<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 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
BMC SOFTWARE, INC.
(Exact name of registrant as specified in its charter)
Delaware 74-2126120
(State or other jurisdiction of (IRS Employer identification No.)
incorporation or organization)
BMC Software, Inc.
2101 CityWest Boulevard
Houston, Texas 77042
(Address of principal executive officer) (Zip Code)
Registrant's telephone number including area code: (713)918-8800
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No____
As of February 1, 1996, there were outstanding 50,136,593 shares of Common
Stock, par value $.01, of the registrant.
<PAGE>
BMC SOFTWARE, INC. AND SUBSIDIARIES
Quarter Ended December 31, 1995
INDEX
PAGE
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements 3
Condensed Consolidated Balance Sheets
December 31, 1995 (Unaudited) and March 31, 1995 3
Condensed Consolidated Statements of Earnings
Three months and nine months ended December 31, 1995
and 1994 (Unaudited) 5
Condensed Consolidated Statements of Cash Flows
Nine months ended December 31, 1995 and 1994
(Unaudited) 6
Notes to Condensed Consolidated Financial
Statements 7
Item 2. Management's Discussion and Analysis of Results
of Operations and Financial Condition 9
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 17
SIGNATURES 18
2
<PAGE>
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
BMC SOFTWARE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
ASSETS 1995 1995
------------- ---------
(UNAUDITED)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 26,211 $ 39,494
Securities available for sale 6,950 --
Securities held to maturity 68,771 54,330
Trade accounts receivable, net 94,821 64,741
Other accounts receivable 7,828 5,641
Prepaid expenses and other 4,257 6,432
Deferred income and other taxes 12,209 12,262
-------- --------
Total current assets 221,047 182,900
-------- --------
Property and equipment, net 105,391 101,288
Software development costs, net 21,498 16,499
Purchased software, net 13,793 11,118
Securities available for sale 19,271 --
Securities held to maturity 149,254 180,009
Finance receivables, long-term 5,390 8,047
Deferred charges and other assets 6,638 2,788
-------- --------
$542,282 $502,649
-------- --------
-------- --------
</TABLE>
See accompanying notes to condensed consolidated financial statements.
3
<PAGE>
BMC SOFTWARE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share information)
(continued)
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
LIABILITIES AND STOCKHOLDERS' EQUITY 1995 1995
------------- ---------
(UNAUDITED)
<S> <C> <C>
Current liabilities:
Trade accounts payable $ 10,124 $ 11,344
Accrued liabilities 28,670 35,564
Taxes payable 21,258 3,427
Current portion of deferred revenue 98,525 97,399
-------- --------
Total current liabilities 158,577 147,734
-------- --------
Deferred revenue and other 35,703 48,761
-------- --------
Total liabilities 194,280 196,495
-------- --------
Stockholders' equity:
Preferred stock, $.01 par value,
1,000,000 shares authorized, none
issued and outstanding -- --
Common stock, $.01 par value, 180,000,000
shares authorized, 52,520,000 shares
issued 525 525
Additional paid-in capital 67,431 67,864
Retained earnings 363,018 296,204
Foreign currency translation adjustment (31) (282)
Unrealized gain on securities available
for sale 277 --
-------- --------
431,220 364,311
Less treasury stock (2,633,000 and
2,019,000 shares, respectively) 80,711 54,694
Less unearned portion of restricted
stock compensation 2,507 3,463
-------- --------
Total stockholders' equity 348,002 306,154
-------- --------
$542,282 $502,649
-------- --------
-------- --------
</TABLE>
See accompanying notes to condensed consolidated financial statements.
