<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 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
BMC SOFTWARE, INC.
(Exact name of registrant as specified in its charter)
Delaware 74-2126120
(State or other jurisdiction of (IRS Employer identification No.)
incorporation or organization)
BMC Software, Inc.
2101 CityWest Boulevard
Houston, Texas 77042
(Address of principal executive officer) (Zip Code)
Registrant's telephone number including area code: (713)918-8800
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X No
---- ----
As of August 7, 1996, there were outstanding 50,241,321 shares of Common
Stock, par value $.01, of the registrant.
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BMC SOFTWARE, INC. AND SUBSIDIARIES
Quarter Ended June 30, 1996
INDEX
PAGE
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements 3
Condensed Consolidated Balance Sheets
June 30, 1996 (Unaudited) and March 31, 1996 3
Condensed Consolidated Statements of Earnings
Three months ended June 30, 1996 and 1995
(Unaudited) 5
Condensed Consolidated Statements of Cash Flows
Three months ended June 30, 1996 and 1995
(Unaudited) 6
Notes to Condensed Consolidated Financial
Statements 7
Item 2. Management's Discussion and Analysis of Results
of Operations and Financial Condition 8
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 18
SIGNATURES 19
2
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Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
BMC SOFTWARE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
June 30, March 31,
1996 1996
ASSETS ----------- ---------
(Unaudited)
Current assets:
Cash and cash equivalents $ 37,615 $ 62,128
Securities available for sale 7,288 8,464
Securities held to maturity 44,898 59,566
Trade accounts receivable, net 84,930 79,299
Interest and other accounts receivable 9,448 7,723
Prepaid expenses and other 7,685 5,922
Deferred income and other taxes 4,852 4,870
-------- --------
Total current assets 196,716 227,972
-------- --------
Property and equipment, net 109,117 107,912
Software development costs, net 28,558 25,840
Purchased software, net 14,327 13,400
Securities available for sale 37,891 39,281
Securities held to maturity 215,662 182,593
Trade finance receivables, long-term 34,268 4,146
Deferred charges and other assets 8,106 7,074
-------- --------
$ 644,645 $ 608,218
-------- --------
-------- --------
See accompanying notes to condensed consolidated financial statements.
3
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BMC SOFTWARE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share information)
(continued)
June 30, March 31,
1996 1996
---- ----
(Unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Trade accounts payable $ 7,665 $ 8,417
Accrued liabilities 31,555 52,544
Taxes payable 11,823 16,595
Current portion of deferred revenue 113,072 106,641
--------- ---------
Total current liabilities 164,115 184,197
--------- ---------
Deferred revenue and other 64,814 40,313
--------- ---------
Total liabilities 228,929 224,510
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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 67,940 67,888
Retained earnings 428,947 401,775
Foreign currency translation adjustment 11 82
Unrealized gain (loss) on securities available
for sale (121) 82
--------- ---------
497,302 470,352
Less treasury stock (2,319,796 and 2,547,000
shares, respectively) 79,342 84,480
Less unearned portion of restricted
stock compensation 2,244 2,164
--------- ---------
Total stockholders' equity 415,716 383,708
--------- ---------
$ 644,645 $608,218
--------- ---------
--------- ---------
See accompanying notes to condensed consolidated financial statements.
4
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BMC SOFTWARE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
(in thousands, except per share data)
(Unaudited)
Three Months Ended
June 30,
1996 1995
---- ----
Revenues:
Licenses $ 82,630 $ 54,796
Maintenance 43,420 38,504
-------- ---------
Total revenues 126,050 93,300
-------- ---------
Operating expenses:
Selling and marketing 37,526 24,572
Research and development 17,859 14,106
Cost of maintenance services
and product licenses 14,014 10,271
General and administrative 10,595 7,938
Acquired research and
development costs 11,259 ---
-------- ---------
Total operating expenses 91,253 56,887
-------- ---------
Operating income 34,797 36,413
Other income 4,294 3,683
-------- ---------
Earnings before taxes 39,091 40,096
Income taxes 11,919 12,630
-------- ---------
Net earnings $ 27,172 $ 27,466
-------- ---------
-------- ---------
Earnings per share $ 0.51 $ 0.53
-------- ---------
-------- ---------
Shares used in computing
earnings per share 53,119 51,832
-------- ---------
-------- ---------
See accompanying notes to condensed consolidated financial statements.
