<PAGE> 1
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q/A
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 0-17136
BMC SOFTWARE, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
DELAWARE 74-2126120
(State or other jurisdiction of (IRS Employer identification No.)
incorporation or organization)
BMC SOFTWARE, INC.
2101 CITYWEST BOULEVARD
HOUSTON, TEXAS 77042
(Address of principal executive officer) (Zip Code)
</TABLE>
Registrant's telephone number including area code: (713)918-8800
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
As of August 10, 1999, there were outstanding 239,265,949 shares of Common
Stock, par value $.01, of the registrant.
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BMC SOFTWARE, INC. AND SUBSIDIARIES
QUARTER ENDED JUNE 30, 1999
INDEX
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements........................................ 2
Condensed Consolidated Balance Sheets March 31, 1999 and
June 30, 1999 (Unaudited)................................. 2
Condensed Consolidated Statements of Earnings Three months
ended June 30, 1998 and 1999 (Unaudited).................. 3
Condensed Consolidated Statements of Cash Flows Three months
ended June 30, 1998 and 1999 (Unaudited).................. 4
Notes to Condensed Consolidated Financial Statements........ 5
ITEM 2. Management's Discussion and Analysis of Results of
Operations and Financial
Condition................................................. 10
ITEM 3. Quantitative and Qualitative Disclosures about Market
Risk...................................................... 24
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings........................................... 26
ITEM 6. Exhibits and Reports on Form 8-K............................ 26
SIGNATURES.................................................. 27
</TABLE>
1
<PAGE> 3
PART I.
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
BMC SOFTWARE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
ASSETS
<TABLE>
<CAPTION>
MARCH 31, JUNE 30,
1999 1999
---------- -----------
(UNAUDITED)
<S> <C> <C>
Current assets:
Cash and cash equivalents................................. $ 347,914 $ 313,114
Investment securities..................................... 106,292 97,705
Trade accounts receivable, net............................ 178,388 159,510
Trade finance receivables, current........................ 180,614 223,035
Deferred tax asset........................................ 19,363 18,043
Prepaid expenses and other................................ 40,854 54,806
---------- ----------
Total current assets............................... 873,425 866,213
Property and equipment, net................................. 244,359 265,807
Software development costs, net............................. 110,136 121,299
Purchased software, net..................................... 32,766 153,169
Investment securities....................................... 750,427 734,791
Deferred tax asset.......................................... 7,473 17,542
Long-term receivables....................................... 223,977 174,928
Goodwill and other intangibles, net......................... 2,494 415,447
Deferred charges and other assets........................... 37,636 30,722
---------- ----------
Total assets....................................... $2,282,693 $2,779,918
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Trade accounts payable.................................... $ 27,310 $ 31,921
Accrued commissions payable............................... 31,944 10,143
Accrued liabilities and other............................. 142,120 121,851
Accrued merger related costs.............................. 38,305 48,730
Short-term debt........................................... -- 485,000
Current portion of deferred revenue....................... 411,172 418,770
---------- ----------
Total current liabilities.......................... 650,851 1,116,415
Deferred revenue and other................................ 297,477 301,129
---------- ----------
Total liabilities.................................. 948,328 1,417,544
Stockholders' equity:
Common stock.............................................. 2,366 2,377
Additional paid-in capital................................ 185,831 211,099
Retained earnings......................................... 1,143,131 1,159,489
Accumulated other comprehensive income (loss)............. 8,762 (4,160)
---------- ----------
1,340,090 1,368,805
Less unearned portion of restricted stock
compensation.......................................... 5,725 6,431
---------- ----------
Total stockholders' equity......................... 1,334,365 1,362,374
---------- ----------
$2,282,693 $2,779,918
========== ==========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
2
<PAGE> 4
BMC SOFTWARE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
JUNE 30,
-------------------
1998 1999
-------- --------
<S> <C> <C>
Revenues:
Licenses.................................................. $190,426 $279,782
Maintenance............................................... 88,858 120,949
-------- --------
Total revenues.................................... 279,284 400,731
-------- --------
Operating expenses:
Selling and marketing..................................... 89,801 140,359
Research and development.................................. 40,154 57,552
Cost of maintenance services and product licenses......... 32,434 37,199
General and administrative................................ 20,747 34,295
Acquired research and development costs................... 17,304 80,800
Amortization of goodwill & intangibles.................... -- 30,359
Merger related costs...................................... -- 12,487
-------- --------
Total operating expenses.......................... 200,440 393,051
-------- --------
Operating income............................................ 78,844 7,680
Interest expense............................................ -- (6,133)
Interest and other income................................... 13,514 17,082
-------- --------
Other income................................................ 13,514 10,949
-------- --------
Earnings before taxes....................................... 92,358 18,629
Income taxes................................................ 25,141 2,271
-------- --------
Net earnings...................................... $ 67,217 $ 16,358
======== ========
Basic earnings per share.................................... $ .29 $ .07
======== ========
Shares used in computing basic earnings per share........... 233,197 237,575
======== ========
