<PAGE> 1
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 September 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________________ to _________________
Commission file number 0-17136
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 November 13, 1998, there were outstanding 215,525,000 shares of Common
Stock, par value $.01, of the registrant.
<PAGE> 2
BMC SOFTWARE, INC. AND SUBSIDIARIES
Quarter Ended September 30, 1998
INDEX
<TABLE>
<CAPTION>
Page
----
<S> <C>
PART I. FINANCIAL INFORMATION
---------------------
Item 1. Financial Statements 3
Condensed Consolidated Balance Sheets
September 30, 1998 (Unaudited) and March 31, 1998 3
Condensed Consolidated Statements of Earnings
Three months and six months ended September 30,
1997 and 1998 (Unaudited) 5
Condensed Consolidated Statements of Cash Flows
Six months ended September 30, 1997 and 1998
(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 20
SIGNATURES 21
----------
</TABLE>
2
<PAGE> 3
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
BMC SOFTWARE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
<TABLE>
<CAPTION>
March 31, September 30,
1998 1998
---------- ----------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 72,093 $ 100,982
Investment securities 56,174 65,855
Trade accounts receivable 170,778 186,911
Income tax receivable 40,805 --
Prepaid expenses and other 34,028 50,010
---------- ----------
Total current assets 373,878 403,758
Property and equipment, net 162,996 197,813
Software development costs, net 63,475 78,376
Purchased software, net 32,063 29,272
Investment securities 587,806 795,762
Deferred charges and other assets 28,277 53,214
---------- ----------
$1,248,495 $1,558,195
========== ==========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
3
<PAGE> 4
BMC SOFTWARE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
(continued)
<TABLE>
<CAPTION>
March 31, September 30,
1998 1998
----------- -----------
(Unaudited)
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Trade accounts payable $ 11,361 $ 13,306
Accrued liabilities and other 81,352 105,370
Current portion of deferred revenue 242,821 293,290
----------- -----------
Total current liabilities 335,534 411,966
Long-term Liabilities:
Deferred revenue and other 104,986 152,156
Other long-term liabilities 48,818 48,817
----------- -----------
Total long-term liabilities 153,804 200,973
----------- -----------
Total liabilities 489,338 612,939
Stockholders' equity:
Common stock 2,101 2,173
Additional paid-in capital 129,098 137,592
Retained earnings 729,925 863,286
Foreign currency translation adjustment (1,543) (1,235)
Unrealized gain on securities available for sale 3,179 6,525
----------- -----------
862,760 1,008,341
Less treasury stock 99,513 58,748
Less unearned portion of restricted stock compensation 4,090 4,337
----------- -----------
Total stockholders' equity 759,157 945,256
----------- -----------
$ 1,248,495 $ 1,558,195
=========== ===========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
4
<PAGE> 5
BMC SOFTWARE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
(in thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
September 30, September 30,
------------------------- -------------------------
1997 1998 1997 1998
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Revenues:
Licenses $ 110,201 $ 166,500 $ 217,947 $ 327,005
Maintenance 52,508 69,398 103,176 134,498
---------- ---------- ---------- ----------
Total revenues 162,709 235,898 321,123 461,503
---------- ---------- ---------- ----------
Operating expenses:
Selling and marketing 46,737 69,684 94,138 134,546
Research and development 23,281 33,825 44,050 67,654
Cost of maintenance services
and product licenses 18,204 25,887 35,719 48,792
General and administrative 12,635 15,389 23,824 31,591
Acquired research and
development costs 5,201 -- 65,473 17,304
---------- ---------- ---------- ----------
Total operating expenses 106,058 144,785 263,204 299,887
---------- ---------- ---------- ----------
Operating income 56,651 91,113 57,919 161,616
Other income 7,148 12,685 13,296 22,629
---------- ---------- ---------- ----------
Earnings before taxes 63,799 103,798 71,215 184,245
Income taxes 18,877 29,083 36,856 50,884
---------- ---------- ---------- ----------
Net earnings $ 44,922 $ 74,715 $ 34,359 $ 133,361
========== ========== ========== ==========
Basic earnings per share $ .22 $ .35 $ .17 $ .62
========== ========== ========== ==========
Shares used in computing
earnings per share 202,816 215,066 202,446 214,534
========== ========== ========== ==========
Diluted earnings per share $ .21 $ .33 $ .16 $ .58
========== ========== ========== ==========
Shares used in computing diluted
earnings per share 216,664 228,425 216,384 227,975
========== ========== ========== ==========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
5
<PAGE> 6
BMC SOFTWARE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended
September 30,
-----------------------------------
1997 1998
---------- ----------
<S> <C> <C>
Cash flows from operating activities:
Net earnings (loss) $ 34,359 $ 133,361
Adjustments to reconcile net earnings
to net cash provided by operating
activities:
Acquired research and development costs 65,473 17,304
Depreciation and amortization 24,572 30,212
Net change in receivables,
payables and other items 6,626 115,152
---------- -----------
Total adjustments 96,671 162,668
---------- -----------
Net cash provided by operating activities 131,030 296,029
---------- -----------
Cash flows from investing activities:
Technology acquisitions, net of cash acquired (66,989) (6,400)
Purchased software and related assets (1,718) (903)
Capital expenditures (36,476) (43,804)
Capitalization of software development (18,658) (28,415)
Purchases of securities held to maturity (53,454) (237,929)
Proceeds from securities held to maturity 45,623 23,638
(Increase) decrease in long-term finance receivables (124) (21,797)
---------- -----------
Net cash used in investing activities (131,796) (315,610)
---------- -----------
Cash flows from financing activities:
Income tax reduction relating to stock options 13,170 37,177
Stock options exercised and other 11,617 10,985
Treasury stock acquired (37,928) --
---------- -----------
Net cash used in financing activities (13,141) 48,162
---------- -----------
Effect of exchange rate changes on cash 42 308
---------- -----------
Net change in cash and cash equivalents (13,865) 28,889
Cash and cash equivalents at beginning of period 79,794 72,093
---------- -----------
Cash and cash equivalents at end of period $ 65,929 $ 100,982
========== ===========
Supplemental disclosure of cash flow information:
Cash paid for income taxes $ 22,997 $ 2,234
</TABLE>
See accompanying notes to condensed consolidated financial statements.
