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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, 1996
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 27, 1996 was $2,955,051,715.
As of June 28, 1996, there were outstanding 50,105,171 shares of Common
Stock, par value $.01, of the registrant.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the following documents are incorporated by reference in this
report:
Definitive Proxy Statement to be filed in connection with the
registrant's Annual Meeting of Stockholders currently scheduled to be
held on August 19, 1996 (Part III of this Report)
Such Proxy Statement shall be deemed to have been "filed" only to the
extent portions thereof are expressly incorporated by reference.
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This Annual Report contains certain forward looking statements within the
meaning of Section 27A of the Securities Act of 1933, as amended, and Section
21E of the Securities Act of 1934, as amended. Actual results could differ
materially from those indicated by such forward looking statements as a result
of numerous important factors, certain of which are described herein. Readers
should pay particular attention to the risk factors described in the section of
this Report entitled "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Forward Looking Information and Certain
Risks and Uncertaintities That Could Affect Future Operating Results." Readers
should also carefully review the cautionary statements described in the other
documents the Company files from time to time with the Securities and Exchange
Commission, specifically the Quarterly Reports on Form 10-Q and Reports on Form
8-K filed by the Company.
PART I
ITEM 1. BUSINESS
OVERVIEW
BMC Software, Inc. ("BMC" or the "Company") develops, markets and provides
maintenance and support services for systems software products that improve the
performance, reliability, and manageability of large scale mainframe systems
software from International Business Machines Corp. ("IBM') and for open systems
databases, other systems software and applications. As discussed below, BMC's
three most important product families are its high performance utilities for
IMS/DB and DB2, its administrative products for DB2 and its PATROL monitoring
and event management tools. 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 tools
for DB2. These database utilities and tools contributed approximately 70% of
total revenues in each of the last three fiscal years and higher percentages of
net earnings. 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 automate
routine and repetitive tasks necessary to the operation of large DB2 databases.
The DB2 administrative products also include DB2 recovery products, which
automate the recovery of a DB2 database after an outage.
Over the last three fiscal years, BMC has invested over $105 million in
developing and acquiring open systems software products to extend its product
offerings into the rapidly growing market for open systems management products.
The Company's open systems product offerings are currently concentrated in three
areas: 1) the PATROL monitoring and event management tools for applications,
databases and operating systems; 2) the back-up and recovery products, which
include the SQL BackTrack high performance database back-up utilities for which
the Company has exclusive marketing rights; and 3) the MetaSuite database
administration tools that extend the functions provided by the Company's DB2
administrative tools to the leading open systems DBMSs from Oracle Corp.
("Oracle"), Sybase, Inc. ("Sybase") and other vendors. BMC is developing and
delivering these
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products in furtherance of its Cooperative Enterprise Management Solutions
("CEMS") strategy, which emphasizes enterprise-wide support of the disparate mix
of hardware platforms, DBMSs and applications that characterizes large-scale
open systems implementations. By providing superior support of multiple
applications, DBMS and operating systems, BMC intends to differentiate its open
systems products from those provided by a hardware, DBMS or applications vendor,
which tend to favor that vendor's products. In addition to these three product
areas, BMC is developing high performance utilities for open systems DBMSs. In
the first quarter of fiscal 1997, the Company introduced the first of these, a
high speed reorganization utility for the Oracle DBMS. In fiscal 1996, the
Company's open systems products contributed $44.9 million, or 11% of total
revenues, a 198% increase over fiscal 1995.
STRATEGY
The Company believes its primary strengths are its ability in, and
reputation for, developing and supporting highly reliable systems software
products for the critical information systems employed by large enterprises. BMC
has remained committed to the IBM mainframe platform. The Company believes that,
over the last 18 to 24 months, the IBM mainframe platform has been re-validated
relative to open systems alternatives for large scale, transaction intensive
systems. In fiscal 1996, the Company introduced 22 new mainframe products, which
include the EP family of IMS/DB utilities for the largest IMS customers and the
first of several high performance utilities for IBM's next-generation CMOS
parallel processor mainframe platform. The Company believes customers will
continue to increase the processing capacity of their mainframe systems over the
next several years, in some cases dramatically, which should create additional
demand for its mainframe products. The Company intends to market its mainframe
products primarily through its well-established direct sales channel.
Two cornerstones of the Company's CEMS strategy are its commitments to
heterogenous platform support and to indirect channel partners. These
commitments are most evident in the evolution of PATROL in fiscal 1996. PATROL's
ability to monitor and manage a particular application, database or operating
system is provided by "knowledge modules," which collect, measure and manage the
parameters and metrics particular to the managed application, database or
operating system. Since acquiring PATROL, the Company has introduced over 20
additional knowledge modules and related components, thereby extending PATROL to
the most prevalent open systems applications, databases and operating systems.
To further increase PATROL's breadth, the Company acquired Peer Networks, Inc.
in November 1995 to add support of the Simple Network Management Protocol
("SNMP"), the leading protocol for network management and the leading standard
for information collection in multi-vendor networks. The Company is also
designing its other open systems products for heterogenous environments; for
example, the MetaSuite and Recovery Manager products will support the leading
open systems DBMSs and hardware platforms. In addition to broad support of
disparate open systems platforms, the CEMS strategy envisions the bridging of
open systems and mainframe environments. The Company believes it is well suited
to achieve this because of its core competencies in applications and data
management in both environments. For example, PATROL provides MVS platform
support and will be extended to encompass mainframe DBMSs.
A key component of the CEMS strategy is the integration of PATROL with the
leading network management frameworks used today, such as OpenView from
Hewlett-Packard Corp. ("HP") and SPECTRUM from Cabletron Systems, Inc.
("Cabletron"), and leading systems management frameworks such as TME from Tivoli
Systems, Inc. ("Tivoli") and CA-Unicenter from Computer Associates,
International ("CA"). This integration allows a user of one of these systems or
network management frameworks to monitor and manage additional applications,
databases and operating systems via the PATROL agent and knowledge modules. The
integration also allows the use of the framework's management console to view
and manage these additional objects. To provide greater market coverage, defray
first level support costs and accelerate market acceptance, the Company is
entering into OEM and reseller agreements with many of the vendors whose
products are supported
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by or integrated with PATROL. The Company made significant progress in fiscal
1996 in building its channels operations infrastructure and in signing
distribution agreements with major vendors such as HP. In fiscal 1996, net
indirect open systems sales were approximately $6,000,000.
The primary industry trend in fiscal 1996 was the emergence of the Internet
as a communications platform for large enterprises, both internally via
corporate "intranets" and externally as an interface with customers and other
constituencies requiring communication with or information about the enterprise.
The Company believes that users of Internet and intranet servers will face most
of the same problems that users of mainframes and open systems servers have
always faced, such as DBMS performance and administration, back-up and recovery,
change management, fault management and network management, and that its
products will address these needs. PATROL, for example, will add an Internet
browser-based management console and knowledge modules for intranet and Internet
servers. On a broader scale, the Company believes widespread adoption of
intranets and Internet communications gateways will further increase the
requirement for immediate access to legacy enterprise data residing in IMS and
DB2. The Company has announced its Enterprise Data Management product family,
which will provide high speed data extraction, transformation and transportation
between legacy and open systems DBMSs. Sybase is licensing the EDM products on
an OEM basis to provide these data movement capabilities between the Sybase DBMS
and IMS and DB2.
Another emerging trend is the adoption of Microsoft Corporation's Windows NT
operating system and SQL Server DBMS, and of Intel-based servers, as alternative
open systems server platforms. The Company believes the Windows NT and Intel
servers will continue to gain momentum and is supporting Windows NT with its
open systems products. PATROL currently includes a Windows NT agent, and the
Company is porting its PATROL applications knowledge modules to Windows NT. The
Company has announced the addition by Intel of PATROL into its i960 motherboard,
which will provide high speed input/output operations for the next generation of
Intel-based servers using the Pentium Pro microprocessor. The Company's
MetaSuite products will also support Windows NT and the SQL Server DBMS.
PRODUCTS
At March 31, 1996, BMC's product portfolio was comprised of 110 products in
13 product groups, of which 83 were mainframe products and 27 were open systems
products, including Knowledge Modules for PATROL. These products groups are
discussed below.
MAINFRAME PRODUCTS
The Company's mainframe products generated 89% of total revenues and 84% of
license revenues in fiscal 1996. As of March 31, 1996, there were 9 groups of
mainframe products, which are listed in order of revenue contribution.
MASTERPLAN PRODUCTS FOR DB2
The Masterplan products for DB2 generated approximately 33%, 34% and 36% of
the Company's total revenues in fiscal 1994, 1995 and 1996, respectively, and
39%, 39% and 38% 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.
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,
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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 IMS Database Utilities provided 38% of total revenues and 35% of license
revenues in fiscal 1994, 37% of total revenues and 34% of license revenues in
fiscal 1995 and 34% of total revenues and 31% of license revenues in fiscal
1996. 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.
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 9%, 7% and 6% of the Company's total revenues
for fiscal 1994, 1995 and 1996, respectively.
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 8%,
7% and 5% of the Company's total revenues in fiscal 1994, 1995 and 1996,
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.
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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%, 4% and 3% of the Company's total revenues in fiscal 1994, 1995 and 1996,
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 total
revenues in fiscal 1994 and 1995 and 2% in fiscal 1996.
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 2% of total revenues in each of fiscal 1994, 1995 and 1996.
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 2%, 1%
and 1% of the Company's total revenues in fiscal 1994, 1995 and 1996,
respectively.
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 1994, 1995 and 1996.
OPEN SYSTEMS PRODUCTS
PATROL
The PATROL product family monitors and manages applications, databases and
operating systems. The PATROL products and architecture provide centralized
control and event management for distributed computing environments by using a
graphical management console, intelligent and autonomous agents and loadable
libraries of system expertise known as "knowledge modules." PATROL allows users
to discover and map the distributed environment, continuously survey the managed
objects, initiate alarms based on preset parameters and automatically implement
recovery actions. PATROL provides the ability to interface with advanced
notification systems for remote phone or page messages when immediate
administrative intervention is required. In addition, PATROL is architected to
be quickly and easily extended to support in-house or non-standard applications
through the development of additional knowledge modules by using the Patrol
Scripting Language ("PSL"). PSL also allows the customization and extension of
off-the-shelf knowledge modules to add parameters monitored and to provide other
additional functionality. In furtherance of its CEMS strategy, the Company is
integrating PATROL with the leading third-party network and systems management
frameworks.
The PATROL product line accounted for 4% of the Company's total revenues in
fiscal 1995 and 8% in fiscal 1996.
SQL BACKTRACKS; OPEN SYSTEMS BACK-UP AND RECOVERY
The Company is the exclusive distributor for the SQL Backtracks
high-performance back-up products developed by DataTools, Inc. These products
currently consist of SQL BackTrack for Sybase and SQL BackTrack for Oracle.
These products facilitate the necessary task of making back-up copies
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of data stored in these databases. As the size of these databases grows and they
are increasingly integrated into mission critical applications, the need and
difficulty of creating back-up copies increase. The Company has introduced its
Recovery Manager product for open systems DBMSs, which automates the scheduling
and administration of creating back-up copies of multiple and/or heterogeneous
open systems databases and the recovery of applications running on such
databases after a database or systems failure. The SQL BackTracks product line
contributed approximately 2% of the Company's total revenues in fiscal 1996.
METASUITE
The MetaSuite family of products consists of the MetaDesk, MetaManage and
MetaChange products for the administration of open systems DBMSs. The MetaSuite
products are intended to provide the functionality of the Company's DB2
administrative products for open systems DBMSs and thereby to automate tedious
and error-prone manual tasks. Functions provided by this product family include
SQL statement generation and execution and advanced database schema change
management. The MetaSuite products operate from a single point of control using
consistent graphical user interfaces and administrative methodologies regardless
of DBMS type or hardware platform being managed. The MetaDesk and MetaManage
products were introduced in the first quarter of fiscal 1996, and MetaChange is
scheduled for general availability in the second quarter of fiscal 1997. The
MetaSuite products generated less than 1% of total revenues in fiscal 1996.
NETTUNE PRO AND NETREPORT
NetTune Pro provides automatic tuning automatically tunes the Novell Netware
operating system by adjusting in real time the internal set parameters.
NetReport is a capacity planning tool for Netware networks that provides
extensive analysis, monitoring and reporting capabilities. The Company acquired
these products in November 1995 to extend its mainframe network optimization
product line to open systems networks and intends to add support of Windows NT
in future releases of the product. NetTune Pro and NetReport provide less than
1% of total revenues in fiscal 1996.