5
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BMC SOFTWARE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)
Three Months Ended
June 30,
1996 1995
---- ----
Cash flows from operating activities:
Net earnings $ 27,172 $ 27,466
Adjustments to reconcile net earnings
to net cash provided by operating
activities:
Acquired research and development costs 11,259 --
Depreciation and amortization 8,582 6,572
Net change in receivables,
payables and other items 13,874 (11,308)
-------- --------
Total adjustments 33,715 (4,736)
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Net cash provided by operating activities 60,887 22,730
-------- --------
Cash flows from investing activities:
Technology acquisitions (13,580) --
Purchased software and related assets (190) --
Capital expenditures (5,269) (3,594)
Capitalization of software development costs (5,910) (4,177)
Purchases of securities held to maturity (60,783) (31,241)
Proceeds from securities held to maturity 25,415 1,227
(Increase) decrease in long-term finance receivables (30,122) 1,285
-------- --------
Net cash used in investing activities (90,439) (36,500)
-------- --------
Cash flows from financing activities:
Earned portion of restricted
stock compensation 342 337
Income tax reduction relating
to stock options -- 660
Stock options exercised and other 5,648 1,148
Treasury stock acquired (880) (5,862)
-------- --------
Net cash used in financing activities 5,110 (3,717)
-------- --------
Effect of exchange rate changes on cash (71) (117)
-------- --------
Net change in cash and cash equivalents (24,513) (17,604)
Cash and cash equivalents at beginning of period 62,128 39,494
-------- --------
Cash and cash equivalents at end of period $ 37,615 $ 21,890
-------- --------
-------- --------
Supplemental disclosure of cash
flow information:
Cash paid for Income taxes $16,433 $ 2,200
Future cash payments for technology acquired 2,281 --
See accompanying notes to condensed consolidated financial statements.
6
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BMC SOFTWARE, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
Note 1 - Basis of Presentation
The accompanying condensed consolidated financial statements include the
accounts of BMC Software, Inc. and its wholly owned subsidiaries (collectively,
the "Company"). All significant intercompany balances and transactions have
been eliminated in consolidation.
The accompanying unaudited interim condensed consolidated financial
statements reflect all adjustments (consisting of normal recurring accruals)
which, in the opinion of management, are necessary for a fair presentation of
the results for the interim periods presented. These financial statements have
been prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-Q and
Article 10 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting
principles for complete financial statements.
These financial statements should be read in conjunction with the Company's
annual audited financial statements for the year ended March 31, 1996, as filed
with the Securities and Exchange Commission on Form 10-K.
Note 2 - Earnings Per Share
Earnings per share is based on the weighted average number of common shares
and common stock equivalents outstanding for the period. For purposes of this
calculation, outstanding stock options and unearned restricted stock shares are
considered common stock equivalents using the treasury stock method. Fully
diluted earnings per share is the same as, or not materially different from,
primary earnings per share and, accordingly, is not presented.
Note 3 - Technology Acquisitions
The Company completed the acquisitions of assets of certain technology
companies for an aggregate purchase price of approximately $13 million,
including direct acquisition costs. The Company accounted for these
transactions using the purchase method of accounting. During the quarter,
the Company recorded an $11,259,000 charge ($7,318,000 net of income tax
benefits), for acquired research and development costs.
7
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BMC SOFTWARE, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of
Results of Operations and Financial Condition
Item 2. Management's Discussion and Analysis of Results of Operations and
Financial Condition
This discussion comprises historical information for the periods covered,
followed by certain forward looking information and information about certain
risks and uncertainties that could affect the Company's future operating
results. This discussion should be read in conjunction with the attached
consolidated financial statements and notes thereto and with the audited
financial statements and notes thereto, and the Management's Discussion and
Analysis of Results of Operation and Financial Condition, contained in the
Company's Form 10-K for fiscal 1996.
A. HISTORICAL INFORMATION
RESULTS OF OPERATION
The following table sets forth, for the periods indicated, the percentages
that selected items in the Condensed Consolidated Statements of Earnings bear to
total revenues. The year to year comparisons of financial results are not
necessarily indicative of future results.