6
<PAGE> 7
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, 1998,
as filed with the Securities and Exchange Commission (SEC) on Form 10-K.
Note 2 - Earnings Per Share
The Company presents its earnings per share in accordance with
Statement of Financial Accounting Standards (SFAS) No. 128, "Earnings Per
Share". SFAS No. 128 requires dual presentation of earnings per share (EPS);
basic EPS and diluted EPS. Basic EPS is computed by dividing net income by the
weighted average number of common shares outstanding for the period. Diluted EPS
reflects the potential dilution that could occur if securities or other
contracts to issue common stock were exercised or converted into common stock.
For purposes of this calculation, outstanding stock options and unearned
restricted stock are considered common stock equivalents using the treasury
stock method.
Note 3 - Stock Split
On April 20, 1998, the Company's board of directors declared a
two-for-one stock split. The stock split was effected in the form of a stock
dividend. The stockholders of record received one share of common stock for each
share held. All stock related data in the condensed consolidated financial
statements and related notes reflect this stock split for all periods presented.
Note 4 - Comprehensive Income
In June 1997, the Financial Accounting Standards Board (FASB) issued
SFAS No. 130, "Reporting Comprehensive Income". SFAS No. 130 requires the
presentation of a Comprehensive Income Statement that is to be presented with
other general financial statements. This statement is effective for the
Company's fiscal year end 1999. The following table sets forth the calculation
of comprehensive income for the following periods:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
September 30 September 30
(in thousands) (in thousands)
1997 1998 1997 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net earnings ................... $44,922 $74,715 $34,359 $133,361
Foreign currency translation
gains/losses ................. (139) 213 42 308
Unrealized gain on securities
available for sale ........... 969 2,018 3,311 3,346
------- ------- ------- --------
Total comprehensive income . $45,752 $76,946 $37,712 $137,015
======= ======= ======= ========
</TABLE>
Note 5 - Accounting for Derivative Instruments and Hedging Activities
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." The Statement establishes accounting and
reporting standards requiring that every derivative instrument be recorded in
the balance sheet as either an asset or liability measured at its fair value.
The Statement also requires that changes in a derivative's fair value be
recognized currently in earnings unless specific hedge accounting criteria are
met. SFAS No. 133 is effective for the Company at the beginning of its fiscal
year 2000. The Company has not yet quantified the impact of adopting SFAS No.
133 on its financial statements.
Note 6 - Subsequent Event
On November 2, 1998, the Company announced its intention to merge with
Boole & Babbage, Inc. (Boole) (the Merger) through an exchange of common stock
and stock options using an exchange rate of .675 shares of BMC Software common
stock for each share of Boole common stock. The Company expects to account for
this transaction using the pooling of interests method. The Merger is subject to
approval by the Boole stockholders and review by certain governmental and
regulatory bodies.
7
<PAGE> 8
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 section of the Form 10-Q includes historical information for the
periods covered, certain forward looking information and the information
provided below under the heading "Certain Risks and Uncertainties that Could
Affect Future Operating Results" about certain risks and uncertainties that
could cause the Company's future operating results to differ from the results
indicated by any forward looking statements made by the Company or others. It is
important that the historical discussion below be read together with the
attached consolidated financial statements and notes thereto, with the
discussion of such risks and uncertainties and with the audited financial
statements and notes thereto, and the Management's Discussion and Analysis of
Results of Operations and Financial Condition, contained in the Company's Form
10-K for fiscal 1998.
A. RESULTS OF OPERATION AND FINANCIAL CONDITION
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. These comparisons of financial results are not
necessarily indicative of future results.