SALES AND MARKETING
BMC sells its mainframe products primarily through its direct sales force
and its open systems products through its direct sales force and indirect sales
channels. In its direct sales channel, the Company continues to employ
telephonic sales, or "telesales," to sell its products and encourage prospects
to test its products on a free trial basis. The direct sales channel is
organized into mainframe and open systems groups, although the mainframe
representatives cooperate extensively with the open systems representatives in
large account situations. The Company does not employ further product
specialization of its sales force, other than in the new telemarketing group
discussed below, and instead relies upon its software consultants for detailed
technical knowledge of a given product. As of March 31, 1996, the Company's
direct sales force employed 115 sales representatives in North America and 122
international sales representatives.
The Company employs technically trained software consultants to provide
specialized technical product knowledge to accounts, particularly in the DB2 and
open systems markets. The sales support consultants assist in installing the
Company's products and conducting in-depth technical evaluations of their
performance and features. In many cases, the software consultants provide these
services on-site. The Company has significantly expanded its staff of sales
support consultants as competition in the DB2 tools and utilities markets has
increased and as open systems sales have grown. As of March 31, 1996, the
Company employed 44 software consultants.
The Company's North American sales force is primarily based in Houston,
Texas. The Company has also opened field sales offices in Washington, D.C., Los
Angeles, California, and Chicago, Illinois, to increase it direct presence in
the regions surrounding those cities. The Company also staffs the offices with
software consultants to reduce the overall travel requirements to these regions.
As discussed under "-- Strategy" above, the Company is developing indirect
channels for its open systems products. The Company has established a channels
operations group to promote, negotiate and support such distribution
arrangements and is continuing to invest in its channels infrastructure.
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To market certain open systems and networking products that sell at price
points below those of its traditional product lines, the Company has implemented
a telemarketing sales group. The group's purpose is to identify new prospects
for these products and to follow-up on the many open systems leads generated by
direct mail campaigns and trade show participation. As of March 31, 1996, the
Company employed 26 sales representatives in this group.
INTERNATIONAL OPERATIONS
Approximately 39%, 39% and 41% of the Company's total revenues in fiscal
1994, 1995 and 1996, respectively, was derived from business outside North
America.
The Company conducts its international sales, marketing and support
primarily through 14 wholly-owned subsidiaries worldwide. 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 fiscal 1996, the Company established direct sales
subsidiaries in Brazil and Singapore. In addition to its subsidiaries, the
Company is represented by 25 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
herein. 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. The Company's growth prospects are
highly dependent upon the continued growth of its international license and
software maintenance revenues. The Company's international license revenues and
expenses have, however, been somewhat unpredictable at times over the last three
fiscal years.
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 and the impact of currency
fluctuations on international license revenues in fiscal 1995 and 1996, see
"Management's Discussion and Analysis of Results of Operations and Financial
Conditions -- Results of Operations -- Expenses -- Risk Management" and Note
1(i) of Notes to the Consolidated Financial Statements contained herein. 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.
RESEARCH AND PRODUCT DEVELOPMENT
The Company continues to invest a significant amount of its resources in its
internal research and development operations. These costs are primarily
compensation of research and development personnel. As of March 31, 1996, the
Company employed 619 research and development personnel (including independent
contractors). 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 below under the headings, "Management's
Discussion and Analysis of Results of Operations and Financial Condition --
Expenses -- Research and Development" and "-- Expenses -- Cost of Maintenance
Services and Product Licenses."
The Company's CEMS strategy of supporting a broad variety of open systems
platforms with its products increases the complexity and difficulty of
developing new products and requires greater cooperation between development
teams than its traditional mainframe tools and utilities. The Company has
experienced delays in certain of its product introductions as a result.
The Company's research, development and support teams are organized around
its product groups and are led by product authors, who are key developers that
receive incentive commissions on product sales. At March 31, 1996, the Company
employed 52 such product authors. The Company's research and development
organizations are based in Houston and Austin, Texas.
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MAINTENANCE, ENHANCEMENT AND SUPPORT SERVICES
Revenues from the provision of maintenance, enhancement and support services
comprised 42%, 41% and 37% of total revenues in fiscal 1994, 1995 and 1996,
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. These
services are also important to customers, particularly mainframe customers, who
require prompt problem resolution because of their dependence on the products to
run information systems that are central to their enterprises. The services are
also necessary because customers require forward compatibility when they install
new versions of the systems software supported by a particular BMC product. The
Company internally creates and produces all user manuals, sales materials and
other documentation related to its products.
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 18% to 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.
PRODUCT PRICING AND LICENSING
The Company's mainframe 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 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 27%, 25% and 23% of total revenues in fiscal years
1994, 1995 and 1996, 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 for its mainframe and open
systems products, including standard discounts for multiple copies of a product,
discounts for enterprise license transactions and discounts for its DB2
products.
The Company also prices and licenses PATROL on a CPU tier basis. Because
PATROL is a relatively new product and because many of its licensees are still
in a pilot or implementation phase of use, CPU upgrade fees from PATROL have
been immaterial to date. The Company expects that PATROL revenues will be
predominately from additional unit sales rather than CPU upgrade fees, but that
such CPU upgrade fees will increase over time. Certain of the Company's other
open systems products are also licensed on a tiered basis, while those at lower
price points such as MetaDesk are licensed on a per unit basis.
BMC's products are generally marketed on a trial basis. When a customer
desires to license a trialed product, a permanent product copy or a coded
password to convert the trial tape to a permanent tape is provided 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.
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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 discussion below 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 mainframe products run primarily with IBM's IMS/DB and DB2
database management systems and IMS/TM, CICS and VTAM data communications
systems. Certain of these products are essentially improved versions of system
software utilities that are provided as part of these integrated IBM system
software products. IBM continues to improve or add to these integrated software
packages as part on its strategic initiative of reducing the overall software
costs associated with its mainframe computers. If IBM is successful in
duplicating the Company's products, it would provide them at little or nominal
additional cost to the customer. This would likely have a material adverse
effect on demand for new licenses and recurring maintenance of the Company's
competing products.
The mainframe 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 market for DB2 tools and utilities is far more
competitive than the Company's traditional IMS markets and continues to increase
in competitiveness. Product pricing is a key competitive factor in the market
for third-party tools and utilities for DB2, and the Company has periodically
adjusted its discount structure for its DB2 products to maintain its
competitiveness in this market.
The open systems markets the Company is addressing are competitive to an
even greater degree than the mainframe systems software market. All of the major
mainframe systems software vendors have announced open systems strategies that
appear to overlap to varying degrees with PATROL and BMC's other open systems
products. The relational DBMS vendors, such as Oracle and Sybase, and hardware
companies such as HP, Sun Microsystems Inc. and Cabletron, are also providing
competitive or potentially competitive products. PATROL overlaps with network
management products, such as HP's OpenView and Cabletron's SPECTRUM, and with
systems management frameworks such as CA-Unicenter and Tivoli's TME. The
Company's strategy is to complement these frameworks by integrating with them.
It is likely, however, that the network and systems management framework
providers will over time attempt to extend their products into PATROL's
functional space. In addition, the barriers to entry are far lower in the open
systems software markets, as computer resources are far less expensive,
development skills are more widespread and venture funding is widely available.
The Company expects these markets to continue to increase in competitiveness.
The Company continually modifies its mainframe products 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 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
acquire 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. Certain of the leading open systems DBMs
vendors are less cooperative in providing technical assistance to independent
systems software vendors.
9
<PAGE>
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.
CLIENTS
No individual client accounted for a material portion of the Company's
revenues during any of the past three fiscal years. Since the Company's
mainframe packages are used with relatively expensive computer hardware, most of
its revenues are derived from companies that have the resources to make a
substantial commitment to data processing and their computer installations. Most
of the world's major companies use one or more of the Company's software
packages. The Company's software products are generally used in a broad range of
industries, business and applications. The Company's clients include
manufacturers, financial service providers, banks, insurance companies,
educational institutions, hospitals and value-added resellers.
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. The Company is, however, in some cases distributing
its open systems products on a shrink wrap basis and the enforceability of such
restrictions in a shrink wrap license is uncertain. Also, 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, 1996, the Company had 1,444 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,
and competition is intense for open systems sales and development 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 a 100,000 square foot
product development office in Austin, Texas and its marketing and support
offices in Sao Paulo, Brazil; Camberley, England; Frankfurt, Germany; Milan,
Italy; Paris, France; Tokyo, Japan; Madrid, Spain; Melbourne, Australia;
Copenhagen, Denmark; Nieuwegein, Netherlands; Singapore and Brussels, Belgium.
The Company leases its principal mainframe computers, an IBM ES9000-952, an IBM
390 600S and a CMOS-1, and its telecommunications equipment. See Notes 1(e) and
10 of Notes to the Consolidated Financial Statements below.
ITEM 3. LEGAL PROCEEDINGS
The Company filed a lawsuit styled BMC SOFTWARE, INC. VS. PEREGRINE SYSTEMS,
INC. ET.AL., Cause No. 95-10161, in the 200th Judicial District Court of Travis
County, Texas, in August 1995. The lawsuit seeks an injunction prohibiting seven
former employees and their employer, among other things, from using the
Company's confidential information and trade secrets in the development of
products similar to the products on which they worked while employed by the
Company. The defendants have filed several counterclaims against the Company,
alleging that the Company has tortiously interfered with Peregrine Systems,
Inc.'s business relations, breached its nondisclosure agreements with the
individual defendants, violated Section 15.05(a) of the Texas Free Enterprise
and AntiTrust Act and misappropriated certain trade secrets and confidential
information belonging to Peregrine/
10
<PAGE>
Bridge Transfer Corporation in violation of a confidentiality agreement between
the Company and Peregrine Systems, Inc. The defendants' counterclaims seek
injunctive relief preventing the Company from using Peregrine/Bridge Transfer
Corporation's trade secrets and confidential information allegedly disclosed to
the Company, a declaratory judgment that the Company's trade secrets and
confidential information allegedly disclosed to the Company, a declaratory
judgment that the Company's trade secrets and confidential information at issue
are unqualified for protection as trade secrets or confidential information and
actual and exemplary monetary damages. Management believes the ultimate
resolution of the above matters will not be material to the Company's financial
condition.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not Applicable.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Since August 12, 1988, the Company's Common Stock has been traded in the
NASDAQ National Market System under the symbol "BMCS". At June 18, 1996, the
Company had 565 holders of record of Common Stock.
The following table sets forth the high and low bid quotations per share of
Common Stock for the periods indicated.
<TABLE>
<CAPTION>
PRICE RANGE OF
COMMON STOCK
--------------------
HIGH LOW
--------- ---------
<S> <C> <C>
FISCAL 1995
First Quarter.................................................................... $ 33.25 $ 20.88
Second Quarter................................................................... 27.50 20.06
Third Quarter.................................................................... 28.75 20.13
Fourth Quarter................................................................... 34.88 27.00
FISCAL 1996
First Quarter.................................................................... $ 40.50 $ 27.63
Second Quarter................................................................... 51.50 34.50
Third Quarter.................................................................... 46.25 32.40
Fourth Quarter................................................................... 61.38 37.25
</TABLE>
The Company has not paid any dividends since 1988 and does not intend to pay
any cash dividends in the foreseeable future. The Company currently intends to
retain any future earnings otherwise available for cash dividends on the Common
Stock for use in its operations, for expansion and for stock repurchases. See
"Management's Discussion and Analysis of Results of Operations and Financial
Condition Liquidity and Capital Resources."
11
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
The following selected consolidated financial data presented under the
captions "Statement of Earnings Data" and "Balance Sheet Data" for, and as of
the end of, each of the years in the five year period ended March 31, 1996, are
derived from the consolidated financial statements of BMC Software, Inc. and
subsidiaries. The financial statements for each of the fiscal years in the three
year period ended March 31, 1996, have been audited by Arthur Andersen LLP,
independent public accountants. The selected consolidated financial data should
be read in conjunction with the consolidated financial statements as of March
31, 1995 and 1996 and for each of the years in the three year period ended March
31, 1996, the accompanying notes and the report thereon, which are included
elsewhere in this Form 10-K.
