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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K/A
AMENDMENT NO. 1
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<C> <S>
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED MARCH 31, 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
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BMC SOFTWARE, INC.
(Exact name of registrant as specified in its charter)
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<S> <C>
DELAWARE 74-2126120
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
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BMC SOFTWARE, INC.
2101 CITYWEST BOULEVARD
HOUSTON, TEXAS
(Address of principal executive offices)
77042-2827
(Zip code)
Registrant's telephone number, including area code: (713) 918-8800
Securities Registered Pursuant to Section 12(b) of the Act:
NONE
Securities Registered Pursuant to Section 12(g) of the Act:
COMMON STOCK, PAR VALUE $.01 PER SHARE
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the registrant's voting stock held by
non-affiliates of the registrant, based upon the last reported sale price of the
registrant's Common Stock on June 24, 1998 was $10,865,264,452.
As of June 24, 1998, there were outstanding 214,514,461 shares of Common
Stock, par value $.01, of the registrant.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the following documents are incorporated by reference in this
report:
Definitive Proxy Statement filed in connection with the
registrant's Annual Meeting of Stockholders currently scheduled to
be held on August 24, 1998 (Part III of this Report)
Such Proxy Statement shall be deemed to have been "filed" only to
the extent portions thereof are expressly incorporated by
reference.
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EXPLANATORY NOTE TO FORM 10-K/A
The Registrant is filing on this Amendment No. 1 on Form 10-K/A:
(i) audited consolidated financial statements as of March 31, 1997 and
1998 and for each of the three years in the period ended March 31, 1998;
and
(ii) management's discussion and analysis of financial condition and
results of operations for each of the periods described above, all of which
have been restated to reflect the operations of BGS Systems, Inc. ("BGS")
which was acquired in March 1998 in a transaction accounted for under the
pooling of interests method of accounting.
The BGS acquisition had been accounted for as an immaterial pooling of
interests transaction for which prior periods were not restated to reflect BGS
operations in the Registrant's fiscal 1998 Annual Report on Form 10-K. The
restatement resulted from a change in the Registrant's evaluation of the
materiality of BGS's results of operations and financial position relative to
the Registrant's prior period financial statements.
The Items of Form 10-K affected by this Amendment No. 1 on Form 10-K/A are
as follows:
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Part I -- Item 1. Business
Market for Registrant's Common Equity and Related
Part II -- Item 5. Stockholder Matters
Part II -- Item 6. Selected Financial Data
Management's Discussion and Analysis of Financial Condition
Part II -- Item 7. and Results of
Operations
Part II -- Item 8. Financial Statements and Supplementary Data
Exhibits, Financial Statement Schedules and Reports on Form
Part IV -- Item 14. 8-K
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This Annual Report contains certain forward looking statements within the
meaning of Section 27A of the Securities Act of 1933, as amended, and Section
21E of the Securities Act of 1934, as amended, which are identified by the use
of the words "believes," "expects", "anticipates," "will," "contemplates,"
"would" and similar expressions that contemplate future events. Numerous
important factors, risks and uncertainties affect the Company's operating
results, including without limitation those contained in this report, 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.
Readers should pay particular attention to the important risk factors and
cautionary statements described in the section of this Report entitled
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Certain Risks and Uncertainties That Could Affect Future Operating
Results." Readers should also carefully review the cautionary statements
described in the other documents BMC files from time to time with the Securities
and Exchange Commission, specifically all Quarterly Reports on Form 10-Q and
Current Reports on Form 8-K filed by BMC.
PART I
ITEM 1. BUSINESS
OVERVIEW
BMC Software, Inc. ("BMC" or the "Company") is a leading global provider of
systems management software solutions for host mainframe and distributed
information systems. BMC provides over 200 software products designed to provide
major improvements to a customer's core information technology ("IT")
operations. These products are designed to ensure that a customer's software
applications and the software systems on which they run are available, have
optimal performance and can be recovered and restarted quickly and predictably
after failure. BMC also sells and provides maintenance, enhancement and support
services for its products. Founded in 1980, BMC first earned a position of
leadership in providing high performance
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software tools and utilities for the mainframe computers on which large
enterprises depend. BMC is now a major provider of systems management solutions
for distributed IT systems as well and has established its PATROL(R) application
availability and monitoring product suite as a market leader. By providing
solutions that address both mainframe and all of the prevalent distributed
environments, BMC enables customers to use the latest technologies while
preserving their substantial investments in legacy hardware, applications and
data. In executing its product strategies, BMC emphasizes internal product
development and innovation supplemented by acquisitions of both emerging
technologies and established software companies.
BMC's customers are transaction and information intensive enterprises that
rely heavily on their computing systems. They are typically Fortune 1000
industrial and service corporations and similarly sized organizations worldwide.
As BMC extends its distributed systems management product lines, the number of
potential customers for its products has greatly increased. BMC markets and
distributes its products primarily through its well-established direct sales
organization and also sells its distributed systems products through an indirect
sales network of value-added resellers and systems integrators.
BMC's software products address the three predominant operating
environments of enterprise computing: 1) the International Business Machine
("IBM") OS/390 mainframe operating system; 2) the various UNIX operating systems
employed by leading hardware manufacturers such as Hewlett Packard Company
("HP"), Sun Microsystems, Inc. ("Sun"), IBM and Digital Equipment Corporation
and 3) Microsoft Corporation's ("Microsoft" or "MS") rapidly emerging MS Windows
NT operating system. BMC's core products address the performance, availability
and recovery of these operating systems and the most prevalent database
management systems ("DBMSs") used with them. DBMSs, when loaded with data,
comprise the databases that store all of the information an application
generates and requires. In addition to storing and organizing the data, the
DBMSs allow an application to access, retrieve, manipulate and analyze it. The
primary DBMSs employed in the three enterprise operating environments are: IBM's
IMS and DB2 for the OS/390 platform; Oracle Corporation ("Oracle"), Informix
Software, Inc. ("Informix"), Sybase, Inc. ("Sybase") and DB2/2 for the UNIX
platform; and MS SQL Server and Oracle for the Windows NT platform. The
operating systems and DBMSs form the backbone of the transaction intensive IT
systems that are critical to both the day-to-day operations and the long-term
strategies of BMC's customers. These IT systems are continuously growing in size
and complexity. Since BMC's inception, one of its key focuses and competencies
has been improving the performance, availability, reliability, recoverability
and ease of use of these DBMSs.
Over the past four years, BMC has devoted significant resources to building
its distributed systems software products and sales channels. To date, these
efforts have centered around the PATROL application availability and monitoring
products. In fiscal 1998, PATROL application and other distributed systems
management products generated $222 million in revenues, representing an increase
of 81% over the prior fiscal year and 28% of total revenues. While building its
distributed systems management business, BMC has continued to invest in and
enhance its many products for the OS/390 mainframe platform. Of these, the most
important are the high performance utilities for the IMS and DB2 DBMSs and the
database administration products for DB2. The high performance utilities
maximize the availability of large IMS and DB2 databases by providing core
services, such as copying, loading, unloading and reorganizing a database, at
very high levels of performance and reliability. The administrative products for
DB2 include a DB2 performance monitor and the change management products for
DB2, which automate routine and repetitive tasks necessary to the operation of
large DB2 databases. The high performance utilities for IMS and DB2 and the
administrative products for DB2 generated approximately 54% of total revenues in
fiscal 1998.
BMC was organized as a Texas corporation in 1980 and was reincorporated in
Delaware in July 1988. Its principal corporate offices are located at 2101
CityWest Blvd., Houston, TX 77042-2827. Its telephone number is (713) 918-8800.
STRATEGY
BMC's focus is now evolving to the applications that are the ultimate
purpose of all IT systems. Organizations are requiring that their IT systems
deliver guaranteed levels of service to the end-user. IT systems must maximize
an application's availability by minimizing or eliminating the amount of time
the
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application is unavailable to users because of scheduled maintenance operations
or necessary changes and upgrades to the system. They must also deliver high
performance levels measured by minimized and consistent response times. Finally,
they must guarantee that an application and all of its underlying components can
be recovered quickly and with confidence and integrity from a system failure.
BMC's products can be critical to delivering targeted service levels because of
their orientation towards the highest levels of performance and reliability for
the DBMS and other critical software components that support the application.
This applications centric approach is the object of BMC's Application Service
Assurance(TM) ("ASA") product strategy, which is designed to allow enterprises
to achieve the desired states of key applications by maximizing their
availability, performance and recoverability.
The ASA strategy also encompasses BMC's early commitment to delivering
third party software tools for packaged enterprise resource planning
applications ("ERPs"), which represent one of the most significant recent trends
in enterprise computing. ERP applications address the core business processes of
any business or other organization, such as accounting and financial reporting,
manufacturing and inventory management, human resources and payroll, and order
entry and tracking. The packaged ERP applications from vendors such as SAP
Corporation ("SAP"), Baan Company N.V. ("BAAN"), PeopleSoft, Inc. ("PeopleSoft")
and Oracle save an enterprise from the highly difficult and unpredictable task
of writing an application from scratch and, equally important, allow for the
standardization and integration of these business processes throughout an
organization. BMC's PATROL product family supports all of the leading ERP
applications as well as their key underlying components such as the UNIX and
Windows NT operating systems and the leading DBMSs. BMC is actively developing
ERP modules for its other distributed systems management products.
The underlying premise of BMC's strategy is that the productivity of any
enterprise today increasingly hinges on its business-critical applications.
These applications include ERPs, other off-the-shelf and custom manufacturing,
billing, shipping and payroll applications. Even seemingly pedestrian
applications such as e-mail or calendaring applications become business critical
when an organization depends on them for its day-to-day operations. BMC's
strategy is to provide enterprise systems management products that ensure the
availability, performance and recoverability of these key applications and the
DBMSs, operating systems and other software platforms on which they run in the
OS/390 mainframe and distributed environments.
BMC believes the OS/390 mainframe platform will continue to be the
preferred system for large-scale IT systems for the foreseeable future.
Contributing to the ongoing viability of the OS/390 platform are enterprises'
large investments in their OS/390 applications and databases and the significant
price reductions and performance enhancements delivered by IBM and other
mainframe hardware vendors over the last five years. In addition, the OS/390
platform is generally perceived as more stable and reliable than distributed
systems alternatives, in part because of its homogeneity and the many well
established systems management tools provided by IBM, BMC and other independent
software vendors. BMC's confidence in the OS/390's platform has been reinforced
by the increased demand for mainframe processing capacity over the past 36
months and projected mainframe growth rates. The Meta Group, for example,
estimates that mainframe capacity as measured in millions of instructions per
second will grow at an annual rate of 33% through the year 2003. BMC intends to
continue to enhance its important tools and utilities for the IMS and DB2 DBMSs,
as well as for other OS/390 subsystems, and to develop new mainframe products.
In contrast with the OS/390 mainframe environment, distributed IT systems
are highly fragmented and characterized by multiple hardware, software and
network configurations. The applications and underlying IT infrastructure
components are provided by many different vendors. BMC is providing software
solutions designed to manage heterogeneous IT systems centered around its PATROL
applications management and monitoring product. It is highly desirable to be
able to monitor and manage these disparate IT system components from a single
point of control. PATROL achieves this, thereby delivering higher levels of
operating efficiency and performance management.
PATROL employs a modular architecture that allows support of many different
IT systems components (such as a DBMS or an ERP application) to be added
relatively quickly and without requiring changes to the underlying PATROL
infrastructure. BMC and third parties have written "knowledge modules" for all
of the
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prevalent applications, DBMSs, operating systems and other software components
of a distributed IT system. The knowledge modules encapsulate the information
and instruction sets necessary to the monitoring and management of the
application or other component. BMC's strategy is to support a broad range of
distributed systems components with PATROL, so that customers can maximize their
investment in PATROL by using it to manage their key systems components. PATROL
is designed as well to be complementary with the many available systems and
network management products, such as IBM's Tivoli, Computer Associates
International, Inc.'s ("Computer Associates") Unicenter TNG and HP's OpenView
systems management frameworks as well as domain specific management products
such Cabletron Systems, Inc.'s ("Cabletron") Spectrum and Sun's Solstice. BMC is
integrating PATROL with these other systems management products to maximize
PATROL's flexibility and usefulness to customers.
The following table sets forth the primary operating systems, DBMSs and
applications that PATROL manages and the various systems management tools with
which PATROL is integrated:
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INTEGRATION WITH
OTHER SYSTEMS
OPERATING SYSTEMS DBMSS APPLICATIONS MIDDLEWARE MANAGEMENT PRODUCTS
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Netware ADABAS BAAN MQSeries Tivoli
OS/390 CA-Ingres Internet Servers MS MQ Unicenter TNG
OS/2 CA-Open Ingres MS Exchange Tuxedo HP OpenView
OpenVMS DB2 Universal Database Lotus Notes DCE Sun Solstice Domain Manager
UNIX DB2 for OS/390 Oracle Applications TX-Series Cabletron Spectrum
MS Windows NT IMS/DB PeopleSoft ENTIRE NET-WORK Remedy AR System
AS/400 IMS/Fast Path SAP R/3 Compaq Insight Manager
Informix
MS SQL Server
Oracle
PROGRESS
Sybase
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PATROL also manages numerous other IT system components via third party
knowledge modules. BMC established in fiscal 1998 an active third party
development network and knowledge module certification program around PATROL.
This PATROL Developers Network ("PDN") is intended to stimulate and provide a
process for external development of products to extend PATROL's reach to
applications and systems software products that are important but do not appear
to represent a market opportunity large enough to be included in BMC's internal
software development plans. In its first year, the PDN has attracted over 185
development and/or distribution partners.
In furtherance of its ASA strategy and to complement the PATROL product
suite, BMC acquired BGS Systems, Inc. ("BGS") in March 1998 in a $300 million
stock-for-stock merger accounted for as a pooling-of-interests. The financial
results reflected in this Form 10-K/A include the results of BGS for all periods
presented. BGS is a leading vendor of software tools that collect and analyze
information about how a mainframe or distributed application and its underlying
components are performing. Using this performance data and analysis, the BGS
BEST/1(R) products can be used to tune the system and to predict how it will
behave under various scenarios, such as increased load, and BMC believes the
BEST/1 products have unique capabilities to analyze and predict the performance
of the various IT system components on an aggregated, holistic basis and that
these capabilities will represent a strong strategic fit with PATROL's
efficiency, quality and depth of data collection and broad platform support. BMC
intends to tightly integrate the BEST/1 and PATROL product families.
To extend its capabilities to back-up, recover and restore an application
or DBMS, BMC acquired in May 1997 DataTools, Inc. ("DataTools") in a $73 million
transaction, which was accounted for using the purchase method. DataTools is a
leading developer of back-up and recovery tools for the Oracle, Sybase and MS
SQL Server DBMSs. The DataTools products automate and increase the speed for the
many sequential steps and processes associated with backing up and recovering a
large database. They also allow a customer to back-up a database incrementally,
meaning that only changed data is copied and backed-up, not the entire database.
This greatly increases the speed and frequency of back-ups. BMC is integrating
the DataTools SQL-
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BackTrack(TM) products with its PATROL Recovery Manager product line to enable
users to provide for and control multiple back-up and recovery scenarios from a
single point of control.
BMC's ASA strategy contemplates the development of solutions suites for an
ERP, DBMS or operating system that are designed to ensure its availability,
performance and recoverability. For example, the Oracle solutions suite would
include the PATROL Oracle Knowledge Module, the PATROL DB-Admin Knowledge
Module, the BEST/1 Oracle module, PATROL Recovery Manager for Oracle,
SQL-BackTrack for Oracle and PATROL-DB-Reorg. BMC intends to design these
integrated suites to provide customers with a common look and feel for all of
the management products as well as shared infrastructure components.
BMC's distribution strategy is based upon its well established direct sales
channel, which is concentrated on the 1,000 largest information technology users
worldwide. BMC is rapidly building its direct sales channel for its distributed
systems products. BMC hired over 130 additional distributed systems sales
representatives and technical sales consultants in fiscal 1998 and employed 250
distributed sales representatives and 177 technical sales consultants at March
31, 1998. To assist customers in implementing its products and to broaden its
market coverage, BMC is: 1) opening supplemental field sales offices in major
cities that are staffed with both sales and pre-sales technical support
personnel, 2) building a product implementation services capability and 3)
establishing an indirect channel of value added resellers and systems
integrators. The PDN program is also designed to stimulate demand for and
acceptance of PATROL by encouraging third parties to build businesses around
PATROL.
PRODUCTS
Application Availability
BMC's application and data availability product line comprise its: 1) high
availability utilities and administrative tools for IMS and DB2 mainframe DBMSs,
2) PATROL applications management and monitoring product suite and 3) PATROL DB
administrative tools for distributed DBMSs. The Application Availability
solutions maximize availability of an IT system by minimizing unplanned
application outages and by reducing the number and length of necessary scheduled
outages.
The high availability utilities and administrative tools for IMS/DB and DB2
have historically been BMC's largest revenue source. Large enterprise DBMSs
require periodic maintenance in order to optimize performance and ensure data
integrity. These maintenance processes are time consuming and often render the
DBMS inaccessible to users, thus disrupting business operations. BMC's high
availability utilities dramatically increase the speed of these maintenance
processes and condense the number of steps required, resulting in higher DBMS
and application availability. The IMS and DB2 high availability utilities
automate and speed routine, required database maintenance tasks such as loading,
unloading, reorganizing and checking the integrity of the database. The database
administration products for IBM's DB2 DBMS provide for the creation,
modification, migration and versioning of database schema and can initiate the
activities of the database utilities to provide maintenance functions and
increase performance. These products generated over 44%, 38% and 35% of total
revenues in fiscal 1996, 1997 and 1998, respectively, and higher percentages of
net earnings. In addition to the utilities and administrative tools for IMS and
DB2 discussed above, BMC offers high availability utilities for the IMS Fast
Path environment and enhancements to the IMS/TM environment. These products
contributed approximately 6%, 7% and 5% of total revenues for fiscal 1996, 1997
and 1998, respectively.
BMC's PATROL applications and data management product suite delivers
solutions that monitor the availability and performance of increasingly complex,
heterogeneous environments. PATROL uses a unique, three-tiered architecture
comprised of the: 1) console, 2) agent and 3) knowledge module. The console
graphically depicts all applications, operating systems, DBMSs and underlying IT
resources being monitored and managed by PATROL. The user may access this
information through the native PATROL console or use the PATROLVIEW integration
module to view performance and availability data through leading systems
management framework consoles such as OpenView from HP, Unicenter from Computer
Associates or Tivoli TME from IBM.
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The autonomous, intelligent PATROL agent, which resides on the DBMS or
application server, is equipped to take corrective action on its own without
communication with the central console. By reducing the amount of communication
between the console and agent, network traffic is reduced. Exception reporting
and corrective actions are communicated to the console on an "as needed" basis
as defined by the user, improving PATROL's scalability and allowing it to manage
many servers concurrently.
The PATROL knowledge module component incorporates knowledge specific to
given operating systems, DBMSs and applications. The knowledge module
architecture, through the use of the PATROL Scripting Language, allows for rapid
extension and customization of PATROL's management capabilities to meet a
customer's individual requirements. Through the PDN, BMC licenses a knowledge
module development tool kit to third parties, allowing for external development
of knowledge modules to expand the breadth of systems managed by PATROL.
The PATROL application management product suite contributed approximately
8%, 11% and 16% of total revenues in fiscal 1996, 1997 and 1998, respectively.
The PATROL DB database administration product suite provides the change
management functions of the DB2 administrative tools for distributed DBMSs, and
most importantly the automation of changes to database schema. In keeping with
BMC's strategy of broad heterogeneous platform support, PATROL DB supports all
of the leading distributed DBMSs: Oracle, MS SQL Server, Sybase, Informix, DB2
Universal Database and DB2 for OS/390. The PATROL DB products generated less
than 5% of total revenues in fiscal 1996, 1997 and 1998.
Application Performance
BMC's application performance solutions address the quality of service an
application is providing to users when it is available. Examples include
optimizing the response time of an application, tracking and reporting its
service levels, detecting and analyzing performance bottlenecks and predicting
future performance and problems. The Application Performance products comprise:
1) the BGS BEST/1 performance assurance products acquired in March 1998, 2) the
network optimization product series and 3) the dynamic tuning and optimization
product series.
The BEST/1 performance assurance software products measure, analyze, trend,
predict and report the performance of a customer's computer system and network.
These software products enable customers to make more efficient use of their
existing hardware, software and computer personnel and to plan for the most
cost-effective expansion of their computer operations to meet increasing loads.