Diluted earnings per share.................................. $ .27 $ .07
======== ========
Shares used in computing diluted earnings per share......... 248,221 249,759
======== ========
Comprehensive Income:
Net earnings.............................................. $ 67,217 $ 16,358
Foreign currency translation adjustment, net of taxes of
$546 and $747.......................................... (1,555) (2,127)
Unrealized gain (loss) on securities available for sale:
Gross unrealized gain (loss), net of taxes of $2,139
and $2,474............................................ 6,086 7,043
Realized (gain) loss included in net earnings, net of
taxes of $324 and $224................................ (921) (639)
-------- --------
Net unrealized gain (loss) on securities available
for sale......................................... 5,165 6,404
Unrealized gain on derivative instruments:
Gross unrealized gain, net of taxes of $-- and $732.... -- 2,083
Realized gain included in net earnings, net of taxes of
$-- and $--........................................... -- --
-------- --------
Net unrealized gain on derivative instruments..... -- 2,083
-------- --------
Comprehensive income.............................. $ 70,827 $ 22,718
======== ========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
3
<PAGE> 5
BMC SOFTWARE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
JUNE 30,
---------------------
1998 1999
--------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net earnings.............................................. $ 67,217 $ 16,358
Adjustments to reconcile net earnings to net cash provided
by operating activities:
Acquired research and development and merger related
costs................................................. 17,304 81,859
Depreciation and amortization.......................... 13,943 44,392
Loss on sale/disposal of fixed assets.................. 42 --
Gain on sale/disposal of investments................... (1,539) --
Stock issued under compensatory stock plans............ 33 (706)
Net change in deferred taxes........................... -- 1,498
Net change in receivables, payables, deferred revenue
and other components of working capital............... 151,456 (85,161)
--------- ---------
Total adjustments.................................... 181,239 41,882
--------- ---------
Net cash provided by operating activities......... 248,456 58,240
--------- ---------
Cash flows from investing activities:
Technology acquisitions, net of cash acquired............. (2,000) (635,501)
Purchased software and related assets..................... (495)
Capital expenditures...................................... (22,661) (21,291)
Capitalization of software development.................... (12,563) (16,756)
Purchases of securities held to maturity.................. (155,208) --
Proceeds from securities held to maturity................. 10,668 --
Increase in long-term finance receivables................. 13 74,278
--------- ---------
Net cash used in investing activities............. (182,246) (599,270)
--------- ---------
Cash flows from financing activities:
Proceeds from borrowings.................................. -- 498,825
Repayments of borrowings.................................. (769) (15,000)
Income tax reduction relating to stock options............ 10,138 11,185
Stock options exercised and other......................... 6,881 14,094
Treasury stock acquired................................... (4,797) --
Proceeds from issuance of Boole common stock.............. 2,376 --
--------- ---------
Net cash provided by financing activities......... 13,829 509,104
--------- ---------
Adjustment to conform quarter end of Boole.................. 7,388 --
Effect of exchange rate changes on cash..................... 914 (2,874)
--------- ---------
Net change in cash and cash equivalents..................... 88,341 (34,800)
Cash and cash equivalents at beginning of period............ 106,016 347,914
--------- ---------
Cash and cash equivalents at end of period.................. $ 194,357 $ 313,114
========= =========
Supplemental disclosure of cash flow information:
Cash paid for interest.................................... $ 835 $ 2,300
Cash paid for income taxes................................ $ 3,252 $ 24,678
Supplemental disclosure of non-cash investing and financing
activities:
Capital lease obligations incurred for equipment
purchase............................................... $ 632 $ --
</TABLE>
See accompanying notes to condensed consolidated financial statements.
4
<PAGE> 6
BMC SOFTWARE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 -- BASIS OF PRESENTATION
The accompanying condensed consolidated financial statements include the
accounts of BMC Software, Inc. and its wholly owned subsidiaries (collectively,
the "Company"). All significant intercompany balances and transactions have been
eliminated in consolidation.
The accompanying unaudited interim condensed consolidated financial
statements reflect all normal recurring adjustments which, in the opinion of
management, are necessary for a fair presentation of the results for the interim
periods presented. These financial statements have been prepared in accordance
with generally accepted accounting principles for interim financial information
and with the instructions to Form 10-Q and Article 10 of Regulation S-X.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for complete financial statements.
These financial statements should be read in conjunction with the Company's
annual audited financial statements for the year ended March 31, 1999, as filed
with the Securities and Exchange Commission ("SEC") on Form 10-K.
Effective March 30, 1999, the Company merged with Boole & Babbage, Inc.
("Boole"). As such, the Company's results of operations for the quarter ended
June 30, 1998, have been restated to include the historical results of
operations of Boole for the same period.
The Company acquired New Dimension Software, Ltd. ("New Dimension"),
headquartered in Tel Aviv, Israel, effective April 14, 1999. As such, the
Company's financial results for the quarter ended June 30, 1999, include the
financial results of New Dimension for the period beginning April 14, 1999
through June 30, 1999. See Note 3 -- Technology Acquisitions for further
discussion regarding the New Dimension acquisition and unaudited pro forma
financial information.
NOTE 2 -- EARNINGS PER SHARE
The Company presents its earnings per share in accordance with Statement of
Financial Accounting Standards (SFAS) No. 128, "Earnings Per Share". SFAS No.