<TABLE>
<CAPTION>
YEARS ENDED MARCH 31,
---------------------------------------------------------------
1992 1993 1994 1995 1996
----------- ----------- ----------- ----------- -----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF EARNINGS DATA:
Revenues:
Licenses.................................... $ 105,738 $ 136,901 $ 167,176 $ 204,957 $ 269,022
Maintenance................................. 78,869 101,599 121,324 140,043 159,828
----------- ----------- ----------- ----------- -----------
Total revenues............................ 184,607 238,500 288,500 345,000 428,850
Selling and marketing expenses.................. 54,347 67,263 75,198 89,724 116,724
Research and development expenses............... 24,144 38,131 46,969 55,493 59,011
Cost of maintenance services and product
licenses....................................... 20,633 23,289 28,216 31,960 44,854
General and administrative expenses............. 23,089 23,732 26,175 29,935 37,083
Acquired research and development
costs.......................................... -- -- 32,038 29,260 23,589
----------- ----------- ----------- ----------- -----------
Operating income (2)(3)(4)................ 62,394 86,085 79,904 108,628 147,589
Other income.................................... 4,379 7,323 10,708 11,704 15,446
----------- ----------- ----------- ----------- -----------
Earnings before income taxes (2)(3)(4).... 66,773 93,408 90,612 120,332 163,035
Income taxes.................................... 20,589 28,022 34,123 42,815 57,464
----------- ----------- ----------- ----------- -----------
Net earnings (2)(3)(4).................... $ 46,184 $ 65,386 $ 56,489 $ 77,517 $ 105,571
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
Earnings per share (2)(3)(4).................... $ .89 $ 1.25 $ 1.08 $ 1.52 $ 2.02
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
Shares used in computing earnings per
share(1)....................................... 51,686 52,354 52,304 50,976 52,286
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
<CAPTION>
AS OF MARCH 31,
---------------------------------------------------------------
1992 1993 1994 1995 1996
----------- ----------- ----------- ----------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents....................... $ 137,912 $ 44,797 $ 37,814 $ 39,494 $ 62,128
Working capital................................. 108,038 74,449 29,429 35,166 43,775
Total assets.................................... 246,249 378,652 417,527 502,649 608,218
Long-term obligations, including current
portion........................................ -- -- -- -- --
Stockholders' equity............................ 140,891 223,386 250,400 306,154 383,708
</TABLE>
- ------------------------
(1) See Note 1 to Consolidated Financial Statements for the basis of computing
net earnings per share.
(2) Includes the impact of a one-time charge of $32,038,000 (pre-tax), or
$28,398,000 (net of tax), for the fiscal 1994 acquisition of Patrol
Software. Excluding this one-time charge, fiscal 1994 earnings were
$84,887,000 or $1.62 per share. Operating income was $111,942,000. Earnings
before income taxes were $122,650,000.
12
<PAGE>
(3) Includes the impact of a one-time charge related to several fiscal 1995
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
$2.02 per share. Operating income was $137,888,000. Earnings before income
taxes were $149,592,000.
(4) Includes the impact of a one-time charge related to several fiscal 1996
technology acquisitions of $23,589,000 (pre-tax), or $22,831,000 (net of
tax). Excluding this one-time charge, fiscal 1996 earnings were $128,402,000
or $2.46 per share. Operating income was $171,178,000. Earnings before
income taxes were $186,624,000.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
OVERVIEW
This discussion comprises historical information for the periods covered,
followed by certain forward looking information and information about certain
risks and uncertainties that could cause the Company's future operating results
to differ from any results indicated by any forward looking statements made by
the Company or others. It is important that the historical discussion be read
together with the discussion of such risks and uncertainties, and that these
discussions are read in conjunction with the accompanying audited financial
statements and notes thereto.
BMC Software specializes in the development, marketing and maintenance of
systems software products for large enterprises operating IBM and IBM-compatible
mainframes or client/server information systems. The Company is currently
offering 110 software products, of which 87 are mainframe products and 23 are
client/server products. The Company's core business is the provision of high
performance utilities and administrative tools for the primary high-end IBM
mainframe database management systems, IMS and DB2. In each of the last three
fiscal years, these products generated approximately 70% of the Company's total
revenues and higher percentages of its earnings. The utility products provide
high performance replacement functionality that performs time-critical
operations such as loading, copying or reorganizing a database, thereby
increasing the availability of the data and the applications that require it.
The administrative tools increase productivity by automating routine and
repetitive database management operations.
Over the last three years, the Company has invested significantly in
extending its product offerings to open systems hardware and software platforms.
The Company's PATROL product, acquired in January 1994, has emerged as a leading
monitoring and management tool for open systems applications, databases and
operating systems. Including the PATROL acquisition, the Company has invested
over $105,000,000 in its open systems product strategies, including both
internal research and development and external technology acquisitions. The
Company's open systems strategy has been concentrated in three areas: (a) the
extension of PATROL's support of additional applications; the continued
enhancement of its functionality and the integration of PATROL with the leading
third-party network and systems management frameworks; (b) the provision of
heterogeneous back-up and recovery products for open systems relational database
management systems; and (c) the delivery of open systems equivalents of its
database administration products for DB2. The Company is also developing
high-speed utilities for the leading open systems relational database management
systems.
During June of 1995, the Company released Version 3.0 of PATROL, which
incorporated significant enhancements in scalability, interoperability and
flexibility including autonomous agents, agent-to-agent integration and
independent consoles. In addition, during fiscal 1996 the PATROL suite was
expanded to operate with an increased number of different systems management
frameworks, databases and applications. In the third quarter of fiscal 1996, to
further expand the scope of PATROL and to augment the Company's client/server
offerings, the Company acquired HawkNet, Inc., and PEER Networks, Inc. The
acquisitions of HawkNet and PEER expanded the Company's product offerings in the
enterprise networking area. HawkNet provides network server optimization and
tuning software for Novell NetWare and Windows NT environments and PEER provides
SNMP management agents and agent development tool kits.
13
<PAGE>
Fiscal 1996's total revenues of $428,850,000 were 24% higher than fiscal
1995 total revenues. The increase was the result of a 26% increase in North
American product license revenues, a 39% increase in international product
license revenues and a 14% increase in worldwide maintenance revenues. Net
earnings in fiscal 1996 were $128,402,000, excluding a one-time write-off of
$22,831,000 (net of income taxes) related to the third quarter acquisitions of
stock and assets of certain technology companies. These results represent a 24%
increase over fiscal 1995 net earnings of $103,218,000 (excluding the acquired
research and development charge related to acquisitions of technology and the
write-off of the purchase option to acquire DataTools, Inc.). Increased net
earnings were attributable to the 24% total revenue growth; operating income as
a percentage of revenues ("Operating Margins") remained relatively unchanged
from fiscal 1995 to 1996. There can be no assurance that operating margins will
be sustained at historical levels. For a discussion of factors affecting
operating margins, see the discussions below under the headings "Quarterly
Results" and "Forward Looking Information and Certain Risks and Uncertainties
That Could Affect Future Operating Results."
HISTORICAL INFORMATION
RESULTS OF OPERATIONS
The following table sets forth, for the fiscal years indicated, the
percentages that selected items in the Consolidated Statements of Earnings bear
to total revenues.
<TABLE>
<CAPTION>
PERCENTAGE OF
TOTAL REVENUES
-------------------------------
YEAR ENDED MARCH 31,
-------------------------------
1994 1995 1996
--------- --------- ---------
<S> <C> <C> <C>
Revenues
Licenses....................................................................... 57.9% 59.4% 62.7%
Maintenance.................................................................... 42.1 40.6 37.3
--------- --------- ---------
Total revenues............................................................... 100.0 100.0 100.0
--------- --------- ---------
Selling and marketing expenses................................................... 26.0 26.0 27.2
Research and development expenses................................................ 16.3 16.1 13.8
Cost of maintenance services and product licenses................................ 9.8 9.3 10.5
General and administrative expenses.............................................. 9.1 8.6 8.6
Acquired research and development costs.......................................... 11.1 8.5 5.5
--------- --------- ---------
Operating income............................................................. 27.7 31.5 34.4
Other income..................................................................... 3.7 3.4 3.6
--------- --------- ---------
Earnings before income taxes................................................... 31.4 34.9 38.0
Income taxes..................................................................... 11.8 12.4 13.4
--------- --------- ---------
Net earnings................................................................... 19.6% 22.5% 24.6%
--------- --------- ---------
Net earnings, excluding acquired research and development costs.................. 29.4% 29.9% 29.9%
--------- --------- ---------
--------- --------- ---------
</TABLE>
14
<PAGE>
REVENUES
<TABLE>
<CAPTION>
PERCENTAGE CHANGE
FISCAL YEAR ENDED MARCH 31, ----------------------------
------------------------------------- 1995 COMPARED 1996 COMPARED
1994 1995 1996 TO 1994 TO 1995
----------- ----------- ----------- ------------- -------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Licenses
North America.................................... $ 101,959 $ 124,382 $ 156,807 22.0% 26.1%
International.................................... 65,217 80,575 112,215 23.5% 39.3%
----------- ----------- -----------
Total perpetual licenses........................... 167,176 204,957 269,022 22.6% 31.3%
Maintenance........................................ 121,324 140,043 159,828 15.4% 14.1%
----------- ----------- -----------
Total revenues..................................... $ 288,500 $ 345,000 $ 428,850 19.6% 24.3%
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
The Company generates revenues from the licensing of its 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 1995 to fiscal 1996,
total revenues increased 24% to $428,850,000. License revenues comprised 58%,
59% and 63% of total revenues in fiscal 1994, 1995 and 1996, while maintenance
revenues for the same years contributed 42%, 41% and 37%, respectively. The
Company's North American operations generated 61% of license revenues in fiscal
1994 and 1995 and 58% in fiscal 1996. The Company has increased its product list
prices by approximately 5% in each of the last three fiscal years, although
discounting has mitigated the effect of such price increases for many customers.
Although the Company expects revenues to continue to grow in fiscal 1997 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.
As of March 31, 1996, BMC marketed 110 systems software products designed to
improve the availability, reliability, accuracy and integrity of enterprise data
maintained in IBM mainframe and open systems environments. During fiscal 1996,
the Company continued to diversify its product offerings beyond the IBM
mainframe environment, which has been its traditional market. The Company's open
system products (including the DataTools SQL BackTrack products) generated
$44,900,000 in total revenues in fiscal 1996, an increase of approximately 200%
over the prior fiscal year. From fiscal 1994 to fiscal 1995, open systems total
revenues increased from $1,100,000 to $15,100,000.
Mainframe-related product revenues increased 15% from fiscal 1994 to fiscal
1995 and 16% from fiscal 1995 to fiscal 1996. As discussed below, the Company's
mainframe revenues are dependent on large customers and their current and
anticipated mainframe capacity needs.
LICENSE REVENUES The Company's license revenues include both product
license fees and product upgrade fees. Product license fees are generated from
the initial licensing of a product and from license restructurings wherein a
customer pays a fee to increase the discounts used to calculate future
maintenance and upgrade 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 the aggregate millions of
instructions per second ("MIPS") on which the Company's products are installed.
These upgrade fees include fees for current additional processing capacity and
for future additional processing capacity. Product upgrade fees accounted for
27%, 25% and 23% of total revenues for fiscal years 1994, 1995 and 1996,
respectively. All license and upgrade fees are recognized as revenue when the
license agreement is executed and the applicable products (if any, in the case
of upgrade fees) have been delivered.
North American license revenue grew 22% in fiscal 1995 and 26% in fiscal
1996. Increased sales of the Company's open systems products have represented a
significant part of North American license revenue growth over the past two
years and represented the single largest component of North
15
<PAGE>
American license revenue growth from fiscal 1995 to fiscal 1996. In addition to
the increased open systems licenses, increased mainframe product license fees
and upgrade fees for current additional processing capacity drove license growth
in fiscal 1996. North American license revenue growth in fiscal 1995 was derived
primarily from restructuring fees and increased product license fees for the
Company's mainframe products.
International operations contributed 39% of license revenues in fiscal 1994
and 1995 and 42% of license revenues in fiscal 1996. From fiscal 1994 to fiscal
1995, international license revenues grew 24% and 39% from fiscal 1995 to fiscal
1996. In fiscal 1995, international license revenues grew as a result of
increased upgrade fees for future processing capacity, product license sales of
open systems products and restructuring fees. International license revenue
growth from fiscal 1995 to fiscal 1996 was derived principally from upgrade fees
for future processing capacity and, to a lesser extent, by product license sales
of mainframe and open systems products. International license revenues received
a benefit of approximately 8% and 3% from the weakening of the dollar,
respectively from fiscal 1994 to fiscal 1995 and from fiscal 1995 to fiscal
1996.
Enterprise license transactions have been and continue to be a significant
component of the Company's license revenues and license revenue growth. 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. Substantially all of these
transactions include a fee for additional processing capacity beyond the
customer's current usage level and/or a restructuring fee, and some include
license fees for additional products. The fees for future additional processing
capacity typically comprise from one-half to substantially all of the license
fees included in an enterprise license transaction. The aggregate fees for
future additional processing capacity and license restructuring comprised 13% of
total revenues in fiscal 1994 compared to 19% in fiscal 1995 and 20% in fiscal
1996.
In addition to the administrative and pricing benefits that an enterprise
license agreement offers the customer, the Company believes that the multi-year
relationship offers a strategic advantage for additional revenues in that it (1)
establishes the Company's technology and product strategy within key accounts
and (2) eases the competitive pressures from other independent software vendors.