The predictive capabilities of the BEST/1 performance assurance products are
designed to allow customers to anticipate system bottlenecks and performance
problems and take preventative corrective action. The BEST/1 products support
all of the major mainframe, midrange and workstation platforms, including the
OS/390, Unix and MS Windows NT operating environments. BGS revenues, most of
which relate to BEST/1, generated approximately 9%, 8% and 7% of total revenues
in fiscal 1996, 1997 and 1998, respectively.
The network optimization products provide performance and availability
enhancements for mainframe networks. These products minimize the load
transmitted across telecommunications networks connecting host mainframe CPUs or
IP networks and end-user terminals or personal computers, thus increasing
response time and decreasing network traffic.
The dynamic tuning and optimization products provide transparent management
of enterprise data, resulting in increased availability and performance of the
operating systems, DBMSs and applications with which they operate. The DELTA IMS
line allows organizations to define IMS system components, expand user access
and increase the size of the network without extensive programming or impact to
IMS/DB application access. The data compression products for the OS/390-based
DBMSs and VSAM data sets deliver advanced compression techniques and options
that maximize storage and input/output performance. BMC's EXTENDED BUFFER
MANAGER ("XBM") products for IMS/DB and DB2 improve system performance by
greatly reducing the input/output needed to provide access to data frequently
used by one or more applications running in the same operating environment. When
coupled with BMC's IMAGE COPY
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PLUS or COPY PLUS for DB2 products, XBM allows for the creation of DBMS backup
copies with limited interruption of access to the data stored within the DBMSs.
The network optimization products and dynamic tuning and optimization products
generated approximately 11%, 11% and 10% of total revenues in fiscal 1996, 1997
and 1998, respectively.
Application Recovery
Application Recovery solutions are designed to provide the ability to
recover an application and all of its underlying components to a consistent
point in time and restarting the application as quickly as possible after an
outage. These products provide a comprehensive approach across multiple
platforms and provide assurance that critical data is recoverable after both a
local or systems wide outage. They backup and restore files and databases,
recover data, databases and applications, coordinate point in time recoveries
across multiple data stores and restart applications to the point of failure.
These products eliminate manual, error prone steps, reduce redundant
reprocessing work following the outage and provide an audit of recoverability.
The Application Recovery solutions include the mainframe Recovery Manager
products for IMS and DB2 DBMSs and the PATROL Recovery Manager products for
distributed DBMSs, which support coordinated recovery between different DBMS,
thereby eliminating the need for individual DBMS recoveries, and the Application
Restart Control products, which provide the ability to resume processing of a
failed or interrupted batch application from the most recent successful
checkpoint rather than from the beginning of the job. This restart capability
eliminates wasted time and resources while improving data availability and
ensuring data integrity. The Recovery Manager, PATROL Recovery Manager and
Application Restart Control products generated approximately 19%, 21% and 19% of
total revenues in fiscal 1996, 1997 and 1998, respectively.
The Application Recovery solutions also include the DataTools SQL BackTrack
database backup and recovery products acquired in May 1997. Prior to acquiring
DataTools, BMC was the exclusive distributor of the SQL-BackTrack products. The
SQL-BackTrack products speed up and automate the complex sequential steps that
must be performed in order to backup or recover distributed systems databases.
BMC is continuing to market the SQL-BackTrack products as best of breed stand
alone solutions and is integrating them as well with its PATROL Recovery Manager
automated recovery solutions. The SQL-BackTrack products generated less than 5%
of total revenues in fiscal 1997 and 1998.
SALES AND MARKETING
BMC markets and sells its products principally through its direct sales
force. BMC employs a model of primary customer contact by telephone and other
telecommunications media, such as e-mail, combined with significant on-site
sales and technical sales support activity. BMC also emphasizes technical
customer briefings at its Houston, Texas headquarters. BMC provides many of its
products on a free trial basis to facilitate the initial sale. BMC's sales
operations are organized into mainframe and distributed systems groups, with the
mainframe account representatives cooperating extensively with the distributed
systems representatives. BMC does not employ further product specialization of
its sales force, with the exception of dedicated DataTools and BGS sales
organizations. BMC employs technically trained software consultants to provide
specialized technical product knowledge to accounts. These consultants assist in
justifying BMC's products and conducting in-depth technical evaluations of their
performance and features. As of March 31, 1998, BMC employed 397 sales
representatives and software consultants in North America and 336
internationally, including 245 in Europe and 91 in the Asia-Pacific region. BMC
is investing heavily in its distributed systems sales channel and hired over 130
distributed systems sales representatives and software consultants in fiscal
1998.
BMC's North American sales force is primarily based in Houston, Texas. BMC
has opened field sales offices in Waltham, Massachusetts, Washington, D.C., Los
Angeles and San Francisco, California, Chicago, Illinois, New York, New York and
other major cities to increase its local presence in the regions surrounding
those cities. BMC conducts its international sales, marketing and support
primarily through 17 wholly-owned subsidiaries worldwide.
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As discussed under "Strategy" above, BMC is developing indirect channels
for its distributed systems products. BMC has established channels operations
groups in North America and Europe to promote, negotiate and support such
distribution arrangements and is continuing to invest in its channels
infrastructure. BMC is also represented by local agents in geographical
territories in which it has not established a direct sales presence. As of March
31, 1998, BMC was distributing its products through over 175 indirect channel
partners.
INTERNATIONAL OPERATIONS
Approximately 40%, 38% and 35% of BMC's total revenues in fiscal 1996, 1997
and 1998, respectively, was derived from business outside North America. BMC's
international operations provide sales, sales support, product support,
marketing and product distribution services for its customers located outside of
North America. BMC also conducts development activities in Singapore and
Frankfurt, Germany to provide local language support and integration with
local-market hardware and software systems vendors.
Total revenues, operating profits and identifiable assets attributable to
BMC's North American, European and other international operations (primarily in
the Pacific Rim) are set forth in Note 10 to the Consolidated Financial
Statements contained herein. BMC believes that its operations outside the United
States are located in countries that are politically stable and that such
operations are not exposed to any special or unusual risks. BMC's growth
prospects are highly dependent upon the continued growth of its international
license and software maintenance revenues. BMC's international license revenues
and expenses have been, however, somewhat unpredictable over the last three
fiscal years.
Revenues from BMC's foreign subsidiaries are denominated in local
currencies, as are operating expenses incurred in these locales. To date, BMC
has not had any material foreign exchange currency losses. For a discussion of
BMC's currency hedging program and the impact of currency fluctuations on
international license revenues in fiscal 1997 and 1998, see "Management's
Discussion and Analysis of Results of Operations and Financial
Conditions -- Results of Operations -- Expenses -- Risk Management" and Note
1(g) of Notes to Consolidated Financial Statements contained herein. BMC has not
previously experienced any difficulties in exporting its products, but no
assurances can be given that such difficulties will not occur in the future.
RESEARCH AND PRODUCT DEVELOPMENT
From inception, BMC has concentrated on internal software development. BMC
maintains a relatively high level of investment in its internal research and
development operations: in fiscal 1998, research and development spending, net
of capitalized amounts, represented 13% of total revenues and 18% of total
expenses. These costs relate primarily to the compensation of research and
development personnel. BMC's expenditures on research and development and on
product maintenance and support, including amounts capitalized, in the last
three fiscal years are discussed below under the headings, "Management's
Discussion and Analysis of Results of Operations and Financial
Condition -- Expenses -- Research and Development" and "-- Expenses -- Cost of
Maintenance Services and Product Licenses."
BMC's general product strategy is discussed under "Strategy" above. A major
focus of BMC's current product development efforts is the integration of the
acquired BEST/1 and DataTools products with the PATROL and PATROL Recovery
Manager products, respectively, and the development of a major new release of
PATROL designed to facilitate the interoperability of these and BMC's other
distributed systems management products. BMC is also concentrating its
development efforts on extensions of and enhancements to its core mainframe
product lines as customers continue to rely on them for their most critical IT
operations.
BMC's primary research and development activities are based in Houston and
Austin, Texas, Sunnyvale, California (DataTools) and Waltham, Massachusetts
(BGS). BMC internally creates and produces all user manuals, sales materials and
other documentation related to its products. Product manufacturing and
distribution is based in Houston, Texas, with European manufacturing and
distribution being based in Nieuwegein, The Netherlands.
8
<PAGE> 10
MAINTENANCE, ENHANCEMENT AND SUPPORT SERVICES
Revenues from the provision of maintenance, enhancement and support
services comprised 38%, 33% and 30% of total revenues in fiscal 1996, 1997 and
1998, respectively. Payment of maintenance, enhancement and support fees
entitles a company to telephone support and problem resolution services and
enhanced versions of a product released during the maintenance period, including
new versions necessary to run with the most current release of the operating
systems, databases and other software supported by the product. Such maintenance
fees are an important source of recurring revenue to BMC, and BMC invests
significant resources in providing maintenance services and new product
versions. These services are important to customers, particularly mainframe
customers, who require immediate problem resolution because of their dependence
on the products to run IT systems that are central to their enterprises. The
services are also necessary because customers require forward compatibility when
they install new versions of the software systems supported by a BMC product.
For BMC's mainframe products, the fee for the first year of product
maintenance services is included in the perpetual license fee. Subsequently,
perpetual licensees may renew their maintenance agreements each year for an
annual fee. The annual fee for mainframe products is generally 18% to 20% of the
then current list perpetual license fee of the licensed product as adjusted for
any applicable discounts. For BMC's distributed systems products, the initial
maintenance period is shorter and the renewal fee varies depending on the level
of support selected by the licensee.
PRODUCT PRICING AND LICENSING
BMC's mainframe products have traditionally been priced and licensed on a
tiered pricing basis whereby the license fee for a product increases in relation
to the processing capacity of the CPU on which the product is installed. Under
tiered pricing, CPUs are classified by CPU tier according to their processing
power as measured in millions of instructions per second ("MIPS"). More powerful
CPUs fall into higher tiers and carry higher license fees. CPU upgrade fees are
charged if a product is installed on another CPU that falls in a higher CPU
group category. Under BMC's enterprise licensing program, customers may
alternatively license products on an enterprise wide basis, whereby the customer
can use the products on an unlimited number of CPUs of any size, subject to a
limit on the aggregate processing power of such CPUs as measured in MIPS. CPU
upgrade fees contributed approximately one-fourth to one-third of total revenues
in fiscal years 1996, 1997 and 1998, respectively. Because maintenance fees are
based on the license fee for the product as of the annual renewal date,
maintenance fees increase when a product is installed on a larger CPU.
BMC maintains various discount programs for its mainframe and distributed
systems products, including standard discounts for multiple copies of a product
and volume discounts for enterprise license transactions.
BMC also prices and licenses PATROL on a CPU tier basis. Because PATROL is
a relatively new product and because many of its licensees are still in a pilot
or implementation phase of use, CPU upgrade fees from PATROL have been
immaterial to date. BMC expects that PATROL revenues will be predominately from
additional unit sales rather than CPU upgrade fees. Certain of BMC's other
distributed systems products are also licensed on a tiered basis, while those at
lower price points are licensed on a per unit basis.
BMC's products are generally marketed on a trial basis. When a customer
desires to license a trialed product, a permanent product copy or a coded
password to convert the trial tape to a permanent tape is provided.
Consequently, BMC does not have any material product backlog of undelivered
products. BMC licenses its software products almost exclusively on a perpetual
basis.
BMC recognizes revenues from perpetual licenses and upgrade fees when both
parties are legally obligated under the terms of the respective agreement, the
underlying software products have been delivered, collection is deemed probable
and there are no remaining material Company obligations. BMC recognizes
maintenance revenues, including maintenance bundled with perpetual license fees,
ratably over the maintenance period.
For a discussion of enterprise license transactions, the various components
of license and upgrade revenues and BMC's revenue recognition practices for such
components, see the discussion below under the
9
<PAGE> 11
heading "Management's Discussion and Analysis of Results of Operations and
Financial Condition -- Operating Results -- Revenues -- License Revenues" and
Note 1(h) in Notes to Consolidated Financial Statements.
COMPETITION; SYSTEM DEPENDENCE
The mainframe and distributed systems management software markets in which
BMC competes are highly competitive, as discussed below and in the "Management's
Discussion and Analysis of Results of Operations and Financial Condition"
section of this report under the heading "Certain Risks and Uncertainties that
Could Affect Future Operating Results."
BMC's mainframe products run primarily with IBM's IMS and DB2 DBMSs and
IMS/TM, CICS transaction managers and VTAM. Certain of these BMC products are
essentially improved versions of system software utilities that are provided as
part of these integrated IBM system software products. IBM continues to improve
or add to these integrated software packages as part of its strategic initiative
of reducing the overall software costs associated with its mainframe computers.
IBM also markets separately priced competing high performance utilities in
addition to its base utilities. If IBM is successful in duplicating BMC's
products, it would provide them at a much lower cost because of the different
economics of its mainframe business. This would likely have a material adverse
effect on demand for product licenses, license upgrades and recurring
maintenance of BMC's competing products. IBM is significantly increasing the
performance of its tools and utilities for the IMS and DB2 DBMSs, both through
internal development efforts and arrangements with third party software
developers.
The mainframe systems software business is highly competitive. BMC's
competitors include IBM as well as Platinum technologies, inc. ("Platinum"),
Innovative Designs, Inc., Neon Systems, Inc. and other independent software
vendors that have the ability to develop and market products similar to, and
competitive with, BMC's products. Product pricing is a key competitive factor in
the market for third-party tools and utilities for IMS and DB2, and BMC has
periodically adjusted its discount structures to reflect this competition.
The distributed systems markets that PATROL and BMC's other systems
management products address are also highly competitive. All of the major
mainframe systems software vendors have announced distributed systems management
strategies that overlap to varying degrees with PATROL. These competitors
include, to differing degrees, IBM's Tivoli subsidiary, Computer Associates,
Platinum, Compuware Corporation, Candle Corporation and Boole & Babbage, Inc.
The relational DBMS vendors, such as Oracle and Sybase, and hardware companies
such as HP, Sun and Cabletron, are also providing competitive or potentially
competitive products for their respective platforms that are relatively
inexpensive. BMC's strategy is to complement these frameworks and alternative
systems management products by integrating with them. The network and systems
management framework providers are, however, attempting to extend their products
into PATROL's functional space. In addition, start up companies continually
enter the distributed systems management software markets, such as NetIQ Corp.
for MS Windows NT management. BMC intends to differentiate PATROL from these
other products in part by providing broader support of the many different
components of a distributed IT system, although there can be no assurance
whether this strategy will be successful. BMC expects these markets to continue
to increase in competitiveness.
BMC continually modifies its mainframe products to maintain compatibility
with new IBM hardware and software. To do so and to develop and test new
products, BMC licenses IMS/DB, DB2, IMS/TM, CICS and other software systems from
IBM on similar terms as other IBM customers. If IBM were to terminate the
current license arrangements or otherwise deny BMC access to these systems, or
if IBM adopts technological changes that prevent or make more difficult access
to the systems, BMC would be adversely affected. Similarly, if BMC is unable to
acquire and maintain access to the major ERP applications, distributed DBMSs and
other IT system components equivalent to its access to DB2 and other IBM systems
software, its development of client/server products would be impeded. Certain of
the leading distributed systems DBMS vendors are less cooperative in providing
technical assistance to independent systems software vendors.
10
<PAGE> 12
BMC believes that the key criteria considered by potential purchasers of
its products are as follows: the operational advantages and cost savings
provided by a product; product quality and capability; product price and the
terms on which the product is licensed; ease of integration of the products with
the purchaser's existing systems; quality of support and product documentation;
and the experience and financial stability of the vendor.
CUSTOMERS
No individual customers accounted for a material portion of BMC's revenues
during any of the past three fiscal years. Because BMC's mainframe packages are
used with relatively expensive computer hardware, most of its revenues are
derived from companies that have the resources to make a substantial commitment
to data processing and their computer installations. Most of the world's major
companies use one or more of BMC's software packages. BMC's software products
are generally used in a broad range of industries, businesses and applications.
BMC's customers include manufacturers, telecommunications companies, financial
service providers, banks, insurance companies, educational institutions,
retailers, distributors, hospitals and value-added resellers.
INTELLECTUAL PROPERTY
BMC distributes its products in object code form and relies upon contract,
trade secret, copyright and patent laws to protect its intellectual property.
The license agreements under which customers use BMC's products restrict the
customer's use to its own operations and prohibit disclosure to third persons.
BMC now distributes certain of its distributed systems products on a shrink wrap
basis, and the enforceability of such restrictions in a shrink wrap license is
unproven in certain jurisdictions. Also, notwithstanding those restrictions, it
is possible for other persons to obtain copies of BMC's products in object code
form. BMC believes that obtaining such copies would have limited value without
access to the product's source code, which BMC keeps highly confidential. In
addition, BMC's products are generally encoded to run only on a designated CPU,
and trial tapes provided to potential customers generally function only for a
limited trial period.
EMPLOYEES
As of March 31, 1998, BMC had 2,777 full-time employees. BMC believes that
its continued success will depend in part on its ability to attract and retain
highly skilled technical, sales, marketing and management personnel. Competition
continues to increase for well qualified software sales, development and
consulting service personnel. BMC considers its employee relations to be
excellent.
11
<PAGE> 13
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Since August 12, 1988, the Company's Common Stock has been traded in the
NASDAQ National Market System under the symbol "BMCS." At June 24, 1998, the
Company had 913 holders of record of Common Stock.
The following table sets forth the high and low bid quotations per share of
Common Stock for the periods indicated.
<TABLE>
<CAPTION>
PRICE RANGE OF
COMMON STOCK
---------------
HIGH LOW
------ ------
<S> <C> <C>
FISCAL 1997
First Quarter............................................. $16.94 $13.31
Second Quarter............................................ 21.56 12.69
Third Quarter............................................. 23.38 19.63
Fourth Quarter............................................ 25.50 19.88
FISCAL 1998
First Quarter............................................. $29.31 $19.81
Second Quarter............................................ 34.75 26.56
Third Quarter............................................. 35.63 27.38
Fourth Quarter............................................ 42.13 29.25
</TABLE>
The only dividends declared or paid by BMC since 1988 relate to BGS. BGS
paid dividends of $7,009,000, $5,786,000 and $7,555,000 in fiscal 1996, 1997 and
1998, respectively. The Company does not intend to pay any cash dividends in the
foreseeable future. The Company currently intends to retain any future earnings
otherwise available for cash dividends on the Common Stock for use in its
operations, for expansion and for stock repurchases. See "Management's
Discussion and Analysis of Results of Operations and Financial
Condition -- Liquidity and Capital Resources."
12
<PAGE> 14
ITEM 6. SELECTED FINANCIAL DATA
The following selected consolidated financial data presented under the
captions "Statement of Earnings Data" and "Balance Sheet Data" for, and as of
the end of, each of the years in the five-year period ended March 31, 1998, are
derived from the Consolidated Financial Statements of BMC Software, Inc. and
subsidiaries. The financial statements of BMC for all fiscal years presented
have been audited by Arthur Andersen LLP, independent public accountants, except
for the consolidated financial statements of BGS which were audited by Ernst &
Young LLP, independent auditors. The selected consolidated financial data should
be read in conjunction with the Consolidated Financial Statements as of March
31, 1997 and 1998, and for each of the three years in the period ended March 31,
1998, the accompanying notes and the report thereon, which are included
elsewhere in this Form 10-K/A.