128 requires dual presentation of earnings per share (EPS); basic EPS and
diluted EPS. Basic EPS is computed by dividing net income by the weighted
average number of common shares outstanding for the period. Diluted EPS reflects
the potential dilution that could occur if securities or other contracts to
issue common stock were exercised or converted into common stock. For purposes
of this calculation, outstanding stock options and unearned restricted stock are
considered common stock equivalents using the treasury stock method. Options to
purchase 4.6 million shares have been excluded from the calculation of diluted
EPS as they are anti-dilutive. The following table summarizes the basic EPS and
diluted EPS computations for the quarters ended June 30, 1998 and 1999 (in
thousands, except per share amounts):
<TABLE>
<CAPTION>
QUARTERS ENDED JUNE 30,
-----------------------
1998 1999
---------- ----------
<S> <C> <C>
Basic earnings per share:
Net earnings.............................................. $ 67,217 $ 16,358
-------- --------
Weighted average number of common shares.................. 233,197 237,575
-------- --------
Basic earnings per share.................................. $ 0.29 $ 0.07
======== ========
Diluted earnings per share:
Net earnings.............................................. $ 67,217 $ 16,358
-------- --------
Weighted average number of common shares.................. 233,197 237,575
Incremental shares from assumed conversion of stock
options and other...................................... 15,024 12,184
-------- --------
Adjusted weighted average number of common shares......... 248,221 249,759
-------- --------
Diluted earnings per share................................ $ 0.27 $ 0.07
======== ========
</TABLE>
5
<PAGE> 7
BMC SOFTWARE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 3 -- TECHNOLOGY ACQUISITION
On April 14, 1999, the Company acquired, through a public tender offer, in
excess of 95% of the outstanding ordinary shares of New Dimension for
approximately $673 million in total consideration. The acquisition was accounted
for as a purchase transaction, and the purchase price was allocated as follows:
$126 million to software assets, $436 million to goodwill and other intangibles,
and $30 million to equipment, receivables and other non-software assets, net of
liabilities assumed. Additionally, BMC allocated $81 million, or 12% of the
purchase price, to purchased in-process research and development ("IPR&D"),
which was charged to expense in the June 1999 quarter. Purchased IPR&D
represents the present value of the estimated after-tax cash flows expected to
be generated by the purchased technology, which, at the acquisition date, had
not yet reached technological feasibility. The cash flow estimates for revenues
were based on estimates of relevant market sizes and growth factors, expected
industry trends, the anticipated nature and timing of new product introductions
by the Company and its competitors, individual product sales cycles, and the
estimated life of each products' underlying technology. Estimated operating
expenses and income taxes were deducted from estimated revenue projections to
arrive at estimated after-tax cash flows. Estimated operating expenses included
cost of goods sold, selling and marketing expenses, general and administrative
expenses, and research and development, including estimated costs to maintain
the products once they have been introduced into the market and are generating
revenue. The rates utilized to discount to value the estimated cash flows were
20% for in-process technologies and 15% for developed technologies and were
based primarily on venture capital rates of return and the weighted average cost
of capital for BMC at the time of the acquisition.
As of the date of acquisition, the Company concluded that the IPR&D had no
alternative future use after taking into consideration the potential use of the
technology in different products, the stage of development and life cycle of
each project, resale of the software, and internal use. The value of the
purchased IPR&D was expensed at the time of the acquisition. Refer to "Acquired
Research and Development and Related Costs" in Management's Discussion and
Analysis of Results of Operations and Financial Condition for further discussion
of the Company's IPR&D charges.
In order to fund the purchase price, the Company entered into a 364-day,
unsecured revolving credit facility with a group of banks on which the Company
drew down approximately $500 million of short-term borrowings. The remaining
consideration was satisfied from the Company's existing working capital.
Additionally, the purchase price includes the Company's historical cost of
approximately $2 million for 452,800 shares of New Dimension held by Boole, a
wholly owned subsidiary of the Company, prior to the acquisition. Such shares
would have been valued at approximately $24 million based on the $52.50 per
share tender offer price.
6
<PAGE> 8
BMC SOFTWARE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following unaudited pro forma results of operations for the quarters
ended June 30, 1998, and 1999, are as if the acquisition of New Dimension had
occurred at the beginning of each period presented. The pro forma information
includes New Dimension's financial results for the quarters ended March 31, 1998
and June 30, 1999, respectively, combined with the accounts of the Company for
the quarters ended June 30, 1998 and 1999, respectively.
<TABLE>
<CAPTION>
JUNE 30,
-------------------------
1998 1999
----------- -----------
(IN THOUSANDS, EXCEPT PER
SHARE AMOUNTS)
<S> <C> <C>
Total revenues(1)........................................... $294,486 $403,625
Total operating expenses(1)(2).............................. $247,324 $321,307
Net earnings(2)............................................. $ 29,297 $ 60,251
Basic EPS(2)................................................ $0.13 $0.25
Diluted EPS(2).............................................. $0.12 $0.24
</TABLE>
- ---------------
(1) Includes the elimination of $3.4 million in the quarter ended June 30, 1998,
of royalties paid by the Company to New Dimension.
(2) The pro forma results of operations exclude the effect of the $80.8 million
($56.6 million, net of taxes) write-off of IPR&D associated with the
acquisition, in accordance with generally accepted accounting principles.
NOTE 4 -- STOCK SPLIT
On April 20, 1998, the Company's board of directors declared a two-for-one
stock split. The stock split was effected in the form of a stock dividend. The
stockholders of record received one additional share of common stock for each
share held. All stock related data in the condensed consolidated financial
statements and related notes reflect this stock split for all periods presented.
NOTE 5 -- SHORT-TERM BORROWINGS
In April 1999, the Company entered into a 364-day unsecured revolving
credit facility (the Credit Facility) with a group of banks. The Company drew
down approximately $500 million on the Credit Facility during the first quarter
to fund the New Dimension acquisition. Interest on the outstanding balance is
payable monthly and is accrued at LIBOR plus 75 basis points, which approximated
5.9% as of June 30, 1999. The Company holds a renewal option on the Credit
Facility, which, if exercised, will enable the Company to convert the
outstanding balance at the end of the initial 364-day period into a one-year
term loan. The Company repaid $15 million of principal during the first quarter.
NOTE 6 -- SIGNIFICANT CUSTOMER
During the quarter ended June 30, 1999, the Company entered into a
transaction with a single customer which accounted for 12% of total revenues
recognized in the quarter. This transaction contained a significant amount of
new product license fees and license upgrade fees associated with future
capacity.
NOTE 7 -- ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
The Company adopted SFAS No. 133, "Accounting for Derivative Instruments
and Hedging Activities" in the fourth quarter of fiscal 1999. The Statement
establishes accounting and reporting standards requiring that every derivative
instrument be recorded in the balance sheet as either an asset or liability
measured at its fair value. The Statement also requires that changes in a
derivative's fair value be recognized currently in earnings unless specific
hedge accounting criteria are met, in which case changes are recognized in
7
<PAGE> 9
BMC SOFTWARE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
comprehensive income. Special accounting for qualifying hedges allows a
derivative's gains and losses to offset related results on the hedged item in
the income statement, and requires that the Company formally document,
designate, and assess the effectiveness of transactions that receive hedge
accounting.