<TABLE>
<CAPTION>
Percentage of Total Revenues
-----------------------------------------------
Three Months Ended Six Months Ended
September 30, September 30,
------------------- -------------------
1997 1998 1997 1998
----- ----- ----- -----
<S> <C> <C> <C> <C>
Revenues:
License 67.7% 70.6% 67.9% 70.9%
Maintenance 32.3 29.4 32.1 29.1
----- ----- ----- -----
Total revenues 100.0 100.0 100.0 100.0
Operating expenses:
Selling and marketing 28.7 29.6 29.3 29.2
Research and development 14.3 14.3 13.7 14.7
Cost of maintenance services
and product licenses 11.2 11.0 11.1 10.6
General and administrative 7.8 6.5 7.4 6.8
Acquired research and development costs 3.2 -- 20.4 3.7
----- ----- ----- -----
Operating income 34.8 38.6 18.1 35.0
Other income 4.4 5.4 4.1 4.9
----- ----- ----- -----
Earnings before taxes 39.2 44.0 22.2 39.9
Income taxes 11.6 12.3 11.5 11.0
----- ----- ----- -----
Net earnings 27.6% 31.7% 10.7% 28.9%
===== ===== ===== =====
</TABLE>
8
<PAGE> 9
BMC SOFTWARE, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of
Results of Operations and Financial Condition
(continued)
<TABLE>
<CAPTION>
REVENUES
Three Months Ended Six Months Ended
September 30, September 30,
--------------------- ---------------------
(in thousands) (in thousands)
1997 1998 Change 1997 1998 Change
-------- -------- ------ -------- -------- ------
<S> <C> <C> <C> <C> <C> <C>
North American license revenues $ 73,200 $109,000 49% $148,399 $223,252 50%
International license revenues 37,001 57,500 55% 69,548 103,753 49%
-------- -------- -------- --------
Total license revenues 110,201 166,500 51% 217,947 327,005 50%
Maintenance revenues 52,508 69,398 32% 103,176 134,498 30%
-------- -------- -------- --------
Total revenues $162,709 $235,898 45% $321,123 $461,503 44%
======== ======== ======== ========
</TABLE>
Product Line Revenues
The Company's products for the IBM OS/390 mainframe environment accounted
for 77% and 75% of total revenues in the quarters ended September 30, 1997 and
1998, and 80% and 75% of total revenues, respectively, in the six-month periods
ended September 30, 1997 and 1998. The database utilities and administrative
tools for IBM's IMS and DB2 database management systems comprise the largest
portion of the Company's mainframe-based and total revenues. These product lines
accounted for 57% of total revenues and 60% of license revenues in the quarter
ended September 30, 1998 and 56% and 57% of total and license revenues in the
six-month period ended September 30, 1998. Total revenues and license revenues
from these product lines grew 37% and 54%, respectively, in the second quarter
of fiscal 1999, and grew 28% and 38% in the six-month period of fiscal 1999
compared to the respective prior year periods. The Company's other products for
the OS/390 mainframe environment contributed 18% of total revenues and 15% of
license revenues for the quarter ended September 30, 1998 and contributed 19%
and 17% of total and license revenues, respectively, in the six-month period of
fiscal 1999. Total revenues and license revenues for these other mainframe
products grew 62% and 69%, respectively, in the second quarter of fiscal 1999
and grew 61% and 80% in the six-month period of fiscal 1999.
The Company's distributed systems product lines comprise the PATROL
application and database management solutions, the BEST/1 performance
management products, the PATROL DB database administration products and the
Company's high-performance database backup and recovery solutions. In total,
these product lines contributed 23% and 25% of total revenues for the quarters
ended September 30, 1997 and 1998, respectively, and 28% and 25% of license
revenues for the same periods. In the six months ended September 30, 1997 and
1998, these product lines contributed 20% and 25% of total revenues and 25% and
26% of license revenues, respectively. Total revenues for these product lines
grew 56% and license revenues grew 36% in the second quarter of fiscal 1999, and
80% and 64%, respectively, for the six-months ended September 30, 1998.
9
<PAGE> 10
BMC SOFTWARE, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of
Results of Operations and Financial Condition
(continued)
License Revenues
The Company's license revenues include product license fees, capacity-based
license upgrade fees and restructuring fees. Product license fees are generated
from the initial licensing of a product and subsequent licenses purchased under
the Company's per copy, central processing unit ("CPU") tier-based licensing
program. Product license fees also include fees associated with the initial
licensing of a product on a MIPS basis. Capacity-based license upgrade fees are
charged when a customer acquires the right to run an already licensed product on
additional processing capacity, as measured by a CPU tier or by the aggregate
processing capacity measured in millions of instructions per second ("MIPS") of
all CPUs for which the Company's products are licensed. These license upgrade
fees include fees associated with customers' purchasing the right to operate a
product on currently installed additional processing capacity and/or on
anticipated future processing capacity. Restructuring fees increase the
discounts associated with a customer's installed base of products, which,
therefore, reduce a customer's future maintenance charges and capacity based
upgrade fees pertaining to such installed products.
The Company's North American operations generated 66% and 65% of total
license revenues in the quarters ended September 30, 1997 and 1998,
respectively, and 68% of total license revenues in the six-month periods ending
on such dates. The 49% growth in North American license revenues in the second
quarter of fiscal 1999 over the second quarter of fiscal 1998 was principally
derived from increased capacity-based upgrade fees for future capacity and, to a
lesser extent, product license fees generated from the company's distributed
systems products. For the six months ended September 30, 1998, the 50% increase
in North American license revenues over the comparable prior year six-month
period is primarily attributable to increased capacity-based upgrade fees for
future capacity and product license fees generated from the Company's
distributed systems products. Capacity-based upgrade fees for future capacity
represented the single largest component of North American license revenues for
the quarter and six months ended September 30, 1998 and were a substantial
contributor to revenue growth during the period. International license revenues
represented 34% and 35% of total license revenues for the quarters ended
September 30, 1997 and 1998, respectively, and 32% of total license revenues in
the six-month periods ending on such dates. International license revenue growth
of 55% from the second quarter of fiscal 1998 to the comparable quarter of
fiscal 1999 was derived principally from capacity-based upgrade fees associated
with future capacity. For the six months ended September 30, 1998, the 49%
increase in international license revenues over the prior year is primarily
attributable to capacity-based upgrade fees for future capacity and, to a lesser
extent, product license fees generated from the Company's distributed systems
products. The Company's license fees for distributed systems products
represented the single largest component of international license revenues for
the six months ended September 30, 1998.