<TABLE>
<CAPTION>
YEARS ENDED MARCH 31,
----------------------------------------------------
1994 1995 1996 1997 1998
-------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF EARNINGS DATA:
Revenues:
Licenses................................ $183,080 $223,474 $290,998 $409,015 $549,338
Maintenance............................. 137,472 156,907 178,908 202,773 238,815
-------- -------- -------- -------- --------
Total revenues.................. 320,552 380,381 469,906 611,788 788,153
Selling and marketing expenses............ 85,616 100,431 130,220 169,521 221,461
Research and development expenses......... 48,618 57,381 60,976 80,210 99,876
Cost of maintenance services and product
licenses................................ 35,674 40,799 55,033 70,906 92,926
General and administrative expenses....... 29,239 33,300 41,071 49,887 58,955
Acquired research and development costs... 32,038 29,260 23,589 11,259 65,473
Merger costs.............................. -- -- -- -- 7,737
-------- -------- -------- -------- --------
Operating income.......................... 89,367 119,210 159,017 230,005 241,725
Other income.............................. 11,796 12,516 16,378 21,129 30,277
-------- -------- -------- -------- --------
Earnings before income taxes.............. 101,163 131,726 175,395 251,134 272,002
Income taxes.............................. 37,479 46,804 61,842 78,149 97,012
-------- -------- -------- -------- --------
Net earnings.................... $ 63,684 $ 84,922 $113,553 $172,985 $174,990
======== ======== ======== ======== ========
Basic earnings per share(1)............... $ 0.29 $ 0.41 $ 0.55 $ 0.83 $ 0.83
======== ======== ======== ======== ========
Shares used in computing basic earnings
per share(1)............................ 216,157 209,577 208,213 208,611 211,129
======== ======== ======== ======== ========
Diluted earnings per share(1)............. $ 0.29 $ 0.40 $ 0.52 $ 0.78 $ 0.78
======== ======== ======== ======== ========
Shares used in computing diluted earnings
per share(1)............................ 217,043 211,471 216,748 222,012 224,185
======== ======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
AS OF MARCH 31,
--------------------------------------------------------------
1994 1995 1996 1997 1998
---------- ---------- ---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents......... $ 44,923 $ 48,579 $ 73,356 $ 89,790 $ 72,093
Working capital................... 41,730 47,100 50,995 65,568 38,344
Total assets...................... 445,719 533,742 643,599 889,686 1,248,495
Long-term obligations, including
current portion(2).............. -- -- -- -- --
Stockholders' equity.............. 264,184 319,877 398,669 564,454 759,157
Dividends declared................ 6,289 6,809 7,009 5,786 7,555
Dividends declared per share...... $ 0.03 $ 0.03 $ 0.03 $ 0.03 $ 0.03
</TABLE>
- ---------------
(1) See Note 1(i) to Consolidated Financial Statements for the basis of
computing basic and diluted net earnings per share.
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<PAGE> 15
(2) Excludes deferred revenue.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
INTRODUCTION
This section 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
business discussion at Item 1 of this report and historical discussion below be
read together with the discussion of such risks and uncertainties, and that
these discussions are read in conjunction with the accompanying audited
financial statements and notes thereto.
HISTORICAL INFORMATION
Results of Operations
The following table sets forth, for the fiscal years indicated, the
percentages that selected items in the Consolidated Statements of Earnings bear
to total revenues.
<TABLE>
<CAPTION>
PERCENTAGE OF TOTAL REVENUE
YEARS ENDED MARCH 31,
-----------------------------
1996 1997 1998
------- ------- -------
<S> <C> <C> <C>
Revenues
Licenses.................................................. 61.9% 66.9% 69.7%
Maintenance............................................... 38.1 33.1 30.3
----- ----- -----
Total revenues.................................... 100.0 100.0 100.0
Selling and marketing expenses.............................. 27.7 27.7 28.1
Research and development expenses........................... 13.0 13.1 12.7
Cost of maintenance services and product licenses........... 11.7 11.6 11.8
General and administrative expenses......................... 8.7 8.2 7.4
Acquired research and development costs..................... 5.0 1.8 8.3
Merger costs................................................ -- -- 1.0
----- ----- -----
Operating income.................................. 33.9 37.6 30.7
Interest and other income................................... 3.5 3.5 3.8
----- ----- -----
Earnings before income taxes...................... 37.4 41.1 34.5
Income taxes................................................ 13.2 12.8 12.3
----- ----- -----
Net earnings...................................... 24.2% 28.3% 22.2%
===== ===== =====
</TABLE>
EARNINGS
Total revenues in fiscal 1998 were $788,153,000, a 29% increase over fiscal
1997 total revenues of $611,788,000. The increase was the result of a 42%
increase in North American product license revenues, a 21% increase in
international product license revenues and an 18% increase in worldwide
maintenance revenues. Over the three year period ending March 31, 1998, the
Company's operating expenses (excluding acquired research and development and
merger costs) remained at approximately 60% of total revenues. Net earnings were
$174,990,000 in fiscal 1998, a 1% increase over net earnings of $172,985,000 in
fiscal 1997. Historical performance should not be viewed as indicative of future
operating margins, as there can be no assurance that operating income or net
earnings as a percentage of revenues will be sustained at these levels. For a
discussion of factors affecting operating margins, see the discussions below
under the heading "Certain Risks and Uncertainties That Could Affect Future
Operating Results."
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<PAGE> 16
REVENUES
<TABLE>
<CAPTION>
PERCENTAGE CHANGE
-------------------------
YEARS ENDED MARCH 31, 1997 1998
------------------------------ COMPARED TO COMPARED TO
1996 1997 1998 1996 1997
-------- -------- -------- ----------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Perpetual licenses
North America.......................... $170,413 $253,527 $360,643 49% 42%
International.......................... 120,585 155,488 188,695 29% 21%
-------- -------- --------
Total perpetual licenses....... 290,998 409,015 549,338 41% 34%
Maintenance.............................. 178,908 202,773 238,815 13% 18%
-------- -------- --------
Total revenues................. $469,906 $611,788 $788,153 30% 29%
======== ======== ========
</TABLE>
The Company generates revenues from product license fees for its computer
software products and product maintenance fees for the associated maintenance,
enhancement and support of these products. The Company generally recognizes
revenue from license fees upon the execution of a software license agreement by
both parties, the delivery of the underlying products and the acceptance of such
product(s) by the customer. Maintenance and support fees are recognized ratably
over the course of the maintenance and support term as defined in the software
license agreement. For further discussion of the Company's revenue recognition
policies, refer to the discussion below and to Note 1(h) of Notes to
Consolidated Financial Statements.
Total revenue growth in fiscal 1997 and 1998 was derived from continued
demand for the Company's mainframe products for the IBM OS/390 operating system
and IMS and DB2 DBMSs, its expansion of its distributed systems product lines
and sales channels and, to a lesser extent, higher growth rates of product
maintenance fees. The growth in product license and maintenance fees was derived
principally from existing product lines in fiscal 1997 and 1998. As discussed
below, mainframe product revenue growth was generated primarily by customers'
rapid expansion of their mainframe-based IT systems. Distributed systems product
revenue growth was driven primarily by increased adoption of distributed IT
systems, by growing acceptance of the Company's PATROL application and data
management product suite and expansion of the distributed systems sales
channels. Product revenue growth was only nominally impacted by price increases
and inflation in fiscal 1997 and fiscal 1998.
The Company's customer base is diversified, with no single customer
representing greater than 10% of its total revenues in fiscal 1996, 1997 and
1998. This customer base is nonetheless concentrated in the top 1,000 IT
purchasers worldwide and, by industry, in the telecommunications, financial
services and other transaction-intensive sectors. The Company believes that
sales to repeat customers accounted for the substantial majority of total
license and maintenance revenues in the periods presented.
PRODUCT LINE REVENUES
At March 31, 1998, the Company marketed over 200 software products designed
to improve the availability, performance and recoverability of enterprise
applications, databases and other IT systems components operating in host
mainframe and distributed computing environments. The Company's mainframe
products accounted for approximately 88%, 80% and 72% of total revenues for
fiscal years 1996, 1997 and 1998, respectively. Total revenues from mainframe
products grew 18% from fiscal 1996 to fiscal 1997 and 16% from fiscal 1997 to
fiscal 1998. The revenues from these products are driven largely by the growth
in customers' processing capacity, as discussed below.
The Company's mainframe revenues are concentrated in its high performance
utilities and administrative tools for IBM's IMS and DB2 database management
systems. The IMS Database Utilities product series contributed 30%, 29% and 24%
of total revenues for fiscal years 1996, 1997 and 1998, respectively, and the
MASTERPLAN product series for DB2 contributed 33%, 29% and 30% of total revenues
for the same periods. Combined revenues for these product lines grew 19% from
both fiscal 1996 to 1997 and from fiscal
15
<PAGE> 17
1997 to 1998. The balance of the Company's mainframe products represented 25%,
22% and 18% of total revenues for fiscal years 1996, 1997 and 1998,
respectively, representing growth of 15% from fiscal 1996 to fiscal 1997 and 6%
from fiscal 1997 to fiscal 1998. The declines in relative revenue contribution
by the mainframe product lines reflect the increased contribution by the
Company's distributed systems products in these periods.
Total revenues from distributed systems products grew 124% from 1996 to
1997 and 81% from 1997 to 1998. Distributed systems product revenue growth was
derived primarily from increased market acceptance of the PATROL application and
data management product suite, the Company's significant and growing investment
in its distributed systems direct and indirect sales channels and higher
distributed systems maintenance fees. The Company's principal distributed
systems management product lines are the PATROL application and management
suite, the BGS BEST/1 performance management products, the PATROL DB database
administration products and the DataTools SQL-Backtrack application and database
recovery products.
The PATROL application and data management products accounted for 8%, 11%
and 16% of total revenues for fiscal years 1996, 1997 and 1998, respectively,
reflecting an 85% increase from fiscal 1996 to fiscal 1997 and a 95% increase
from fiscal 1997 to fiscal 1998. The remaining distributed systems products
accounted for 4%, 9% and 12%, respectively, reflecting a 201% increase from
fiscal 1996 to fiscal 1997 and a 66% increase from fiscal 1997 to fiscal 1998.
The revenues from the Company's distributed systems product offerings are
dependent upon the continued market acceptance of the Company's existing
products and the Company's ability to successfully develop and deliver
additional products for the distributed systems environment. The Company has
experienced rapid growth in its distributed systems product lines since their
introduction in late fiscal 1994. The distributed systems market is highly
competitive and dynamic and there can be no assurance that this growth will
continue.
LICENSE REVENUES
The Company's license revenues include product license fees and
capacity-based license upgrade 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 an aggregate processing capacity measured on a
millions of instructions per second ("MIPS") basis. Capacity-based license
upgrade fees have, to date, been generated almost exclusively by the Company's
mainframe products. These fees are charged when a customer acquires the right to
run an already licensed product on additional processing capacity, as measured
by CPU tier or by MIPS. Customers may purchase this right for current processing
capacity or anticipated future processing capacity. In both fiscal 1997 and
fiscal 1998, revenue related to both current and future capacity contributed
significantly to the Company's North American and International mainframe
license revenue growth.
The Company's North American operations generated 59%, 62% and 66% of total
license revenues in fiscal 1996, 1997 and 1998, respectively. North American
license revenues increased by 49% from fiscal 1996 to fiscal 1997 and by 42%
from fiscal 1997 to fiscal 1998. Capacity-based license upgrade fees were the
largest contributor to growth in fiscal 1997 and 1998, followed by increased
licensing of the Company's distributed systems products.
International license revenues represented 41%, 38% and 34% of total
license revenues in fiscal 1996, 1997 and 1998, respectively. International
license revenues increased by 29% from fiscal 1996 to fiscal 1997 and by 21%
from fiscal 1997 to fiscal 1998. From fiscal 1996 to fiscal 1997, the principal
contributors to growth in international license revenues were mainframe product
license fees, distributed systems license fees and capacity-based license
upgrade fees. From fiscal 1997 to fiscal 1998, the largest single component of
international license growth was increased sales of the Company's distributed
systems products, followed by capacity-based license upgrade fees. International
license revenues were slightly reduced by the strengthening of the dollar
against local currencies from fiscal 1996 to fiscal 1997 and from fiscal 1997 to
fiscal 1998 after giving effect to foreign currency hedging gains.
16
<PAGE> 18
The sustainability and growth of the Company's mainframe-based license
revenues are dependent upon capacity-based upgrade fees, particularly within its
largest customer accounts. Most of the Company's largest customers have entered
into enterprise license agreements 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. As companies increase their
MIPS within their mainframe environment, they may elect to increase or decrease
the number of underlying CPU's. Regardless of which approach is utilized,
additional fees are owed if the MIPS limit is exceeded. Substantially all of
these transactions include upgrade charges associated with additional processing
capacity beyond the customers' current usage level, and some include license
fees for additional products. The fees associated with future additional
mainframe processing capacity typically comprise from one-half to substantially
all of the license fees included in enterprise license transactions. 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
IT systems, at lower unit cost levels for both hardware and software. This trend
has led to larger single transactions with higher per MIPS discounts. 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 efficiencies 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.
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
incurred 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 in proportion
to the processing capacity on which the products are installed; consequently,
the Company receives higher absolute maintenance fees as customers install its
products on additional processing capacity. Due to the increased discounting for
higher levels of additional processing capacity, the maintenance fees per MIPS
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 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.
INTEREST AND OTHER INCOME
Interest and other income consists primarily of interest earned on cash and
cash equivalents, marketable securities and to a lesser degree, financed
receivables. Interest and other income increased by 29% from fiscal 1996 to 1997
and 43% from fiscal 1997 to 1998. This increase is primarily due to higher
interest income earned on larger invested cash balances.
17
<PAGE> 19
EXPENSES
<TABLE>
<CAPTION>
PERCENTAGE CHANGE
-------------------
1997 1998
FISCAL YEARS ENDED MARCH 31, COMPARED COMPARED
------------------------------ TO TO
1996 1997 1998 1996 1997
-------- -------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Selling and marketing.................... $130,220 $169,521 $221,461 30% 31%
Research and development................. 60,976 80,210 99,876 32% 25%
Cost of maintenance services and product
licenses............................... 55,033 70,906 92,926 29% 31%
General and administrative............... 41,071 49,887 58,955 21% 18%
Acquired research and development........ 23,589 11,259 65,473 (52%) 482%
Merger costs............................. -- -- 7,737 N/A N/A
-------- -------- --------
Total operating expenses....... $310,889 $381,783 $546,428
======== ======== ========
</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 fiscal 1997 and fiscal 1998. Selling and marketing
year-end headcount increased by 25% from fiscal 1996 to fiscal 1997, and by 58%
from fiscal 1997 to fiscal 1998. The large increase during fiscal 1998 was
primarily attributable to significant increases in the Company's open systems
sales representatives and technical sales support consultants. Sales commissions
increased in fiscal 1997 and in fiscal 1998, as a result of the 41% and 34%
increases, respectively, in license revenues. Ongoing commission plan
adjustments held sales commission expense growth below license revenue growth in
both fiscal years. 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 trade show activity, the accelerated depreciation of certain computer
equipment 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 expenses
necessary to maintain the Company's data processing center. Increases in the
Company's research and development expenses for fiscal 1997 and 1998, 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 29% from fiscal 1996 to fiscal 1997 and by 44% from fiscal 1997
to fiscal 1998. The significant increase in headcount in fiscal 1998 resulted
primarily from the addition of research and development personnel during the
fiscal year. Research and development costs were reduced in all three fiscal
years 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 fiscal 1996, 1997 and 1998, the
Company capitalized approximately $19,947,000, $22,909,000 and $41,608,000,
respectively, of software development costs. The growth in capitalized costs is
primarily due to increases in new distributed systems product development.
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 fiscal 1996
to
18
<PAGE> 20
fiscal 1997 was primarily attributable to increases in customer support
employees and royalty fees, primarily those paid to DataTools. The Company
acquired DataTools in May of 1997 (refer to Note 2 of Notes to Consolidated
Financial Statements) and, therefore, reduced its royalty expense significantly
from fiscal 1997 to fiscal 1998. The increase in cost of maintenance services
and product licenses during fiscal 1998 is mainly due to increases in the
amortization of both purchased and internally developed software and in
maintenance, enhancement and support activities. Maintenance costs are
increasing as a percentage of maintenance fees as the Company's revenue mix
shifts to distributed systems. The Company amortized $8,805,000, $8,755,000 and
$20,405,000 in fiscal 1996, 1997 and 1998, respectively, of capitalized software
development costs pursuant to SFAS No. 86. In these periods, the Company
expensed $3,865,000, $3,694,000 and $12,016,000, respectively, of capitalized
software development costs to accelerate the amortization of certain software
products. These software products 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 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 from
fiscal 1996 to fiscal 1997 was largely due to increased personnel costs and
higher costs associated with managing the Company's foreign currency exposure.
Growth in general and administrative expenses from fiscal 1997 to fiscal 1998
was primarily attributable to increased personnel and related infrastructure to
support the Company's growth. Fiscal year end headcount within the general and
administrative organizations grew by 4% from fiscal 1996 to fiscal 1997 and 30%
from fiscal 1997 to fiscal 1998.
ACQUIRED RESEARCH AND DEVELOPMENT
Over the past three years, the Company has devoted significant resources to
developing its distributed systems software solutions. Distributed systems are
highly fragmented and characterized by multiple hardware, software and network
components. The applications and underlying infrastructure components are
provided by many different vendors.
In executing its distributed systems product strategies, the Company
employs both internal research and development and the acquisition of emerging
technologies and, in the case of BGS, established software companies. The
Company believes that time-to-market is critical to its success in the rapidly
evolving distributed systems software market, where it must compete with
well-established companies such as IBM, and where its products must integrate
with the predominate relational database management systems (RDBMS's), operating
systems, network protocols and applications within the enterprise computing
environment. Accordingly, the Company must continuously evaluate whether it is
more efficient and effective to develop a given solution internally or acquire a
technology that must be completed and then integrated into its existing product
architecture. The developers of the acquired technologies are typically small,
early stage software companies with minimal to no revenues, quality and
documentation standards and name recognition in the marketplace. This strategy
involves a high degree of risk and is costly in that a premium is typically paid
for software code that is incomplete and only partially contributes to the
Company's overall development plans. From fiscal 1996 through fiscal 1998, some
of the acquired technologies were successfully completed and integrated, while
others were not. For example, the Company's acquisitions of technologies from
Sento Technical Innovations Corporation (Sento) and Hawknet, Inc. (Hawknet) in
June 1997 and October 1995,
19
<PAGE> 21
respectively, failed to yield the anticipated results. The Sento technology was
to provide PATROL with more effective data collection techniques. The Company's
completion and integration efforts were unsuccessful and the Company decided to
abandon its efforts and utilize superior technology acquired from BGS. The
Hawknet technology was to provide the Company with a product that would
dynamically tune the networking functionality of Microsoft Windows NT servers.
This technology proved to be flawed and the Company was forced to substantially
rewrite the acquired software.
The two primary areas wherein the Company has focused its distributed
systems technology acquisition strategy are, as follow: a) Application Recovery
and b) Distributed Systems Performance and Availability. The status of the
primary, research and development efforts associated with acquired technologies
that were incomplete, completed or abandoned in Fiscal 1998 follows.
FISCAL 1998 IN-PROCESS DEVELOPMENT EFFORTS
<TABLE>
<CAPTION>
ACQUIRED MONTH TECHNOLOGY PURCHASE IPR&D CAPITALIZED
COMPANY/TECHNOLOGY ACQUIRED ACQUIRED PRICE CHARGE NET ASSETS
- --------------------- ---------- ------------------ ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
DataTools Database
(company).......... May 1997 Back-up & Recovery $73,000,000 $54,372,000 $18,628,000
Software Partners File System
(technology)....... July 1997 Back-up & Recovery $ 6,901,000 $ 5,201,000 $ 1,700,000
Network Catalyst Network
(technology)....... May 1996 Monitoring $ 5,300,000 $ 4,304,050 $ 995,950
FISCAL 1998 ABANDONED TECHNOLOGY
Sento (technology)... June 1997 Data Collection $ 7,700,000 $ 5,900,000 $ 1,800,000
DataTools-SBS/I Individual
(company).......... May 1997 Device Recovery See above See above See above
</TABLE>
A) APPLICATION RECOVERY
During the past year the Company focused on developing technology that
would enable customers to back-up and recover all of its databases and file
systems throughout the enterprise from a single point of control in a user
friendly mode. The Company was also focused on building back-up and recovery
scheduling and archiving functionality, and, more recently, on designing ERP
application back-up and recovery technology. Pursuant to this strategy, the
Company acquired DataTools in May 1997, for an aggregate purchase price of $73
million. DataTools owns certain RDBMS-specific back-up products that were sold
as stand-alone products. Its' flagship product is called SQL Backtrack (SQL-BT).
DataTools was in the process of developing numerous products and enhanced
versions of products, including next generation versions of SQL-BT for the
Informix platform (SQI) and the Oracle platform (SBO), as well as first
generation products for the Microsoft SQL (SBM) and Sybase IDR (SBS/I)
platforms.