4
<PAGE>
BMC SOFTWARE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
(in thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
DECEMBER 31, DECEMBER 31,
-------------------- --------------------
1995 1994 1995 1994
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenues:
Licenses $ 78,524 $ 55,555 $182,590 $145,823
Maintenance 40,476 35,145 117,960 102,877
-------- -------- -------- --------
Total revenues 119,000 90,700 300,550 248,700
-------- -------- -------- --------
Operating expenses:
Selling and marketing 32,281 23,875 79,100 64,524
Research and development 15,729 13,716 43,036 40,631
Cost of maintenance services
and product licenses 11,367 7,977 32,094 23,189
General and administrative 11,176 7,950 27,003 21,651
Acquired research and
development costs 23,589 -- 23,589 --
-------- -------- -------- --------
Total operating expenses 94,142 53,518 204,822 149,995
-------- -------- -------- --------
Operating income 24,858 37,182 95,728 98,705
Other income 3,956 2,975 11,541 8,675
-------- -------- -------- --------
Earnings before taxes 28,814 40,157 107,269 107,380
Income taxes 15,749 12,449 40,455 33,288
-------- -------- -------- --------
Net earnings $ 13,065 $27,708 $ 66,814 $ 74,092
-------- -------- -------- --------
-------- -------- -------- --------
Earnings per share $ .25 $ .55 $ 1.28 $ 1.46
-------- -------- -------- --------
-------- -------- -------- --------
Shares used in computing
earnings per share 51,965 50,370 52,155 50,784
-------- -------- -------- --------
-------- -------- -------- --------
</TABLE>
See accompanying notes to condensed consolidated financial statements.
5
<PAGE>
BMC SOFTWARE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
DECEMBER 31,
-------------------
1995 1994
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net earnings $ 66,814 $ 74,092
Adjustments to reconcile net earnings
to net cash provided by operating
activities:
Acquired research and development costs 23,589 --
Depreciation and amortization 19,692 9,454
Net change in receivables, payables
and other items (26,401) (10,205)
-------- --------
Total adjustments 16,880 (751)
-------- --------
Net cash provided by operating
activities 83,694 73,341
-------- --------
Cash flows from investing activities:
Technology acquisitions, net of cash
acquired (15,051) --
Purchased software and related assets (2,232) (338)
Capital expenditures (14,135) (10,476)
Capitalization of software development (12,733) (3,745)
Purchases of securities held to maturity (51,814) (50,861)
Proceeds from securities held to maturity 42,461 32,065
(Increase) decrease in long-term finance
receivables 2,657 (11,081)
-------- --------
Net cash used in investing
activities (50,847) (44,436)
-------- --------
Cash flows from financing activities:
Earned portion of restricted stock
compensation 1,012 418
Income tax reduction relating to stock
options 2,713 1,107
Stock options exercised and other 3,441 --
Treasury stock acquired (53,270) (42,049)
-------- --------
Net cash used in financing
activities (46,104) (40,524)
-------- --------
Effect of exchange rate changes on cash 251 277
Gain on available for sale securities (277) --
-------- --------
Net change in cash and cash equivalents (13,283) (11,342)
Cash and cash equivalents at beginning of
period 39,494 37,814
-------- --------
Cash and cash equivalents at end of period $ 26,211 $ 26,472
-------- --------
-------- --------
Supplemental disclosure of cash flow
information:
Cash paid for Income taxes $ 19,934 $ 23,300
Value of treasury stock issued for
technology acquired 20,611 --
Future cash payments for technology
acquired 5,420 --
</TABLE>
See accompanying notes to condensed consolidated financial statements.
6
<PAGE>
BMC SOFTWARE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - Basis of Presentation
The accompanying condensed consolidated financial statements include the
accounts of BMC Software, Inc. and its wholly owned subsidiaries (collectively,
the "Company"). All significant intercompany balances and transactions have
been eliminated in consolidation.
The accompanying unaudited interim condensed consolidated financial
statements reflect all adjustments (consisting of normal recurring accruals)
which, in the opinion of management, are necessary for a fair presentation of
the results for the interim periods presented. These financial statements have
been prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-Q and Article
10 of Regulation S-X. Accordingly, they do not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements.