The enterprise license program has been successful and most of the Company's
larger customers have converted their licenses to enterprise license terms. An
enterprise license typically requires an evaluation of the customer's processing
capacity level periodically throughout the term of the agreement or at the end
of the term. The licensee is required to pay additional charges if the MIPS
capacity on which the licensed products are being used exceeds the stipulated
processing capacity level previously purchased. The continued growth of the
Company's mainframe revenues is dependent on the Company's success in the
closing of additional enterprise license agreements as well as the expansion of
existing agreements as customers continue to require additional mainframe
processing capacity.
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, subsystems and applications. Maintenance charges are generally 15% to
20% of the license fee for the product at the time of renewal. Maintenance
revenues also include the bundled fees for first-year maintenance services
covered by the related perpetual license agreement. All maintenance fees are
deferred at the time of billing and recognized ratably over the term of the
agreement. 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 have increased over the last three fiscal years as a
result of the continued growth in the base of installed products and the CPU
capacity on which they run and high maintenance renewal rates. Under the
traditional, tier-pricing model, maintenance fees are calculated on the current
list price of the product which is dependent upon the size of the CPU on which
the product is installed. Consequently, the Company receives higher maintenance
fees as the customers install its
16
<PAGE>
products on larger CPUs. Maintenance revenue in a particular year is impacted by
the level of license revenue in the preceding years, the bundled fees for
first-year maintenance and by restructuring transactions. As discussed above,
restructuring fees entitle a customer to higher, volume-based discounts that
apply to future maintenance and other charges. The reduction in the rate of
maintenance revenue growth rate from 19% in fiscal 1994 to 15% in fiscal 1995
and 14% in fiscal 1996 is primarily attributable to these discounts.
PRODUCT LINE REVENUES The IMS Database Utilities and Masterplan for DB2
product series represent the Company's largest revenue-producing product lines.
The IMS Database Utilities represented 38%, 37% and 33% of total revenues and
35%, 34% and 31% of license revenues for fiscal 1994, 1995 and 1996,
respectively. The Masterplan for DB2 line comprised 33%, 34% and 36% of total
revenues in fiscal years 1994, 1995 and 1996, respectively, and contributed 39%
of license revenues in fiscal 1994 and 1995 and 38% of license revenues in
fiscal 1996. These product lines showed combined total revenue growth of 20%
from 1994 to 1995 and 21% from 1995 to 1996. License revenues for these product
lines grew 20% in fiscal 1995 and 25% in fiscal 1996. The Company believes that
these product lines will continue to be a significant source of revenues and
continues to invest heavily in the support and enhancement of these products.
The Company offers several other product lines in the mainframe environment
which include, but are not limited to network optimization, data backup and
availability enhancement and data compression and performance. In the aggregate,
these product lines accounted for 28%, 25% and 20% of total revenues and 25%,
20% and 15% of license revenues for fiscal year 1994, 1995 and 1996,
respectively.
The Company's current product offerings outside of the IBM mainframe
environment fall into four categories: the PATROL database monitoring and
application management series introduced in late fiscal 1994, the MetaSUITE-SM-
database administration series, introduced in fiscal 1996, the SQL BackTrack
database backup and recovery series from DataTools, Inc., for whom the Company
acts as an exclusive distributor and NetTune Pro and NetReport introduced in
fiscal 1996. The aggregate total and license revenues from these four product
series comprised 11% and 16% of total and license revenues, respectively, for
fiscal 1996. The PATROL product line represented less than 1% of total and
license revenues in fiscal 1994, 4% of total revenues and 7% of license revenues
in fiscal 1995, 8% of total revenues and 13% of license revenues in fiscal 1996.
While the open systems potential for revenue growth is substantial, the
environment is extremely competitive. The Company believes that the application
of its expertise in data administration and management to the open systems
environment will enable it to compete effectively in this market; consequently,
the Company has invested heavily in the acquisition and development of its open
systems products and intends to continue this investment.
OTHER INCOME Other income was approximately 4%, 3% and 4% of total revenues
in fiscal years 1994, 1995 and 1996, respectively. Other income consists
primarily of interest earned on cash and cash equivalents, financed receivables
and marketable securities. Other income increased by 9% from fiscal 1994 to
fiscal 1995 and by 32% from fiscal 1995 to 1996. The increase in interest income
is primarily due to larger invested cash balances in 1996 than in 1995.
17
<PAGE>
EXPENSES
<TABLE>
<CAPTION>
PERCENTAGE CHANGES
---------------------------
FISCAL YEAR ENDED MARCH 31, 1996
------------------------------------- 1995 COMPARED COMPARED TO
1994 1995 1996 TO 1994 1995
----------- ----------- ----------- ------------- ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Selling and marketing.............................. $ 75,198 $ 89,724 $ 116,724 19.3% 30.1%
Research and development........................... 46,969 55,493 59,011 18.1% 6.3%
Cost of maintenance services and product
licenses.......................................... 28,216 31,960 44,854 13.3% 40.3%
General and administrative......................... 26,175 29,935 37,083 14.4% 23.9%
Acquired research and development.................. 32,038 29,260 23,589 (8.7)% (19.4)%
----------- ----------- -----------
Total operating expenses......................... $ 208,596 $ 236,372 $ 281,261
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
SELLING AND MARKETING The Company's selling and marketing expenses are
comprised primarily of personnel and related costs, sales commissions and costs
associated with industry trade shows and sales seminars. Compensation costs were
the largest single contributor to the expense growth in fiscal 1996 due to the
continued hiring of sales and marketing personnel to promote and sell the
Company's increasing number of product offerings. Selling and marketing
headcount increased by 32% from March 31, 1995 to March 31, 1996. Sales
commissions increased as a result of the 31% increase in license revenues,
although the increase was lower than the growth in license revenues. Also, the
Company increased its participation in trade shows and sponsored more sales
seminars during fiscal 1996. The Company's increase in selling and marketing
activities was distributed ratably between its domestic and international
operations. Increased selling and marketing expenses from fiscal 1994 to 1995
was the result of increases in the Company's marketing organization and
increases in sales commissions. As a percentage of total revenues, selling and
marketing expenses increased from 26% in fiscal 1994 and 1995 to 27% in fiscal
1996.
RESEARCH AND DEVELOPMENT Research and development expenses are mainly
comprised of personnel costs related to software developers and development
support personnel. These expenses also include computer hardware/software costs
and telecommunications expenses necessary to maintain the Company's data
processing center. The Company's net research and development expenditures
during fiscal 1996 increased slightly over fiscal 1995 levels although the
Company's investment in research and development activities during fiscal 1996
was greater than the indicated growth. A portion of the Company's research and
development expenditures were capitalized as software development costs in
accordance with Statement of Financial Accounting Standards (SFAS) No. 86 in all
three fiscal years. During fiscal 1994, 1995 and 1996, the Company capitalized
approximately $4,771,000, $6,883,000 and $19,309,000, respectively of software
development costs. The growth in capitalized costs during fiscal 1996 was due to
increases in new product development of open systems products and, to a lesser
degree, mainframe software products that have reached the stage of development
where the costs are capitalized under SFAS No. 86. Excluding the effect of
capitalized software on research and development expenses, the growth in
research and development occurred primarily in increased compensation. The
Company increased its headcount in the research and development organization by
35% from fiscal year end 1995 to fiscal year end 1996 (including contracted
personnel). Increased personnel and related costs were the primary cause for
research and development expense growth from fiscal 1994 to fiscal 1995.
COST OF MAINTENANCE SERVICES AND PRODUCT LICENSES Cost of maintenance
services and product licenses consists of compensation for technical employees
providing customer support, amortization of both purchased and internally
developed software and royalty fees paid to third parties. The increase in cost
of maintenance services and product licenses is mainly due to increases in
amortization of both purchased and internally developed software and the advent
of royalty fees. Royalty fees were not incurred by the Company prior to fiscal
1996. The Company amortized $4,771,000,
18
<PAGE>
$5,134,000 and $8,667,000 in fiscal 1994, 1995 and 1996, respectively of
capitalized software development costs pursuant to SFAS No. 86. During fiscal
1994, 1995 and 1996, the Company accelerated the amortization of certain
products which contributed to the increase in all fiscal years. The Company's
cost of maintenance services and product licenses is expected to continue
increasing as the Company capitalizes a higher level of software development
costs and as royalties paid to third parties, such as DataTools, increase. As a
percentage of total revenues, cost of maintenance services and product licenses
was 10% in fiscal 1994, 9% in fiscal 1995 and 11% in fiscal 1996.
GENERAL AND ADMINISTRATIVE General and administrative expenses were
comprised primarily of key executive compensation and personnel costs within
finance and accounting, product distribution, human resources and word
processing. Other expenses included in general and administrative expenses are
fees paid for legal services, accounting services, consulting projects,
insurance, travel and costs of managing the Company's foreign currency exposure.
Growth in general and administrative expenses was primarily attributable to
personnel costs and costs associated with managing the Company's foreign
currency exposure. The increase in personnel costs was driven by a 12% increase
in headcount from fiscal year end 1995 to fiscal year end 1996 as well as by
expenses associated with the termination and hiring of management personnel in
Europe in the last half of fiscal 1996. Costs associated with the Company's
foreign currency exposure increased due to the increase in international license
revenues from fiscal 1995 to fiscal 1996. The percentage growth in general and
administrative expenses was split evenly between the domestic and international
operations. As a percentage of total revenues, general and administrative
expenses remained constant at 9% in fiscal years 1994, 1995 and 1996. Growth in
general and administrative expenses from fiscal 1994 to fiscal 1995 was due
primarily to an increase in personnel and related costs.
ACQUIRED RESEARCH AND DEVELOPMENT COSTS The Company completed various
technology acquisitions during fiscal 1996. The aggregate purchase price for
these transactions totaled $27,789,000, including direct acquisition costs. The
Company funded these acquisitions primarily through the issuance of its own
common stock, and to a lesser extent, with cash. As of March 31, 1996,
approximately $2,911,000 of such consideration had not been paid and was
included in accrued liabilities. The Company used the purchase method of
accounting for these technology acquisitions. The Company recorded a $22,831,000
charge, net of an income tax benefit of $758,000, for acquired research and
development costs during fiscal 1996.
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 aggre-gate purchase price of $24,485,000,
including warrants to purchase the Company's stock valued at approximately
$3,280,000 and direct acquisition costs. Also, as of March 31, 1995, the Company
obtained exclusive product distribution rights and a purchase option from
DataTools, Inc. for $10,000,000. The term of the Company's option is March 31,
1996 through March 31, 1998. The distribution 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 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.
19
<PAGE>
INCOME TAXES The Company recorded income tax expense of $34,123,000,
$42,815,000 and $57,464,000 in fiscal 1994, 1995 and 1996, respectively. The
Company's effective tax rates were 38%, 36% and 35% for fiscal years ended 1994,
1995 and 1996, 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 1996, 39% and 41%, respectively of the Company's consolidated revenues
were 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, 1994,
1995 and 1996 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 derivative 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 several 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, given their
high credit ratings.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of,"
was issued in 1995. Implementation of SFAS No. 121 is required in the fiscal
year commencing April 1, 1996. SFAS No. 121 established accounting standards for
the impairment of long-lived assets, certain identifiable intangibles and
goodwill relating to those assets to be held and used and for long-lived assets
and certain identifiable intangibles to be disposed of. SFAS No. 121 is not
expected to have a significant impact on the Company's consolidated financial
statements.
SFAS No. 123, "Accounting for Stock-Based Compensation," was issued in 1995.
Implementa-tion is required in the fiscal year commencing April 1, 1996. SFAS
No. 123 established financial accounting and reporting standards for stock-based
compensation plans. SFAS No. 123 allows the
20
<PAGE>
Company to adopt one of two methods for accounting stock options. The Company
currently intends to adopt the method that approximates its current accounting
treatment. In fiscal 1997, disclosure will be required for the effect of
adopting the alternative method, which would generally require the Company to
record compensation expense equal to the valuation of stock options granted at
the grant date.