The Company allocated approximately $18.6 million of the purchase price to
developed technology, workforce and goodwill. The Company allocated
approximately $54.4 million to IPR&D. The most significant four specific
development projects, which comprised $40.6 million (74%) of the IPR&D,
pertained to the above mentioned projects. The primary remaining efforts
associated with the IPR&D included code completion in several key areas, such as
logical extraction and piecemeal back-up and recovery, large database support
and performance-related functionality. As of the acquisition date, the expected
costs to complete the IPR&D were, on a calendar year basis, approximately $2.9
million in 1997, $4.7 million in 1998, $2.1 million in 1999, and $729,000 in
2000. The Company has made significant progress with the development of the
acquired R&D and continues to advance its efforts to attain technological
feasibility throughout all of the underlying IPR&D projects. With respect to the
estimated completion costs, the Company is below the above mentioned, forecasted
amounts as a result of decisions to terminate certain of the IPR&D projects
(such as
20
<PAGE> 22
the SBS/I project noted below) and more efficient development efforts than
anticipated. The following summarizes the four primary projects pertaining to
the DataTools IPR&D.
* The Company spent approximately $700,000 through March 31, 1998 on the
SBM product in addition to the approximate $750,000 spent by DataTools prior to
the acquisition. The Company released this product in April 1998.
* The SBO product was released in June 1998 for both the NT and Unix
environments. The IPR&D was successfully completed resulting in new
functionality in several areas, including back-up and recovery scheduling,
remote BU&R, archive log management and a graphical user interface. The Company
spent approximately $1.7 million in completing these technologies subsequent to
the DataTools acquisition.
* BMC abandoned the SBS/I project, on which DataTools had spent
approximately $1 million in research and development. BMC made this decision
based on concerns over market demand and the allocation of Sybase resources to
the core Sybase product. The Company spent less than $500,000 on this technology
prior to deciding to cancel this development project.
* The Company spent approximately $1 million on SBI through March 31, 1998,
in addition to the approximate $500,000 spent by DataTools prior to the
transaction. As a result, Version 2.0 of this product was released in April
1998. The completion of the in-process technology resulted in added
functionality, including selective recovery of tables, as opposed to full
back-ups, which increases flexibility and efficiency. This version also allows
for incremental restart if a recovery is interrupted, eliminating the need to
run the entire recovery again.
In July 1997, the Company acquired certain software code from Software
Partners/32, Inc. (Software Partners) for a total purchase price of $6.9
million. The Company allocated $1.7 million of the purchase price to completed
technology and $5.2 million to IPR&D. This code permits file system back-up and
recovery, but was not competitive with the leading products in this market.
While the acquired code contained certain key functionality, it was incomplete
in various aspects. As a result, the Company attempted to complete this code by,
among other things, developing support for dual network hosts, enhancing the
interface with the SQL-BT object back-up stream interface (OBSI), developing
support for SBI and SBM and developing support for the IBM tape library. The
Company initially planned on completing this code and integrating it into its
Patrol recovery manager product. These efforts were unsuccessful and, the
Company is now attempting to complete the code and integrate it into a planned
distributed systems application recovery management product scheduled to be
released in the latter part of Fiscal 2000. The expected costs to complete the
R&D (and to integrate the R&D into the application recovery product) are
approximately $720,000 in Fiscal 1999 and $1,200,000 in Fiscal 2000. The
allocation of purchase price to completed technology reflects the estimated,
discounted future cash flows associated with the customers using the existing
technology.
The Company believes that while the various products released in the
back-up and recovery space are beneficial to its customers and generate
incremental revenue for the company, the value of these acquisitions to the
company will only be realized upon the successful completion of an
enterprise-wide, integrated back-up and recovery management product. This
product should provide back-up and recovery functions on all major applications,
databases and file systems. Patrol Recovery Manager, which manages SBO and SBS,
will be released in December 1998. Late in Fiscal 2000, the Company plans on
releasing its first comprehensive, distributed systems "application recovery"
product, which is intended to incorporate essentially all of the Company's
distributed systems back-up and recovery technology. To date, the Company has
not generated a material amount of net cash flow from these back-up and recovery
technologies. The Company anticipates that it will continue to invest
significantly in this area over the next few years. If these efforts prove
unsuccessful, there would be a detrimental impact on the Company's financial
results.
B) DISTRIBUTED SYSTEMS PERFORMANCE AND AVAILABILITY
In an effort to strengthen PATROL's monitoring and management capabilities
in the middleware arena, the Company acquired certain in-process technology in
May of 1996 from Network Catalyst Software LLC (Network Catalyst) with the
intention of improving PATROL's ability to measure and report on the
21
<PAGE> 23
performance of its customers' middleware technologies. The acquired code was
incomplete as it had no display capability, was not scalable, supported only a
few platforms and did not work with certain communication protocols. The Company
estimates that it will spend approximately $2.1 million in completing the code,
and, will release its new version of PATROL's middleware knowledge module for
networked applications in September 1998.
The values assigned to acquired IPR&D in the above mentioned transactions
were generally determined by estimating the costs to develop the purchased
in-process technology into commercially viable products, estimating the
resulting net cash flows from the projects and discounting the net cash flows to
their present value. The revenue projections used to value the acquired IPR&D
were based on estimates of relevant market sizes and growth factors, expected
trends in technology, and the nature and expected timing of new product
introductions by the Company and its competitors. Operating expenses were
estimated based on historical results and anticipated profit margins. Due to
purchasing power increases and general economies of scale, estimated operating
expenses as a percentage of revenues were, in some cases, estimated to decrease
after the acquisitions.
The rates utilized to discount the net cash flows to their present value
were based on cost of capital calculations. Due to the nature of the forecast
and risks associated with the projected growth, profitability and the
developmental nature of the projects, discount rates of 16% to 20% were used to
value the acquired IPR&D. These discount rates were commensurate with the
respective stage of development and the uncertainties in the economic estimates
described above. If the acquired IPR&D projects are not successfully completed,
the Company's business, operating results, and financial condition may be
materially adversely affected in future periods. In addition, the value of other
intangible assets acquired may become impaired.
INCOME TAXES
The Company recorded income tax expense of $61,842,000, $78,149,000 and
$97,012,000 in fiscal 1996, 1997 and 1998, respectively. The Company's effective
tax rates were 35%, 31% and 36% for fiscal years ended 1996, 1997 and 1998,
respectively. An analysis of the differences between the statutory and effective
income tax rates is provided in Note 6 of Notes to Consolidated Financial
Statements.
MARKET RISK MANAGEMENT
The Company is exposed to certain market risks in its normal course of
business operations related to foreign currency fluctuations as well as changes
in the value of its marketable securities.
FOREIGN CURRENCIES
For the fiscal years 1996, 1997 and 1998, 40%, 38% and 35%, respectively of
the Company's consolidated revenues were derived from customers outside of North
America, substantially all of which were billed and collected in foreign
currencies. Substantially all of the expenses of operating the Company's foreign
subsidiaries are similarly incurred in foreign currencies. Consequently, the
Company's reported financial results are affected by fluctuations of those
foreign currencies against the U.S. dollar.
The Company has adopted a foreign currency hedging program under which it
enters into foreign currency derivative contracts with the objective of reducing
its impact from exposure to foreign currency market fluctuations. Foreign
currency forward and option contracts are utilized to hedge firm commitments and
anticipated transactions, respectively. Principal currencies hedged are the
German deutschemark, the British pound and the French franc in Europe; and, the
Japanese yen and Australian dollar in the Pacific Rim region. While the Company
actively manages its foreign currency risks on an ongoing basis, there can be no
assurance that the hedges employed will substantially offset negative impacts on
its foreign denominated exposures.
Based on the Company's overall derivative exposure to foreign currency rate
movements, a near-term change in foreign currency rates, calculated using a
value at risk model with a 95% confidence interval, would
22
<PAGE> 24
not materially affect its financial position, results of operations or cash
flows for the year ended March 31, 1998.
MARKETABLE SECURITIES
The Company adheres to a conservative investment policy, whereby its
principal concern is the preservation of liquid funds while maximizing its yield
on such assets. Cash, cash equivalents and marketable securities approximated
$716 million on March 31, 1998, and were invested in different types of
investment-grade securities with the intent of holding these securities to
maturity. Although the Company's portfolio is subject to fluctuations in
interest rates and market conditions, no gain or loss on any security would
actually be realized unless the instrument was sold. The Company's near-term
market risk on marketable securities was deemed immaterial, calculated using a
value at risk model with a 95% confidence interval, as of March 31, 1998.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
The AICPA issued SOP 97-2, "Software Revenue Recognition" in October 1997,
which replaces the previous revenue recognition rules provided by SOP 91-1. SOP
97-2 is effective for transactions entered into in fiscal years beginning after
December 15, 1997, which, in the case of the Company, is April 1, 1998. The
adoption of this SOP is not expected to have a material impact on the Company's
future Consolidated Financial Statements.
In March 1998, the AICPA issued SOP 98-1, "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use." This standard
requires that certain costs related to the development or purchase of
internal-use software be capitalized and amortized over the estimated useful
life of the software. This SOP also requires that costs related to the
preliminary project stage and the post-implementation/operations stage of an
internal-use computer software development project be expensed as incurred. SOP
98-1 is effective for financial statements issued for fiscal years beginning
after December 31, 1998, which, in the case of the Company is April 1, 1999. SOP
98-1 is not expected to have a material impact on the Company's Consolidated
Financial Statements.
In June 1997, SFAS No. 130, "Reporting Comprehensive Income" was issued.
Under SFAS No. 130, all items that meet the definition of comprehensive income
will be separately reported for the period in which they are recognized. The
only impact will be that comprehensive income, which will include changes in the
balances of items that are reported separately in the Stockholders' Equity
section of the Consolidated Balance Sheets, will be either reported in a
separate statement or at the bottom of the Consolidated Statements of Earnings.
This statement is effective for fiscal years beginning after December 15, 1997,
which, in the case of the Company, is April 1, 1998.
SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information" was issued in June 1997. SFAS No. 131 requires that a public
business enterprise report financial and descriptive information about its
reportable operating segments. Generally, financial information is required to
be reported on the basis used internally for evaluating segment performance and
resource allocation. SFAS No. 131 is effective for fiscal years beginning after
December 31, 1997, and disclosure is not required in interim financial
statements in the initial year of adoption. Accordingly, the Company will
reflect SFAS No. 131 information in its Consolidated Financial Statements for
the March 31, 1999, fiscal year. The Company is currently assessing the SFAS No.
131 requirements.
23
<PAGE> 25
QUARTERLY RESULTS
The following table sets forth certain unaudited quarterly financial data
for the fiscal years ended March 31, 1997 and 1998. This information has been
prepared on the same basis as the Consolidated Financial Statements and all
necessary adjustments have been included in the amounts stated below to present
fairly the selected quarterly information when read in conjunction with its
Consolidated Financial Statements and Notes thereto. Results for the quarters
ended June 30, September 30, and December 31, 1996 and 1997, and March 31, 1997
and 1998 include the historical quarterly financial results of BMC for the
periods then ended and of BGS for the quarters ended April 30, July 31, October
31, 1996 and 1997, and January 31, 1997 and 1998, respectively. The Company's
quarterly results are subject to seasonality and can be volatile and difficult
to predict accurately prior to a quarter's end as discussed under "Certain Risks
and Uncertainties that Could Affect Future Operating Results." Historical
quarterly financial results and trends may not be indicative of future results.
<TABLE>
<CAPTION>
FISCAL QUARTER ENDED
---------------------------------------------------------------------------------------
JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31,
1996 1996 1996 1997 1997 1997 1997 1998
-------- --------- -------- -------- -------- --------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Total revenues........................ $136,539 $137,818 $162,099 $175,331 $170,028 $175,378 $212,027 $230,720
Selling and marketing expenses........ 40,661 39,141 43,538 46,180 50,337 49,848 57,448 63,828
Research and development expense...... 18,270 20,207 20,802 20,931 21,875 24,651 28,558 24,792
Cost of maintenance services and
product licenses.................... 17,176 16,727 17,455 19,548 20,982 21,884 21,792 28,268
General and administrative expenses... 11,409 12,044 13,261 13,173 12,102 13,675 16,596 16,582
Acquired research and development
costs............................... 11,259 -- -- -- 60,272 5,201 -- --
Merger related costs.................. -- -- -- -- -- -- -- 7,737
-------- -------- -------- -------- -------- -------- -------- --------
Operating income...................... 37,764 49,699 67,043 75,499 4,460 60,119 87,633 89,513
-------- -------- -------- -------- -------- -------- -------- --------
Net earnings.......................... $ 29,274 $ 37,360 $ 50,315 $ 56,035 $ (8,349) $ 47,259 $ 67,602 $ 68,478
======== ======== ======== ======== ======== ======== ======== ========
Basic earnings per share (EPS)........ $ 0.14 $ 0.18 $ 0.24 $ 0.27 $ (0.04) $ .23 $ 0.32 $ 0.32
======== ======== ======== ======== ======== ======== ======== ========
Shares used in computing basic EPS.... 207,900 208,303 209,364 209,266 209,689 210,040 210,773 213,237
======== ======== ======== ======== ======== ======== ======== ========
Diluted EPS........................... $ 0.13 $ 0.17 $ 0.23 $ 0.25 $ (0.04) $ 0.21 $ .31 $ 0.30
======== ======== ======== ======== ======== ======== ======== ========
Shares used in computing diluted
EPS................................. 220,112 221,232 223,218 223,484 223,983 224,488 221,640 225,892
======== ======== ======== ======== ======== ======== ======== ========
</TABLE>
In April 1998, the Company announced that its board of directors approved a
two-for-one stock split (in the form of a dividend) that was payable to
stockholders of record on May 1, 1998 and was effective May 15, 1998. Share and
per share data presented here and throughout the Consolidated Financial
Statements, have been adjusted to give effect to this two-for-one split.
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 1998, the Company's cash, cash equivalents and marketable
securities were $716,073,000, which represents a 29% increase over the March 31,
1997 balance. An important contributor to the increase is the Company's software
financing program, whereby interests in its trade receivables are transferred to
third party financial institutions in exchange for cash. The Company's working
capital as of March 31, 1998, was $38,344,000. The Company continues to invest
cash in securities with maturities beyond one year. While yielding greater
returns, this has the impact of reducing reported working capital. The Company's
securities are investment grade and highly liquid. The Company had no debt as of
March 31, 1998, other than normal trade payables, accrued liabilities and
deferred tax liabilities. Stockholders' equity as of March 31, 1998, was
$759,157,000.
The Company continues to finance its growth through funds generated from
operations. For the year ended March 31, 1998, net cash provided by operating
activities was $334,882,000, which included an increase in deferred revenue of
approximately $98,285,000. Net cash used in investing activities in fiscal 1998
was $372,355,000, primarily related to the purchase of investment securities,
acquisition of computers and related equipment, construction of a new building
and the technology acquisitions discussed above. Net cash provided
24
<PAGE> 26
by financing activities in fiscal 1998 was $19,409,000, which derived primarily
from the income tax benefit associated with the exercise of employee stock
options. This benefit, together with stock option proceeds, exceeded the funds
used to acquire the Company's stock during the fiscal year.
During fiscal 1998, the Company repurchased 2,304,000 shares of its common
stock. The Company's board of directors terminated the share buy-back program,
prior to consummation of the BGS merger, in March 1998, consistent with the
pooling of interests accounting provisions. Prior to cancellation of the share
buy-back program, the Company was authorized to acquire 7,530,000 shares of its
common stock under its stock repurchase program. The Company continues to
evaluate business acquisition opportunities that complement the Company's
strategic plans. The Company believes that its existing cash balances and funds
generated from operations will be sufficient to meet its liquidity requirements
for the foreseeable future.
CERTAIN RISKS AND UNCERTAINTIES THAT COULD AFFECT FUTURE OPERATING RESULTS
This Annual Report and Management's Discussion and Analysis of Results of
Operations and Financial Condition contain 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, which are identified
by the use of the words "believes," "expects," "anticipates," "will,"
"contemplates" and "would" and similar expressions that contemplate future
events. 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 above under the heading "Business," including,
without limitation, the discussion under the subheading "Competition; System
Dependence."
The Company's stock price has been and is highly volatile. Future revenues,
earnings and stock prices may be subject to wide swings in response to
variations in operating and financial results, anticipated revenue and/or
earnings growth rates, competitive pressures and other factors. The stock price
of software companies in general, and the Company in particular, is based on
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 the Company's perceived long-term growth prospects 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 charges for acquired research and development and merger costs, have
accelerated over the last 24 months. The Company's current valuation reflects
expectations based on these higher rates of growth. The Company may not achieve,
in future periods, these relatively higher rates of growth.
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
upon contracts entered into or orders booked and shipped in that quarter. Most
of the Company's mainframe and distributed systems license 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. Other factors that may
cause significant fluctuations in the Company's quarterly revenues include
competition, industry or technological trends, customer budgetary decisions,
mainframe processing capacity growth, general economic conditions or
uncertainties, mainframe industry pricing and other trends, announcements of new
hardware or software products, the timing of price increases and the factors
described in this section of the Annual Report. The Company generally does not
know whether revenues and earnings will meet expected results until the final
days or day of a quarter.
The Company derived approximately 72% of its total revenues in fiscal 1998
from software products for IBM and IBM-compatible mainframe computers; over 50%
of total revenues and a higher percentage of
25
<PAGE> 27
earnings were contributed by the Company's high availability utilities for IMS
and DB2 administration products. IBM continues to focus on reducing the overall
software costs associated with the OS/390 mainframe platform. Further, IBM
continues, directly and through third parties, to improve its base and enhanced
utilities for IMS and DB2 to provide lower cost alternatives to those 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 twelve months. The Company has traditionally maintained sufficient
performance and functional advantages over IBM's base utilities to justify its
pricing differential although there can be no assurance that it will continue to
maintain such advantages.
Fees from enterprise license transactions remain fundamental components of
the Company's revenues and the primary source of mainframe revenues. These
revenues depend on 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. The Company believes that the
demand for enterprise licenses has been driven by customers' recommitment over
the last 24 to 36 months to the OS/390 mainframe platform for large scale,
transaction intensive information systems. Whether this trend will continue is
difficult to predict. If the Company's customers' processing capacity growth
were too slow and/or if such customers were to perceive less relative benefit
from the Company's current mainframe products, the Company's revenues would be
adversely affected.
Capacity-based upgrade fees associated with both current and future
processing capacity contributed approximately one-fourth to one-third of total
revenues in fiscal years 1996, 1997 and 1998. The charging of upgrade fees based
on CPU tier classifications is standard among mainframe systems software
vendors, including IBM. While the Company believes its current pricing policies
properly reflect the value provided by its products, the pricing of mainframe
systems software is under constant pressure from customers and competitive
vendors, including IBM. IBM continues to reduce the costs of its mainframe
systems software to increase the overall cost competitiveness of its mainframe
hardware and software products. IBM also generally charges significantly less
for its software products. These actions continue to increase pricing pressures
within the mainframe systems software markets. The Company has continued to
reduce the cost of its mainframe tools and utilities in response to these and
other competitive pressures.
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. 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 and a resultant
drop in its stock price.
The Company's operating margins (exclusive of charges for acquired research
and development and merger costs) have ranged between 39% and 40% for fiscal
years ended March 31, 1996, 1997 and 1998, which is at the high-end of the range
for peer companies. The Company does not expect future margin expansion.
Further, since research and development, sales, support and distribution costs
for distributed systems software products are higher than for mainframe
products, operating margins will experience more pressure as the mix of the
Company's business continues its shift to distributed systems revenues.
The Company has historically realized greater revenues and net earnings in
the latter half of its fiscal year; the quarter ending December 31 coincides
with the end of customers' annual budgetary periods and the quarter ending March
31 coincides with the end of the Company's annual sales plans and fiscal year.
For the same reasons, the Company has typically reported lower or flat revenues
in the first two quarters of a fiscal year than in the last two quarters of the
previous year, resulting in lower operating margins in the first two quarters.
The Company historically has generated greater revenues in the third and fourth
quarters while maintaining lower rates of expense growth and expanded operating
margins. Past financial performance is not a reliable indicator of future
performance, and there can be no assurance that this pattern will be maintained.
Future operating results are also dependent on sustained performance
improvement by the Company's international offices, particularly its European
operations. Revenue growth by the Company's European operations has been slower
than revenue growth in North America, and in an effort to improve its European
performance, the Company has recently replaced the head of its European
operations. There can be no assurance that the Company will be successful in
accelerating the revenue growth of its European operations.
26
<PAGE> 28
The Company's operations and financial results internationally could be
significantly adversely affected by several risks such as changes in foreign
currency exchange rates, sluggish regional economic conditions and difficulties
in staffing and managing international operations. Many systems and applications
software vendors are experiencing difficulties internationally. In particular,
the recent Asian economic crisis has resulted in customer budget cuts and
financial uncertainty. Less than 5% of the Company's revenues are generated in
the Pacific Rim region.
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.