Capacity-based upgrade fees include fees for both current and future
additional processing capacity. These fees accounted for 34% and 41% of total
revenues for the quarters ended September 30, 1997 and 1998, respectively, and
34% and 38% of total revenues for the respective six-month periods. The
sustainability and growth of the Company's mainframe-based license revenues are
dependent upon these capacity-based upgrade fees, particularly within its
largest customer accounts. Most of the Company's largest customers have entered
into enterprise license agreements
10
<PAGE> 11
BMC SOFTWARE, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of
Results of Operations and Financial Condition
(continued)
allowing them to install the Company's products on an unspecified number of
CPUs, subject to a maximum limit on the aggregate power of the CPUs as measured
in MIPS. Additional fees are due if this limit is exceeded. Substantially all of
these transactions include upgrade charges associated with additional processing
capacity beyond the customer's current usage level and/or a restructuring fee,
and many include license fees for additional products. In the quarters ended
September 30, 1997 and 1998, the enterprise license fees for future additional
processing capacity and license restructurings comprised approximately 24% and
35% of total revenues, respectively, and comprised 25% and 31% of total revenues
in the respective six-month periods. The fees associated with future additional
mainframe processing capacity typically comprise from one-half to substantially
all of the license fees included in the enterprise license transaction. The
Company has experienced a strong increase in demand from its largest customers
for the right to run its products on increased current and anticipated mainframe
processing capacity as enterprises invest heavily in their core OS/390 mainframe
information systems. The Company expects that it will continue to be dependent
upon these capacity-related license revenue components. With the rapid
advancement of distributed systems technology and customers' needs for more
functional and open applications, such as pre-packaged ERP applications, to
replace legacy systems, there can be no assurance that the demand for mainframe
processing capacity or the higher operating effeciencies afforded by the
Company's products will continue at current levels. Should this trend slow
dramatically or reverse, it would adversely impact the Company's mainframe
license revenues and its operating results. See the discussion below under the
heading "Certain Risks and Uncertainties that Could Affect Future Operating
Results."
Maintenance and Support Revenues
Maintenance and support revenues represent the ratable recognition of fees
to enroll licensed products in the Company's software maintenance, enhancement
and support program. Enrollment entitles customers to product enhancements,
technical support services and ongoing compatibility with third-party operating
systems, database management systems and applications. These fees are generally
charged annually and equal 15% to 20% of the list price of the product at the
time of renewal, less any applicable discounts. Maintenance revenues also
include the ratable recognition of the bundled fees for any first-year
maintenance services covered by the related perpetual license agreement. The
Company continues to invest heavily in product maintenance and support and
believes that maintaining its reputation for superior product support is a key
component of its value pricing model.
Maintenance revenues have increased over the last three fiscal years as a
result of the continuing growth in the base of installed products and the
processing capacity on which they run. Maintenance fees increase as the
processing capacity on which the products are installed increases; consequently,
the Company receives higher absolute maintenance fees as customers install its
products on additional processing capacity. Due to increased discounting at
higher levels of additional processing capacity, the maintenance fees on a per
MIPS basis are typically reduced in enterprise license agreements. Historically,
the Company has enjoyed high maintenance renewal rates for its mainframe-based
products. Should customers migrate from their mainframe applications or find
alternatives to the Company's products, increased cancellations could adversely
impact the sustainability and growth of
11
<PAGE> 12
BMC SOFTWARE, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of
Results of Operations and Financial Condition
(continued)
the Company's maintenance revenues. To date, the Company has been successful in
extending its traditional maintenance and support pricing model to the
distributed systems market. At this time, there is insufficient historical data
to determine whether customers will continue to accept this pricing model and
renew their maintenance and support contracts at the levels experienced in the
mainframe market.
<TABLE>
<CAPTION>
OPERATING EXPENSES
Three Months Ended Six Months Ended
September 30, September 30,
--------------------- ---------------------
(in thousands) (in thousands)
1997 1998 Change 1997 1998 Change
-------- -------- ------ -------- -------- ------
<S> <C> <C> <C> <C> <C> <C>
Selling and marketing $ 46,737 $ 69,684 49% $ 94,138 $134,546 43%
Research and development 23,281 33,825 45% 44,050 67,654 54%
Cost of maintenance services
and product licenses 18,204 25,887 42% 35,719 48,792 37%
General and administrative 12,635 15,389 22% 23,824 31,591 33%
Acquired research and
development 5,201 -- N/A 65,473 17,304 (74)%
-------- -------- -------- --------
Total operating expenses $106,058 $144,785 37% $263,204 $299,887 14%
======== ======== ======== ========
</TABLE>
Selling and Marketing
The Company's selling and marketing expenses include personnel and
related costs, sales commissions and costs associated with advertising, industry
trade shows and sales seminars. Personnel costs were the largest single
contributor to the expense growth in the three months and six months ended
September 30, 1998. Selling and marketing headcount increased by 48% from
September 30, 1997 to September 30, 1998. This increase was primarily
attributable to significant hiring of additional open systems sales
representatives and technical sales support consultants. Sales commissions
increased in the second quarter and first half of fiscal 1999 as a result of the
51% and 50% increases, respectively, in license revenues. Ongoing commission
plan adjustments held sales commission expense growth below license revenue
growth. Marketing costs have continued to increase to meet the requirements of
marketing a greater number of increasingly complex distributed systems products
and of supporting a growing indirect distribution channel. Other contributors to
the increase were significantly higher levels of travel and the opening of
additional field sales offices.