QUARTERLY RESULTS
The following table sets forth certain unaudited quarterly financial data
for the fiscal years ended March 31, 1995 and 1996. 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>
FISCAL QUARTER ENDED
--------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30, SEPT. 30,
1994 1994 1994 1995 1995 1995
----------- ----------- --------- ----------- ----------- -----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Total revenues................................ $ 78,000 $ 80,000 $ 90,700 $ 96,300 $ 93,300 $ 88,250
Selling and marketing expenses................ 20,468 20,181 23,875 25,200 24,572 22,247
Research and development expenses............. 13,919 12,996 13,716 14,862 14,106 13,201
Cost of maintenance services and product
licenses..................................... 8,189 7,023 7,977 8,771 10,271 10,456
General and administrative expenses........... 6,194 7,507 7,950 8,284 7,938 7,889
Acquired research and development costs....... -- -- -- 29,260 -- --
----------- ----------- --------- ----------- ----------- -----------
Operating income.............................. 29,230 32,293 37,182 9,923 36,413 34,457
----------- ----------- --------- ----------- ----------- -----------
Net earnings.................................. $ 22,101 $ 24,283 $ 27,708 $ 3,425 $ 27,466 $ 26,283
----------- ----------- --------- ----------- ----------- -----------
----------- ----------- --------- ----------- ----------- -----------
Earnings per share (EPS)...................... $ 0.43 $ 0.48 $ 0.55 $ 0.07 $ 0.53 $ 0.50
----------- ----------- --------- ----------- ----------- -----------
----------- ----------- --------- ----------- ----------- -----------
EPS, excluding acquired research and
development costs............................ $ 0.43 $ 0.48 $ 0.55 $ 0.57 $ 0.53 $ 0.50
----------- ----------- --------- ----------- ----------- -----------
----------- ----------- --------- ----------- ----------- -----------
Shares used in computing earnings per share... 51,396 50,590 50,370 51,550 51,396 52,667
----------- ----------- --------- ----------- ----------- -----------
----------- ----------- --------- ----------- ----------- -----------
<CAPTION>
<S> <C> <C>
DEC. 31, MAR. 31,
1995 1996
--------- ---------
Total revenues................................ $ 119,000 $ 128,300
Selling and marketing expenses................ 32,281 37,624
Research and development expenses............. 15,729 15,975
Cost of maintenance services and product
licenses..................................... 11,367 12,760
General and administrative expenses........... 11,176 10,080
Acquired research and development costs....... 23,589 --
--------- ---------
Operating income.............................. 24,858 51,861
--------- ---------
Net earnings.................................. $ 13,065 $ 38,757
--------- ---------
--------- ---------
Earnings per share (EPS)...................... $ 0.25 $ 0.74
--------- ---------
--------- ---------
EPS, excluding acquired research and
development costs............................ $ 0.69 $ 0.74
--------- ---------
--------- ---------
Shares used in computing earnings per share... 51,965 52,679
--------- ---------
--------- ---------
</TABLE>
On a relative basis, the Company has historically realized greater revenues
and net earnings in the latter half of its fiscal year. The proportion of second
half revenues and earnings relative to those in the first half of the Company's
fiscal year is expected to increase in fiscal 1997. 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 the related fringe
benefits, which are fixed in the short term except for commissions and bonuses,
which were 19% of operating expenses in fiscal 1996. 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, mainframe processing capacity growth, 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 the
high percentage of expenses is 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.
LIQUIDITY AND CAPITAL RESOURCES At March 31, 1996, the Company's cash, cash
equivalents and marketable securities were $352,032,000. The Company's working
capital as of March 31, 1996, was $43,775,000. 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, 1996, other than
normal trade payables and liabilities and a $2,911,000 payable relating to
technology acquisitions discussed under "Acquired Research and Development
Costs" above. Stockholders' equity as of March 31, 1996, was $383,708,000.
21
<PAGE>
The Company continues to finance its growth through funds generated from
operations. For the year ended March 31, 1996, net cash provided by operating
activities was $166,194,000. Net cash used in investing activities in fiscal
1996 was $93,496,000, primarily related to the acquisition of computers and
related equipment, the purchase of investment securities and the technology
acquisitions discussed above. Net cash used in financing activities in fiscal
1996 was $50,428,000. The primary uses of cash generated from operations
pertained to the Company's stock repurchase program and to purchases of
investment securities.
During fiscal 1996, the Company repurchased 1,673,000 shares of its common
stock for an aggregate purchase price of $63,472,000. As of March 31, 1996, the
Company was authorized to acquire 2,785,000 shares of its common stock under its
stock repurchase program. 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.
FORWARD LOOKING INFORMATION AND CERTAIN RISKS AND UNCERTAINTIES THAT COULD
AFFECT FUTURE OPERATING RESULTS.
The forward looking statements made in the above Management's Discussion and
Analysis of Results of Operations and Financial Condition include statements
regarding the continued significance of enterprise license transactions and the
Company's IMS Database utilities and Masterplan for DB2 product series, as well
as the Company's ability to compete effectively in the open systems market. In
addition, the Company's statement regarding the expected increase in the
proportion of second half revenues and earnings to those in the first half and
the Company's statement regarding its ability to meet its future liquidity
requirements are forward looking statements.
Numerous important factors affect the Company's operating results and could
cause the Company's actual results to differ materially from the results
indicated in this discussion or in any other forward looking statements made by,
or on behalf of the Company. There can be no assurance that future results will
meet expectations. These important factors include, but are not limited to,
those described in the following paragraphs and in the discussion above under
the heading "Business," including, without limitation, the discussion under the
subheading "-- Competition; System Dependence."
The Company derives approximately 90% of its revenues from software products
for IBM and IBM-compatible mainframe computers. IBM is attempting to reduce the
overall software costs associated with the MVS mainframe platform and is
continuing to enhance its utilities for IMS and DB2 to provide lower cost
alternatives to those provided by BMC and other independent software vendors.
The Company has traditionally maintained sufficient performance and functional
advantages over IBM's base utilities, although there can be no assurances that
it will continue to maintain such advantages.
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. In fiscal 1995 and 1996, the enterprise
license fees for future additional processing capacity and license
restructurings comprised 19% and 20%, respectively, of total revenues. 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. The Company
believes that the demand for enterprise licenses has been driven by customers'
re-commitment over the last 18 to 24 months to the MVS mainframe platform for
large scale, transaction intensive information systems. Whether this trend will
continue is difficult to predict. 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 or that demand for enterprise license
transactions will be sustained.
22
<PAGE>
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. The Company's operations and financial results could be
significantly adversely affected by factors associated with international
operations, including changes in foreign currency exchange rates, uncertainties
relative to regional economic circumstances and difficulties in staffing and
managing international operations.
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 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 spending significantly
in fiscal 1996 on its open systems initiatives, with the investment being
targeted to research and development, sales and pre-sales personnel. The Company
intends to continue such increased investment, which will place additional
pressure on its Operating Margins, particularly if revenue expectations are not
met by its open systems products. The Company's financial model in fiscal 1997
anticipates a reduction in Operating Margins in the first two quarters, with
expenses increasing more rapidly than revenues. 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 is
developing indirect channels through major open systems vendors to increase its
coverage and presence in open systems markets in a cost effective manner. There
can be no assurance that this strategy will be effective, however. Although the
Company has made significant progress in implementing reseller and distribution
arrangements for PATROL, open systems indirect sales were not material in fiscal
1996 and generated approximately $6,000,000 in sales. If the Company's direct
sales force remains the primary channel for its client/server products, its cost
of sales will likely increase and Operating Margins could be reduced.
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 in response to variations in operating and
financial results, perceived revenue growth rates and other factors. 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. The timing and
amount of the Company's license revenues are subject to a number of factors that
make estimation of operating results prior to the end of a quarter extremely
uncertain. The Company generally operates with little or no sales backlog and,
as a result, license revenues in any quarter are dependent on contracts entered
into or orders booked and shipped in that quarter. Most of the Company's sales
are closed at the end of each quarter, and there has been and continues to be a
trend toward larger single enterprise license transactions, which can have
extended sales cycles and are less predictable. The timing of closing large
license agreements also increases the risks of quarter-to-quarter fluctuations
and the uncertainty of estimating quarterly operating results. Failure to close
an expected individually significant transaction could cause the Company's
revenues and earnings in a period to fall short of expectations. The Company
generally does not know whether revenues and earnings will meet expected results
until the last days 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's
growth prospects are dependent upon the success of its open systems products.
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
are possible and would have an adverse effect on the Company's revenues and
earnings. New products or new versions of existing products may, despite
testing, contain undetected
23
<PAGE>
errors or bugs that will delay the introduction or adversely affect commercial
acceptance of such products. The Company's strategic plans and business models
contemplate significant revenue growth from its open systems product families.
This market is highly dynamic and is characterized by rapid change and intense
competition. Many of the Company's competitors and potential competitors have
significantly greater financial, technical, sales and marketing resources than
the Company and greater experience in open systems development and sales. A key
factor in determining the success of the Company's products, particularly its
open systems offerings, will be their ability to interoperate and perform well
with existing and future leading database management systems and other systems
software products supported by the Company's products. 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. The emergence of the Internet and
enterprise intranets as potential alternatives to the client/server paradigm
heightens such unpredictability.
CPU upgrade fees contributed 27%, 25% and 23% of total revenues in fiscal
years 1994, 1995 and 1996. 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 or other capacity-based 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 CPUs. 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 and is attempting to reduce the costs of its mainframe
systems software to increase the overall cost competitiveness of its mainframe
computing platforms. These actions have 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.
Litigation seeking to enforce patents, copyrights and trade secrets is
increasing in the software industry. There can be no assurance that a third
party will not assert that its patents or other proprietary rights are violated
by products offered by the Company. Any such claims, with or without merit, can
be time consuming and expensive to defend and could have an adverse effect on
the Company's business, results of operations, financial position and cash
flows.
24
<PAGE>
BMC SOFTWARE, INC. AND SUBSIDIARIES
To The Board Of Directors Of
BMC Software, Inc.:
We have audited the accompanying consolidated balance sheets of BMC
Software, Inc. (a Delaware corporation) and subsidiaries as of March 31, 1995
and 1996, and the related consolidated statements of earnings, stockholders'
equity and cash flows for each of the three years in the period ended March 31,
1996. 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, 1995 and 1996, and the results
of their operations and their cash flows for each of the three years in the
period ended March 31, 1996, in conformity with generally accepted accounting
principles.