One of the Company's principal hedging activities is to purchase foreign
currency option contracts to hedge anticipated revenue transactions. The Company
has reported the option contracts at fair value each reporting period and the
change in the intrinsic value of such contracts has been reported as other
comprehensive income.
NOTE 8 -- SEGMENT REPORTING
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. The Company currently operates in a single segment,
distributing its enterprise systems management software products. The Company
has recently announced initiatives to realign its product marketing and
development operations along a strategic business unit basis which closely
follows product lines. However, financial information for reporting on these
initiatives is not yet available. The Company expects that such financial
information will be available in future periods and will revise its segment
reporting disclosures once such financial information is available.
Revenues are tracked by both geography and product categories based upon
the predominant operating environments of enterprise computing: mainframe and
distributed systems. The Company is not organized into business units along
these product categories nor does it capture expenses on this basis. Revenues
relating to product categories are as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
JUNE 30,
-------------------
1998 1999
-------- --------
(IN THOUSANDS)
<S> <C> <C>
REVENUES
Mainframe:
License................................................... $134,475 $190,941
Maintenance............................................... 71,190 89,890
-------- --------
Total mainframe revenues.......................... 205,665 280,831
Distributed systems:
License................................................... 55,951 88,841
Maintenance............................................... 17,668 31,059
-------- --------
Total distributed systems revenues................ 73,619 119,900
-------- --------
Total revenues.................................... $279,284 $400,731
======== ========
</TABLE>
Mainframe revenue represents revenue pertaining to products which operate
primarily on the IBM OS/390 mainframe operating system and databases.
Distributed systems revenue represents revenue pertaining to products which
operate on Unix, MS Windows NT and other distributed systems operating systems
and Oracle, Informix, Sybase, SQL and other distributed systems databases. Also
classified as distributed systems products are enterprise products which deliver
solutions across the enterprise regardless of the platform. These enterprise
products are generally licensed based on metrics such as number of users or
tasks managed.
8
<PAGE> 10
BMC SOFTWARE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 9 -- MERGER RELATED COSTS
Pursuant to the close of the Company's merger with Boole in March, 1999,
BMC's management approved a formal plan of restructuring (the Plan) which
included steps to be taken to fully integrate the operations of the two
companies, consolidate duplicate facilities, and eliminate redundancies to
achieve reductions in overhead expenses in future periods. In connection with
the Plan, in March of 1999, the Company accrued approximately $17.7 million in
restructuring related costs and $20.6 million in direct transaction costs.
During the quarter ended June 30, 1999, the Company made certain revisions
to the Plan. Significant revisions to the Plan include the following: the
termination of approximately 275 additional employees, primarily in the United
States and Europe, which resulted in an increase in accrued termination benefits
of approximately $11 million; the accrual of other termination benefits which
were contingent upon certain performance criteria of approximately $1 million;
revisions to the original exit strategy for certain operating leases for office
space in the United States and Europe which led to a decrease in the liability
of approximately $3 million; and the accrual for termination costs for certain
operating leases for computer hardware and equipment of approximately $1
million. Additionally, in conjunction with the New Dimension acquisition (see
Note 3 -- Technology Acquisitions), the Company has accrued approximately $0.4
million for estimated costs to terminate certain operating leases for duplicate
office space. As of June 30, 1999, the Company has paid approximately $2 million
for restructuring related charges, comprised mostly of employee termination
benefits.
In addition to the restructuring charges, the Company incurred various
direct transaction costs, such as investment banking, legal and accounting fees,
pursuant to the Boole and New Dimension transactions. As of June 30, 1999, the
Company's accrual for unpaid transaction costs approximated $22.3 million. The
Company expects that payment of these accruals will occur by the end of fiscal
2000.
The following table summarizes the activity during the three months ended
June 30, 1999, in the accruals for acquisition and other costs, excluding direct
transaction costs (in millions):
<TABLE>
<CAPTION>
PAID OUT OR INCREASE IN
BALANCE AT CHARGED AGAINST REVISION OF ACCRUAL DUE TO BALANCE AT
MARCH 31, 1999 THE RELATED ASSETS THE ACCRUAL NEW DIMENSION JUNE 30, 1999
-------------- ------------------ ----------- -------------- -------------
<S> <C> <C> <C> <C> <C>
Facility costs and write-down of
fixed assets to be disposed
of............................. $10.2 $ -- $(2.0) $0.4 $ 8.6
Employee termination benefits.... 7.0 (1.7) 12.1 -- 17.4
Other merger related costs....... 0.5 (0.1) -- -- 0.4
----- ----- ----- ---- -----
Total.................. $17.7 $(1.8) $10.1 $0.4 $26.4
===== ===== ===== ==== =====
</TABLE>
This accrual, which excludes accrued transaction costs, represents
management's best estimate, based on available information as of June 30, 1999,
of identifiable and quantifiable charges that the Company anticipates it will
incur as a result of the actions taken under the Plan. The Company expects to
incur other costs which were either not quantifiable or to which the Company had
not committed to a course of action as of June 30, 1999, and therefore, have not
been included in the accrual. These costs could have a material adverse impact
on future operating results. In addition to costs included in the accrual for
the merger and restructuring plan, the Company will incur other incremental
expenses in the near term as a direct result of its integration efforts, but for
which classification as restructuring charges is not allowed under current
accounting standards. These items, such as relocation and retraining of
personnel and development or marketing efforts for enhanced or integrated
products, could be significant to future operating results.