These financial statements should be read in conjunction with the Company's
annual audited financial statements for the year ended March 31, 1995, as filed
with the Securities and Exchange Commission on Form 10-K.
Note 2 - 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.
Note 3 - Securities
Management determines the appropriate classification of debt and equity
securities at the time of purchase and reevaluates such designation as of each
subsequent balance sheet date. The Company has the ability and intent to hold
most of its investment securities to maturity and thus has classified these
securities as "held to maturity" pursuant to Statement of Financial
Accounting Standards (SFAS) No.115. These securities have been recorded at
amortized cost in the Company's balance sheets. On December 15, 1995, the
Company reclassified $26.2 million of its investment securities to "available
for sale". This reclassification was a result of the one-time opportunity to
reclassify investment securities allowed under the SFAS No. 115 Special
Report issued in November 1995. The reclassification resulted in an
unrealized gain of $277,000 reported as an increase to investment securities
and stockholders' equity. The Company holds no securities classified as
"trading securities". The following table summarizes the Company's total
investment securities portfolio as of December 31, 1995:
7
<PAGE>
BMC SOFTWARE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAIN LOSS VALUE (a)
--------- ---------- ---------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Securities with Maturities Within 1 Year:
Held to Maturity Securities
Municipal Securities 28,652 -- -- 28,652
Auction Preferred Stock 25,950 -- -- 25,950
Corporate Notes, Bonds and Other 14,169 -- -- 14,169
------- --- --- -------
68,771 -- -- 68,771
Available for Sale Securities
Municipal Securities 6,939 11 -- 6,950
------- --- --- -------
Total Securities with Maturities Within 1 Year 75,710 11 -- 75,721
Securities with Maturities From 1-5 Years:
Held to Maturity Securities
Municipal Securities 112,508 -- -- 112,508
Corporate Notes, Bonds and Other 36,746 -- -- 36,746
------- --- --- -------
149,254 -- -- 149,254
Available for Sale Securities
Municipal Securities 19,005 266 -- 19,271
------- --- --- -------
Total Securities with Maturities From 1-5 Years 168,259 266 -- 168,525
------- --- --- -------
Total Investment Securities 243,969 277 -- 244,246
------- --- --- -------
------- --- --- -------
</TABLE>
(a)For securities classified as "held to maturity", the reported fair value
represents the value to be realized upon maturity. As of December 31, 1995,
the fair market value of these securities exceeded amortized cost by
approximately $2.9 million.
Note 4 - Stock Split
On July 19, 1995, the Company declared a two-for-one stock split of its
common stock. The stock split was effected in the form of a stock dividend.
Stockholders of record at the close of business on August 4, 1995, received two
shares of common stock for each share held. The payment date for the
distribution of shares was August 14, 1995. All stock related data in the
financial statements reflects the stock split for all periods presented.
8
<PAGE>
BMC SOFTWARE, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Item 2. Management's Discussion and Analysis of Results of Operations and
Financial Condition
This discussion comprises historical information for the periods covered,
followed by certain forward looking information and information about certain
risks and uncertainties that could affect the Company's future operating
results. This discussion should be read in conjunction with the attached
consolidated financial statements and notes thereto and with the audited
financial statements and notes thereto and the Management's Discussion and
Analysis of Results of Operation and Financial Condition contained in the
Company's Annual Report to Stockholders for fiscal 1995.
A. HISTORICAL INFORMATION
RESULTS OF OPERATION
The following table sets forth, for the periods indicated, the percentages
that selected items in the Condensed Consolidated Statements of Earnings bear to
total revenues. The year to year comparisons of financial results are not
necessarily indicative of future results.