ARTHUR ANDERSEN LLP
Houston, Texas
April 23, 1996
25
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
BMC SOFTWARE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
MARCH 31,
----------------------
1995 1996
---------- ----------
(IN THOUSANDS, EXCEPT
PER SHARE DATA)
<S> <C> <C>
Current assets:
Cash and cash equivalents............................................................... $ 39,494 $ 62,128
Securities available for sale........................................................... -- 8,464
Securities held to maturity............................................................. 54,330 59,566
Accounts receivable:
Trade, less allowance for doubtful accounts of $1,511 and $1,933...................... 47,333 70,631
Trade finance receivables, current.................................................... 17,408 8,668
---------- ----------
Total accounts receivable........................................................... 64,741 79,299
Interest and other receivables.......................................................... 5,641 7,723
Prepaid expenses and other.............................................................. 6,432 5,922
Deferred income taxes................................................................... 12,262 4,870
---------- ----------
Total current assets................................................................ 182,900 227,972
---------- ----------
Property and equipment, net of accumulated depreciation and amortization of $26,560 and
$36,818.................................................................................. 101,288 107,912
Software development costs, net of accumulated amortization of $11,290 and $10,908........ 16,499 25,840
Purchased software and related assets, net of accumulated amortization of $12,628 and
$18,953.................................................................................. 11,118 13,400
Securities available for sale............................................................. -- 39,281
Securities held to maturity............................................................... 180,009 182,593
Trade finance receivables, long-term...................................................... 8,047 4,146
Deferred charges and other assets......................................................... 2,788 7,074
---------- ----------
$ 502,649 $ 608,218
---------- ----------
---------- ----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Trade accounts payable.................................................................. $ 11,344 $ 8,417
Accrued securities purchases............................................................ -- 19,330
Accrued purchase price payable.......................................................... 14,867 2,911
Accrued commissions payable............................................................. 7,612 10,848
Accrued liabilities and other........................................................... 13,085 19,455
Taxes payable........................................................................... 3,427 16,595
Current portion of deferred revenue..................................................... 97,399 106,641
---------- ----------
Total current liabilities........................................................... 147,734 184,197
Deferred revenue and other................................................................ 48,761 40,313
---------- ----------
Total liabilities................................................................... 196,495 224,510
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, 52,520,000 shares issued.... 525 525
Additional paid-in capital.............................................................. 67,864 67,888
Retained earnings....................................................................... 296,204 401,775
Foreign currency translation adjustment................................................. (282) 82
Unrealized gain on securities available for sale........................................ -- 82
---------- ----------
364,311 470,352
Less treasury stock, at cost (2,020,000 and 2,547,000 shares, respectively)............. 54,694 84,480
Less unearned portion of restricted stock compensation.................................. 3,463 2,164
---------- ----------
Total stockholders' equity.......................................................... 306,154 383,708
---------- ----------
$ 502,649 $ 608,218
---------- ----------
---------- ----------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
26
<PAGE>
BMC SOFTWARE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
<TABLE>
<CAPTION>
YEARS ENDED MARCH 31,
-------------------------------------
1994 1995 1996
----------- ----------- -----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
Revenues:
Licenses................................................................. $ 167,176 $ 204,957 $ 269,022
Maintenance.............................................................. 121,324 140,043 159,828
----------- ----------- -----------
Total revenues......................................................... 288,500 345,000 428,850
Selling and marketing expenses............................................. 75,198 89,724 116,724
Research and development expenses.......................................... 46,969 55,493 59,011
Cost of maintenance services and product licenses.......................... 28,216 31,960 44,854
General and administrative expenses........................................ 26,175 29,935 37,083
Acquired research and development costs.................................... 32,038 29,260 23,589
----------- ----------- -----------
Operating income......................................................... 79,904 108,628 147,589
Other income............................................................... 10,708 11,704 15,446
----------- ----------- -----------
Earnings before income taxes............................................. 90,612 120,332 163,035
Income taxes............................................................... 34,123 42,815 57,464
----------- ----------- -----------
Net earnings............................................................. $ 56,489 $ 77,517 $ 105,571
----------- ----------- -----------
----------- ----------- -----------
Earnings per share......................................................... $ 1.08 $ 1.52 $ 2.02
----------- ----------- -----------
----------- ----------- -----------
Shares used in computing earnings per share................................ 52,304 50,976 52,286
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
27
<PAGE>
BMC SOFTWARE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
UNREALIZED UNEARNED
FOREIGN GAIN ON PORTION OF
ADDITIONAL CURRENCY SECURITIES RESTRICTED
YEARS ENDED COMMON PAID-IN RETAINED TRANSLATION AVAILABLE FOR TREASURY STOCK
MARCH 31, 1994, 1995 AND 1996 STOCK CAPITAL EARNINGS ADJUSTMENT SALE STOCK COMPENSATION
- -------------------------------------- ----------- ----------- --------- ------------- ------------- --------- -------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, March 31, 1993............... $ 525 $ 65,573 $ 162,198 $ (218) $ -- $ (286) $ (4,406)
Net earnings.......................... -- -- 56,489 -- -- -- --
Foreign currency translation
adjustment........................... -- -- -- (693) -- -- --
Treasury stock purchased.............. -- -- -- -- -- (40,672) --
Stock options exercised and restricted
shares issued........................ 1 (3,769) -- -- -- 9,652 (3,181)
Income tax benefit from stock options
exercised............................ -- 2,655 -- -- -- -- --
Restricted shares forfeited........... -- (745) -- -- -- -- 745
Earned portion of restricted stock
compensation......................... -- -- -- -- -- -- 2,132
Issuance of stock options pursuant to
acquisition of PATROL Software....... -- 4,400 -- -- -- -- --
Retirement of restricted shares....... (1) 1 -- -- -- -- --
----- ----------- --------- ------ ----- --------- -------------
Balance, March 31, 1994............... 525 68,115 218,687 (911) -- (31,306) (4,710)
Net earnings.......................... -- -- 77,517 -- -- -- --
Foreign currency translation
adjustment........................... -- -- -- 629 -- -- --
Treasury stock purchased.............. -- -- -- -- -- (32,001) --
Stock options exercised and restricted
shares issued........................ -- (4,121) -- -- -- 9,394 (2,599)
Income tax benefit from stock options
exercised............................ -- 663 -- -- -- -- --
Restricted shares forfeited........... -- (73) -- -- -- (781) 854
Earned portion of restricted stock
compensation......................... -- -- -- -- -- -- 2,992
Issuance of stock warrants in
association with certain acquired
technology........................... -- 3,280 -- -- -- -- --
----- ----------- --------- ------ ----- --------- -------------
Balance, March 31, 1995............... 525 67,864 296,204 (282) -- (54,694) (3,463)
Net earnings.......................... -- -- 105,571 -- -- -- --
Foreign currency translation
adjustment........................... -- -- -- 364 -- -- --
Treasury stock purchased.............. -- -- -- -- -- (64,816) --
Stock options exercised and restricted
shares issued........................ -- (4,838) -- -- -- 35,030 (55)
Unrealized gain on securities
available for sale................... -- -- -- -- 82 -- --
Income tax benefit from stock options
exercised............................ -- 4,862 -- -- -- -- --
Earned portion of restricted stock
compensation......................... -- -- -- -- -- -- 1,354
----- ----------- --------- ------ ----- --------- -------------
Balance, March 31, 1996............... $ 525 $ 67,888 $ 401,775 $ 82 $ 82 $ (84,480) $ (2,164)
----- ----------- --------- ------ ----- --------- -------------
----- ----------- --------- ------ ----- --------- -------------
<CAPTION>
TOTAL
YEARS ENDED STOCKHOLDERS'
MARCH 31, 1994, 1995 AND 1996 EQUITY
- -------------------------------------- ------------
<S> <C>
Balance, March 31, 1993............... $ 223,386
Net earnings.......................... 56,489
Foreign currency translation
adjustment........................... (693)
Treasury stock purchased.............. (40,672)
Stock options exercised and restricted
shares issued........................ 2,703
Income tax benefit from stock options
exercised............................ 2,655
Restricted shares forfeited........... --
Earned portion of restricted stock
compensation......................... 2,132
Issuance of stock options pursuant to
acquisition of PATROL Software....... 4,400
Retirement of restricted shares....... --
------------
Balance, March 31, 1994............... 250,400
Net earnings.......................... 77,517
Foreign currency translation
adjustment........................... 629
Treasury stock purchased.............. (32,001)
Stock options exercised and restricted
shares issued........................ 2,674
Income tax benefit from stock options
exercised............................ 663
Restricted shares forfeited........... --
Earned portion of restricted stock
compensation......................... 2,992
Issuance of stock warrants in
association with certain acquired
technology........................... 3,280
------------
Balance, March 31, 1995............... 306,154
Net earnings.......................... 105,571
Foreign currency translation
adjustment........................... 364
Treasury stock purchased.............. (64,816)
Stock options exercised and restricted
shares issued........................ 30,137
Unrealized gain on securities
available for sale................... 82
Income tax benefit from stock options
exercised............................ 4,862
Earned portion of restricted stock
compensation......................... 1,354
------------
Balance, March 31, 1996............... $ 383,708
------------
------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
28
<PAGE>
BMC SOFTWARE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED MARCH 31,
----------------------------------------
<S> <C> <C> <C>
1994 1995 1996
------------ ------------ ------------
<CAPTION>
(IN THOUSANDS)
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings.............................................................. $ 56,489 $ 77,517 $ 105,571
Adjustments to reconcile net earnings to net cash provided by operating
activities:
Acquired research and development costs................................. 32,038 29,260 23,589
Depreciation and amortization........................................... 14,404 18,791 28,354
Change in allowance for doubtful accounts............................... 377 (523) 426
Deferred income tax provision (benefit)................................. (3,548) 150 7,392
Earned portion of restricted stock compensation......................... 2,132 2,992 1,354
Changes in operating assets and liabilities:
Increase in accounts receivable....................................... (8,794) (10,414) (14,258)
Increase in interest and other receivables............................ (708) (2,162) (2,080)
Increase in prepaid expenses and other................................ (337) (3,744) (484)
(Increase) decrease in deferred charges and other assets.............. 139 (749) (3,680)
Increase (decrease) in trade accounts payable......................... 2,042 3,718 (3,306)
Increase (decrease) in accrued commissions payable.................... 405 (789) 3,236
Increase (decrease) in accrued liabilities and other.................. (422) 2,850 6,138
Increase (decrease) in taxes payable.................................. 2,256 (563) 13,168
Increase in current and long-term deferred revenue and other.......... 22,299 26,876 774
------------ ------------ ------------
Total adjustments................................................... 62,283 65,693 60,623
------------ ------------ ------------
Net cash provided by operating activities......................... 118,772 143,210 166,194
------------ ------------ ------------
------------ ------------ ------------
Cash flows from investing activities:
Cash paid for technology acquisitions..................................... $ (23,691) $ (22,055) $ (18,510)
Purchases of marketable securities........................................ (111,330) (101,060) (101,050)
Maturities of marketable securities....................................... 112,733 47,830 64,897
Proceeds from sales of fixed assets....................................... -- 1,004 1,072
Capital expenditures...................................................... (38,124) (20,150) (21,586)
Capitalization of software development costs.............................. (4,771) (6,883) (19,309)
Purchased software and related assets..................................... (746) -- (2,911)
Decrease in long-term financed receivables................................ -- -- 3,901
------------ ------------ ------------
Net cash used in investing activities................................... (65,929) (101,314) (93,496)
Cash flows from financing activities:
Treasury stock purchased.................................................. (28,491) (44,182) (64,816)
Stock options exercised................................................... 2,703 2,674 9,526
Income tax benefit from stock options exercised........................... 2,655 663 4,862
Payments on note payable with bank........................................ (36,000) -- --
------------ ------------ ------------
Net cash used in financing activities................................... (59,133) (40,845) (50,428)
------------ ------------ ------------
Effect of translation exchange rate changes on cash......................... (693) 629 364
------------ ------------ ------------
Net change in cash and cash equivalents................................... (6,983) 1,680 22,634
Cash and cash equivalents at beginning of year.............................. 44,797 37,814 39,494
------------ ------------ ------------
Cash and cash equivalents at end of year.................................... $ 37,814 $ 39,494 $ 62,128
------------ ------------ ------------
Supplemental disclosures of cash flow information --
Cash paid during the year for:
Income taxes.............................................................. $ 31,409 $ 40,236 $ 30,102
Value of treasury stock issued for technology acquired...................... -- -- 20,611
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
29
<PAGE>
BMC SOFTWARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(A) NATURE OF OPERATIONS
BMC Software, Inc. and its wholly-owned subsidiaries (collectively, the
Company or BMC) is a worldwide developer and vendor of software solutions for
automating application and data management across host-based and open systems
environments. The Company sells and supports its products primarily through its
sales offices around the world, as well as through its relationships with
independent partners. Numerous factors affect the Company's operating results,
including general economic conditions, market acceptance and demand for its
products, its ability to develop new products, rapidly changing technologies and
increasing competitive pressures. For a discussion of certain of these important
factors, see the discussion in Management's Discussion and Analysis of Results
of Operations and Financial Condition under the heading "Forward Looking
Information and Certain Risks and Uncertainties That Could Affect Future
Operating Results."
(B) USE OF ESTIMATES
The Company's management makes estimates and assumptions in the preparation
of its financial statements in conformity with generally accepted accounting
principles. These estimates and assumptions may affect the reported amounts of
assets and liabilities, the disclosure of contingent assets and liabilities as
of the date of the financial statements, and the reported amounts of revenues
and expenses during the respective reporting periods. Actual results could
differ from those results implicit in the estimates.
(C) BASIS OF PRESENTATION
The accompanying consolidated financial statements include the accounts of
the Company. All significant intercompany balances and transactions have been
eliminated in consolidation.
(D) CASH EQUIVALENTS
The Company considers investments with a maturity of three months or less
when purchased to be cash equivalents. As of March 31, 1995 and 1996, the
Company's cash equivalents were comprised primarily of Eurodollar deposits,
commercial paper and repurchase agreements. The Company's cash and cash
equivalents are subject to potential credit risk. The Company's cash management
and investment policies restrict investments to investment quality, highly
liquid securities.
(E) PROPERTY AND EQUIPMENT
Owned 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 all property and equipment, with the exception of building
and leasehold improvements, is calculated on the straight-line method over the
estimated useful lives of the assets which range from three to five years.
Depreciation on the building is calculated on the straight-line method over the
estimated useful lives of the components of the building (twenty years for the
infrastructure and thirty years for the shell). Leasehold improvements are
amortized on the straight-line method over the shorter of the lease term or the
estimated useful life of the assets which range from two to five years.
30
<PAGE>
BMC SOFTWARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
A summary of property and equipment is as follows:
<TABLE>
<CAPTION>
MARCH 31,
------------------------
1995 1996
----------- -----------
<S> <C> <C>
(IN THOUSANDS)
Land.......................................................................... $ 9,100 $ 9,100
Building...................................................................... 66,693 67,762
Computer and other equipment.................................................. 33,191 45,727
Furniture and fixtures........................................................ 10,240 12,361
Transportation equipment...................................................... 6,437 7,354
Leasehold improvements........................................................ 2,187 2,426
----------- -----------
127,848 144,730
Less accumulated depreciation and amortization.............................. (26,560) (36,818)
----------- -----------
Net property and equipment.................................................... $ 101,288 $ 107,912
----------- -----------
----------- -----------
</TABLE>
(F) SOFTWARE DEVELOPMENT COSTS
Costs of internally developed software are expensed until the technological
feasibility of the software has been established. Thereafter, software
development costs are capitalized and subsequently reported at the lower of
unamortized cost or net realizable value. The cost of capitalized software is
amortized over the products' estimated useful lives, which is typically five
years. During the years ended March 31, 1994, 1995 and 1996, $4,771,000,
$6,883,000 and $19,309,000, respectively, of software development costs were
capitalized. The increased capitalization in fiscal 1996 is the result of the
significant increases in open systems development work in areas where
technological feasibility has been achieved. Amortization for the years ended
March 31, 1994, 1995 and 1996 was $4,771,000, $5,134,000 and $8,667,000,
respectively. Amortization amounts were reported as cost of maintenance services
and product licenses in the accompanying consolidated statements of earnings.