Percentage of Total Revenues
----------------------------
Three Months Ended
June 30,
1996 1995
---- ----
Revenues:
License 65.6% 58.7%
Maintenance 34.4 41.3
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Total revenues 100.0 100.0
Operating expenses:
Selling and marketing 29.8 26.4
Research and development 14.2 15.1
Cost of maintenance services
and product licenses 11.1 11.0
General and administrative 8.4 8.5
Acquired research and development costs 8.9 --
----- -----
Operating income 27.6 39.0
Other income 3.4 3.9
----- -----
Earnings before taxes 31.0 42.9
Income taxes 9.5 13.5
----- -----
Net earnings 21.5% 29.4%
----- -----
----- -----
8
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BMC SOFTWARE, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of
Results of Operations and Financial Condition
(continued)
REVENUES
Three Months Ended
June 30,
------------------
(in thousands)
1996 1995 Change
---- ---- ------
North American license revenues $ 55,728 $ 34,296 62.5 %
International license revenues 26,902 20,500 31.2 %
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Total license revenues 82,630 54,796 50.8 %
Maintenance revenues 43,420 38,504 12.8 %
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Total revenues $ 126,050 $ 93,300 35.1 %
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LICENSE REVENUES
The Company's license revenues include fees generated from (a) the
initial licensing of a copy of a software product, (b) central processing
unit ("CPU") tier and millions of instructions per second ("MIPS") capacity
license upgrade fees, which allow the customer to run an already-licensed
product on additional processing capacity that is either currently needed or
is anticipated to be needed in the future and (c) license restructurings,
wherein a customer pays a fee to relicense its installed base of products at
current volume-based discount levels, which has the affect of increasing the
discounts of record applicable to the customer's installed base of products
that are used in calculating future maintenance and upgrade charges. For
the Company's mainframe product lines, these various fees are calculated
based on the processing capacity as measured by CPU tier or by the aggregate
MIPS on which the Company's products are running. The license fees for the
Company's open systems product lines are based on the number of servers to
which the products are licensed and the processor speed of those servers.
All license fees, upgrade fees, including those for future additional
processing capacity, and restructuring 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.
License revenues in the quarter increased over the prior year quarter
primarily as a result of higher initial license fees for both the Company's
mainframe and open systems products. The mainframe license growth is largely
attributed to customers' acceptance of the Company's Extended Performance line
of high performance utility products for IBM's IMS and IMS/VS Fast Path
subsystems. These products were introduced in the second half of fiscal 1996.
9
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BMC SOFTWARE, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of
Results of Operations and Financial Condition
(continued)
North American license revenues increased primarily as a result of
increased license fees for the Company's mainframe and open systems products and
an increase in upgrade fees for future additional processing capacity. Over
half of the North American license revenues recognized in the quarter ended June
30, 1996 was derived from initial enterprise license agreements or the expansion
of existing enterprise license agreements, as described below.
Increased sales of the Company's open systems products and upgrade fees for
current additional processing capacity contributed to the growth in
international license revenues. Regionally, the Company's European and Japanese
operations showed strong growth as compared to the year-ago quarter. The
Asia/Pacific and Latin American operations posted weaker results due to
transitional issues as the Company establishes direct-sales offices in several
countries in these regions to complement its network of indirect sales agents
and distributors. Foreign currency fluctuations reduced international license
revenue growth by approximately 3%, as compared to the quarter ended June 30,
1995.
The Company's mainframe license revenues, which comprised approximately
82% and 90% of total license revenues for the quarters ended June 30, 1996
and 1995, respectively, have been and continue to be increasingly dependent
upon large enterprise license transactions with the Company's active
customers. These customers are typically large corporations, governmental
entities and other similarly sized organizations who are heavily reliant on
their mainframe-based data centers and derive significant benefit from the
Company's products. An enterprise license agreement 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 and
a specified time period. At specified intervals during the term of the
agreement, or in some cases at the end of the term, the licensee is required
to pay additional charges if the processing capacity on which the licensed
products are being used exceeds the stipulated level. The license fees
associated with these large transactions typically include a significant
amount of upgrade fees for future additional processing capacity and, to a
lesser degree, restructuring fees. For the fiscal quarters presented, the
aggregate of these fees represented 22% of total revenues. The failure of
the Company to consummate one or more of these large transactions in any
given quarter could materially impact the operating results for that period.
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 pro rata recognition of bundled fees for first-
year maintenance services covered by certain related perpetual license
agreements. 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.
10
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BMC SOFTWARE, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of
Results of Operations and Financial Condition
(continued)
For the quarter ended June 30, 1996, maintenance revenues increased over
the prior-year quarter as a result of the continued growth in the base of
installed products and the CPU capacity on which they run and the continued
high level of maintenance renewal rates. Maintenance revenue in a particular
period is impacted by the level of license revenue in the preceding periods,
the bundled fees for first-year maintenance, customer mergers and outsourcing
arrangements and restructuring activity. As discussed under "License
Revenues" above, restructuring fees entitle a customer to higher,
volume-based discounts that apply to future maintenance and other charges.
This increased level of discounts has contributed significantly to the
reduction in the maintenance revenue growth rate over the past several years.