Research and Development
Research and development expenses mainly comprise personnel costs
related to software developers and development support personnel, including
software programmers, testing and quality assurance personnel and writers of
technical documentation such as product manuals and installation guides. These
expenses also include computer hardware/software costs and telecommunications
12
<PAGE> 13
BMC SOFTWARE, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of
Results of Operations and Financial Condition
(continued)
expenses necessary to maintain the Company's data processing center. Increases
in the Company's research and development expenses in the second quarter of
fiscal 1999 were the result of increased compensation costs associated with both
software developers and development support personnel, as well as associated
benefits and facilities costs. The Company increased its headcount in the
research and development organization by 56% from September 30, 1997 to
September 30, 1998. Research and development costs were reduced by amounts
capitalized in accordance with Statement of Financial Accounting Standards
(SFAS) No. 86. The Company capitalizes its software development costs when the
projects under development reach technological feasibility as defined by SFAS
No. 86. During the second quarter of fiscal 1998 and 1999, the Company
capitalized approximately $9,380,000 and $16,886,000, respectively, of software
development costs. Capitalized software development costs for the six months
ended September 30, 1997 and 1998 were $18,659,000 and $28,054,000,
respectively. The growth in capitalized costs is primarily due to increases in
new distributed systems product development, the porting of distributed systems
products to alternate environments and increased integration development
activity.
Cost of Maintenance Services and Product Licenses
Cost of maintenance services and product licenses consists of
amortization of purchased and internally developed software, costs associated
with the maintenance, enhancement and support of the Company's products and
royalty fees. Growth in the cost of maintenance services and product licenses
from the second quarter of fiscal 1998 to the second quarter of fiscal 1999 was
primarily attributable to an increase in capitalized software amortization;
while growth during the first half of fiscal 1999 was due to increases in
customer support employees and capitalized software amortization. The Company
amortized $4,401,000 and $9,721,000 in the second quarter of fiscal 1998 and
1999, respectively, of capitalized software development costs pursuant to SFAS
No. 86. In these periods, the Company expensed $2,734,000 and $3,156,000,
respectively, of capitalized software development costs to accelerate the
amortization of certain software products. For the six months ended September
30, 1997 and 1998, the Company amortized $8,894,000 and $13,153,000,
respectively; including accelerated amortization of $5,639,000 and $4,250,000,
respectively. The Company accelerated the amortization of these software
products as they were not expected to generate sufficient future revenues which
would be required for the Company to realize the carrying value of the assets.
The Company expects its cost of maintenance services and product licenses will
continue to increase as the Company capitalizes a higher level of software
development costs and as the Company builds its distributed systems product
support organization, which is less cost-effective than its mainframe support
organization because of the complexity and variability of the environments in
which the products operate. The distributed systems products operate in a high
number of operating environments, including operating systems, DBMSs and ERP
applications and require greater ongoing platform support development activity
relative to the Company's OS/390 mainframe products.
General and Administrative
General and administrative expenses are comprised primarily of
compensation and personnel costs within executive management, finance and
accounting, product distribution, facilities
13
<PAGE> 14
BMC SOFTWARE, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of
Results of Operations and Financial Condition
(continued)
management and human resources. Other expenses included in general and
administrative expenses are fees paid for legal and accounting services,
consulting projects, insurance and costs of managing the Company's foreign
currency exposure. Growth in general and administrative expenses for both the
three months and six months ended September 30, 1998 over the same periods ended
September 30, 1997 was largely due to increased personnel costs and higher costs
associated with the related infrastructure to support the Company's growth.
Headcount within the general and administrative organizations grew by 39% from
September 30, 1997 to September 30, 1998.
Acquired Research and Development and Related Costs
During the first quarter of fiscal 1998, 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 $80,700,000
million, including direct acquisition costs. The Company accounted for these
transactions using the purchase method of accounting. During the quarter, the
Company recorded a $60,272,000 charge ($57,267,000 net of income tax benefits)
for acquired research and development costs.
During the second quarter of fiscal 1998, 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 $6,995,000
million, including direct acquisition costs. The Company accounted for these
transactions using the purchase method of accounting. During the quarter, the
Company recorded a net of tax charge of $3,381,000 for acquired research and
development costs.
During the first quarter of fiscal 1999, the Company acquired certain
technology and technology rights for approximately $23,700,000, including direct
acquisition costs. During the quarter, the Company recorded a $17,304,000 charge
($11,246,000 net of income tax benefit) for acquired research and development
and related costs.
OTHER INCOME
For the second quarter of fiscal 1999, other income was $12,685,000,
reflecting an increase of 77% over $7,148,000 of other income in the same
quarter of fiscal 1998. Other income consists primarily of interest earned on
tax-exempt municipal securities, euro bonds, corporate bonds, mortgage
securities and money market funds. The increase in other income is primarily due
to an increase of approximately $423,627,000 in cash and investment securities
from September 30, 1997 to September 30, 1998.
INCOME TAXES
For the second quarter of fiscal 1999, income tax expense was
$29,083,000 compared to $18,877,000 for the same quarter in fiscal 1998. The
Company's income tax expense represents the federal statutory rate of 35%, plus
certain foreign and state taxes, reduced primarily by the benefit from lower
income taxes associated with
14
<PAGE> 15
BMC SOFTWARE, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of
Results of Operations and Financial Condition
(continued)
the Company's European operations and the effect of tax exempt interest earned
from cash investments.