9
<PAGE> 11
BMC SOFTWARE, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
This section of the Form 10-Q includes historical information for the
periods covered, certain forward looking information and the information
provided below under the heading "Certain Risks and Uncertainties that Could
Affect Future Operating Results" about certain risks and uncertainties that
could cause the Company's future operating results to differ from the results
indicated by any forward looking statements made by the Company or others. It is
important that the historical discussion below be read together with the
attached consolidated financial statements and notes thereto, with the
discussion of such risks and uncertainties and with the audited financial
statements and notes thereto, and the Management's Discussion and Analysis of
Results of Operations and Financial Condition, contained in the Company's Form
10-K for fiscal 1999.
A. RESULTS OF OPERATIONS AND FINANCIAL CONDITION
The following table sets forth, for the periods indicated, the percentages
that selected items in the Condensed Consolidated Statements of Earnings bear to
total revenues. These comparisons of financial results are not necessarily
indicative of future results.
<TABLE>
<CAPTION>
PERCENTAGE OF TOTAL
REVENUE FOR THE
THREE MONTHS ENDED
JUNE 30,
-------------------
1998 1999
------ ------
<S> <C> <C>
Revenues:
License................................................... 68.2% 69.8%
Maintenance............................................... 31.8 30.2
----- -----
100.0 100.0
Operating expenses:
Selling and marketing..................................... 32.1 35.0
Research and development.................................. 14.4 14.4
Cost of maintenance services and product licenses......... 11.6 9.3
General and administrative................................ 7.4 8.5
Acquired research and development costs................... 6.2 20.2
Amortization of goodwill & intangibles.................... -- 7.6
Merger related costs...................................... -- 3.1
----- -----
Operating income............................................ 28.3 1.9
Other income................................................ 4.8 2.7
----- -----
Earnings before taxes....................................... 33.1 4.6
Income taxes................................................ 9.0 .5
----- -----
Net earnings...................................... 24.1% 4.1%
===== =====
</TABLE>
10
<PAGE> 12
REVENUES
<TABLE>
<CAPTION>
THREE MONTHS ENDED
JUNE 30,
-------------------
(IN THOUSANDS)
1998 1999 CHANGE
-------- -------- ------
<S> <C> <C> <C>
North American license revenues............................. $124,290 $202,381 62.8%
International license revenues.............................. 66,136 77,401 17.0%
-------- --------
Total license revenues............................. 190,426 279,782 46.9%
North American maintenance revenues......................... 52,365 74,449 42.2%
International maintenance revenues.......................... 36,493 46,500 27.4%
-------- --------
Total maintenance revenues.................................. 88,858 120,949 36.1%
-------- --------
Total revenues..................................... $279,284 $400,731 43.5%
======== ========
</TABLE>
Product Line Revenues
At June 30, 1999, the Company marketed over 450 software products designed
to improve the availability, performance and recoverability of enterprise
applications, databases and other Information Technology ("IT") systems
components operating in host mainframe and distributed computing environments.
The Company's mainframe products accounted for 74% and 70% of total revenues in
the quarters ended June 30, 1998 and 1999, respectively. Total revenues from
mainframe products grew 37% from the first quarter of fiscal 1999 to the first
quarter of fiscal 2000. The revenues from these products are driven largely by
the growth in customers' processing capacity. The decline in relative revenue
contribution by the mainframe product lines reflects the increased contribution
by the Company's distributed systems products in these periods. Excluding
revenues associated with New Dimension Software Ltd., which the Company acquired
in a purchase accounting transaction in April 1999, total revenue growth was
approximately 39% in the June 1999 quarter.
The high performance utilities and administrative tools for IBM's IMS and
DB2 database management systems comprise the largest portion of the Company's
mainframe-based revenues and total revenues. The Company's tools and utilities
for IMS and DB2 databases collectively contributed 44% and 45% of total revenues
for the three months ended June 30, 1998 and 1999, respectively. Total revenues
and license revenues from these product lines combined grew 46% and 53%,
respectively, in the first quarter of fiscal 2000. The Company's other products
for the OS/390 mainframe environment contributed 30% and 25% of total revenues
for the three months ended June 30, 1998 and 1999, respectively. Total revenues
and license revenues for these other mainframe products grew 22% and 23%,
respectively, in the first quarter of fiscal 2000.
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 distributed systems product lines
comprise the PATROL application and database management solutions, the BEST/1
performance management products, the PATROL DB database administration products,
the SQL-Backtrack application and database recovery products and the
COMMAND/POST, Spaceview and Command MQ products. With the New Dimension
acquisition, the Company has added the Control M job scheduling products,
Control D output management products and Control SA security administration
products for distributed systems environments. In total, the distributed systems
product lines contributed 26% and 30% of total revenues for the quarters ended
June 30, 1998 and 1999, respectively, and 29% and 32% of license revenues for
the same periods. Total distributed systems revenues grew 63% and license
revenues from distributed systems grew 59% in the first quarter of fiscal 2000.
The revenues from the Company's distributed systems product offerings depend
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.
11
<PAGE> 13
License Revenues
License revenues consist of product license fees and license upgrade fees.
The Company licenses its products primarily in two ways: by copy and on an
enterprise license basis by aggregate licensed capacity. When products are
licensed on a per copy basis, license revenues from the initial licensing of
each copy of the product are product license fees. All revenues from the
customer's licensing of the right to use a previously licensed copy on a larger
computer are license upgrade fees. When products are licensed on an enterprise,
aggregate licensed capacity basis, all license revenues associated with the
first time licensing of such products are product license fees. All revenues
associated with the licensing of a previously licensed product to operate on
additional aggregate processing capacity are license upgrade fees. License
upgrade fees and enterprise license fees are primarily generated by the
Company's mainframe products. License upgrade fees include fees associated with
a customer's current additional processing capacity and fees associated with a
customer's future anticipated additional processing capacity.