PRODUCT LINE REVENUES
The Company's database management product lines comprise the administrative
tools and high performance utilities for IBM's IMS and DB2 mainframe database
management systems. These product lines contributed approximately 66% of total
revenues and 64% of license revenues for the quarter ended June 30, 1996, as
compared to 73% and 75% of total and license revenues, respectively, in the
comparable, prior-year quarter. These product lines showed combined total
revenue growth of 22% and license revenue growth of 28% as compared to the first
fiscal quarter of the prior fiscal year.
The open systems product lines, including the PATROL application and
database management products, the PATROL DB data administration and management
products and the backup and recovery utilities from DataTools, Inc. (for whom
the Company acts as an exclusive distributor) represent the Company's fastest-
growing product lines. In the aggregate, both total and license revenues from
these products grew approximately 160% as compared to the quarter ended June 30,
1995. These products contributed 13% of total revenues and 17% of license
revenues for the first quarter of fiscal 1997. For the first quarter of fiscal
1996, these products contributed 7% and 10% of total and license revenues,
respectively.
11
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BMC SOFTWARE, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of
Results of Operations and Financial Condition
(continued)
EXPENSES
Three Months Ended
June 30,
--------
(in thousands)
1996 1995 Change
---- ---- ------
Selling and marketing $ 37,526 $ 24,572 52.7%
Research and development 17,859 14,106 26.6%
Cost of maintenance services
and product licenses 14,014 10,271 36.4%
General and administrative 10,595 7,938 33.5%
Acquired research and
development costs 11,259 -- N/A
-------- --------
Total operating expenses $ 91,253 $ 56,887
-------- --------
-------- --------
SELLING AND MARKETING EXPENSES
Selling and marketing expenses represented the largest absolute and
percentage growth of any other operating expenses, increasing by $12,954,000
or 53%. The growth was primarily fueled by increased personnel costs and
sales commissions. Personnel costs increased as the result of a 36% increase
in headcount from June 30, 1995 to June 30, 1996, which was balanced
approximately equally between its North American and international
operations. Sales commissions increased as a direct result of the 51%
increase in license revenues. Other contributors to the increase were
agent/distributor commissions and travel expenses. As a percentage of total
revenues, selling and marketing expenses increased from 26% in the first
quarter of fiscal 1996 to 30% in the first quarter of fiscal 1997. This
increase is primarily attributable to the headcount and travel expense
increases.
RESEARCH AND DEVELOPMENT EXPENSES
Research and development expenses increased primarily due to the
addition of permanent and contract personnel who were hired to develop new
product offerings and, to a lesser extent, support existing products.
Research and development headcount from June 30, 1995 to June 30, 1996,
including contract developers, increased by 35%. These increases have been
offset by a 41% increase in software capitalization and by decreases in
hardware costs within the Company's data center. For the first quarter of
fiscal 1997, the Company capitalized $5,910,000 in software development
costs. In the first quarter of fiscal 1996, the Company capitalized
$4,177,000 in software development costs.
12
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BMC SOFTWARE, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of
Results of Operations and Financial Condition
(continued)
Over the last two fiscal years, the Company has supplemented its
internal product development efforts with acquisitions of several companies
and technologies, including the base technologies for the PATROL product
lines. The Company's acquisition strategy in general has been to acquire
emerging technologies, rather than established companies, and to
significantly enhance, fortify, expand and integrate the acquired technology.
See "-Acquired Research and Development Costs" below.
COST OF MAINTENANCE SERVICES AND PRODUCT LICENSES
Cost of maintenance services and product licenses expenses consist of
amortization of purchased and internally developed software, costs associated
with technical support operations and royalty fees. These costs have
increased in the first quarter of fiscal 1997 primarily as a result of
increased product licenses costs due to increased amortization of purchased
and internally developed software and increases in royalty fees. During the
first quarter of fiscal 1997, the Company accelerated the amortization of
some of its older products which also led to the increase in cost of
maintenance services and product licenses. As a percentage of total
revenues, these expenses have remained constant, at 11%, relative to the
first quarter of fiscal 1996.
For the first quarter of fiscal 1997, the Company's amortization of
internally developed software costs totaled $3,192,000 versus $2,513,000 in
the first quarter of fiscal 1996.
GENERAL AND ADMINISTRATIVE EXPENSES
The Company's general and administrative expenses increased by
$2,657,000 in the first quarter of fiscal 1997 as compared to the first
quarter of fiscal 1996. The increase is primarily related to personnel costs
associated with a 13% increase in headcount. The Company also incurred a
significant increase in professional fees and management bonuses. As a
percentage of total revenues, general and administrative expenses remained in
the 8 to 9% range in the first quarter of fiscal 1997.
