY EMPLOYER.
- -C-1995, BMC SOFTWARE, INC. ALL RIGHTS RESERVED.
PRINTED ON RECYCLED PAPER.
ANNUAL REPORT DESIGN BY SAVAGE DESIGN GROUP, INC., HOUSTON, TEXAS.
54
<PAGE>
EXHIBIT 22.1
BMC SOFTWARE, INC.
SUBSIDIARIES
JURISDICTION OF
NAME INCORPORATION
---- ---------------
BMC Software (AUST.) Pty. Ltd. AUSTRALIA
BMC Software A/S DENMARK
BMC Software France FRANCE
BMC Software GmbH GERMANY
BMC Software Srl ITALY
BMC Software Japan Ltd. JAPAN
BMC Software, Limited UNITED KINGDOM
BMC Software, (Spain) SPAIN
BMC Software FSC, Inc. U.S.A.
BMC Real Properties, Inc. U.S.A.
BMC Software Services, Inc. U.S.A.
BMC Software Education, Inc. U.S.A.
BMC Software Distribution B.V. NETHERLANDS
BMC Software B.V. NETHERLANDS
BMC Software Investment B.V. NETHERLANDS
BMC Software Cayman, LDC GRAND CAYMAN ISLANDS
Patrol Software, Inc. U.S.A.
Patrol Texas, Inc. U.S.A.
Patrol Software Pty. Ltd. AUSTRALIA
<PAGE>
EXHIBIT 24.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of
our reports included in or incorporated by reference into this Form 10-K into
the Company's previously filed Registration Statements on Form S-8 filed on
November 17, 1989, January 31, 1990 and May 16, 1991, and on Form S-3 filed
on August 19, 1991.
ARTHUR ANDERSEN LLP
Houston, Texas
June 28, 1995
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED MARCH 31, 1995
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> MAR-31-1995
<PERIOD-END> MAR-31-1995
<CASH> 39,494
<SECURITIES> 234,339
<RECEIVABLES> 74,299
<ALLOWANCES> 1,511
<INVENTORY> 0
<CURRENT-ASSETS> 182,900
<PP&E> 127,848
<DEPRECIATION> 26,560
<TOTAL-ASSETS> 502,649
<CURRENT-LIABILITIES> 147,734
<BONDS> 0
<COMMON> 262
0
0
<OTHER-SE> 305,892
<TOTAL-LIABILITY-AND-EQUITY> 502,649
<SALES> 204,957
<TOTAL-REVENUES> 345,000
<CGS> 31,960
<TOTAL-COSTS> 236,372
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 120,332
<INCOME-TAX> 42,815
<INCOME-CONTINUING> 77,517
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 77,517
<EPS-PRIMARY> 3.04
<EPS-DILUTED> 3.04
</TABLE>