The Company's growth prospects depend heavily on the continued success of
its existing distributed systems products, including PATROL, the recently
acquired BGS and DataTools products and those anticipated to be introduced in
the future. The distributed systems and application management markets in which
the Company operates are emerging, fragmented and highly competitive. The
Company has experienced long development cycles and product delays in the past,
particularly with certain 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 affect 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 enterprise systems
management market that the Company's distributed systems products address is
characterized by rapid change and intense competition that continues to increase
as vendors within the broader markets converge. 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. A key factor in determining the
success of the Company's products, particularly its distributed systems
offerings, will be their ability to interoperate and perform well with existing
and future leading database management systems and other systems software
products supported by the Company's products. Maintaining this interoperability
has greatly increased the complexity and cost of the Company's product
development and support activities. 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.
Microsoft has continued its focus on developing operating systems, systems
management products and databases that will provide "business-critical" levels
of functionality and reliability. Specifically, Microsoft is aggressively
promoting its BackOffice family of software products, including its MS 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, Sybase, Informix and other vendors.
Microsoft has significantly lower software price points in some of the Company's
markets, which could place additional pricing pressure on the Company. Further,
Microsoft could choose to develop competing products for use within MS Windows
NT environments. The Company has invested and intends to continue to invest in
the development of systems management products for MS Windows NT and BackOffice
environments, but there are numerous uncertainties associated with the Company's
ability to successfully execute this strategy.
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.
With the acquisitions 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
27
<PAGE> 29
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 DataTool's SQL-BackTrack products are
critical to the completion of the Company's backup, recovery, and restoration
strategy. 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.
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.
The Company recognizes the need to ensure its operations will not be
adversely impacted by the Year 2000. Software failures due to processing errors
potentially arising from calculating using the Year 2000 date are a known risk.
The Company is designing and testing the most current versions of its products
to process Year 2000 data without interruption or errors and believes that these
versions are substantially Year 2000 compliant. The Company may experience
migration costs for customers who are not running current versions of its
products. The Company is continually testing its products to ensure Year 2000
support and compliance; there can be no assurance, however, that despite such
testing, undetected errors or defects will not exist that could cause a product
to fail to process Year 2000 data correctly. The Company's products are
typically used in high volume information systems that are critical to a
customer's operations, so that business interruptions, loss or corruption of
data or other major problems could have significant adverse consequences to the
customer. At this time, the Company is not aware of any material operational
issues or costs associated with Year 2000 compliance of its own products.
The Company is also addressing the Year 2000 risk to the availability,
integrity and the reliability of its own internal information systems. The
Company has a low volume of transactions and operates within a modern
infrastructure. Accordingly, the Company does not believe that the cost of Year
2000 remediation will have a material adverse effect on the Company's results of
operations or financial condition. There are no assurances, however, that there
will not be a delay in, or increased cost associated with, the implementation of
such changes, and the Company's inability to implement such changes could have
an adverse effect on future results of operations. Factors that could cause
unusual costs and delays include the availability and cost of personnel trained
in this area, the ability to locate and correct all relevant computer code and
other uncertainties.
The European Union's adoption of the euro single currency raises a variety
of issues associated with the Company's European operations. Although the
transition will be phased in over several years, the euro will become Europe's
single currency on January 1, 1999. The Company is assessing euro issues related
to its product pricing, contracts, treasury operations and accounting systems.
Although the evaluation of these items is still in process, the Company believes
that the hardware and software systems it uses internally will accommodate this
transition and any required policy or operating changes will not have a material
adverse effect on future results.
28
<PAGE> 30
PART IV
ITEM 14.EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Documents filed as a part of this Report.
1. The following financial statements of the Company and the related
report of independent public accountants are filed herewith:
<TABLE>
<CAPTION>
PAGE
NUMBER
------
<S> <C>
Report of Independent Public Accountants -- Arthur Andersen
LLP....................................................... 32
Report of Independent Auditors -- Ernst & Young LLP......... 33
Consolidated Financial Statements:
Balance Sheets as of March 31, 1997 and 1998.............. 34
Statements of Earnings for the years ended March 31, 1996,
1997 and 1998.......................................... 35
Statements of Stockholders' Equity for the years ended
March 31, 1996, 1997 and 1998.......................... 36
Statements of Cash Flows for the years ended March 31,
1996, 1997 and 1998.................................... 37
Notes to Consolidated Financial Statements................ 38
</TABLE>
2. The following financial statement schedule of the Company and the
related report of independent public accountants are filed herewith:
Schedule II -- Valuation Account
All other financial schedules are omitted because (i) such schedules
are not required or (ii) the information required has been presented in the
aforementioned financial statements.
3. The following Exhibits are filed with this Report or incorporated
by reference as set forth below.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER
-------
<C> <S>
3.1 -- Restated Certificate of Incorporation of the Company;
incorporated by reference to Exhibit 3.1 to the Company's
Registration Statement on Form S-1 (Registration No.
33-22892) (the "S-1 Registration Statement").
3.2 -- Certificate of Amendment of Restated Certificate of
Incorporation; incorporated by reference to Exhibit 3.2
to the Company's Annual Report for the fiscal year ended
March 31, 1997 (the "1997 10-K").
3.2 -- Bylaws of the Company; incorporated by reference to
Exhibit 3.2 to the S-1 Registration Statement.
4.1 -- Specimen Stock Certificate for the Common Stock of the
Company; incorporated by reference to Exhibit 4.1 to the
S-1 Registration Statement.
4.2 -- Rights Agreement, dated as of May 8, 1995, between the
Company and The First National Bank of Boston, as Rights
Agent (the "Rights Agreement"), specifying the terms of
the Rights, which includes the form of Certificate of
Designation of Series A Junior Participating Preferred
Stock as Exhibit A, the form of Right Certificate as
Exhibit B and the form of the Summary of Rights as
Exhibit C (incorporated by reference to Exhibit 1 to the
registrant's Registration Statement on Form 8-A dated May
10, 1995).
4.3 -- Amendment to the Rights Agreement; incorporated by
reference to Exhibit 4.3 to the 1997 10-K.
</TABLE>
29
<PAGE> 31
<TABLE>
<CAPTION>
EXHIBIT
NUMBER
-------
<C> <S>
10.1(a) -- Form of BMC Software, Inc. 1994 Employee Incentive Plan;
incorporated by reference to Exhibit 10.7(a) to the
Company's Annual Report on Form 10-K for the fiscal year
ended March 31, 1995 (the "1995 10-K").
10.1(b) -- Form of Stock Option Agreement employed under BMC
Software, Inc. 1994 Employee Incentive Plan; incorporated
by reference to Exhibit 10.7(b) to the 1995 10-K.
10.2(a) -- Form of BMC Software, Inc. 1994 Non-employee Directors'
Stock Option Plan; incorporated by reference to Exhibit
10.8(a) to the 1995 10-K.
10.2(b) -- Form of Stock Option Agreement employed under BMC
Software, Inc. 1994 Nonemployee Directors' Stock Option
Plan; incorporated by reference to Exhibit 10.8(b) to the
1995 10-K.
10.3 -- Description of BMC Software, Inc. Executive Officer
Annual Incentive Plan; incorporated by reference to
Exhibit 10.6 to the Company's Annual Report on Form 10-K
for the fiscal year ended March 31, 1994.
10.4 -- Form of Stock Option Agreement employed under BMC
Software, Inc. 1994 Employee Incentive Plan for certain
executive officers.
10.5 -- Form of Restricted Stock Agreement employed under BMC
Software Inc. 1994 Employee Incentive Plan for certain
executive officers.
10.5(a) -- License Agreement with International Business Machines
Corporation; incorporated by reference to Exhibit 10.12
to the S-1 Registration Statement.
10.5(b) -- License Agreements for Use and Marketing of Program
Materials dated May 13, 1986, with International Business
Machines Corporation; incorporated by reference to
Exhibit 10.13 to the S-1 Registration Statement.
10.5(c) -- Customer Agreement with International Business Machines
Corporation dated April 10, 1991; incorporated by
reference to Exhibit 10.15 to the Company's Annual Report
on Form 10-K for the fiscal year ended March 31, 1992
(the "1992 10-K").
10.6 -- Form of Indemnification Agreement among the Company and
its directors and executive officers; incorporated by
reference to Exhibit 10.11 to the 1995 10-K.
22.1 -- Subsidiaries of the Company.
*23.1 -- Consent of Arthur Andersen LLP, independent public
accountants.
*24.1 -- Consent of Ernst & Young LLP.
*27 -- Financial Data Schedule
</TABLE>
- ---------------
* Filed herewith.
(b) Reports on Form 8-K
None.
BMC Software is a registered U.S. trademark of BMC Software, Inc. DB2 and
IBM are registered trademarks of International Business Machines Corporation.
All other products and tradenames mentioned herein are trademarks, registered
trademarks or service marks of their respective companies.
30
<PAGE> 32
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
TO BMC SOFTWARE, INC.
We have audited the accompanying consolidated balance sheets of BMC
Software, Inc. (a Delaware corporation) and subsidiaries as of March 31, 1997
and 1998, and the related consolidated statements of earnings, stockholders'
equity and cash flows for each of the three years in the period ended March 31,
1998. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits. We did not audit the financial statements of BGS
Systems, Inc., a company acquired during 1998 in a transaction accounted for as
a pooling of interests, as discussed in Note 2. Such statements are included in
the consolidated financial statements of BMC Software, Inc. and reflect total
assets of 5 percent in 1997 and 4 percent in 1998, and total revenues of 9
percent in 1996, 8 percent in 1997 and 7 percent in 1998, respectively, of the
related consolidated totals. These statements were audited by other auditors
whose report has been furnished to us and our opinion, insofar as it relates to
amounts included for BGS Systems, Inc. is based solely upon the report of the
other auditors.
We conducted our audits in accordance with generally accepted auditing
standards, as well as evaluating the overall financial statement presentation.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits and the report of other auditors provide a reasonable
basis for our opinion.
In our opinion, based on our audit and the report of the other auditors,
the consolidated financial statements referred to above present fairly, in all
material respects, the financial position of BMC Software, Inc. and subsidiaries
as of March 31, 1997 and 1998, and the results of their operations and their
cash flows for each of the three years in the period ended March 31, 1998, in
conformity with generally accepted accounting principles.
As described in Note 2, the Company has restated its 1996, 1997 and 1998
consolidated financial statements to include the financial position, results of
operations and cash flows of a business acquired in 1998 which had been treated
as immaterial pooling of interests transaction for which prior periods were not
previously restated.
ARTHUR ANDERSEN LLP
Houston, Texas
May 1, 1998
31
<PAGE> 33
REPORT OF INDEPENDENT AUDITORS
THE BOARD OF DIRECTORS AND STOCKHOLDERS
BGS SYSTEMS, INC.
We have audited the consolidated balance sheets of BGS Systems, Inc. and
subsidiaries (the Company) as of January 31, 1998 and 1997, and the related
consolidated statements of income, stockholders' equity, and cash flows for each
of the three years in the period ended January 31, 1998 (not separately
presented herein). These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
BGS Systems, Inc. and subsidiaries at January 31, 1998 and 1997, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended January 31, 1998, in conformity with generally
accepted accounting principles.
ERNST & YOUNG LLP
Boston, Massachusetts
March 13, 1998
32
<PAGE> 34
BMC SOFTWARE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
MARCH 31,
----------------------------
1997 1998
----------- -------------
(IN THOUSANDS, EXCEPT SHARE
DATA)
<S> <C> <C>
Current assets:
Cash and cash equivalents................................. $ 89,790 $ 72,093
Marketable securities..................................... 62,169 56,174
Accounts receivable:
Trade, net of allowance for doubtful accounts of $4,642
and $5,971............................................ 91,900 139,844
Trade finance receivables, current..................... 10,148 30,934
-------- ----------
Total accounts receivable......................... 102,048 170,778
Income tax receivable..................................... -- 40,805
Other current assets...................................... 28,210 34,028
-------- ----------
Total current assets.............................. 282,217 373,878
Property and equipment, net of accumulated depreciation and
amortization of $54,469 and $75,776....................... 126,705 162,996
Software development costs, net of accumulated amortization
of $19,801 and $39,293.................................... 40,769 63,475
Purchased software and related assets, net of accumulated
amortization of $22,746 and $31,667....................... 19,735 32,063
Marketable securities....................................... 402,742 587,806
Other long-term assets...................................... 17,518 28,277
-------- ----------
$889,686 $1,248,495
======== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Trade accounts payable.................................... $ 11,001 $ 11,361
Accrued commissions payable............................... 12,741 13,894
Accrued liabilities and other............................. 31,305 67,458
Current portion of deferred revenue....................... 161,602 242,821
-------- ----------
Total current liabilities......................... 216,649 335,534
Deferred revenue............................................ 93,284 110,350
Deferred tax liability...................................... 15,299 43,454
-------- ----------
Total liabilities................................. 325,232 489,338
Commitments and contingencies
Stockholders' equity:
Preferred stock, $.01 par value, 1,000,000 shares
authorized, none issued and outstanding................ -- --
Common stock, $.01 par value, 300,000,000 shares
authorized, 210,080,000 shares issued.................. 2,101 2,101
Additional paid-in capital................................ 95,313 129,098
Retained earnings......................................... 570,481 729,925
Cumulative foreign currency translation adjustment........ (1,910) (1,543)
Unrealized gain (loss) on securities available for sale... (750) 3,179
-------- ----------
665,235 862,760
Less treasury stock, at cost 8,427,000 and 3,752,000
shares................................................. 96,901 99,513
Less unearned portion of restricted stock compensation.... 3,880 4,090
-------- ----------
Total stockholders' equity........................ 564,454 759,157
-------- ----------
$889,686 $1,248,495
======== ==========
</TABLE>
The accompanying notes are an integral part of these Consolidated Financial
Statements.
33
<PAGE> 35
BMC SOFTWARE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
<TABLE>
<CAPTION>
YEARS ENDED MARCH 31,
---------------------------------------
1996 1997 1998
----------- ----------- -----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
Revenues:
Licenses.................................................. $290,998 $409,015 $549,338
Maintenance............................................... 178,908 202,773 238,815
-------- -------- --------
Total revenues.................................... 469,906 611,788 788,153
Selling and marketing expenses.............................. 130,220 169,521 221,461
Research and development expenses........................... 60,976 80,210 99,876
Cost of maintenance services and product licenses........... 55,033 70,906 92,926
General and administrative expenses......................... 41,071 49,887 58,955
Acquired research and development costs..................... 23,589 11,259 65,473
Merger costs................................................ -- -- 7,737
-------- -------- --------
Operating income.................................. 159,017 230,005 241,725
Interest and other income................................... 16,378 21,129 30,277
-------- -------- --------
Earnings before income taxes...................... 175,395 251,134 272,002
Income taxes................................................ 61,842 78,149 97,012
-------- -------- --------
Net earnings...................................... $113,553 $172,985 $174,990
======== ======== ========
Basic earnings per share.................................... $ 0.55 $ 0.83 $ 0.83
======== ======== ========
Shares used in computing basic earnings per share........... 208,213 208,611 211,129
======== ======== ========
Diluted earnings per share.................................. $ 0.52 $ 0.78 $ 0.78
======== ======== ========
Shares used in computing diluted earnings per share......... 216,748 222,012 224,185
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these Consolidated Financial
Statements.
34
<PAGE> 36
BMC SOFTWARE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED MARCH 31, 1996, 1997 AND 1998
(IN THOUSANDS)
<TABLE>
<CAPTION>
UNREALIZED UNEARNED
FOREIGN GAIN (LOSS) PORTION OF
COMMON STOCK ADDITIONAL CURRENCY ON SECURITIES RESTRICTED
---------------- PAID-IN RETAINED TRANSLATION AVAILABLE TREASURY STOCK
SHARES AMOUNT CAPITAL EARNINGS ADJUSTMENT FOR SALE STOCK COMPENSATION
------- ------ ---------- -------- ----------- ------------- -------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance March 31, 1995..... 202,000 $2,101 $ 79,989 $296,738 $ (794) $ -- $(54,694) $(3,463)
Net earnings............... -- -- -- 113,553 -- -- -- --
Foreign currency
translation adjustment... -- -- -- -- 175 -- -- --
Treasury stock purchased... (6,692) -- -- -- -- -- (64,816) --
Common stock and options
issued in connection with
mergers and
acquisitions............. 1,856 -- -- -- -- -- -- --
Stock options exercised and
restricted shares
issued................... 2,728 -- (4,455) -- -- -- 35,030 (55)
Income tax benefit from
stock options
exercised................ -- -- 4,933 -- -- -- -- --
Unrealized gain on
securities available for
sale..................... -- -- -- -- -- 82 -- --
Dividends declared......... -- -- -- (7,009) -- -- -- --
Earned portion of
restricted stock
compensation............. -- -- -- -- -- -- -- 1,354
------- ------ -------- -------- ------- -------- -------- -------
Balance, March 31, 1996.... 199,892 2,101 80,467 403,282 (619) 82 (84,480) (2,164)
Net earnings............... -- -- -- 172,985 -- -- -- --
Foreign currency
translation adjustment... -- -- -- -- (1,291) -- -- --
Treasury stock purchased... (1,385) -- -- -- -- -- (31,460) --
Stock options exercised and
restricted shares
issued................... 3,146 -- 2,376 -- -- -- 19,039 (3,441)
Income tax benefit from
stock options
exercised................ -- -- 12,470 -- -- -- -- --
Unrealized loss on
securities available for
sale..................... -- -- -- -- -- (832) -- --
Dividends declared......... -- -- -- (5,786) -- -- -- --
Earned portion of
restricted stock
compensation............. -- -- -- -- -- -- -- 1,725
------- ------ -------- -------- ------- -------- -------- -------
Balance, March 31, 1997.... 201,653 2,101 95,313 570,481 (1,910) (750) (96,901) (3,880)
Net earnings............... -- -- -- 174,990 -- -- -- --
Foreign currency
translation adjustment... -- -- -- -- 367 -- -- --
Treasury stock purchased... (2,304) -- -- -- -- -- (70,923) --
Common stock and options
issued in connection with
merger and
acquisitions............. 392 -- 2,517 -- -- -- -- --
Adjustment to conform
fiscal year end of BGS... -- -- -- (7,991) -- -- -- --
Stock options exercised and
restricted shares issued
and forfeited............ 6,587 -- (27,250) -- -- -- 68,311 (1,691)
Income tax benefit from
stock options exercised
and restricted shares
issued................... -- -- 58,518 -- -- -- -- --
Unrealized gain on
securities available for
sale..................... -- -- -- -- -- 3,929 -- --
Dividends declared......... -- -- -- (7,555) -- -- -- --
Earned portion of
restricted stock
compensation............. -- -- -- -- -- -- -- 1,481
------- ------ -------- -------- ------- -------- -------- -------
Balance, March 31, 1998.... 206,328 $2,101 $129,098 $729,925 $(1,543) $ 3,179 $(99,513) $(4,090)
======= ====== ======== ======== ======= ======== ======== =======
<CAPTION>
TOTAL
STOCKHOLDERS'
EQUITY
-------------
<S> <C>
Balance March 31, 1995..... $319,877
Net earnings............... 113,553
Foreign currency
translation adjustment... 175
Treasury stock purchased... (64,816)
Common stock and options
issued in connection with
mergers and
acquisitions............. --
Stock options exercised and
restricted shares
issued................... 30,520
Income tax benefit from
stock options
exercised................ 4,933
Unrealized gain on
securities available for
sale..................... 82
Dividends declared......... (7,009)
Earned portion of
restricted stock
compensation............. 1,354
--------
Balance, March 31, 1996.... 398,669
Net earnings............... 172,985
Foreign currency
translation adjustment... (1,291)
Treasury stock purchased... (31,460)
Stock options exercised and
restricted shares
issued................... 17,974
Income tax benefit from
stock options
exercised................ 12,470
Unrealized loss on
securities available for
sale..................... (832)
Dividends declared......... (5,786)
Earned portion of
restricted stock
compensation............. 1,725
--------
Balance, March 31, 1997.... 564,454
Net earnings............... 174,990
Foreign currency
translation adjustment... 367
Treasury stock purchased... (70,923)
Common stock and options
issued in connection with
merger and
acquisitions............. 2,517
Adjustment to conform
fiscal year end of BGS... (7,991)
Stock options exercised and
restricted shares issued
and forfeited............ 39,370
Income tax benefit from
stock options exercised
and restricted shares
issued................... 58,518
Unrealized gain on
securities available for
sale..................... 3,929
Dividends declared......... (7,555)
Earned portion of
restricted stock
compensation............. 1,481
--------
Balance, March 31, 1998.... $759,157
========
</TABLE>
The accompanying notes are an integral part of these Consolidated Financial
Statements.