<TABLE>
<CAPTION>
PERCENTAGE OF TOTAL REVENUES
---------------------------------------
THREE MONTHS ENDED NINE MONTHS ENDED
DECEMBER 31, DECEMBER 31,
------------------ -----------------
1995 1994 1995 1994
----- ----- ----- -----
<S> <C> <C> <C> <C>
Revenues:
License 66.0% 61.3% 60.8% 58.6%
Maintenance 34.0 38.7 39.2 41.4
----- ----- ----- -----
Total revenues 100.0 100.0 100.0 100.0
Operating expenses:
Selling and marketing 27.1 26.3 26.3 25.9
Research and development 13.2 15.1 14.3 16.4
Cost of maintenance services
and product licenses 9.6 8.8 10.7 9.3
General and administrative 9.4 8.8 9.0 8.7
Acquired research and development costs 19.8 -- 7.8 --
----- ----- ----- -----
Operating income 20.9 41.0 31.9 39.7
Other income 3.3 3.3 3.8 3.5
Earnings before taxes 24.2 44.3 35.7 43.2
Income taxes 13.2 13.7 13.5 13.4
----- ----- ----- -----
Net earnings 11.0% 30.6% 22.2% 29.8%
----- ----- ----- -----
----- ----- ----- -----
</TABLE>
9
<PAGE>
BMC SOFTWARE, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
(CONTINUED)
REVENUES
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
DECEMBER 31, DECEMBER 31,
-------------------------- ----------------------------
(IN THOUSANDS) (IN THOUSANDS)
1995 1994 CHANGE 1995 1994 CHANGE
------- ------- ------ -------- --------- ------
<S> <C> <C> <C> <C> <C> <C>
North American license revenues $ 41,954 $32,176 30.4% $107,726 $ 92,671 16.2%
International license revenues 36,570 23,379 56.4% 74,864 53,152 40.8%
-------- ------- -------- --------
Total license revenues 78,524 55,555 41.3% 182,590 145,823 25.2%
Maintenance revenues 40,476 35,145 15.2% 117,960 102,877 14.7%
-------- ------- -------- --------
Total revenues $119,000 $90,700 31.2% $300,550 $248,700 20.8%
-------- ------- -------- --------
-------- ------- -------- --------
</TABLE>
License Revenues
The license revenues line item consists of two categories of revenues:
product license fees and central processing unit ("CPU") upgrade fees.
Product license fees are (a) fees paid when a customer licenses its first
copy or additional copies of a product and (b) license restructuring fees, which
are fees a customer may pay, generally as part of an enterprise license
transaction, to acquire additional permanent discounts that will be used in
calculating future charges for already licensed products, including maintenance
fees, CPU upgrade fees and product license fees for additional copies.
CPU upgrade fees are fees charged when a customer acquires the right to
install and run an already licensed product on additional processing capacity,
whether measured traditionally by CPU tier or, under enterprise license terms,
by millions of instructions per second ("MIPS"). The product upgrade fee
category includes upgrade fees for both currently installed additional
processing capacity and for future anticipated additional processing capacity.
Total CPU upgrade fees for the quarter and nine months ended December 31, 1995,
as a percentage of total revenues, were in the mid-twenty percent range.
North American license revenues comprised 53.4% and 59.0% of total license
revenues in the quarter and nine months ended December 31, 1995, respectively.
North American license revenue growth in the third quarter was derived
principally from higher license sales of the Company's open systems products and
upgrade fees for future additional processing capacity. Increased open systems
license fees and upgrade fees for current processing capacity accounted for
North American license revenue growth for the nine month period.
International license revenues contributed 46.6% of total license
revenues in the third quarter and 41.0% of total license revenues in the
first nine months of fiscal 1996. For the quarter and nine months ended
December 31, 1995, international license revenue growth was driven by
increased license sales of the Company's mainframe products, by upgrade fees
for future additional processing capacity and, to a lesser extent, by
increased sales of the Company's open systems products. International license
revenues received a benefit of approximately 4.7% from the weakening of the
dollar from the third quarter of fiscal 1995.