ACQUIRED RESEARCH AND DEVELOPMENT COSTS
During the first quarter of fiscal 1997, the Company completed the
acquisitions of assets (including in-process research and development) of
certain technology companies for an aggregate purchase price of approximately
$13 million, including direct acquisition costs. The Company accounted for
these transactions using the purchase method of accounting. During the
quarter, the Company recorded an $11,259,000 charge ($7,318,000 net of income
tax benefits), for acquired research and development costs.
OTHER INCOME
For the first quarter of fiscal 1997, other income was $4,294,000,
reflecting an increase of 17% over $3,683,000 of other income in the same
quarter of fiscal 1996. Other income consists primarily of interest earned
on tax-exempt municipal securities, auction preferred stock, Eurodollar
deposits, corporate debt securities, financed receivables and money market
funds. The increase in other income is primarily due to the increase in cash
available for investment.
13
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BMC SOFTWARE, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of
Results of Operations and Financial Condition
(continued)
INCOME TAXES
For the first quarter of fiscal 1997, income tax expense was $11,919,000,
compared to $12,630,000 for the same quarter in fiscal 1996. The Company's
income tax expense represents the federal statutory rate of 35%, plus certain
state taxes, reduced by the benefit from the Company's Foreign Sales
Corporation, the effect of tax exempt interest earned from cash investments, the
effect of tax deductions on certain technology acquisitions and foreign income
taxes. Excluding the impact of technology acquisitions, the Company's effective
income tax rate for the three months ended June 30, 1996 and 1995 approximated
32%.
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its growth through funds generated from
operations. As of June 30, 1996, the Company had cash, cash equivalents and
investment securities of $343,354,000.
During the quarter ended June 30, 1996, the Company did not repurchase any
shares of its common stock in open market transactions. As of June 30, 1996,
the Company was authorized to repurchase 2,785,000 shares.
The Company believes that existing cash balances and funds generated from
operations will be sufficient to meet its liquidity requirements for the
foreseeable future.
B. 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 ability to meet its future liquidity
requirements.
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.
14
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BMC SOFTWARE, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of
Results of Operations and Financial Condition
(continued)
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. The Company's stock price has been highly volatile over the
last several years. 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.
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 the first quarter of
fiscal 1996 and 1997, the enterprise license fees for future additional
processing capacity and license restructurings comprised 22% 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.
The Company derives approximately 90% of its total 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.
15
<PAGE>
BMC SOFTWARE, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of
Results of Operations and Financial Condition
(continued)
Upgrade fees have historically provided approximately 25% of the Company's
total revenues. 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. 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.
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, excluding the impact of
acquired research and development costs ("Operating Margins"), remained
relatively unchanged in the first quarter of fiscal 1996 and 1997. 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 and in the first quarter of fiscal 1997 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 included 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 the
first quarter of fiscal 1997. 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.
16
<PAGE>
BMC SOFTWARE, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of
Results of Operations and Financial Condition
(continued)
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 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 its 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.
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.
17
<PAGE>
BMC SOFTWARE, INC. AND SUBSIDIARIES
PART II - OTHER INFORMATION
Item 1. 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/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 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS.
None
(b) REPORTS ON FORM 8-K.
None
18
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
BMC SOFTWARE, INC.
Date: August 14, 1996 By: /s/ Max P. Watson Jr.
------------------ ------------------------------------
Max P. Watson Jr.
Chairman of the Board, President and
Chief Executive Officer
Date: August 14, 1996 By: /S/ Kevin M. Klausmeyer
------------------ ------------------------------------
Kevin M. Klausmeyer
Chief Accounting Officer
19
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE
MONTHS ENDED JUNE 30, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAR-31-1997
<PERIOD-START> APR-01-1996
<PERIOD-END> JUN-30-1996
<CASH> 37,615
<SECURITIES> 305,739
<RECEIVABLES> 122,266
<ALLOWANCES> 3,068
<INVENTORY> 0
<CURRENT-ASSETS> 196,716
<PP&E> 149,571
<DEPRECIATION> 40,454
<TOTAL-ASSETS> 644,645
<CURRENT-LIABILITIES> 164,115
<BONDS> 0
0
0
<COMMON> 525
<OTHER-SE> 415,191
<TOTAL-LIABILITY-AND-EQUITY> 644,645
<SALES> 82,630
<TOTAL-REVENUES> 126,050
<CGS> 14,014
<TOTAL-COSTS> 91,253
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 39,091
<INCOME-TAX> 11,919
<INCOME-CONTINUING> 27,172
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 27,172
<EPS-PRIMARY> .51
<EPS-DILUTED> .51
</TABLE>