The definition of product license fees received when a product is licensed
on an aggregate licensed capacity basis became effective for the June 1999
quarter and represents a change from the Company's practices prior to acquiring
Boole & Babbage and New Dimension. Previously in aggregate licensed capacity
transactions, revenues associated with the first time licensing of a product
were allocated between revenues associated with the customer's current
processing capacity, which were categorized as product license fees, and
revenues associated with future processing capacity, which were categorized as
license upgrade fees. Now all of these fees are categorized as product license
fees. The effect of this change is to increase the amount of revenues allocated
to product license fees and to decrease the amount of revenues allocated to
license upgrade fees. For large enterprise license transactions that include
newly licensed products, the effect of this change is significant. This change
solely impacts the Company's internal characterization of license revenues and
has no effect on the Company's license revenue recognition.
The Company's North American operations generated 65% of total license
revenues in the quarter ended June 30, 1998 and 72% for the corresponding
quarter ended June 30, 1999. The 63% growth in North American license revenues
in the first quarter of fiscal 2000 over the first quarter of fiscal 1999 was
derived principally from increased product license fees generated from initial
licenses of the Company's distributed systems products which includes such
licenses pertaining to future MIPS, and capacity-based license upgrade fees from
mainframe products. The Company closed a large single enterprise license
transaction in the June 1999 quarter, as discussed in Note 6 to the Condensed
Consolidated Financial Statements. International license revenues represented
35% and 28% of total license revenues for the quarters ended June 30, 1998 and
1999, respectively. International license revenue growth of 17% from the first
quarter of fiscal 1999 to the comparable quarter of fiscal 2000 was principally
derived from increased product license fees generated from initial licenses and
license upgrade fees associated with mainframe products.
The sustainability and growth of the Company's mainframe-based license
revenues are dependent upon capacity-based license 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 number of CPUs, subject to a maximum limit on the
aggregate power of the CPUs as measured in MIPS. Additional fees are due if the
MIPS limit is exceeded. Substantially all of these transactions include license
upgrade fees associated with additional processing capacity beyond the
customer's current usage level and some include product 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 the enterprise license transaction. During the quarter
ended June 30, 1999, license upgrade fees accounted for 36% of total revenues.
The Company has experienced a strong increase in demand from its largest
customers for the right to run its products on increased current and anticipated
mainframe processing capacity as enterprises invest heavily in their core OS/390
mainframe information systems. 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 upgrade fees. 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 perceived benefits of the Company's core mainframe
products will continue at current levels. Should this trend slow dramatically or
reverse, it would adversely impact the
12
<PAGE> 14
Company's mainframe license revenues and its operating results. See the
discussion below under the heading "Certain Risks and Uncertainties that Could
Affect Future Operating Results."
Maintenance and Support Revenues
Maintenance and support revenues represent the ratable recognition of fees
to enroll licensed products in the Company's software maintenance, enhancement
and support program, and recognition of revenues from professional services
performed during the period by the Company's respective services business.
Maintenance and support enrollment entitles customers to product enhancements,
technical support services and ongoing compatibility with third-party operating
systems, database management systems and applications. These fees are generally
charged annually and equal 15% to 20% of the list price of the product at the
time of renewal, less any applicable discounts. Customers that elect to prepay
for multiple years of maintenance coverage receive an additional,
time-value-of-money discount. Maintenance revenues also include the ratable
recognition of the bundled fees for any first-year maintenance services covered
by the related perpetual license agreement. The Company continues to invest
heavily in product maintenance and support and believes that maintaining its
reputation for superior product support is a key component of its value pricing
model.
Maintenance revenues have increased over the last three fiscal years as a
result of the continuing growth in the base of installed products and the
processing capacity on which they run. Maintenance fees increase as the
processing capacity on which the products are installed increases; consequently,
the Company receives higher absolute maintenance fees as customers install its
products on additional processing capacity. Due to increased discounting at
higher levels of additional processing capacity, the maintenance fees on a per
MIPS basis are typically reduced in enterprise license agreements. Historically,
the Company has enjoyed high maintenance renewal rates for its mainframe-based
products. Should customers migrate from their mainframe applications or find
alternatives to the Company's products, increased cancellations could adversely
impact the sustainability and growth of 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. Total maintenance revenues have
also increased as a result of increased revenues from the Company's growing
services and training organization.
OPERATING EXPENSES
<TABLE>
<CAPTION>
THREE MONTHS ENDED
JUNE 30,
-------------------
(IN THOUSANDS)
1998 1999 CHANGE
-------- -------- ------
<S> <C> <C> <C>
Selling and marketing................................... $ 89,801 $140,359 56.3%
Research and development................................ 40,154 57,552 43.3%
Cost of maintenance services and product licenses....... 32,434 37,199 14.7%
General and administrative.............................. 20,747 34,295 65.3%
Acquired research and Development....................... 17,304 80,800 366.9%
Amortization of goodwill and intangibles................ -- 30,359 N/A
Merger related costs.................................... -- 12,487 N/A
-------- --------
Total operating expenses...................... $200,440 $393,051 96.1%
======== ========
</TABLE>
Selling and Marketing
The Company's selling and marketing expenses include personnel and related
costs, sales commissions and costs associated with advertising, industry trade
shows and sales seminars. Personnel costs were the largest single contributor to
the expense growth in the three months ended June 30, 1999. This increase was
primarily attributable to significant hiring of additional distributed systems
sales representatives and technical sales support consultants as well as
significant growth in the Company's professional services group. Sales
commissions increased in the first quarter of fiscal 2000 as a result of the 47%
increase in license revenues. Improved sales representative productivity,
coupled with normal commission plan modifications, held sales commission expense
growth below license revenue growth. Marketing costs have continued to increase
to meet the requirements of marketing a greater number of increasingly complex
distributed systems products and to
13
<PAGE> 15
support a growing indirect distribution channel. Marketing expenses were further
impacted by a major re-branding effort undertaken during the quarter. Other
contributors to the increase were significantly higher levels of travel and
entertainment expenses.