10
<PAGE>
BMC SOFTWARE, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
(CONTINUED)
The Company continues to rely upon enterprise license fees as
significant components of license revenue growth, license revenues and total
revenues. An enterprise license converts a customer's traditional, CPU
tier-based licenses to a MIPS-based license that allows the customer to run
an unlimited number of copies of a product on its CPUs without regard to
size, subject to a maximum limit on the aggregate power of the CPUs as
measured in MIPS. In a typical enterprise license transaction, the customer
pays the restructuring fee described above to secure a more favorable
discount, pays significant upgrade fees for future additional processing
capacity in anticipation of MIPS growth over the term of the agreement and
may license additional software products. For the three and nine months ended
December 31, 1995, the revenue contribution from restructuring fees and upgrade
fees for future additional processing capacity has remained in the high teens,
which is consistent with the results from the fiscal year ended March 31,
1995. The Company's operating results are dependent upon the continued demand
for enterprise license transactions, which will depend upon customers'
increasing reliance on their IBM mainframe database management systems and a
resulting increase in the mainframe MIPS on which they run their installed
base of the Company's products.
The database management product lines, comprising the company's tools and
utilities for IBM's IMS and DB2 mainframe database management systems,
contributed approximately 66.7% of total revenues and 65.3% of license revenues
in the third quarter. Total revenues and license revenues from these product
lines increased 21.8% and 25.5%, respectively, compared to the third quarter
last year. For the nine month period, the database management product lines
contributed 69.8% of total revenues and license revenues, representing total
revenue growth of 16.2% and license revenue growth of 15.8% over the comparable,
prior year nine month period.
The Company continues to invest substantial resources in the development
and marketing of its open systems products, which currently consist of three
product lines: the PATROL application and database management products, the
MetaSUITE data administration and management products and the backup and
recovery utilities from DataTools, Inc., for whom the Company acts as an
exclusive distributor. The Company's combined open systems license revenues
grew approximately 300% for the quarter and nine month period ended December 31,
1995, as compared to the prior year periods. The increase in open systems
license sales contributed approximately one half of the net license revenue
growth for these periods. These product lines accounted for 18.0% of license
revenues and 12.7% of total revenues for the third quarter. For the nine months
ended December 31, 1995, the open systems products accounted for 14.5% and 9.5%
of license and total revenues, respectively.
Maintenance Revenues
Maintenance revenues represent maintenance fees charged to perpetual
license customers entitling them to product enhancements, technical support
services and ongoing compatibility with third-party operating systems. A
warranty period of one year is included in the initial license of the Company's
mainframe products; accordingly, the Company classifies a portion of the initial
license fee as maintenance. All maintenance revenues are recognized ratably
over the term of the maintenance agreement. The increase in maintenance
revenues is attributable to a growing installed base of the
11
<PAGE>
BMC SOFTWARE, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
(CONTINUED)
Company's products resulting from additional license sales as well as CPU
upgrades, which generate higher maintenance fees. The growth rate in
maintenance revenues has slowed from that achieved in prior years primarily as a
result of the higher discounts granted to customers as a result of license
restructurings and enterprise license agreements.