(G) 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 useful 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. Amortization for the years ended March 31, 1994, 1995 and 1996 was
$2,822,000, $2,644,000 and $5,742,000, respectively. Amortization amounts were
reported as cost of maintenance services and product licenses in the
accompanying consolidated statements of earnings.
(H) 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.
(I) FOREIGN CURRENCY TRANSLATION AND RISK MANAGEMENT
The Company operates internationally, giving rise to 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.
31
<PAGE>
BMC SOFTWARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The Company enters into various types of foreign exchange contracts in
managing its foreign exchange risk, as indicated in the following table (amounts
represent fair values based on dealer quoted prices).
<TABLE>
<CAPTION>
MARCH 31,
--------------------
1995 1996
--------- ---------
<S> <C> <C>
(IN THOUSANDS)
Forwards......................................................................... $ 36,703 $ 45,738
Purchase options................................................................. 1,035 1,635
</TABLE>
The Company enters into forward exchange contracts to hedge firm commitments
that subject the Company to transaction risk. Specifically, the Company hedges
accounts receivable, intercompany transactions, cash balances and certain
liabilities denominated in currencies other than the U.S. dollar. The term of
the forward contracts is generally 30 days. The currencies hedged include
several European currencies, as well as the Japanese yen and Australian dollar.
The Company also enters into standard European currency put 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 U.S. 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 region 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 the Company's right and its commitment to sell foreign currencies.
<TABLE>
<CAPTION>
MARCH 31,
--------------------------------------------
<S> <C> <C> <C> <C>
1995 1996
-------------------- ----------------------
<CAPTION>
BUY SELL BUY SELL
--------- --------- --------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Europe...................................................... $ 706 $ 78,619 $ -- $ 106,911
Other....................................................... -- 6,944 2,931 1,547
--------- --------- --------- -----------
$ 706 $ 85,563 $ 2,931 $ 108,458
--------- --------- --------- -----------
--------- --------- --------- -----------
</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 are recognized at each month-end and included in the basis of the
transaction underlying the commitment. 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
32
<PAGE>
BMC SOFTWARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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. As of March 31, 1996, unamortized premium
costs totaled $1,554,000 and deferred gains were $81,000.
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, given their high
credit ratings.
During fiscal 1994, 1995 and 1996, general and administrative expenses
included net foreign exchange losses of $323,000, $848,000 and $1,725,000,
respectively.
(J) REVENUE RECOGNITION
The Company licenses its software products under perpetual, annual and
monthly licenses. Perpetual licenses include maintenance and enhancements for
either a 90 day period or a one year period. For those licenses which provide
maintenance and enhancements for a one year period, the portion of the license
fee associated with maintenance and enhancements is unbundled and recognized
ratably as maintenance revenue. Maintenance contracts are available annually
thereafter and are generally based on the value (as defined) of the licensed
software products. The Company also generates upgrade revenues as a result of a
customer's migration, or a customer's anticipated migration to more powerful
CPUs. Revenue from the licensing of software, including upgrade revenue, is
recognized when both the Company and the customer are legally obligated under
the terms of the respective agreement and the underlying software products (if
any in the case of upgrade transactions) have been delivered. Maintenance
revenue is recognized ratably over the term of the underlying maintenance
agreement.
(K) 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.
(L) STOCK SPLIT
On July 16, 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 one
share 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 consolidated
financial statements and related notes reflects the stock split for all periods
presented.
(M) RECLASSIFICATIONS
Certain amounts previously reported have been reclassified in order to
ensure comparability among the years reported.
(N) LONG-TERM ASSETS
SFAS No. 121 "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed of," was issued in 1995. Implementation of SFAS
No. 121 is required in the fiscal year commencing April 1, 1996. SFAS No. 121
established accounting standards for the impairment of
33
<PAGE>
BMC SOFTWARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
long-lived assets, certain identifiable intangibles and goodwill relating to
those assets to be held and used and for those long-lived assets and certain
identifiable assets to be disposed of. SFAS No. 121 is not expected to have a
significant impact on the Company's consolidated financial statements.
(2) TECHNOLOGY ACQUISITIONS
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 $27,789,000,
including direct acquisition costs. The Company funded these acquisitions
primarily through the re-issuance of its own common stock, and to a lesser
extent, with cash. The Company accounted for these transactions using the
purchase method and recorded a $22,831,000 charge, net of a $758,000 income tax
benefit, for acquired research and development costs during the third quarter.
As of March 31, 1996, approximately $2,911,000 of such consideration had not
been paid and was included in accrued liabilities.
During the fourth quarter of fiscal 1995, the Company completed various
technology acquisitions for an aggregate purchase price of $24,485,000,
including warrants to purchase 1,600,000 shares of the Company's stock at an
exercise price of $30 per share and direct acquisition costs. These acquisitions
were funded primarily through the issuance of the Company's common stock and
cash. These acquisitions were recorded using the purchase method. During fiscal
1996, approximately $4,590,000 of the aggregate purchase price related to these
acquisitions was paid.
On 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 660,000 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 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 (discussed in the two proceeding
paragraphs), 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 comprised of $32,012,000 in cash, and
options, valued at $4,400,000 (see Note 7). Approximately $5,410,000 of the
purchase price was paid in fiscal year 1995. 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 a $3,640,000
income tax benefit, 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
Management determines the appropriate classification of debt and equity
securities at the time of purchase and re-evaluates such designation as of each
subsequent balance sheet date. The Company has the ability and intent to hold
most of its investment securities to maturity and thus has classified
34
<PAGE>
BMC SOFTWARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(3) FINANCIAL INSTRUMENTS (CONTINUED)
these securities as "held to maturity" pursuant to SFAS No. 115, "Accounting for
Certain Investments in Debt and Equity Securities". These securities have been
recorded at amortized cost in the Company's balance sheets. On December 15,
1995, the Company reclassified $26,221,000 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. As a result of this reclassification,
the Company recorded an unrealized gain of $227,000 on December 15, 1995.
Securities classified as "available for sale" are recorded at fair value. The
resulting net unrealized gains or losses are recorded as an increase or decrease
to stockholders' equity. The Company holds no securities classified as "trading
securities". Gains and losses, realized and unrealized, are calculated using the
specific identification method. The table below summarizes the Company's total
investment securities portfolio as of March 31, 1995 and 1996.
BMC SOFTWARE, INC. AND SUBSIDIARIES
HELD TO MATURITY SECURITIES
<TABLE>
<CAPTION>
GROSS GROSS
UNREALIZED UNREALIZED AMORTIZED
FAIR VALUE GAIN LOSS COST
----------- ----------- ----------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
1995
MATURITIES WITHIN 1 YEAR
Municipal Securities......................................... $ 32,583 $ 29 $ (98) $ 32,652
Preferred Stock.............................................. 19,050 -- -- 19,050
Corporate Notes, Bonds and other............................. 2,572 -- (56) 2,628
----------- ----------- ----------- -----------
Total maturities within 1 year................................. $ 54,205 $ 29 $ (154) $ 54,330
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
MATURITIES FROM 1-5 YEARS
Municipal Securities......................................... $ 121,586 $ 277 $ (903) $ 122,212
Corporate Notes and Bonds.................................... 47,574 255 (403) 47,722
Preferred Stock.............................................. 8,900 -- -- 8,900
Mutual Funds and Equity Securities........................... 1,175 -- -- 1,175
----------- ----------- ----------- -----------
Total maturities from 1-5 years................................ $ 179,235 $ 532 $ (1,306) $ 180,009
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
1996
MATURITIES WITHIN 1 YEAR
Municipal Securities......................................... $ 28,634 $ 94 $ (17) $ 28,557
Preferred Stock.............................................. 8,900 -- -- 8,900
Corporate Bonds.............................................. 16,021 26 (8) 16,003
Euro Bonds and other......................................... 6,103 7 (10) 6,106
----------- ----------- ----------- -----------
Total maturities within 1 year $ 59,658 $ 127 $ (35) $ 59,566
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
MATURITIES FROM 1-5 YEARS
Municipal Securities......................................... $ 151,795 $ 1,222 $ (581) $ 151,154
Corporate Bonds.............................................. 25,923 543 -- 25,380
Euro Bonds and other......................................... 6,281 222 -- 6,059
----------- ----------- ----------- -----------
Total maturities from 1-5 years................................ $ 183,999 $ 1,987 $ (581) $ 182,593
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
</TABLE>
35
<PAGE>
BMC SOFTWARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(3) FINANCIAL INSTRUMENTS (CONTINUED)
<TABLE>
<S> <C> <C> <C> <C>
AVAILABLE FOR SALE SECURITIES
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED
COST GAIN LOSS FAIR VALUE
----------- ----------- ----------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
1996
MATURITIES WITHIN 1 YEAR
Municipal Securities......................................... $ 8,438 $ 26 $ -- $ 8,464
----------- ----------- ----------- -----------
Total maturities within 1 year................................. $ 8,438 $ 26 $ -- $ 8,464
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
MATURITIES FROM 1-5 YEARS
Municipal Securities......................................... $ 35,772 $ 195 $ (139) $ 35,828
Other........................................................ 3,453 -- -- 3,453
----------- ----------- ----------- -----------
Total maturities from 1-5 years................................ $ 39,225 $ 195 $ (139) $ 39,281
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
</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 that 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, financial market conditions and 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.
Many of the Company's customers choose to finance their BMC transactions
through unrelated, third-party financial institutions. In such cases, the
financial institutions bear all the credit risk. In the event of a product
performance issue, however, the Company, as in the case of non-financed license
transactions, would be responsible for resolving the issue. If it were unable to
do so, the Company would most likely provide additional products to the customer
or provide a credit or refund. To date, these occurrences have been minimal. As
of March 31, 1996, amounts owed to third-party financial institutions as a
result of customer transactions with BMC approximated $39,664,000.
(5) COST OF MAINTENANCE SERVICES AND PRODUCT LICENSES
The components of cost of maintenance services and product licenses for the
years ended March 31, 1994, 1995 and 1996 are as follows:
<TABLE>
<CAPTION>
1994 1995 1996
--------- --------- ---------
<S> <C> <C> <C>
(IN THOUSANDS)
Cost of maintenance services............................... $ 20,623 $ 24,182 $ 27,185
Amortization of software development costs................. 4,771 5,134 8,667
Amortization of purchased software......................... 2,822 2,644 5,742
Royalties.................................................. -- -- 3,260
--------- --------- ---------
$ 28,216 $ 31,960 $ 44,854
--------- --------- ---------
--------- --------- ---------
</TABLE>
36
<PAGE>
BMC SOFTWARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(6) INCOME TAXES
The provision (benefit) for income taxes for the years ended March 31, 1994,
1995 and 1996 consisted of the following:
<TABLE>
<CAPTION>
1994 1995 1996
--------- --------- ---------
<S> <C> <C> <C>
(IN THOUSANDS)
Current
Federal.................................................. $ 31,926 $ 37,480 $ 40,804
Foreign.................................................. 5,745 5,185 9,268
--------- --------- ---------
Total current.......................................... 37,671 42,665 50,072
--------- --------- ---------
Deferred
Federal.................................................. (3,548) (4) 7,392
Foreign.................................................. -- 154 --
--------- --------- ---------
Total deferred......................................... (3,548) 150 7,392
--------- --------- ---------
$ 34,123 $ 42,815 $ 57,464
--------- --------- ---------
--------- --------- ---------
</TABLE>
The foreign provision for income taxes is based on foreign pretax earnings
of $18,645,000 for fiscal 1994, $29,290,000 for fiscal 1995 and $46,474,000 for
fiscal 1996.
The income tax expense of $34,123,000 for fiscal 1994, $42,815,000 for
fiscal 1995 and $57,464,000 for fiscal 1996 differs from the amount computed by
applying the statutory federal income tax rate of 35% to consolidated earnings
before income taxes as follows:
<TABLE>
<CAPTION>
1994 1995 1996
--------- --------- ---------
<S> <C> <C> <C>
(IN THOUSANDS)
Expense computed at statutory rate......................... $ 31,714 $ 42,116 $ 57,062
Increase (reduction) resulting from:
Foreign tax effect, net.................................. (1,187) (4,701) (4,339)
Tax benefit from foreign sales corporation............... (294) (176) (777)
Income not subject to tax................................ (2,326) (2,511) (2,908)
Other.................................................... (1,344) 2,529 2,403
--------- --------- ---------
Subtotal............................................... 26,563 37,257 51,441
Non-deductible charge for acquired research and
development............................................... 7,560 5,558 6,023
--------- --------- ---------
$ 34,123 $ 42,815 $ 57,464
--------- --------- ---------
--------- --------- ---------
</TABLE>
Aggregate unremitted earnings of foreign subsidiaries for which U.S. Federal
income taxes have not been provided, totaled approximately $47,468,000 at March
31, 1996. Deferred income taxes have not been provided on these earnings because
the Company considers them to be indefinitely reinvested.