35
<PAGE> 37
BMC SOFTWARE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED MARCH 31,
-----------------------------------
1996 1997 1998
--------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings.......................................... $113,553.. $ 172,985 $ 174,990
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Adjustment to conform fiscal year end of BGS....... -- -- (7,991)
Acquired research and development and merger
costs............................................ 23,589 11,259 73,210
Depreciation and amortization...................... 29,451 34,054 59,577
(Gain) loss on sale/disposal of fixed assets and
capitalized software............................. (18) (12) 4,720
Change in allowance for doubtful accounts.......... 426 2,344 1,329
Deferred income tax provision...................... 7,320 15,550 28,156
Earned portion of restricted stock compensation.... 1,354 1,725 1,482
Changes in operating assets and liabilities:
Increase in accounts receivable.................. (16,205) (10,684) (70,059)
Increase in income tax receivable................ -- -- (40,805)
Increase in other current assets................. (2,663) (3,754) (5,930)
Increase in other long-term assets............... (3,680) (7,453) (7,501)
Increase (decrease) in trade accounts payable.... (2,254) 1,558 (33)
Increase in accrued commissions payable.......... 3,236 135 1,153
Increase in accrued liabilities and other........ 6,687 3,649 24,299
Increase (decrease) in taxes payable............. 13,273 (17,213) --
Increase in current and long-term deferred
revenue....................................... 2,818 92,813 98,285
--------- --------- ---------
Total adjustments............................. 63,334 123,971 159,892
--------- --------- ---------
Net cash provided by operating activities..... 176,887 296,956 334,882
--------- --------- ---------
Cash flows from investing activities:
Cash paid for technology acquisitions, net of cash
acquired........................................... (18,510) (14,719) (72,657)
Purchases of marketable securities.................... (104,110) (264,237) (262,451)
Maturities of marketable securities................... 73,375 70,120 87,311
Proceeds from sales of fixed assets................... 1,072 -- 1,522
Capital expenditures.................................. (27,989) (31,318) (68,202)
Capitalization of software development costs.......... (19,947) (22,909) (41,608)
Purchased software and related assets................. (2,911) (9,043) (2,449)
(Increase) decrease in long-term financed
receivables........................................ 3,901 (251) (13,821)
--------- --------- ---------
Net cash used in investing activities......... (95,119) (272,357) (372,355)
--------- --------- ---------
Cash flows from financing activities:
Treasury stock purchased.............................. (64,816) (31,460) (70,923)
Dividends paid........................................ (7,009) (5,786) (7,555)
Stock options exercised............................... 9,909 17,975 39,369
Income tax benefit from stock options exercised....... 4,862 12,470 58,518
--------- --------- ---------
Net cash provided by (used in) financing
activities.................................. (57,054) (6,801) 19,409
Effect of translation exchange rate changes on cash..... 63 (1,364) 367
--------- --------- ---------
Net change in cash and cash equivalents....... 24,777 16,434 (17,697)
Cash and cash equivalents at beginning of year.......... 48,579 73,356 89,790
--------- --------- ---------
Cash and cash equivalents at end of year................ $ 73,356 $ 89,790 $ 72,093
========= ========= =========
Supplementary disclosures of cash flow information:
Cash paid during the year for income taxes............ $ 34,214 $ 68,264 $ 45,752
Noncash consideration in acquisitions................. $ 20,611 $ -- $ 8,573
</TABLE>
The accompanying notes are an integral part of these Consolidated Financial
Statements.
36
<PAGE> 38
BMC SOFTWARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(A) NATURE OF OPERATIONS
BMC Software, Inc. and its wholly-owned subsidiaries (collectively, the
Company or BMC) develops software solutions for automating application and data
management processes across host-based and distributed systems environments. BMC
markets, sells and supports its solutions primarily through its sales offices
around the world, as well as through its relationships with independent
partners. Numerous factors affect the Company's operating results, including
general economic conditions, market acceptance and demand for its products, its
ability to develop new products, rapidly changing technologies and competition.
For a discussion of certain of these important factors, see the discussion in
Management's Discussion and Analysis of Results of Operations and Financial
Condition under the heading "Certain Risks and Uncertainties That Could Affect
Future Operating Results."
(B) USE OF ESTIMATES
The Company's management makes estimates and assumptions in the preparation
of its Consolidated Financial Statements in conformity with generally accepted
accounting principles. These estimates and assumptions may affect the reported
amounts of assets and liabilities, the disclosure of contingent assets and
liabilities as of the date of the Consolidated Financial Statements and the
reported amounts of revenues and expenses during the respective reporting
periods. Actual results could differ from those results implicit in the
estimates and assumptions.
(C) BASIS OF PRESENTATION
The accompanying Consolidated Financial Statements include the accounts of
the Company. All significant intercompany balances and transactions have been
eliminated in consolidation. Certain amounts previously reported have been
reclassified in order to ensure comparability among the years reported.
(D) CASH EQUIVALENTS
The Company considers investments with a maturity of three months or less
when purchased to be cash equivalents. As of March 31, 1997 and 1998, the
Company's cash equivalents were comprised primarily of money market funds,
commercial paper and repurchase agreements. The Company's cash and cash
equivalents are subject to potential credit risk. The Company's cash management
and investment policies restrict investments to investment quality, highly
liquid securities.
(E) LONG LIVED ASSETS
Property and Equipment --
Property and equipment are stated at cost. Depreciation on all property and
equipment, with the exception of building and leasehold improvements, is
calculated using the straight-line method over the estimated useful lives of the
assets which range from three to five years. Depreciation on the building is
calculated using the straight-line method over the useful lives of the
components of the building (twenty years for the infrastructure and thirty years
for the shell). Leasehold improvements are amortized using the straight-line
method over the shorter of the lease term or the estimated useful life of the
assets which range from two to seven years.
37
<PAGE> 39
BMC SOFTWARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
A summary of property and equipment is as follows:
<TABLE>
<CAPTION>
MARCH 31,
-------------------
1997 1998
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Land........................................................ $ 11,358 $ 16,366
Buildings and leasehold improvements........................ 77,917 82,092
Construction in progress.................................... 1,976 28,260
Computers, furniture and equipment.......................... 89,923 112,054
-------- --------
181,174 238,772
Less accumulated depreciation and amortization.... (54,469) (75,776)
-------- --------
Net property and equipment.................................. $126,705 $162,996
======== ========
</TABLE>
In March 1998, the American Institute of Certified Public Accountants
(AICPA) issued Statement of Position (SOP) 98-1, "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use." This standard
requires that certain costs related to the development or purchase of
internal-use software be capitalized and amortized over the estimated useful
life of the software. This SOP also requires that costs related to the
preliminary project stage, data conversion and the post-implementation/operation
stage of an internal-use computer software development project be expensed as
incurred. SOP 98-1 is effective for financial statements issued for fiscal years
beginning after December 31, 1998, which, in the case of the Company is April 1,
1999. SOP 98-1 is not expected to have a material impact on the Company's
Consolidated Financial Statements.
Software Development Costs --
Costs of internally developed software for resale are expensed until the
technological feasibility of the software product has been established.
Thereafter, software development costs are capitalized and subsequently reported
at the lower of unamortized cost or net realizable value. The cost of
capitalized software is amortized over the products' estimated useful lives,
which typically begin at five years. Each quarter, the Company analyzes the
realizability of its recorded software assets. This process occasionally results
in accelerated amortization charges which, over the past few years, has driven
the average amortization period to approximately four years. Amortization of the
capitalized software assets begins upon the declaration of the underlying
products as generally available for sale. During the years ended March 31, 1996,
1997 and 1998, $19,947,000, $22,209,000 and $41,608,000, respectively, of
software development costs were capitalized. Amortization for the years ended
March 31, 1996, 1997 and 1998 was $8,805,000, $8,755,000 and $20,405,000,
respectively. These expenses were reported as cost of maintenance services and
product licenses in the accompanying Consolidated Statements of Earnings.
Purchased Software and Related Assets --
Purchased software and related assets are recorded at cost. Amortization is
calculated on the straight-line method over the estimated useful lives of the
products, which, after impairment adjustments (discussed below), ranges from
three to five years. The portion of a purchase which pertains to in-process
research and development is expensed in the period of the acquisition.
Amortization of the capitalized software assets begins upon the declaration of
the underlying products as generally available for sale. Amortization for the
years ended March 31, 1996, 1997 and 1998 was $5,742,000, $5,805,000 and
$8,921,000, respectively. These expenses were reported as cost of maintenance
services and product licenses in the accompanying Consolidated Statements of
Earnings.
38
<PAGE> 40
BMC SOFTWARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company has adopted Statement of Financial Accounting Standards (SFAS)
No. 121, "Accounting for the Impairment of Long-lived Assets and for Long-lived
Assets to be Disposed Of." SFAS No. 121 requires that long-lived assets and
certain identifiable intangibles to be held and used by an entity be reviewed
for impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. If the sum of the expected
future cash flows from the use of the asset and its eventual disposition is less
than the carrying amount of the asset, an impairment loss is recognized based on
the fair value of the asset.
(F) FOREIGN CURRENCY TRANSLATION AND RISK MANAGEMENT
The Company operates globally and the functional currency for most of its
non-U.S. enterprises is the local currency. Financial statements of these
foreign operations are translated into U.S. dollars using the current rate
method in accordance with SFAS No. 52, "Foreign Currency Translation." As a
result, the Company's U.S. dollar net cash flows from international operations
may be adversely affected by changes in foreign currency exchange rates. To
minimize the Company's risk from changes in foreign currency exchange rates, the
Company utilizes certain derivative financial instruments.
The Company utilizes two types of derivative financial instruments in
managing its foreign currency exchange risk; forward exchange contracts and
purchased option contracts. Forward exchange contracts are used to hedge firm
commitments that subject the Company to transaction risk. Such commitments
include accounts receivable, intercompany receivables/payables, cash balances
and certain liabilities of foreign operations. The terms of forward exchange
contracts are generally one month or less.
Purchased option contracts are used by the Company to hedge anticipated,
but not firmly committed, sales transactions. The Company believes that the
anticipated, but not yet committed, sales transactions are probable and are
highly correlated with the hedge instruments. Probability weightings are applied
to the forecasted quarterly sales amounts and option contracts are purchased to
hedge the foreign currency exchange risk on the forecasted quarterly sales
amounts. Each month, the Company compares its dollar amount of purchased option
contracts to sales forecasts in order to ascertain whether the hedge remains
highly correlated. In the event the hedge ceases to be effective or if the
derivative is sold or the Company discontinues hedging operations, any
unamortized premium costs or deferred gains will be recognized in that period.
The terms of purchased option contracts are typically one year or less.
The table below summarizes the contractual amounts of the Company's
financial instruments in U.S. dollars. The Company's foreign exchange financial
instruments are primarily denominated in the major European currencies,
particularly the German deutschemark and the British pound, as well as the
Japanese yen and Australian dollar. The "Buy" amounts in the table below
represent the U.S. dollar equivalent of commitments to purchase foreign
currencies and the "Sell" amounts represent the U.S. dollar equivalent of the
Company's right (with respect to purchased option contracts) and its commitment
(with respect to foreign currency forwards) to sell foreign currencies.
<TABLE>
<CAPTION>
MARCH 31,
--------------------------------
1997 1998
-------------- ---------------
BUY SELL BUY SELL
--- -------- ---- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Options............................................ $-- $ 60,264 $ -- $162,347
Forwards (Europe).................................. -- 71,499 -- 98,637
Forwards (Other)................................... 45 7,980 681 7,838
--- -------- ---- --------
$45 $139,743 $681 $268,822
=== ======== ==== ========
</TABLE>
39
<PAGE> 41
BMC SOFTWARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Gains and losses on forward exchange contracts are recorded as the
contracts expire (typically each month). Premiums from forward exchange
contracts are netted against the related gains and losses. Gains and premiums
associated with purchased option contracts are deferred until the underlying
hedged transactions occur or earlier if a hedged transaction is no longer
expected to occur. As of March 31, 1997 and 1998, the Company had recorded
unamortized premium costs totaling $1,075,000 and $3,226,000, respectively.
Also, as of March 31, 1997 and 1998, the Company had net unrecorded deferred
gains (losses) of $1,478,000 and ($78,000), respectively.
The Company's exposure to credit-related losses from its financial
instruments is minimal. Exposure from the Company's forward exchange contracts
could occur if the Company's foreign customers default on their trade payable
obligations with the Company. The Company has not experienced and does not
expect to experience any significant defaults by its foreign customers. Also,
exposure from the Company's purchased option contracts is limited to the premium
costs associated with buying the instruments. The Company is not obligated to
exercise its purchased option contracts. The Company is also exposed to
credit-related losses in the event of non-performance by counterparties to
financial instruments, but it does not expect any counterparties to fail to meet
their obligations, given their high credit ratings. In addition, the Company
diversifies this risk across several counterparties.
During fiscal 1996, 1997 and 1998, general and administrative expenses
included net foreign exchange expenses of $1,725,000, $2,297,000 and $1,853,000,
respectively. The net cash flows from the Company's foreign exchange financial
instruments are netted with the currency gain or loss of the hedged item in the
Company's Consolidated Statements of Cash Flows.
(G) DEFERRED REVENUE
Deferred revenue is comprised primarily of deferred license revenue,
maintenance revenue and other services. Deferred license and maintenance revenue
which has not been collected is eliminated in consolidation. The principal
components of deferred revenue are as follows:
<TABLE>
<CAPTION>
MARCH 31,
-------------------
1997 1998
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Current:
Maintenance............................................... $136,649 $159,774
Licenses.................................................. 19,472 73,838
Other..................................................... 5,481 9,209
-------- --------
Total Current Deferred Revenue.................... 161,602 242,821
Long-Term:
Maintenance............................................... 87,712 104,986
Other..................................................... 5,572 5,364
-------- --------
Total Long-Term Deferred Revenue.................. 93,284 110,350
-------- --------
Total Deferred Revenue............................ $254,886 $353,171
======== ========
</TABLE>
(H) REVENUE RECOGNITION
The Company licenses its software products under perpetual, annual and
monthly licenses. Perpetual licenses include maintenance and enhancements for
either a 90 day period or a one year period. For those licenses which provide
maintenance and enhancements for a one year period, the portion of the license
fee associated with maintenance and enhancements is unbundled and recognized
ratably as maintenance revenue. Maintenance contracts are available annually
thereafter and are generally based on the value (as defined) of
40
<PAGE> 42
BMC SOFTWARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
the licensed software products. The Company also generates upgrade revenues as a
result of a customer's migration, or a customer's anticipated migration to more
powerful central processing units.
Revenue from the licensing of software, including upgrade revenue, is
recognized when both the Company and the customer are legally obligated under
the terms of the respective agreement and the underlying software products (if
any in the case of upgrade transactions) have been delivered. Maintenance
revenue is recognized ratably over the term of the underlying maintenance
agreement. Revenues from license and maintenance transactions which are financed
are generally recognized in the same manner as those requiring current payment.
The Company has an established business practice of offering installment
contracts to customers and has a history of successfully enforcing original
payment terms without making concessions. Further, the payment obligations are
unrelated to product implementation or any other post-transaction activity. In
all cases, revenue is recognized only if no significant Company obligations
remain and collection of the resulting receivable is deemed probable.
The AICPA issued SOP 97-2, "Software Revenue Recognition" in October 1997,
which replaces the previous revenue recognition rules provided by SOP 91-1. SOP
97-2 is effective for transactions entered into in fiscal years beginning after
December 15, 1997, which, in the case of the Company, is April 1, 1998. The
adoption of this SOP is not expected to have a material impact on the Company's
future Consolidated Financial Statements.
(I) EARNINGS PER SHARE
The Financial Accounting Standards Board (FASB) issued SFAS No. 128,
"Earnings Per Share" in February 1997. Implementation of SFAS No. 128 is
required for periods ending after December 15, 1997. SFAS No. 128 requires dual
presentation of earnings per share (EPS); basic EPS and diluted EPS. Basic EPS
excludes dilution and 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. The
following table summarizes the basic EPS and diluted EPS computations for the
years ended March 31, 1996, 1997 and 1998 (in thousands, except per share
amounts):
<TABLE>
<CAPTION>
YEARS ENDED MARCH 31,
------------------------------
1996 1997 1998
-------- -------- --------
<S> <C> <C> <C>
Basic earnings per share:
Net earnings....................................... $113,553 $172,985 $174,990
-------- -------- --------
Weighted average number of common shares........... 208,213 208,611 211,129
-------- -------- --------
Basic earnings per share........................... $ 0.55 $ 0.83 $ 0.83
======== ======== ========
Diluted earnings per share:
Net earnings....................................... $113,553 $172,985 $174,990
-------- -------- --------
Weighted average number of common shares........... 208,213 208,611 211,129
Incremental shares from assumed conversions of
stock options and other......................... 8,535 13,401 13,056
-------- -------- --------
Adjusted weighted average number of common shares.... 216,748 222,012 224,185
-------- -------- --------
Diluted earnings per share........................... $ 0.52 $ 0.78 $ 0.78
======== ======== ========
</TABLE>
(J) STOCK SPLITS
On July 16, 1995, October 24, 1996 and April 20, 1998, the Company's board
of directors declared two-for-one stock splits. These stock splits were effected
in the form of stock dividends. In each case, stockholders
41
<PAGE> 43
BMC SOFTWARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
of record received one share of common stock for each share held. All stock
related data in the consolidated financial statements and related notes reflects
these stock splits for all periods presented.
(K) TREASURY STOCK
Under a stock repurchase program, the Company repurchased 6,692,000,
1,385,000 and 2,304,000 shares of its common stock on the open market for
aggregate purchase prices of $64,816,000, $31,460,000 and $70,923,000, in the
fiscal years ended March 31, 1996, 1997 and 1998, respectively. The Company's
board of directors terminated the share buy-back program, prior to consummation
of the BGS Systems, Inc. (BGS) merger in March 1998, consistent with the pooling
of interests accounting provisions.
(L) COMPREHENSIVE INCOME
In June 1997, SFAS No. 130, "Reporting Comprehensive Income" was issued.
Under SFAS No. 130, all items that meet the definition of comprehensive income
will be separately reported for the period in which they are recognized. The
only impact will be that comprehensive income, which will include changes in the
balances of items that are reported separately in the Stockholders' Equity
section of the Consolidated Balance Sheets, will be either reported in a
separate statement or at the bottom of the Consolidated Statements of Earnings.
This statement is effective for fiscal years beginning after December 15, 1997,
which, in the case of the Company, is April 1, 1998.
(2) TECHNOLOGY ACQUISITIONS
During fiscal 1996 and 1997, the Company completed acquisitions of stock
and assets (including in process research and development) of several technology
companies. These acquisitions were funded through the issuance of the Company's
common stock and cash. All of the acquisitions completed during fiscal 1996 and
1997 were accounted for using the purchase method. The aggregate purchase price
for the acquired companies was $27,789,000 and $12,950,000 during fiscal 1996
and 1997, respectively. In connection with these acquisitions, the Company
recorded charges of $22,831,000 and $7,318,000 for acquired research and
development, net of $758,000 and $3,941,000 in income tax benefits for fiscal
1996 and 1997, respectively.
During May 1997, the Company completed its acquisition of DataTools, Inc.
(DataTools). The Company's acquisition was the result of a purchase option
exercised by the Company. The Company funded the $73,000,000 aggregate purchase
price with cash, and to a lesser extent, debt forgiveness and options to
purchase the Company's common stock. This acquisition was accounted for as a
purchase.
The following unaudited pro forma results of operations for the years ended
March 31, 1997 and 1998 are as if the acquisition of DataTools had occurred at
the beginning of each period presented. The pro forma information includes
DataTools financial results as of December 31, 1996 and May 26, 1997 combined
with the accounts of the Company as of March 31, 1997 and 1998.
<TABLE>
<CAPTION>
MARCH 31,
---------------------
1997 1998
-------- ----------
(IN THOUSANDS)
<S> <C> <C>
Total Assets................................................ $845,234 $1,200,047
Total Revenues.............................................. $613,304 $ 788,153
Net Earnings................................................ $170,439 $ 230,315
Diluted earnings per share.................................. $ 0.77 $ 1.03
</TABLE>
In addition to the DataTools acquisition, the Company completed additional
acquisitions of assets accounted for as purchases in fiscal 1998. The aggregate
purchase price for these transactions was $14,601,000. The Company recorded a
$9,076,000 charge, net of a $2,025,000 income tax benefit for acquired research
and development.