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its growth through funds generated from
operations. As of September 30, 1998, the Company had cash, cash equivalents and
investment securities of $962,599,000.
The Company did not repurchase any shares on the open market during the
first quarter of fiscal 1999 as its stock repurchase program was rescinded by
the Board of Directors in connection with the pooling of interests transaction
with BGS Systems, Inc. As a result of the proposed Boole transaction noted
above, the Company does not expect to reinstate its share repurchase program.
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. CERTAIN RISKS AND UNCERTAINTIES THAT COULD AFFECT FUTURE OPERATING
RESULTS.
Management's Discussion and Analysis of Results of Operations and
Financial Condition contains certain forward looking statements within the
meaning of Sections 27A of the Securities Act of 1933, as amended, and Section
21E of the Securities Act of 1934, as amended. All statements included or
incorporated by reference in this report or made by management of the Company
are forward-looking statements. Examples of forward-looking statements include
statements regarding the Company's future financial results, operating results,
market positions, product successes, business strategies, projected costs,
future products, competitive positions and plans and objectives of management
for future operations. In some cases, you can identify forward-looking
statements by terminology such as "may," "will," "should," "would," "expects,"
"plans," "anticipates," "believes," "estimates," "predicts," "potential," or
"continue," or the negative of such terms or other comparable terminology.
Numerous important factors, risks and uncertainties affect the Company's
operating results and could cause the Company's actual results to differ
materially from the results implied by these or any other forward looking
statements made by, or on behalf, of the Company. There can be no assurance that
future results will meet expectations. These important factors, risks and
uncertainties include, but are not limited to, those described in the following
paragraphs and in the discussion in the Company's March 31, 1998 Annual Report
on Form 10-K under the heading "Business," including, without limitation, the
discussion under the subheading "Competition, System Dependence."
Volatility of Stock Price. The Company's stock price has been and is
highly volatile. 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, anticipated revenue and/or earnings growth
rates, competitive pressures and other factors. The Company's stock price is
based almost completely on current expectations of sustained future revenue and
earnings growth rates. Any failure to meet anticipated revenue and earnings
levels in a period or any negative change in perceived long-term growth
prospects of the Company would likely have a significant adverse effect on the
Company's stock price. The growth rates of the Company's license revenues, total
revenues, net earnings and earnings per share, excluding one-time charges, have
accelerated over the last seven quarters. The Company may not achieve, in future
periods, these relatively higher rates of growth.
Risks of Fluctuating Earnings. 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
15
<PAGE> 16
BMC SOFTWARE, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of
Results of Operations and Financial Condition
(continued)
result, license revenues in any quarter are dependent upon contracts entered
into or orders booked and shipped in that quarter. Most of the Company's sales
are closed at the end of each quarter, and there has been and continues to be a
trend toward larger enterprise license transactions, which can have sales cycles
of up to a year or more and require approval by a customer's upper management.
These transactions are typically difficult to manage and predict. Failure to
close an expected individually significant transaction could cause the Company's
revenues and earnings in a period to fall short of expectations.
Additionally, management generally does not know whether revenues and
earnings will meet expected results until the final days or day of a quarter.
The Company's operating expenses are to a large extent fixed in the short term
so that the Company has very limited ability to adjust its planned expenses if
revenues fail to meet expectations; therefore, if near-term demand for the
Company's products weakens in a given quarter, there would likely be an
immediate, material adverse effect on net revenues and operating results, which
would likely result in a precipitous drop in the Company's stock price.
Operating Margin Risks. The Company's operating margins, excluding one-time
charges, have ranged from 37% to 45% in recent quarters, which is at the
high-end of the range for peer companies. Since the Company's mix of business
continues to shift to distributed systems revenues and since research and
development, sales, support and distribution costs for distributed systems
software products are generally higher than for mainframe products, operating
margins will experience more pressure.
Seasonality of Results. The Company historically realizes greater revenues
and net earnings in the latter half of its fiscal year because the quarter
ending December 31 coincides with the end of its customers' annual budgetary
periods and the quarter ending March 31 coincides with the end of its annual
sales plans and fiscal year. For the same reasons, the Company typically reports
lower or flat revenues in the first two quarters of a fiscal year than in the
last two quarters of the previous fiscal year, resulting in lower operating
margins in the first two quarters. The Company historically generates greater
revenues in the third and fourth quarters of its fiscal year while maintaining
lower rates of expense growth, resulting in higher operating margins during such
quarters.
The Company's financial projections for fiscal 1999 and analysts'
expectations are based on significantly higher distributed systems products
revenues in the quarters ending December 31, 1998 and March 31, 1999. Although
this was the pattern experienced in fiscal 1998, there can be no assurance that
this pattern will be maintained. Past financial performance is not a reliable
indicator of future performance.
Risks of International Operations. The Company's future operating results
depend on sustained performance improvement by its international offices. In
this regard, the economies in Europe and the Pacific Rim regions have been
depressed in the past year. The Company's operations and financial results could
be significantly adversely affected by changes in foreign currency exchange
rates, sluggish regional economic conditions and difficulties in staffing and
managing international operations.