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 in the first quarter of fiscal 2000
were the result of increased compensation costs associated with both software
developers and development support personnel, as well as associated benefits and
facilities costs. Research and development costs were reduced by amounts
capitalized in accordance with Statement of Financial Accounting Standards
(SFAS) No. 86. The Company capitalizes its software development costs when the
projects under development reach technological feasibility as defined by SFAS
No. 86. During the first quarter of fiscal 1999 and 2000, the Company
capitalized approximately $12.5 million and $16.9 million, respectively, of
software development costs. The growth in capitalized costs is primarily due to
increases in new distributed systems product development, the porting of
existing distributed systems products to alternate environments and increased
integration development activity.
Cost of Maintenance Services and Product Licenses
Cost of maintenance services and product licenses consists of amortization
of purchased and internally developed software, costs associated with the
maintenance, enhancement and support of the Company's products and royalty fees.
Growth in the cost of maintenance services and product licenses from the first
quarter of fiscal 1999 to the first quarter of fiscal 2000 was due to increases
in technical and customer support employees and capitalized software
amortization. The Company amortized $4.6 million and $5.8 million in the first
quarter of fiscal 1999 and 2000, respectively, of capitalized software
development costs pursuant to SFAS No. 86. In these periods, the Company
expensed $1.1 million and $0.7 million, respectively, of capitalized software
development costs to accelerate the amortization of certain software products.
The Company accelerated the amortization of these software products as they were
not expected to generate sufficient future revenues which would be required for
the Company to realize the carrying value of the assets. The Company expects its
cost of maintenance services and product licenses will continue to increase as
the Company capitalizes a higher level of software development costs and as the
Company builds its distributed systems product support organization, which is
less cost-effective than its mainframe support organization because of the
complexity and variability of the environments in which the products operate.
The distributed systems products operate in a high number of operating
environments, including operating systems, DBMSs and ERP applications and
require greater ongoing platform support development activity relative to the
Company's OS/390 mainframe products.
General and Administrative
General and administrative expenses are comprised primarily of compensation
and personnel costs within executive management, finance and accounting, product
distribution, facilities 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
the first quarter of fiscal 1999 to the first quarter of fiscal 2000 was largely
due to certain non-recurring items within legal fees and bad debt expense along
with increased personnel costs and higher costs associated with the related
infrastructure to support the Company's growth.
14
<PAGE> 16
Acquired Research and Development and Related Costs
The Company incurred acquired IPR&D costs for the three months ended June
30, 1998 and 1999 of $17.3 million and $80.8 million, respectively. These
technology charges related to the acquisitions of in-process technologies and
technology rights in the first quarter of fiscal 1999 and the acquisition of New
Dimension in the first quarter of fiscal 2000.
The following table presents information, in thousands, concerning the
purchase price allocations for the acquisitions accounted for under the purchase
method for the three months ended June 30, 1998 and 1999.
<TABLE>
<CAPTION>
ACQUIRED GOODWILL TOTAL
COMPANY NAME SOFTWARE IPR&D AND OTHER PRICE
- ------------ -------- -------- --------- --------
<S> <C> <C> <C> <C>
Fiscal 1999:
Nastel.................................... $ -- $ 6,000 $ -- $ 6,000
Envive.................................... 6,400 11,304 -- 17,704
-------- ------- -------- --------
$ 6,400 $17,304 $ -- $ 23,704
======== ======= ======== ========
Fiscal 2000:
New Dimension............................. $126,300 $80,800 $465,946 $673,046
-------- ------- -------- --------
$126,300 $80,800 $465,946 $673,046
======== ======= ======== ========
</TABLE>
In the latter part of fiscal 1998, the Company was in the process of
designing a middleware management product to assist customers with optimizing
middleware performance and with handling enterprise environmental changes. In
this regard, in April 1998, the Company acquired a license from Nastel
Technologies, Inc. (Nastel) for certain infrastructure source code for use in
its MQ management product that was under development, but had not yet reached
technological feasibility. Accordingly, the Company allocated the entire $6
million purchase price to IPR&D. The Company completed the acquired IPR&D by
creating an effective installation routine, developing an automated MQ
configuration routine, fortifying the underlying Nastel database and modifying
the code to work in environments with complementary management products. Upon
completion of the IPR&D, the Company completed the initial related product after
developing efficient data collection, user interface and business logic code.
In June 1998, the Company entered into a technology agreement with Envive
Corporation (Envive) primarily to strengthen BMC's ERP business management
solutions to provide better diagnostic and correlation ability, service level
management and end-to-end monitoring capability. The Company also secured the
rights to distribute certain products in the SAP management market. The
Company's committed costs associated with the transaction approximated $17.7
million. The Company allocated $6.4 million of the transaction to software
assets, prepaid royalties and interest. The remaining $11.3 million was
allocated to acquired IPR&D that had not reached technological feasibility as of
the date of the transaction. The Company is in the process of evaluating the
alternative levels of commitment and effort required to develop the above-
mentioned functionality in the non-SAP environments. The range of future
expenditures associated with these alternatives is $0.5 million to $3.5 million.
On April 14, 1999, the Company acquired through a public tender offer in
excess of 95% of the outstanding ordinary shares of New Dimension for
approximately $673 million in total consideration. The purchase price includes
the Company's historical cost of approximately $2 million for shares of New
Dimension previously owned by Boole. Unrealized gains related to these New
Dimension shares of approximately $22 million included in long term marketable
securities and accumulated other comprehensive income at March 31, 1999 were
eliminated at the closing of the purchase.