42
<PAGE> 44
BMC SOFTWARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table presents information, in thousands, concerning the
purchase price allocations for the acquisitions accounted for under the purchase
method for the fiscal year ended March 31, 1998.
<TABLE>
<CAPTION>
ACQUIRED TOTAL
ACQUISITIONS SOFTWARE IPR&D OTHER PRICE
- ------------ -------- -------- ------ -------
<S> <C> <C> <C> <C>
DataTools............................................... $15,000 $54,372 $3,628 $73,000
Sento................................................... 1,800 5,900 -- 7,700
Software Partners....................................... 1,700 5,201 -- 6,901
------- ------- ------ -------
$18,500 $65,473 $3,628 $87,601
======= ======= ====== =======
</TABLE>
The Company acquired DataTools in May 1997, for an aggregate purchase price
of $73 million. DataTools owns certain Relational Database Management Systems
(RDBMS) specific back-up products that were sold as stand-alone products. Its'
flagship product is called SQL Backtrack (SQL-BT). DataTools was in the process
of developing numerous products and enhanced versions of products, including
next generation versions of SQL-BT for the Informix platform (SQI) and the
Oracle platform (SBO), as well as first generation products for the Microsoft
SQL (SBM) and Sybase IDR (SBS/I) platforms. The Company allocated approximately
$18.6 million of the purchase price to developed technology, workforce and
goodwill. The Company allocated approximately $54.4 million to acquired
in-process research and development (IPR&D). The four most significant specific
development projects, which comprised $40.6 million (74%) of the acquired IPR&D,
pertained to the above mentioned projects. The primary remaining efforts
associated with the IPR&D included code completion in several key areas, such as
logical extraction and piecemeal back-up and recovery (BU&R), large database
support and performance-related functionality. As of the acquisition date, the
expected costs to complete the IPR&D were, on a calendar year basis,
approximately $2.9 million in 1997, $4.7 million in 1998, $2.1 million in 1999,
and $729,000 in 2000. The Company has made significant progress towards the
completion of most of the underlying IPR&D projects. With respect to the
estimated completion costs, the Company is below these forecasted amounts as a
result of decisions to terminate certain of the IPR&D projects (such as the
SBS/I project noted below) and more efficient development efforts than
anticipated. The following summarizes the four primary projects pertaining to
the DataTools IPR&D.
The Company spent approximately $700,000 through March 31, 1998 on the SBM
product in addition to the approximate $750,000 spent by DataTools prior to the
acquisition. The Company released this product in April 1998.
The SBO product was released in June 1998 for both the NT and Unix
environments. The IPR&D was successfully completed resulting in new
functionality in several areas, including back-up and recovery scheduling,
remote BU&R, archive log management and a graphical user interface. The Company
spent approximately $1.7 million in completing these technologies subsequent to
the DataTools acquisition.
BMC abandoned the SBS/I project, on which DataTools had spent approximately
$1 million in research and development. BMC made this decision based on concerns
over market demand and the allocation of Sybase resources to the core Sybase
product. The Company spent less than $500,000 on this technology prior to
deciding to cancel this development project.
The Company spent approximately $1 million on SBI through March 31, 1998,
in addition to the approximate $500,000 spent by DataTools prior to the
transaction. As a result, Version 2.0 of this product was released in April
1998.
In June 1997, the Company acquired technology from Sento Technical
Innovations, Inc. The Company has since abandoned the technology and expensed
the entire purchase price.
43
<PAGE> 45
BMC SOFTWARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In July 1997, the Company acquired certain software code from Software
Partners/32, Inc. (Software Partners) for a total purchase price of $6.9
million. The Company allocated $1.7 million of the purchase price to completed
technology and $5.2 million to acquired IPR&D. This code permits file system
back-up and recovery, but was not competitive with the leading products in this
market. While the acquired code contained certain key functionality, it was
incomplete in various aspects. As a result, the Company attempted to complete
this code by, among other things, developing support for dual network hosts,
enhancing the interface with the SQL-BT object back-up stream interface (OBSI),
developing support for SBI and SBM and developing support for code and
integrating it into its Patrol recovery manager product. These efforts were
unsuccessful, and the Company is now attempting to complete the code and
integrate it into a planned distributed systems application recovery management
product scheduled to be released in the latter part of fiscal 2000. The expected
costs to complete the IPR&D (and to integrate the technology into the
application recovery product) are approximately $720,000 in fiscal 1999 and
$1,200,000 in fiscal 2000. The allocation of purchase price to completed
technology reflects the estimated discounted future cash flows associated with
the customers using the existing technology.
The values assigned to acquired IPR&D in the above mentioned transactions
were generally determined by estimating the costs to develop the purchased
in-process technology into commercially viable products, estimating the
resulting net cash flows from the projects and discounting the net cash flows to
their present value. The revenue projections used to value the acquired IPR&D
were based on estimates of relevant market sizes and growth factors, expected
trends in technology, and the nature and expected timing of new product
introductions by the Company and its competitors. Operating expenses were
estimated based on historical results and anticipated profit margins. Due to
purchasing power increases and general economies of scale, estimated operating
expenses as a percentage of revenues were, in some cases, estimated to decrease
after the acquisitions.
The rates utilized to discount the net cash flows to their present value
were based on cost of capital calculations. Due to the nature of the forecast
and risks associated with the projected growth, profitability and the
developmental nature of the projects, discount rates of 16% to 20% were
generally appropriate for the acquired IPR&D. These discount rates were
commensurate with the respective stage of development and the uncertainties in
the economic estimates described above. If the acquired IPR&D projects are not
successfully completed, the Company's business, operating results, and financial
condition may be materially adversely affected in future periods. In addition,
the value of other intangible assets acquired may become impaired.
During March 1998, the Company completed the acquisition of BGS. This
acquisition was accounted for as a pooling of interests in accordance with
Accounting Principles Board (APB) Opinion No. 16. The Company recorded a
$7,737,000 charge for merger costs. The Company exchanged a total of 7,179,000
shares of its common stock for all of the outstanding shares of BGS. The Company
also converted BGS employee owned options into options to purchase 746,000
shares of the Company's stock. The results of operations for BGS are included
for all periods presented herein.
BGS had previously reported on a January 31 year end. As such, the accounts
of BGS for its 1996 and 1997 fiscal years have been consolidated with the
accounts of the Company as of March 31, 1996 and 1997, respectively. Total
revenues and net loss were approximately $6.5 million and $8 million (inclusive
of approximately $5.2 million of merger related costs), respectively, during the
two-month period ended March 26, 1998. The revenues and operating results for
this period are not indicative of a full quarter's results since a substantial
amount of license revenues are generated in the last few days of a typical
quarter. An adjustment is included in the consolidated statement of
stockholders' equity for the net income attributed to this two-month period.
The Company has restated its 1996, 1997 and 1998 consolidated financial
statements to include the financial position, results of operations and cash
flows of BGS which was acquired in 1998 and was accounted for under the pooling
of interests method of accounting. This acquisition had been accounted for as an
44
<PAGE> 46
BMC SOFTWARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
immaterial pooling of interests transaction for which prior periods were not
restated in the Company's previously issued financial statements included in the
Company's 1998 Annual Report on Form 10-K. The restatement is a result of a
change in the Company's evaluation of the impact of the pooling of interests
transaction on the Company's prior period financial statements. The following
are reconciliations of total revenues and net earnings previously reported by
the Company for the years ended March 31, 1996 and 1997, with the combined
amounts currently presented in the financial statements for those years:
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED
MARCH 31, 1996 MARCH 31, 1997 MARCH 31, 1998
--------------------- --------------------- ---------------------
AS AS AS
PREVIOUSLY PREVIOUSLY PREVIOUSLY
REPORTED COMBINED REPORTED COMBINED REPORTED COMBINED
---------- -------- ---------- -------- ---------- --------
<S> <C> <C> <C> <C> <C> <C>
Total Revenues................. $428,850 $469,906 $563,210 $611,788 $$730,634 $788,153
Net Earnings................... 105,571 113,553 163,872 172,985 165,854 174,990
</TABLE>
(3) FINANCIAL INSTRUMENTS
Management determines the appropriate classification of debt and equity
securities at the time of purchase and re-evaluates such designation as of each
subsequent balance sheet date. The Company has the ability and intent to hold
most of its investment securities to maturity and thus has classified these
securities as "held to maturity" pursuant to SFAS No. 115, "Accounting for
Certain Investments in Debt and Equity Securities." These securities have been
recorded at amortized cost in the Company's Consolidated Balance Sheets.
Securities classified as "available for sale" are recorded at fair value. The
resulting net unrealized gains or losses are recorded as an increase or decrease
to stockholders' equity. The Company holds no securities classified as "trading
securities." Gains and losses, realized and unrealized, are calculated using the
specific identification method. The tables below summarizes the Company's total
investment securities portfolio as of March 31, 1997 and 1998.
HELD TO MATURITY SECURITIES
<TABLE>
<CAPTION>
GROSS GROSS
UNREALIZED UNREALIZED AMORTIZED
FAIR VALUE GAINS LOSSES COSTS
---------- ---------- ---------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
1997
Maturities Within 1 Year
Municipal Securities..................... $ 32,901 $ 92 $ (4) $ 32,813
Corporate Bonds.......................... 16,030 144 -- 15,886
Euro Bonds and other..................... 2,028 1 -- 2,027
-------- ------ ------- --------
Total maturities within 1 year... $ 50,959 $ 237 $ (4) $ 50,726
======== ====== ======= ========
Maturities From 1-5 Years
Municipal Securities..................... $210,754 $ 736 $(1,145) $211,163
Corporate Bonds.......................... 34,125 48 (305) 34,382
Euro Bonds and other..................... 15,607 193 (50) 15,464
Mortgage securities...................... 11,353 2 (611) 11,962
-------- ------ ------- --------
Total maturities from 1-5
years.......................... $271,839 $ 979 $(2,111) $272,971
======== ====== ======= ========
Maturities From 6-10 Years
Corporate Bonds.......................... $ 2,955 $ -- $ (68) $ 3,023
Euro Bonds............................... 3,019 -- (59) 3,078
Mortgage Securities...................... 4,789 -- (146) 4,935
</TABLE>
45
<PAGE> 47
BMC SOFTWARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
GROSS GROSS
UNREALIZED UNREALIZED AMORTIZED
FAIR VALUE GAINS LOSSES COSTS
---------- ---------- ---------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Municipal Bonds.......................... 34,377 -- (326) 34,703
-------- ------ ------- --------
Total maturities from 6-10
years.......................... $ 45,140 $ -- $ (599) $ 45,739
======== ====== ======= ========
1998
Maturities Within 1 Year
Municipal Securities..................... $ 31,779 $ 214 $ -- $ 31,565
Corporate Bonds.......................... 9,924 45 (5) 9,884
Euro Bonds and other..................... 4,126 40 -- 4,086
-------- ------ ------- --------
Total maturities within 1 year... $ 45,829 $ 299 $ (5) $ 45,535
======== ====== ======= ========
Maturities From 1-5 Years
Municipal Securities..................... $307,651 $3,584 $ (501) $304,568
Corporate Bonds.......................... 38,949 568 (38) 38,419
Mortgage Securities...................... 11,544 30 (67) 11,580
Euro Bonds and other..................... 35,594 104 (178) 35,668
-------- ------ ------- --------
Total maturities from 1-5
years.......................... $393,738 $4,286 $ (784) $390,235
======== ====== ======= ========
Maturities From 6-10 Years
Corporate Bonds.......................... $ 6,296 $ -- $ (83) $ 6,379
Euro Bonds............................... 11,158 -- (57) 11,216
Mortgage Securities...................... 1,645 -- (16) 1,661
Municipal Bonds.......................... 33,165 98 (91) 33,158
-------- ------ ------- --------
Total maturities from 6-10
years.......................... $ 52,264 $ 98 $ (247) $ 52,414
======== ====== ======= ========
</TABLE>
46
<PAGE> 48
BMC SOFTWARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
AVAILABLE FOR SALE SECURITIES
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED
COST GAINS LOSSES FAIR VALUE
--------- ---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
1997
Maturities Within 1 Year
Municipal Securities..................... $ 11,385 $ 58 $ -- $ 11,443
-------- ------ ------- --------
Total maturities within 1 year... $ 11,385 $ 58 $ -- $ 11,443
======== ====== ======= ========
Maturities From 1-5 Years
Municipal Securities..................... $ 43,176 $ 71 $ (281) $ 42,966
Euro Bonds............................... 13,743 -- (159) 13,584
Corporate Bonds.......................... 6,686 -- (86) 6,600
Mortgage Securities and Other............ 9,340 -- (1) 9,339
-------- ------ ------- --------
Total maturities from 1-5
years.......................... $ 72,945 $ 71 $ (527) $ 72,489
======== ====== ======= ========
Maturities From 6-10 Years
Municipal Securities..................... $ 5,644 $ -- $ (92) $ 5,552
Corporate Bonds.......................... 2,079 9 -- 2,088
Mortgage Securities and Other............ 4,172 -- (269) 3,903
-------- ------ ------- --------
Total maturities from 6-10
years.......................... $ 11,895 $ 9 $ (361) $ 11,543
======== ====== ======= ========
1998
Maturities Within 1 Year
Municipal Securities..................... $ 10,196 $ 455 $ (12) $ 10,639
-------- ------ ------- --------
Total maturities within 1 year... $ 10,196 $ 455 $ (12) $ 10,639
======== ====== ======= ========
Maturities From 1-5 Years
Municipal Securities..................... $ 54,513 $ 460 $ (41) $ 54,932
Corporate Bonds.......................... 12,208 141 (16) 12,333
Euro Bonds............................... 28,510 69 (147) 28,432
Other.................................... 8,753 2,452 -- 11,205
-------- ------ ------- --------
Total maturities from 1-5
years.......................... $103,984 $3,122 $ (204) $106,902
======== ====== ======= ========
Maturities From 6-10 Years
Municipal Securities..................... $ 34,939 $ 49 $ (232) $ 34,756
Mortgage Securities and other............ 3,498 28 (27) 3,499
-------- ------ ------- --------
Total maturities from 6-10
years.......................... $ 38,437 $ 77 $ (259) $ 38,255
======== ====== ======= ========
</TABLE>
The Company's mortgage securities are classified according to the stated
maturities of the securities.
(4) TRADE FINANCE RECEIVABLES
Trade finance receivables arise in the ordinary course of business to
accommodate customers' cash flow objectives. Most of the trade finance
receivables entered into by the Company are transferred to financing
institutions on a non-recourse basis. The Company records such transfers as
sales of the related accounts receivable when it is considered to have
surrendered control of such receivables under provisions of SFAS No. 125,
"Accounting for Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities." Such receivables which have not yet been transferred are
classified as trade finance receivables in the accompanying Consolidated Balance
Sheets. The Company adopted SFAS No. 125 effective April 1, 1997.
47
<PAGE> 49
BMC SOFTWARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
During fiscal 1998, the Company transferred a total of $147,022,000, which
approximated fair value, to financing institutions on a non-recourse basis. As
of March 31, 1998, trade finance receivables which have been transferred to
financing institutions, which remain outstanding, totaled approximately
$228,270,000.
(5) COST OF MAINTENANCE SERVICES AND PRODUCT LICENSES
The components of cost of maintenance services and product licenses for the
years ended March 31, 1996, 1997 and 1998 are as follows:
<TABLE>
<CAPTION>
1996 1997 1998
------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Cost of maintenance services.......................... $37,226 $47,644 $56,997
Amortization of software development costs............ 8,805 8,755 20,405
Amortization of purchased software.................... 5,742 5,805 8,921
Royalties............................................. 3,260 8,702 6,603
------- ------- -------
$55,033 $70,906 $92,926
======= ======= =======
</TABLE>
(6) INCOME TAXES
Deferred income taxes are recognized for income and expense items that are
reported for financial reporting purposes in a different year than for income
tax purposes. Research and development tax credits are accounted for as a
reduction of income tax expense in the year realized. The income tax benefit
from nonqualified stock options exercised, wherein the fair market value at date
of issuance is less than that at date of exercise, is credited to additional
paid-in capital.
The provision for income taxes in the years ended March 31, 1996, 1997 and
1998, consisted of the following:
<TABLE>
<CAPTION>
1996 1997 1998
------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Current:
Federal............................................. $44,147 $52,994 $57,558
State............................................... 298 270 202
Foreign............................................. 10,078 9,335 14,516
------- ------- -------
Total current............................... 54,523 62,599 72,276
Deferred:
Federal............................................. 7,319 15,550 24,736
------- ------- -------
Total deferred.............................. 7,319 15,550 24,736
------- ------- -------
$61,842 $78,149 $97,012
======= ======= =======
</TABLE>
The foreign provision for income taxes is based on foreign pre-tax earnings
of $46,474,000 for fiscal 1996, $67,571,000 for fiscal 1997 and $88,114,000 for
fiscal 1998.
48
<PAGE> 50
BMC SOFTWARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The income tax expense of $61,842,000 for fiscal 1996, $78,149,000 for
fiscal 1997 and $97,012,000 for fiscal 1998 differs from the amount computed by
applying the statutory federal income tax rate of 35% to consolidated earnings
before income taxes as follows:
<TABLE>
<CAPTION>
1996 1997 1998
------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Expense computed at statutory rate.................. $61,388 $ 87,897 $ 95,201
Increase (reduction) resulting from:
Foreign tax effect, net........................... (4,339) (11,543) (17,710)
Tax benefit from foreign sales corporation........ (777) (610) (737)
Income not subject to tax......................... (3,081) (2,783) (5,734)
Other............................................. 2,628 4,644 9,213
------- -------- --------
Subtotal.................................. 55,819 77,605 80,233
Non-deductible charge for acquired research and
development....................................... 6,023 544 16,779
------- -------- --------
$61,842 $ 78,149 $ 97,012
======= ======== ========
</TABLE>
Aggregate unremitted earnings of foreign subsidiaries for which U.S.
Federal income taxes have not been provided, totaled approximately $157,195,000
at March 31, 1998. Deferred income taxes have not been provided on these
earnings because the Company considers them to be indefinitely reinvested.
Deferred income taxes reflect the impact of temporary differences between
the amount of assets and liabilities recognized for financial reporting purposes
and such amounts recognized for tax purposes. The tax effects of the temporary
differences as of March 31, 1997 and 1998 are presented as follows:
<TABLE>
<CAPTION>
1997 1998
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Deferred Tax Assets:
Deferred revenue.......................................... $ 17,014 $ 8,495
Acquired research and development......................... 5,513 4,942
Deferred compensation plan................................ 1,821 2,802
Accruals not currently deductible......................... 403 1,805
Other..................................................... 4,781 5,458
-------- --------
Total deferred tax asset.......................... 29,532 23,502
-------- --------
Deferred Tax Liabilities:
Software capitalization, net.............................. (14,326) (21,075)
Book/tax difference on assets............................. (3,499) (3,405)
Stock compensation plans.................................. (2,130) (1,370)
Foreign earnings and other................................ (20,001) (32,411)
-------- --------
Total deferred tax liability...................... (39,956) (58,261)
-------- --------
Net deferred tax liability.................................. $(10,424) $(34,759)
======== ========
As reported:
Net current deferred tax asset (included in other current
assets)................................................... $ 4,875 $ 8,695
======== ========
Net long-term deferred tax liability........................ $(15,299) $(43,454)
======== ========
</TABLE>
49
<PAGE> 51
BMC SOFTWARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(7) STOCK INCENTIVE PLANS
The Company has adopted numerous stock plans that provide for the grant of
options and restricted stock to employees and directors of the Company. Under
these plans, all options have been granted at either fair market value or 115%
of fair market value as of the date of grant and have a ten year term. All
grants under these plans vest over terms of either three, four or five years.
The restricted stock is subject to transfer restrictions that lapse over five
years. Under these plans, the Company was authorized to grant a total of
17,870,000 shares as of March 31, 1998.