The Company adopted SFAS No. 109, "Accounting for Income Taxes," as of April
1, 1993. For fiscal years prior to 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 1996 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.
37
<PAGE>
BMC SOFTWARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(6) INCOME TAXES (CONTINUED)
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,
1995 and March 31, 1996 are presented as follows:
<TABLE>
<CAPTION>
1995 1996
---------- ----------
<S> <C> <C>
(IN THOUSANDS)
DEFERRED TAX ASSETS
Deferred revenue................................................... $ 21,425 $ 24,681
Accruals not currently deductible.................................. 1,097 76
Acquired research and development.................................. 3,328 3,696
Other.............................................................. 70 221
---------- ----------
Total deferred tax asset............................................. 25,920 28,674
DEFERRED TAX LIABILITIES
Software capitalization, net....................................... (5,775) (9,044)
Stock compensation plans........................................... (3,731) (7,075)
Book/tax difference on assets...................................... (2,475) (3,243)
Other.............................................................. (1,677) (4,442)
---------- ----------
Total deferred tax liability......................................... (13,658) (23,804)
---------- ----------
Net deferred tax asset............................................... $ 12,262 $ 4,870
---------- ----------
---------- ----------
</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 5,625,000 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 September 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 2,835,000 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 the
year 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 2,100,000 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 40,000 shares of common stock when first elected to the Board
and options to purchase an additional 10,000 shares on each of his or her third
and fifth anniversaries as a director. A maximum of 300,000 shares are issuable
under the plan. The plan was 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 3,000,000 shares are
issuable under the plan, and the maximum number of shares issuable under awards
granted in a single year is 600,000. The plan is administered by the
Compensation Committee and has a term of five years. The plan was terminated in
October 1995.
38
<PAGE>
BMC SOFTWARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(7) STOCK INCENTIVE PLANS (CONTINUED)
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 6,000,000 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 40,000 shares of
common stock when elected. Directors receive an annual grant of 10,000 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 400,000 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, 1994, 1995 and 1996:
<TABLE>
<CAPTION>
1994 1995 1996
-------------- -------------- ---------------
<S> <C> <C> <C>
Options outstanding at beginning of year............... 2,163,562 2,411,578 6,216,626
Options granted........................................ 671,256 4,934,400 1,034,250
Options exercised...................................... (341,594) (241,872) (631,947)
Options forfeited/cancelled............................ (81,646) (887,480) (110,605)
-------------- -------------- ---------------
Options outstanding at end of year..................... 2,411,578 6,216,626 6,508,324
-------------- -------------- ---------------
Option price range per share........................... $ 0.33-33.44 $ 0.33-33.44 $ 0.33-43.375
-------------- -------------- ---------------
Options exercisable.................................... 1,263,804 1,024,640 1,284,837
-------------- -------------- ---------------
</TABLE>
Included in options granted during 1994 are options to acquire 180,456
shares of common stock issued in connection with the Company's acquisition of
Patrol Software. These options have exercise prices ranging from $0.75 to $7.51
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 pursuant to the 1989 Stock Plan. These shares were subject to
transfer restrictions that lapsed in prescribed increments when the Company
achieved certain objectives for earnings per share growth in fiscal 1993, 1994
and 1995. The Company has also made restricted stock grants to certain executive
officers in connection with their recruitment to the Company 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 or,
alternatively, ten years after the grant date if the grantee is still an
employee of the Company. The Company achieved the objectives in fiscal 1990
through fiscal 1996.
39
<PAGE>
BMC SOFTWARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(7) STOCK INCENTIVE PLANS (CONTINUED)
The following is a summary of the restricted stock share activity for the
years ended March 31, 1994, 1995 and 1996:
<TABLE>
<CAPTION>
1994 1995 1996
---------- ---------- ---------
<S> <C> <C> <C>
Shares granted and unearned at beginning of year............................. 475,600 356,000 130,000
Shares granted............................................................... 130,000 90,000 1,698
Shares earned................................................................ (169,600) (272,250) (50,000)
Shares forfeited............................................................. (80,000) (43,750) --
---------- ---------- ---------
Shares unearned at end of year............................................... 356,000 130,000 81,698
---------- ---------- ---------
</TABLE>
In October of 1995, the Financial Accounting Standards Board issued SFAS No.
123 "Accounting for Stock-Based Compensation". Implementation is required in the
fiscal year commencing April 1, 1996. SFAS No. 123 allows the Company to adopt
one of two methods for accounting for stock options. The Company currently
intends to adopt the method that approximates its current accounting treatment.
SFAS No. 123 will require the Company to disclose, in fiscal 1997, the effect of
adopting the alternative method, which would generally require the Company to
record compensation expense equal to the valuation of stock options on the grant
date.
(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 $8,994 in calendar year 1993 and
$9,240 in calendar years 1994 and 1995. In each of the calendar years 1993, 1994
and 1995, 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 $2,480,000, $2,769,000 and $3,658,000
for the fiscal years ended March 31, 1994, 1995 and 1996, respectively. The
Company contributions vest to the employees in increments of 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 2001 and thereafter, and provide for
various renewal options. Rent expenses for office space is recognized equally
over the lease term. Total rent expense incurred during the years ended March
31, 1994, 1995 and 1996 was approximately $16,443,000, $16,595,000 and
$13,715,000, respectively.
Future minimum lease payments under noncancelable operating leases as of
March 31, 1996 are:
<TABLE>
<CAPTION>
YEARS ENDING MARCH 31,
----------------------
(IN THOUSANDS)
<S> <C>
1997.................................................................. $ 8,211
1998.................................................................. 7,541
1999.................................................................. 5,150
2000.................................................................. 1,317
2001.................................................................. 963
Thereafter............................................................ 93
--------
Total minimum lease payments........................................ $ 23,275
--------
</TABLE>
40
<PAGE>
BMC SOFTWARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(10) FOREIGN OPERATIONS
The following table summarizes selected financial information of the
Company's operations by geographic location:
<TABLE>
<CAPTION>
YEARS ENDED MARCH 31,
-------------------------------------
1994 1995 1996
----------- ----------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
REVENUES
North America............................................................ $ 176,936 $ 209,504 $ 253,593
Europe................................................................... 92,464 113,760 143,630
Other.................................................................... 19,100 21,736 31,627
----------- ----------- -----------
Consolidated........................................................... $ 288,500 $ 345,000 $ 428,850
----------- ----------- -----------
OPERATING PROFITS**
North America............................................................ $ 11,036 $ 28,008 $ 49,310
Europe................................................................... 61,432 74,974 84,802
Other.................................................................... 7,436 5,646 13,477
----------- ----------- -----------
Consolidated........................................................... $ 79,904* $ 108,628* $ 147,589*
----------- ----------- -----------
IDENTIFIABLE ASSETS
North America............................................................ $ 338,282 $ 391,026 $ 462,946
Europe................................................................... 65,433 88,257 120,319
Other.................................................................... 13,812 23,366 24,953
----------- ----------- -----------
Consolidated........................................................... $ 417,527 $ 502,649 $ 608,218
----------- ----------- -----------
</TABLE>
- ------------------------
* Net of acquired research and development costs, which for all locations
totaled $32,038,000, $29,260,000 and $23,589,000 in fiscal 1994, 1995 and
1996, respectively.
** Substantially all of the Company's product research and development is
conducted in North America which has the effect of reducing the reported
North American operating profits.
41
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLUSURE
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 1996
Annual Meeting of Stockholders (the "1996 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, 1996, 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 1996
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 1996 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 1996 Proxy Statement under the caption "OTHER INFORMATION --
Related Transactions" and is incorporated herein by reference in response to
this Item 13.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Documents filed as a part of this Report.
1. The following financial 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> <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.
</TABLE>
42
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER
- ----------------
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).
<C> <S>
10.1 (a) -- Form of BMC Software, Inc. 1994 Employee Incentive Plan; incorporated by reference to
Exhibit 10.7(a) to the Company's Annual Report on Form 10-K for the fiscal year ended
March 31, 1995 (the "1995 10-K").
10.1 (b) -- Form of Stock Option Agreement employed under BMC Software, Inc. 1994 Employee Incentive
Plan; incorporated by reference to Exhibit 10.7(b) to the 1995 10-K.
10.2 (a) -- Form of BMC Software, Inc. 1994 Non-employee Directors' Stock Option Plan; incorporated
by reference to Exhibit 10.8(a) to the 1995 10-K.
10.2 (b) -- Form of Stock Option Agreement employed under BMC Software, Inc. 1994 Nonemployee
Directors' Stock Option Plan; incorporated by reference to Exhibit 10.8(b) to the 1995
10-K.
10.3 -- Description of BMC Software, Inc. Executive Officer Annual Incentive Plan; incorporated
by reference to Exhibit 10.6 to the Company's Annual Report on Form 10-K for the fiscal
year ended March 31, 1994.
10.4 (a) -- License Agreement with International Business Machines Corporation; incorporated by
reference to Exhibit 10.12 to the S-1 Registration Statement.
10.4 (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.
10.4 (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").
10.5 -- Form of Indemnification Agreement among the Company and its directors and executive
officers; incorporated by reference to Exhibit 10.11 to the 1995 10-K.
*22.1 -- Subsidiaries of the Company.
*24.1 -- Consent of Arthur Andersen LLP, independent certified public accountants.
*27 -- Financial Data Schedule
</TABLE>
- ------------------------
* Filed herewith.
(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.
- ------------------------
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.
43
<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 27, 1996.
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 27, 1996
/s/ MELDON K. GAFNER
- ----------------------------------- Director
Meldon K. Gafner
/s/ L. W. GRAY
- ----------------------------------- Director
L. W. Gray
/s/ GEORGE F. RAYMOND
- ----------------------------------- Director
George F. Raymond
44
<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, 1995 and 1996 and for each
of the three years in the period ended March 31, 1996, 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 23, 1996
<PAGE>
SCHEDULE II
BMC SOFTWARE, INC. AND SUBSIDIARIES
VALUATION ACCOUNT
YEARS ENDED MARCH 31, 1994, 1995 AND 1996
<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>
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
1996 Allowance for doubtful
accounts......................... 1,511,184 776,575 -- (354,440) 1,933,319
</TABLE>
<PAGE>
EXHIBIT 22.1
BMC SOFTWARE, INC.
SUBSIDIARIES
JURISDICTION OF
NAME INCORPORATION
---- ----------------
BMC Software (AUST.) Pty. Ltd AUSTRALIA
BMC Software GmbH AUSTRIA
BMC Software Belgium NV/SA BELGIUM
BMC Software DO Brasil BRAZIL
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 PTE Ltd (ASIA) SINGAPORE
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, Inc. U.S.A.
BMC Software Texas, Inc. U.S.A.
BMC Software Texas, L.P. U.S.A.
BMC Software Distributions B.V. NETHERLANDS
BMC Software B.V. NETHERLANDS
<PAGE>
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 dated April 23, 1996 included in this Form 10-K into the Company's
previously filed Registration Statements on Form S-8 filed on November 17, 1989,
January 31, 1990, May 16, 1991, October 13, 1995 and June 12, 1996, and on Form
S-3 filed on August 19, 1991, October 13, 1995 and November 7, 1995.
ARTHUR ANDERSEN LLP
Houston, Texas
June 27, 1996
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S MARCH 31, 1996 AUDITED CONSOLIDATED FINANCIAL STATEMENTS, INCLUDED IN
ITS FORM 10-K AND IS QUALIFIED IN ITS ENTIRETY BE REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> MAR-31-1996
<PERIOD-START> APR-01-1995
<PERIOD-END> MAR-31-1996
<CASH> 62,128
<SECURITIES> 289,904
<RECEIVABLES> 85,378
<ALLOWANCES> 1,933
<INVENTORY> 0
<CURRENT-ASSETS> 227,972
<PP&E> 144,730
<DEPRECIATION> 36,818
<TOTAL-ASSETS> 608,218
<CURRENT-LIABILITIES> 184,197
<BONDS> 0
0
0
<COMMON> 525
<OTHER-SE> 383,183
<TOTAL-LIABILITY-AND-EQUITY> 608,218
<SALES> 269,022
<TOTAL-REVENUES> 428,850
<CGS> 44,854
<TOTAL-COSTS> 281,261
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 163,035
<INCOME-TAX> 57,464
<INCOME-CONTINUING> 105,571
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 105,571
<EPS-PRIMARY> 2.02
<EPS-DILUTED> 2.02
</TABLE>