Risks Associated with IBM. The Company derived approximately 74% of its
total revenues in fiscal 1998 from software products for IBM and IBM-compatible
mainframe computers. IBM continues to focus on reducing the overall software
costs associated with the OS/390 mainframe platform. IBM continues, directly and
through third parties, to aggressively enhance its utilities for IMS and DB2 to
provide lower cost alternatives to the products provided by the Company and
other independent software vendors. IBM has significantly increased its level of
activity in the IMS and DB2 high speed utility markets over the last
16
<PAGE> 17
BMC SOFTWARE, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of
Results of Operations and Financial Condition
(continued)
twelve months. If IBM is successful in achieving performance and functional
equivalence with the Company's products at a lower cost, the Company's business
will be materially adversely affected.
Risk of Reduced Enterprise Licenses. Fees from enterprise license
transactions remain a fundamental component of the Company's revenues. Such fees
continue to represent an increasingly greater percentage of total mainframe
license revenues and of total deferred revenues. In fiscal 1998, enterprise
license fees for future additional processing capacity and license
restructurings comprised approximately 24% of total revenues. These revenues are
dependent upon the Company's customers' continuing to perceive an increasing
need to use the Company's existing software products on substantially greater
mainframe processing capacity in future periods. If the Company's customers'
processing capacity growth were to slow and/or if such customers were to
perceive alternatives to relying upon the Company's current mainframe products,
the Company's revenues would be adversely impacted. Additionally, the Company
expects that even in the absence of reductions in customer demand, its deferred
revenue balance may decline over time.
Risk of Reduced Mainframe Product Pricing. The Company's capacity-based
upgrade fees associated with both current and future processing capacity
contributed 33% of total revenues in fiscal 1998. The charging of upgrade fees
based on running previously licensed software on more powerful computers is
standard among mainframe systems software vendors, including IBM. The pricing of
these processing capacity-based fees is under constant pressure from customers.
IBM is aggressively seeking to reduce the costs of its mainframe systems
software. These pricing pressures within the mainframe systems software markets
could have an adverse effect on the Company's revenues and earnings.
Rapid Technological Change and Highly Competitive Industry. The Company
operates in a highly competitive industry characterized by rapid technological
change. The Company's ability to compete effectively and its growth prospects
depend upon many factors, including:
o the success of its existing distributed systems products;
o the timely introduction of new products into the marketplace;
o the success of distributed systems products anticipated to be
introduced in the future; and
o the ability of the Company's products to interoperate and perform well
with existing and future leading databases and other platforms
supported by its products.
The distributed systems and application management markets in which the
Company operates are far more crowded and competitive than its traditional
mainframe systems management markets. Certain of the Company's competitors and
potential competitors have significantly greater financial, technical, sales and
marketing resources than the Company and greater experience in distributed
systems development and sales. The Company has experienced long development
cycles and product delays in the past, particularly with some of its distributed
systems products, and expects to have delays in the future. Delays in new
mainframe or distributed systems product introductions or less-than-anticipated
market acceptance of these new products are possible and would have an adverse
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.
Uncertainty Relating to Development of Products for Microsoft Platforms.
Microsoft Corporation has significantly increased its focus on developing
operating systems, systems management products and databases that will provide
"business-critical" class functionality. Specifically, Microsoft is aggressively
promoting its BackOffice family of software products, including its Windows NT
operating system and its SQL Server relational database management system, as
lower cost alternatives to the UNIX operating systems, coupled with relational
database management systems from Oracle Corporation, Sybase, Inc., Informix
Corporation and other vendors. Microsoft could significantly lower software
price points in
17
<PAGE> 18
BMC SOFTWARE, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of
Results of Operations and Financial Condition
(continued)
some of the Company's markets, which could place additional pricing pressure on
the Company. The Company has invested and intends to continue to invest in the
development of systems management products for Windows NT and BackOffice
environments, but there are numerous uncertainties associated with the Company's
ability to successfully execute this strategy.
Risks Associated with Possible Litigation. Litigation seeking to enforce
patents, copyrights and trade secrets is increasing in the software industry.
There can be no assurance that third parties will not assert that their patent
or other proprietary rights are violated by products offered by the Company. Any
such claims, with or without merit, can be time consuming and expensive to
defend and could have an adverse effect on the Company's business, results of
operations, financial position and cash flows.
Risks Related to Year 2000 Compliance. The Company believes the current
versions of its products are Year 2000 compliant. The Company does not intend to
make all prior versions of its products Year 2000 compliant and has notified its
customers as to which versions will and will not be Year 2000 compliant. The
Company has developed transition plans for customers who expect to be using
noncompliant versions of the Company's products on or after January 1, 2000 and
does not expect to incur significant costs in accommodating them.
The Company is unaware of any potential material liabilities or operational
difficulties associated with Year 2000 compliance of its own internal
information systems, which are based on Oracle Corporation's enterprise resource
planning system.
Efforts by customers to address Year 2000 issues may absorb a substantial
part of their information technology budgets in the near term. There is much
speculation that the cost of Year 2000 compliance efforts will significantly
reduce spending on non-Year 2000 products through January 1, 2000. the Company
believes that its core customers are well into their Year 2000 compliance
programs and that this trend has not materially adversely affected demand for
its products to date. The impact of Year 2000 issues on future Company
revenue is difficult to assess, but is a risk to be considered in evaluating the
Company's future growth.
Management Changes. In fiscal 1998, the Company announced several
executive management and organizational changes involving its Chief Operating
Officer, Senior Vice President, Research and Development, and Senior Vice
President, European Sales. The Company may make other management and
organizational changes in the future. Organizational and management changes are
intended to enhance competitiveness, productivity and execution; however, there
can be no assurance that they will produce the desired results.