EXPENSES
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
DECEMBER 31, DECEMBER 31,
------------------ ------------------
(IN THOUSANDS) (IN THOUSANDS)
1995 1994 CHANGE 1995 1994 CHANGE
------- ------- ------ -------- -------- ------
<S> <C> <C> <C> <C> <C> <C>
Selling and marketing expenses $32,281 $23,875 35.2% $ 79,100 $ 64,524 22.6%
Research and development
expenses 15,729 13,716 14.7% 43,036 40,631 5.9%
Cost of maintenance services
and product licenses 11,367 7,977 42.5% 32,094 23,189 38.4%
General and administrative
expenses 11,176 7,950 40.6% 27,003 21,651 24.7%
Acquired research and
development 23,589 -- -- % 23,589 -- -- %
------- ------- -------- --------
Total operating expenses $94,142 $53,518 $204,822 $149,995
------- ------- -------- --------
------- ------- -------- --------
</TABLE>
Selling and Marketing Expenses
Selling and marketing expenses of the Company increased over 35% in the
third quarter of fiscal 1996. Primary contributors to this growth were
increases in selling and marketing personnel and increased marketing
activities. These increases primarily relate to expenses associated with the
Company's efforts to expand its presence in the open systems market. Sales
commissions also increased as a direct result of the 41% increase in license
revenue in the third quarter. The Company also incurred certain costs
relative to international sales personnel changes. All of these factors
contributed to the expense growth for the first nine months of fiscal 1996
over fiscal 1995 levels. Sales commissions, however, did not contribute as
significantly to the expense growth in the nine months of fiscal 1996
compared to the comparable period in fiscal 1995. As a percentage of total
revenues, selling and marketing expenses have only increased slightly over
fiscal 1995 levels for both the third quarter and first nine months.
Research and Development Expenses
The Company significantly increased its spending on its research and
development organization in the third quarter and for the first nine months of
fiscal 1996 over the comparable periods in fiscal 1995. The primary focus
within the research and development organization has been the hiring of
permanent and contract developers to create product offerings in the open
systems market. These expense increases have largely been offset by the
increase in capitalized software.
12
<PAGE>
BMC SOFTWARE, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
(CONTINUED)
The Company has recorded increased capitalization of $2,137,000 in the
third quarter of fiscal 1996 and $9,081,000 in the first nine months of
fiscal 1996 over the comparable periods in fiscal 1995. The capitalization
increases relate primarily to costs associated with new open systems
products. As a percentage of total revenues, net research and development
expenses have decreased to 13.2% in the third quarter of fiscal 1996 from
15.1% in the third quarter of fiscal 1995; and decreased to 14.3% in the
first nine months of fiscal 1996 from 16.4% in the first nine months of
fiscal 1995. Excluding the impact of software capitalization, research and
development expenses continue to approximate 17% to 18% of total revenues in
the third quarter of fiscal 1996.
For the third quarter of fiscal 1996, the Company capitalized $4,237,000 in
software development costs. In the third quarter of fiscal 1995, the Company
capitalized $2,100,000.
Over the last two fiscal years, the Company has supplemented its
internal product development efforts with acquisitions of several companies
and technologies, including the base technologies for the PATROL and
MetaSUITE product lines. The Company's acquisition strategy in general has
been to acquire emerging technologies, rather than established companies, and
to significantly enhance and add to the acquired technology. In the quarter
ended December 31, 1995, the Company acquired two open systems software
companies, Peer Networks, Incorporated and HawkNet, Inc., and certain
mainframe database technologies. See "-Acquired Research and Development Cost"
below.
Cost of Maintenance Services and Product Licenses
Cost of maintenance services and product licenses expenses consist of
amortization of purchased and internally developed software, costs associated
with technical support operations and royalty fees. These costs have increased
in the third quarter and in the first nine months of fiscal 1996 primarily as a
result of increased product licenses costs due to increased amortization of
purchased and internally developed software. Also, increases in royalty fees
have contributed to the increase in cost of product licenses. As a percentage
of total revenues, these expenses increased from 8.8% in the third quarter of
fiscal 1995 to 9.6% in the third quarter of fiscal 1996.
For the third quarter of fiscal 1996, the Company's amortization of
internally developed software costs totaled $1,553,000 versus $822,000 in the
third quarter of fiscal 1995.
General and Administrative Expenses
The Company's general and administrative expenses increased significantly
in the third quarter of fiscal 1996 as compared to the third quarter of fiscal
1995. The increase is primarily attributable to variable compensation plans for
the Company's executives and the country managers of the Company's international
offices, which are based on increases in operating income. In addition to the
factors above, certain severance payments to former country managers were
incurred during the third quarter of fiscal 1996 that were not incurred in
fiscal 1995. General and administrative expenses for the first six months of
fiscal 1996 increased 15.5%. The increases incurred during the third quarter
of fiscal 1996 caused general and administrative expenses for the first nine
months of fiscal 1996 to increase approximately 25% from the comparable period
in fiscal 1995. As a percentage of total revenues, general and administrative
expenses remain in the 9% range in the third quarter of fiscal 1996.