The following is a summary of the stock option activity for the years ended
March 31, 1996, 1997 and 1998 (in thousands, except price per share amounts):
<TABLE>
<CAPTION>
1996 1997 1998
---------------------- ---------------------- ----------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
----------- -------- ----------- -------- ----------- --------
<S> <C> <C> <C> <C> <C> <C>
Options outstanding at
beginning of year............ 25,477 $ 5 26,734 $ 6 26,626 $ 8
Options granted................ 4,280 $10 3,430 $22 5,821 $30
Options exercised.............. (2,545) $ 4 (2,944) $ 6 (6,542) $ 6
Options forfeited or
canceled..................... (478) $ 7 (594) $ 8 (1,684) $ 8
----------- ----------- -----------
Options outstanding at end of
year......................... 26,734 $ 6 26,626 $ 8 24,221 $14
=========== =========== ===========
Option price range per share... $0.09-10.85 $0.32-24.19 $0.48-33.47
=========== =========== ===========
Options exercisable............ 5,458 $ 4 7,322 $ 5 6,447 $ 8
=========== =========== ===========
</TABLE>
The following is a summary of the restricted stock activity for the years
ended March 31, 1996, 1997 and 1998:
<TABLE>
<CAPTION>
1996 1997 1998
---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C>
Shares granted and unearned at beginning of year............ 520 327 294
Shares granted.............................................. 7 169 82
Shares earned............................................... (200) (202) (45)
Shares forfeited............................................ -- -- (120)
---- ---- ----
Shares granted and unearned at end of year.................. 327 294 211
==== ==== ====
</TABLE>
In fiscal 1997, the Company adopted the BMC Software, Inc. 1996 Employee
Stock Purchase Plan (the Purchase Plan). A total of 1,000,000 shares of common
stock may be issued under the Purchase Plan to participating employees. Purchase
rights under the Purchase Plan are granted at 85% of the lesser of the market
value at the offering date or on the exercise date. During fiscal 1997 and 1998,
98,000 and 171,000 shares of stock, respectively, were issued pursuant to this
plan. The Purchase Plan terminates in the year 2006.
In 1996, BGS adopted the 1995 Employee Stock Purchase Plan (the BGS ESPP).
Under the BGS ESPP, an aggregate of 72,840 shares of Common Stock were reserved
for purchase by qualified employees, at 85% of the appropriate market price. The
BGS ESPP had a two-year term with 18,210 shares being offered for purchase in
semi-annual offerings. The BGS ESPP provided that qualified employees may
authorize payroll deductions from 1% to 10% of their base pay to purchase shares
at the lower of the market price in effect on
50
<PAGE> 52
BMC SOFTWARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
the day the offering starts or the day the offering terminates. If more than
18,210 shares qualified to be purchased in an offering, employees received
shares on a pro rata basis. During fiscal 1996, 1997 and 1998, BGS issued
35,849, 26,254 and 24,077 shares pursuant to this plan. This plan was terminated
in connection with BGS's merger with the Company. Shares previously acquired
pursuant to the plan were converted to the Company's common shares.
In October 1995, the FASB issued SFAS No. 123 "Accounting for Stock-Based
Compensation," which allows the Company to account for its employee stock-based
compensation plans under Accounting Principles Board Opinion (APB) No. 25 and
the related interpretations. According to APB No. 25, deferred compensation is
recorded for stock-based compensation grants based on the excess of the market
value of the common stock on the measurement date over the exercise price. The
deferred compensation is amortized over the vesting period of each unit of
stock-based compensation grant. If the exercise price of the stock-based
compensation grants is equal to the market price of the Company's stock on the
date of grant, no compensation expense is recorded.
For fiscal years ended March 31, 1996, 1997 and 1998, the Company has
recorded compensation expense of $1,354,000, $1,725,000 and $1,481,000,
respectively for restricted stock grants. The Company was not required under APB
No. 25 and SFAS No. 123 to record compensation expense for stock option grants
during the same period.
Had the compensation cost for these plans been determined pursuant to the
alternative method permitted under SFAS No. 123, the Company's net income and
diluted earnings per share would have been reduced to the following pro forma
amounts (in thousands, except per share amounts):
<TABLE>
<CAPTION>
1996 1997 1998
-------- -------- --------
<S> <C> <C> <C> <C>
Net Income: As Reported............................... $113,553 $172,985 $174,990
Pro Forma................................. $112,679 $169,211 $165,777
Diluted EPS: As Reported............................... $ 0.52 $ 0.78 $ 0.78
Pro Forma................................. $ 0.52 $ 0.76 $ 0.74
</TABLE>
In computing the above disclosure, the fair values of each option grant,
the BGS ESPP and the Purchase Plan discounts are estimated using the
Black-Scholes option pricing model with the following weighted average
assumptions used for grants in both 1997 and 1998: risk-free interest rate of 6
percent, expected life of 5 years for options and restricted stock, expected
life of 6 months for Purchase Plan shares, expected volatility of 40 percent and
no expected dividend yields. The weighted average fair value of options granted
in fiscal 1996, 1997 and 1998 was $4.23, $9.61 and $13.36, respectively.
Because the SFAS No. 123 alternative method of accounting has not been
applied to options granted prior to April 1, 1995, the resulting pro forma
compensation cost may not be representative of that to be expected in future
years. Additionally, the 1997 and 1998 pro forma amounts include $403,000 and
$771,000, respectively, related to the purchase discount offered under the
Purchase Plan. The weighted average fair value of shares purchased by employees
in fiscal 1997 and 1998 was $4.53 and $23.61, respectively.
The Company's outstanding options as of March 31, 1998, are segregated into
the following three categories in accordance with SFAS No. 123 (in thousands,
except per share and year amounts):
<TABLE>
<CAPTION>
WEIGHTED AVERAGE
OUTSTANDING EXERCISABLE RANGE OF WEIGHTED AVERAGE REMAINING
SHARES SHARES EXERCISE PRICE EXERCISE PRICE CONTRACTUAL LIFE
- ----------- ----------- -------------- ---------------- ----------------
<S> <C> <C> <C> <C>
10,806 4,516 $ 0.48-6.09 $ 5.46 6.41
5,118 1,446 $ 6.25-17.06 $10.26 7.34
8,297 485 $19.84-33.47 $28.43 9.32
</TABLE>
51
<PAGE> 53
BMC SOFTWARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(8) RETIREMENT PLAN
The Company maintains a salary reduction profit sharing plan or 401(k) plan
("the Plan") available to all domestic employees. The Plan is based on a
calendar year end and allows employees to contribute up to 15% of their annual
compensation with a maximum contribution of $9,240 in calendar year 1995 and
$9,500 in calendar years 1996 and 1997. In each of the calendar years 1995, 1996
and 1997, the board of directors authorized contributions to the Plan that would
match the employee's contribution up to a maximum of $5,000. The costs of these
contributions to the Company amounted to $3,211,000, $3,956,000 and $6,556,000
for the fiscal years ended March 31, 1996, 1997 and 1998, respectively. The
Company contributions vest to the employee in increments of 20% per year
beginning with the third year of employment and ending with the seventh.
BGS has a profit-sharing plan covering all employees and officers who are
at least 21 years of age and have completed at least one year of service with
BGS. Contributions under the plan are discretionary and may not exceed 15% of
the total compensation paid to all eligible participants each year.
Contributions were $50,000, $72,500 and $100,000 in 1996, 1997 and 1998,
respectively.
In addition to the Company's 401(k) plans, the Company maintains a deferred
compensation plan for certain employees of the Company. At March 31, 1998, a
total of approximately $9,975,000 is included in long term securities, with a
corresponding aggregate amount included in accrued liabilities and unrealized
gain on securities available for sale. Employees participating in this plan may
receive their respective amounts upon request.
(9) COMMITMENTS AND CONTINGENCIES
The Company has several noncancelable operating leases for office space,
computer equipment and software. Rent expense for office space is recognized
equally over the lease term. Total expenses incurred under these leases during
the years ended March 31, 1996, 1997 and 1998, were approximately $13,715,000,
$14,946,000 and $15,085,000, respectively.
Future minimum lease payments under noncancelable operating leases as of
March 31, 1998 are:
<TABLE>
<CAPTION>
FISCAL YEARS
ENDING
MARCH 31,
--------------
(IN THOUSANDS)
<S> <C>
1999................................................... $15,425
2000................................................... 12,832
2001................................................... 7,903
2002................................................... 3,825
2003................................................... 2,295
2004 and thereafter.................................... 2,773
-------
Total minimum lease payments................. $45,053
=======
</TABLE>
The Company filed a trade secret lawsuit styled BMC Software, Inc. vs.
Peregrine Systems, Inc. et al., Cause No. 91-10161, in the 200th Judicial
District Court of Travis County, Texas, in August 1995. The lawsuit sought an
injunction prohibiting a group of former employees and their employer from
misappropriating and misusing certain of the Company's trade secrets. The
Company has settled the litigation as to certain individuals and claims and is
continuing to pursue its trade secret and other claims against the remaining and
additional defendants. These defendants are asserting counterclaims against the
Company for violations of the Texas Free Enterprise and Antitrust Act of 1983,
abuse of process, slander of title, tortious interference with contract and
tortious interference with advantageous and prospective business relationships.
These counter-
52
<PAGE> 54
BMC SOFTWARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
claims seek compensatory, treble and exemplary damages, costs and attorneys'
fees and certain injunctive relief. Management believes the ultimate resolution
of the above matters will not be material to the Company's financial condition.
The Company is subject to various other legal proceedings and claims,
either asserted or unasserted, which arise in the ordinary course of business.
Management does not believe that the outcome of any of these legal matters will
have a material adverse effect on the Company's results of operations or
consolidated financial position.
53
<PAGE> 55
BMC SOFTWARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(10) FOREIGN OPERATIONS
The table below summarizes selected financial information with respect to
the Company's operations by geographic locations. Within the European
marketplace, the Company's German operations are the most significant with total
revenues accounting for over 32% of total European revenues in each of the three
fiscal years presented.
<TABLE>
<CAPTION>
YEARS ENDED MARCH 31,
--------------------------------
1996 1997 1998
-------- -------- ----------
(IN THOUSANDS)
<S> <C> <C> <C>
REVENUES
North America..................................... $280,146 $379,008 $ 512,765
Europe............................................ 158,133 196,748 238,365
Pacific Rim and Other............................. 31,627 36,032 37,023
-------- -------- ----------
Consolidated.............................. $469,906 $611,788 $ 788,153
======== ======== ==========
OPERATING PROFITS*
North America..................................... $ 60,076 $102,223 $ 101,708
Europe............................................ 85,464 109,433 133,787
Pacific Rim and Other............................. 13,477 18,349 6,230
-------- -------- ----------
Consolidated.............................. $159,017 $230,005 $ 241,725
======== ======== ==========
IDENTIFIABLE ASSETS
North America..................................... $488,854 $687,762 $ 976,843
Europe............................................ 129,792 87,491 106,270
Pacific Rim and Other............................. 24,953 114,433 165,382
-------- -------- ----------
Consolidated.............................. $643,599 $889,686 $1,248,495
======== ======== ==========
</TABLE>
- ---------------
* Substantially all of the Company's product research and development is
conducted in North America which has the effect of reducing the reported North
American operating profits.
SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information" was issued in June 1997. SFAS No. 131 requires that a public
business enterprise report financial and descriptive information about its
reportable operating segments. Generally, financial information is required to
be reported on the basis used internally for evaluating segment performance and
resource allocation. SFAS No. 131 is effective for fiscal years beginning after
December 31, 1997, however, disclosure is not required in interim financial
statements in the initial year of adoption. Accordingly, the Company will
reflect the provisions of SFAS No. 131 in its Consolidated Financial Statements
for the March 31, 1999, fiscal year. The Company is currently assessing the SFAS
No. 131 requirements.
54
<PAGE> 56
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
We have audited in accordance with generally accepted auditing standards,
the consolidated financial statements of BMC Software, Inc. and subsidiaries
included in this Form 10-K and have issued our report thereon dated May 1, 1998.
Our audits were made for the purpose of forming an opinion on the basic
consolidated financial statements taken as a whole. This Schedule is the
responsibility of the Company's management and is presented for purposes of
complying with the Securities and Exchange Commission's rules and is not part of
the basic consolidated financial statements. This Schedule has been subjected to
the auditing procedures applied in the audits of the basic consolidated
financial statements and, in our opinion, fairly states in all material respects
the financial data required to be set forth therein in relation to the basic
consolidated financial statements taken as a whole.
ARTHUR ANDERSEN LLP
Houston, Texas
May 1, 1998
55
<PAGE> 57
SCHEDULE II
BMC SOFTWARE, INC. AND SUBSIDIARIES
VALUATION ACCOUNT
YEARS ENDED MARCH 31, 1996, 1997 AND 1998
(IN THOUSANDS)
<TABLE>
<CAPTION>
BALANCE AT CHARGED CHARGED TO
BEGINNING OF (CREDIT) TO OTHER BALANCE AT
YEAR DESCRIPTION YEAR EXPENSES ACCOUNTS DEDUCTION END OF YEAR
- ---- ----------- ------------ ----------- ---------- --------- -----------
<S> <C> <C> <C> <C> <C> <C>
1996 Allowance for doubtful
accounts......................... $1,876 776 -- (354) $2,298
1997 Allowance for doubtful
accounts......................... $2,298 2,344 -- -- $4,642
1998 Allowance for doubtful
accounts......................... $4,642 1,489 -- (160) $5,971
</TABLE>
56
<PAGE> 58
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, on February 22, 1999.
BMC SOFTWARE, INC.
By: /s/ MAX P. WATSON JR.
----------------------------------
Max P. Watson Jr.
Chairman of the Board, President
and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons on behalf of the Registrant and
in the capacities and on the dated indicated.
<TABLE>
<CAPTION>
SIGNATURES TITLE DATE
---------- ----- ----
<C> <S> <C>
/s/ MAX P. WATSON JR. Chairman of the Board, President
- ----------------------------------------------------- and Chief Executive Officer
Max P. Watson Jr. (Principal Executive Officer)
/s/ WILLIAM M. AUSTIN Senior Vice President and Chief
- ----------------------------------------------------- Financial Officer
William M. Austin
/s/ JOHN W. BARTER Director
- -----------------------------------------------------
John W. Barter
/s/ B. GARLAND CUPP Director
- -----------------------------------------------------
B. Garland Cupp
/s/ MELDON K. GAFNER Director
- -----------------------------------------------------
Meldon K. Gafner
/s/ L. W. GRAY Director
- -----------------------------------------------------
L. W. Gray
/s/ KEVIN M. KLAUSMEYER Vice President, Controller (Chief
- ----------------------------------------------------- Accounting Officer)
Kevin M. Klausmeyer
/s/ GEORGE F. RAYMOND Director
- -----------------------------------------------------
George F. Raymond
/s/ TOM C. TINSLEY Director
- -----------------------------------------------------
Tom C. Tinsley
</TABLE>
57
<PAGE> 59
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER
- -------
<S> <C>
3.1 -- Restated Certificate of Incorporation of the Company;
incorporated by reference to Exhibit 3.1 to the Company's
Registration Statement on Form S-1 (Registration No. 33-22892)
(the "S-1 Registration Statement").
3.2 -- Certificate of Amendment of Restated Certificate of
Incorporation; incorporated by reference to Exhibit 3.2 to the
Company's Annual Report for the fiscal year ended March 31, 1997
(the "1997 10-K").
3.2 -- Bylaws of the Company; incorporated by reference to Exhibit 3.2
to the S-1 Registration Statement.
4.1 -- Specimen Stock Certificate for the Common Stock of the Company;
incorporated by reference to Exhibit 4.1 to the S-1 Registration
Statement.
4.2 -- Rights Agreement, dated as of May 8, 1995, between the Company
and The First National Bank of Boston, as Rights Agent (the
"Rights Agreement"), specifying the terms of the Rights, which
includes the form of Certificate of Designation of Series A
Junior Participating Preferred Stock as Exhibit A, the form of
Right Certificate as Exhibit B and the form of the Summary of
Rights as Exhibit C (incorporated by reference to Exhibit 1 to
the registrant's Registration Statement on Form 8-A dated May 10,
1995).
4.3 -- Amendment to the Rights Agreement; incorporated by reference to
Exhibit 4.3 to the 1997 10-K.
10.1(a) -- Form of BMC Software, Inc. 1994 Employee Incentive Plan;
incorporated by reference to Exhibit 10.7(a) to the Company's
Annual Report on Form 10-K for the fiscal year ended March 31,
1995 (the "1995 10-K").
10.1(b) -- Form of Stock Option Agreement employed under BMC Software, Inc.
1994 Employee Incentive Plan; incorporated by reference to
Exhibit 10.7(b) to the 1995 10-K.
10.2(a) -- Form of BMC Software, Inc. 1994 Non-employee Directors' Stock
Option Plan; incorporated by reference to Exhibit 10.8(a) to the
1995 10-K.
10.2(b) -- Form of Stock Option Agreement employed under BMC Software, Inc.
1994 Nonemployee Directors' Stock Option Plan; incorporated by
reference to Exhibit 10.8(b) to the 1995 10-K.
10.3 -- Description of BMC Software, Inc. Executive Officer Annual
Incentive Plan; incorporated by reference to Exhibit 10.6 to
the Company's Annual Report on Form 10-K for the fiscal year
ended March 31, 1994.
10.4 -- Form of Stock Option Agreement employed under BMC Software, Inc.
1994 Employee Incentive Plan for certain executive officers.
10.5 -- Form of Restricted Stock Agreement employed under BMC Software
Inc. 1994 Employee Incentive Plan for certain executive officers.
10.5(a) -- License Agreement with International Business Machines
Corporation; incorporated by reference to Exhibit 10.12 to the
S-1 Registration Statement.
10.5(b) -- License Agreements for Use and Marketing of Program Materials
dated May 13, 1986, with International Business Machines
Corporation; incorporated by reference to Exhibit 10.13 to the
S-1 Registration Statement.
10.5(c) -- Customer Agreement with International Business Machines
Corporation dated April 10, 1991; incorporated by reference to
Exhibit 10.15 to the Company's Annual Report on Form 10-K for the
fiscal year ended March 31, 1992 (the "1992 10-K").
10.6 -- Form of Indemnification Agreement among the Company and its
directors and executive officers; incorporated by reference to
Exhibit 10.11 to the 1995 10-K.
22.1 -- Subsidiaries of the Company.
*23.1 -- Consent of Arthur Andersen LLP, independent public accountants.
*23.2 -- Consent of Ernst & Young LLP, independent auditors.
*27 -- Financial Data Schedule
</TABLE>
- -------------
* Filed herewith.
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of
our reports dated May 1, 1998, included in this Form 10-K/A, into the Company's
previously filed Registration Statements on Form S-8 filed on November 17,
1989, January 31, 1990, May 16, 1991, October 13, 1995, June 12, 1996 and March
26, 1998, on Form S-3 filed on August 19, 1991, October 13, 1995, November 7,
1995 and March 4, 1998, and on Form S-4 filed on February 20, 1998. It should
be noted that we have not audited any financial statements of the Company
subsequent to March 31, 1998 or performed any audit procedures subsequent to
the date of our report.
ARTHUR ANDERSEN LLP
Houston, Texas
February 18, 1999
<PAGE> 1
EXHIBIT 23.2
Consent of Independent Auditors
We consent to the use of our report dated March 13, 1998 with respect to the
consolidated financial statements of BGS Systems, Inc., included in the Annual
Report, as amended, on Form 10-K/A of BMC Software, Inc. for the year ended
March 31, 1998.
/s/ ERNST & YOUNG LLP
ERNST & YOUNG LLP
Boston, Massachusetts
February 18, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Company's March 31, 1998, Consolidated Financial Statements included in its Form
10-K/A.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> MAR-31-1998
<PERIOD-START> APR-01-1997
<PERIOD-END> MAR-31-1998
<CASH> 72,093
<SECURITIES> 643,980
<RECEIVABLES> 194,602
<ALLOWANCES> 5,606
<INVENTORY> 0
<CURRENT-ASSETS> 373,878
<PP&E> 238,772
<DEPRECIATION> 75,776
<TOTAL-ASSETS> 1,248,495
<CURRENT-LIABILITIES> 335,534
<BONDS> 0
0
0
<COMMON> 2,101
<OTHER-SE> 757,056
<TOTAL-LIABILITY-AND-EQUITY> 1,248,495
<SALES> 549,338
<TOTAL-REVENUES> 788,153
<CGS> 92,926
<TOTAL-COSTS> 546,428
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 272,002
<INCOME-TAX> 97,012
<INCOME-CONTINUING> 174,990
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 174,990
<EPS-PRIMARY> 0.83<F1>
<EPS-DILUTED> 0.78
<FN>
<F1>The extracted information above identified as "EPS-PRIMARY" and "EPS-DILUTED"
represents basic earnings per share (EPS) and diluted EPS, respectively,
calculated in accordance with Statement of Financial Accounting Standards No.
128, "Earnings Per Share."
</FN>
</TABLE>