Success of ASA Strategy. When the Company acquired BGS, it also
announced its ASA strategy. The ASA strategy contemplates the development of
solutions suites that will ensure the availability, performance and
recoverability of an ERP, DBMS or operating system. These solution suites will
contain several of the Company's existing products as well as those acquired in
the BGS acquisition. The Company intends to design these solution suites to
provide customers with a common look and feel for all included products. There
can be no assurance that these integration efforts involving separate and
distinct products, including those acquired from BGS, will be successful. Also,
given the recent announcement of this strategy, the Company cannot predict its
acceptance by customers.
18
<PAGE> 19
BMC SOFTWARE, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of
Results of Operations and Financial Condition
(continued)
Recent Acquisitions. With the acquisition of DataTools in May 1997 and
BGS in March 1998, the Company has initiated efforts to integrate the disparate
cultures, employees, systems and products. In both acquisitions, retention of
key employees is critical to ensure the continued advancement, development,
support, sales and marketing efforts pertaining to the acquired products. The
Company has implemented retention programs to keep many of the key technical,
sales and marketing employees. The Company has also elected to retain the
principal offices of both DataTools and BGS and has reorganized the management
structure at both of these locations. The Company has not historically managed
significant, fully staffed business units at locations different from the
Company's headquarters. As a result, the Company may experience additional
difficulties in integrating its management policies and practices into
DataTool's and BGS's operations. The Company has lost key employees that were
acquired in these acquisitions, especially at DataTools. The loss of the key
employees to date has not been detrimental to the Company's product integration
plans, although further losses could cause the product integrations to be
significantly delayed. Integration of DataTools SQL-BackTrack products is
critical to the completion of the Company's backup, recovery, and restoration
strategy. As noted above, integration of BGS's BEST/1 products with PATROL is
also critically important to the ASA Strategy. Successful integration of these
complex software products having different origins is difficult to predict and
achieve. There can be no assurance that these product integrations will meet
expectations or be successful.
Pending Acquisition. On November 2, 1998, the Company announced its
intentions to acquire Boole & Babbage, Inc. (Boole) through an exchange of
common stock and stock options using an exchange rate of .675 shares of the
Company Software common stock for each share of Boole common stock. The
acquisition is subject to approval by the Boole stockholders and to review by
certain governmental and regulatory bodies. Like the DataTools and BGS
acquisitions, the Company faces significant technical and organizational
challenges in integrating Boole operations with those of the Company. The
Company has plans to implement retention programs to keep many of the key
technical, sales and marketing employees. Integration of the Boole products and
organizational structure will be difficult, and there can be no assurance that
the integration efforts will be successful. For discussion of additional risks
related to the proposed merger, see the Company's Registration Statement on Form
S-4 filed with the SEC on November 13, 1998.
19
<PAGE> 20
BMC SOFTWARE, INC. AND SUBSIDIARIES
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
Platinum technology, inc. ("Platinum") filed suit against the
Company and Boole on November 13, 1998 in the Circuit Court of the Eighteenth
Judicial Circuit Chancery Division, DuPage County, Wheaton, Illinois, alleging
breach of, and tortious interference with, a standstill and exclusive
negotiation agreement between Boole and Platinum. As its remedy, Platinum is
seeking an injunction voiding the merger agreement between the Company and
Boole and enforcement of an exclusive 120-day period for negotiations with
Boole. The Company is investigating this matter.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits.
None
(b) Reports on Form 8-K.
The Company filed a Form 8-K on November 6, 1998
relating to its expected acquisition of Boole and
Babbage, Inc.
20
<PAGE> 21
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: November 16, 1998 By: /s/ Max P. Watson Jr.
---------------------- -------------------------------
Max P. Watson Jr.
Chairman of the Board, President and
Chief Executive Officer
Date: November 16, 1998 By: /s/ William M. Austin
---------------------- -------------------------------
William M. Austin
Senior Vice President and
Chief Financial Officer
Date: November 16, 1998 By: /s/ Kevin M. Klausmeyer
---------------------- -------------------------------
Kevin M. Klausmeyer
Chief Accounting Officer
21
<PAGE> 22
INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
- - ------ -----------
27 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE SIX
MONTHS ENDED SEPTEMBER 30, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS INCLUDED IN THE COMPANY'S FORM 10-Q FOR THE PERIOD
ENDING SEPTEMBER 30, 1998.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> MAR-31-1999
<PERIOD-START> APR-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 100,982
<SECURITIES> 861,617
<RECEIVABLES> 235,413
<ALLOWANCES> 8,487
<INVENTORY> 0
<CURRENT-ASSETS> 403,758
<PP&E> 285,216
<DEPRECIATION> 87,404
<TOTAL-ASSETS> 1,558,195
<CURRENT-LIABILITIES> 411,966
<BONDS> 0
0
0
<COMMON> 2,173
<OTHER-SE> 943,083
<TOTAL-LIABILITY-AND-EQUITY> 1,558,195
<SALES> 327,005
<TOTAL-REVENUES> 461,503
<CGS> 48,792
<TOTAL-COSTS> 299,887
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 184,245
<INCOME-TAX> 50,884
<INCOME-CONTINUING> 133,361
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 133,361
<EPS-PRIMARY> 0.62
<EPS-DILUTED> 0.58
</TABLE>