13
<PAGE>
BMC SOFTWARE, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
(CONTINUED)
Acquired Research and Development Costs
During the third quarter of fiscal 1996, the Company completed the
acquisitions of stock and assets (including in-process research and development)
of certain technology companies for an aggregate purchase price of $27.8
million, including direct acquisition costs. The Company accounted for these
transactions using the purchase method and recorded a $23,589,000 charge
($22,831,000 net of income tax benefits), for acquired research and development
costs during the quarter.
OTHER INCOME
For the third quarter of fiscal 1996, other income was $3,956,000,
reflecting an increase of 33.0% over $2,975,000 of other income in the same
quarter of fiscal 1995. Other income consists primarily of interest earned on
tax-exempt municipal securities, auction preferred stock, Eurodollar deposits,
corporate debt securities, financed receivables and money market funds. The
increase is primarily the result of the increase in cash available for
investment.
INCOME TAXES
For the third quarter of fiscal 1996, income tax expense was $15,749,000,
compared to $12,449,000 for the same quarter in fiscal 1995. Income tax expense
for the first nine months of fiscal 1996 was $40,455,000 compared to $33,288,000
for the same period in fiscal 1995. The Company's income tax expense represents
the federal statutory rate of 35%, plus certain state taxes, reduced by the
benefit from the Company's Foreign Sales Corporation, the effect of tax
exempt interest earned from temporary cash investments, the effect of tax
deductions on certain technology acquisitions and foreign income taxes.
Excluding the impact of technology acquisitions, the Company's effective
income tax rate for the nine months ended December 31, 1995 and 1994
approximated 31.5% and 31.0%, respectively.
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its growth through funds generated from
operations. As of December 31, 1995, the Company had cash, cash equivalents
and investment securities of $270,457,000.
During the quarter ended December 31, 1995, the Company repurchased
1,313,000 shares of its common stock for approximately $47,408,000 in open
market transactions. As a result, the Company depleted its shares authorized,
by the Board of Directors, for repurchase.
The Company believes that existing cash balances and funds generated
from operations will be sufficient to meet its liquidity requirements for the
foreseeable future.
14
<PAGE>
BMC SOFTWARE, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
(CONTINUED)
B. FORWARD LOOKING INFORMATION AND CERTAIN RISKS AND UNCERTAINTIES THAT COULD
AFFECT FUTURE OPERATING RESULTS.
Numerous factors affect the Company's operating results, including
general economic conditions, market acceptance and demand for its products,
its ability to develop new products, rapidly changing technologies and
increasing competitive pressures. These and other important factors,
including the risks and uncertainties discussed below, could cause the
Company's actual results for the fourth quarter of fiscal 1996 and for fiscal
1997 and beyond to differ materially from those expressed in any
forward-looking statements made by, or on behalf of, the Company.
The Company derives approximately 90% of its revenues from software
products for IBM and IBM-compatible mainframe computers. CPU upgrade fees and
enterprise license transactions are a substantial and integral component of the
Company's mainframe business, and the percentage of license revenues contributed
by enterprise license transactions has increased over the last three fiscal
years. See "Results of Operations-Revenues-License Revenues" above. The
Company believes that demand for enterprise licenses 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 and customers' continually increasing need to use the Company's
existing software products on substantially greater mainframe processing
capacity. There can be no assurance that these trends of MIPS growth and of
customers using the Company's current mainframe products on more powerful
computers will continue. Future operating results are also dependent on
sustained improvement of the Company's international operating results, which
have been inconsistent over the last three fiscal years.
Operating income as a percentage of revenues ("Operating Margins")
remained relatively unchanged in the reported periods from fiscal 1995 to
fiscal 1996. Since the Company's costs, however, are to a large extent fixed
in the short term and are planned primarily based on sales forecasts, failure
to achieve planned revenue growth in a period would likely have a material
adverse affect on Operating Margins and net earnings. The Company has
increased its research and development and marketing spending significantly
in fiscal 1996 and intends to continue such increased investment, 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 are generally
higher, as a percentage of sales, than for mainframe products, because of
lower unit prices, more widely dispersed customers and prospects and intense
competition. The Company intends to supplement 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 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.
15
<PAGE>
BMC SOFTWARE, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
(CONTINUED)
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 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 a
significant 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
a trend toward larger single sales transactions, which can have extended
sales cycles and are less predictable. The Company generally does 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 open systems market and has relied upon acquisitions of open
systems technologies to accelerate and augment its open systems product
initiatives. The Company is also continuing to develop and to acquire new
mainframe products and technologies. Over 70% of the Company's revenues are
derived from its IMS and DB2 database utility products, which are mature
product lines. The Company has invested in the development of new mainframe
products that have been recently released or are scheduled for release in
fiscal 1997. 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 and product delays in the past and
expects to have delays in the future. Delays in new mainframe or client/server
product introductions or less-than-anticipated market acceptance of these new
products would have an adverse effect on the Company's revenues and earnings.
Further, the Company's strategic plans and business models 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 and there can be no
assurance that anticipated results will be achieved.
CPU upgrade fees contributed 19%, 27% and 25% of total revenues in
fiscal years 1993, 1994 and 1995. 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 enterprise
licenses, it has not significantly changed the fact that customers pay more
to use its products on more powerful CPU's. The Company believes its current
pricing policies most properly reflect the value provided by its products.
IBM provides alternatives to tier-based pricing with respect to its large
mainframe CPUs. This action has increased pricing pressures within the
mainframe systems software markets. The advent of IBM's "Sysplex" pricing of
its mainframe systems software when installed in a complex of coupled
mainframe CPUs may additionally increase these pricing pressures. If changes
in mainframe systems software pricing or increased 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.
16
<PAGE>
BMC SOFTWARE, INC. AND SUBSIDIARIES
PART II - OTHER INFORMATION
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS.
None
(b) REPORTS ON FORM 8-K.
Report dated October 6, 1995 reporting the Company's
preliminary financial results for the three months
ended September 30, 1995.
17
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
BMC SOFTWARE, INC.
Date: February 14, 1996 By: /s/ MAX P. WATSON JR.
----------------------- -----------------------------------
Max P. Watson Jr.
Chairman of the Board, President and
Chief Executive Officer
Date: February 14, 1996 By: /s/ KEVIN M. KLAUSMEYER
----------------------- -----------------------------------
Kevin M. Klausmeyer
Chief Accounting Officer
18
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE NINE
MONTHS ENDED DECEMBER 31, 1995, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> MAR-31-1996
<PERIOD-START> APR-01-1995
<PERIOD-END> DEC-31-1995
<CASH> 26,211
<SECURITIES> 244,246
<RECEIVABLES> 102,294
<ALLOWANCES> 2,083
<INVENTORY> 0
<CURRENT-ASSETS> 221,047
<PP&E> 139,670
<DEPRECIATION> 34,279
<TOTAL-ASSETS> 542,282
<CURRENT-LIABILITIES> 158,577
<BONDS> 0
0
0
<COMMON> 525
<OTHER-SE> 347,477
<TOTAL-LIABILITY-AND-EQUITY> 542,282
<SALES> 78,524
<TOTAL-REVENUES> 119,000
<CGS> 11,367
<TOTAL-COSTS> 94,142
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 28,814
<INCOME-TAX> 15,749
<INCOME-CONTINUING> 13,065
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