In order to fund the purchase price, the Company entered into a 364-day
unsecured revolving credit facility with a group of banks on which the Company
drew down approximately $500 million of short-term borrowings. The remaining
consideration was satisfied from the Company's existing working capital.
The acquisition was accounted for as a purchase transaction, and the
purchase price was allocated as follows: $126 million to software assets, $436
million to goodwill and other intangibles, and $30 million to
15
<PAGE> 17
equipment, receivables and other non-software assets, net of liabilities
assumed. Additionally, the Company allocated $80.8 million, or 12% of the
purchase price, to IPR&D, which was charged to expense in the June 1999 quarter.
Purchased IPR&D represents the present value of the estimated after-tax cash
flows expected to be generated by the purchased technology, which, at the
acquisition date, had not yet reached technological feasibility nor had
alternative future use.
New Dimension groups its product lines into five categories: (i) Enterprise
Production Management ("EPM"), (ii) Enterprise Output Management ("EOM"), (iii)
Enterprise Event Management ("EEM"), (iv) Enterprise Security Management
("ESM"), and (v) Tandem Solutions ("TS"). New Dimension's primary IPR&D efforts
can be summarized into four categories: (i) Integrated Operations Architecture
for the Enterprise ("IOA/e"), (ii) Odaiko, (iii) E-business Enablement, and (iv)
Security. These technologies will be incorporated into new releases of products
within the categories listed above.
Integrated Operations Architecture for the Enterprise. IOA/e is the
supporting infrastructure for all of the distributed systems products from New
Dimension. This infrastructure is anticipated to be the key enabler for all of
the New Dimension products going forward. The intent of the project is to
maintain competitiveness and ensure the product infrastructure can support all
key customer requirements and product developments. It is also the intent of
this infrastructure to ensure that products can scale to meet the growing
demands customers are placing on them. This infrastructure will be the
distributed systems version of the Integrated Operations Architecture for New
Dimension's mainframe products. The goals of the project are to ensure easy
configuration and installation of all of the products, increase the scalability
of the products, ensure a common look and feel, and enable them to be better
integrated with each other. The intent is to ensure that each of the products
could be autonomous or fully integrated depending upon the customers' needs.
Odaiko. Odaiko is the next major release of the Output Management family of
products focused specifically on broadening this product family from purely a
mainframe output management system to an enterprise-wide document and output
management product family. Currently, this product family supports a document
archive only on the mainframe, viewing of reports on a terminal or a PC and
distribution of the reports to network connected printers. Odaiko will not only
enable the end user to view the archived reports via a Web browser but also will
give them the ability to customize the view of the data, making it easier for
the customer to create e-business applications. This requires the interpretation
of a variety of document formats (e.g., Xerox, IBM, Microsoft) and
transformation of those formats into JPEG or HTML formats easily read via a Web
browser.
This project also entails the creation of lower-end repositories on UNIX
and Windows NT. This enables customers to use a mainframe, UNIX or Windows NT
system to archive their reports. This will allow customers to store reports on
whatever systems they have and scale up to terabyte storage systems only
currently available on mainframe systems.
E-business Enablement. E-business enablement is the development of the
infrastructure necessary to "internet-ize" the entire New Dimension product
family. Each of the products that will utilize e-business enablement are
Internet applications which not only provide a browser-based front-end but also
are brand new applications with new and important functionality that customers
require.
Security. The security market is brand new for New Dimension. Customers
have accepted the technology offered in current products and are asking for
additional features and add-on applications to enable them to make better use of
these applications. The current technology supports the administration of
passwords and user ID's of security systems (e.g., RACF, TopSecret, ACF2, SEOS),
applications (e.g., Lotus Notes, SAP R/3, Microsoft Exchange), databases (e.g.,
Oracle, Informix, MS SOL Server) and operating systems (e.g., UNIX, Microsoft
Windows NT). It does this by placing an agent on each managed node along with a
module, which understands how to communicate with each Resident Security System
("RSS"). These agent/module combinations communicate with a repository and the
Enterprise Security Station ("ESS") console. Customer requirements drive the
porting of the agent to each new operating system and platform as well as to
support new RSS's. Key IPR&D projects involve the support of new RSS's including
firewalls, ERP applications, and other security systems and platforms (e.g.,
Tandem). Additional features within the IPR&D project include the ability to
have users request and create new passwords and user ID's. These passwords and
16
<PAGE> 18
user ID's would then be utilized or synchronized across all of the applications
and systems that a user accesses. This technology will be Web-based and will
allow end-users to enter their user ID and password and automatically register
it with the appropriate applications, then trigger the synchronization job,
while allowing for the system to monitor access.
A significant portion of the IPR&D value also relates to the (i) CONTROL-M,
(ii) CONTROL-D, (iii) CONTROL-SA, and (iv) Enterprise Controlstation ("ECS")
products. The IPR&D projects associated with these products have accounted for
approximately $4.8 million of R&D expense. Remaining anticipated development
costs in connection these IPR&D projects at the time of acquisition are expected
to be approximately $3.5 million. The following is a summary of the primary
IPR&D related to CONTROL-M, CONTROL-D, CONTROL-SA, and ECS.
CONTROL-M
- new Two Tier architecture for big SYSPLEX environments
- an independent database layer (one source code for all supported
databases)
- functionality allowing for the ability to perform actions on a group of
projects
CONTROL-D
- repository for providing multi-level, global indexing of data
- SYSPLEX support
- CONTROL-D technology for the Win/NT environment
CONTROL-SA
- security for managing users of Internet e-commerce applications
- enhanced administration of control access rights
- ability to be access and manage various enterprise applications
- password synchronization
ECS
- functionality allowing for the ability to perform actions on a group of
projects
- mass environment management on Windows NT platform
- enhanced diagnostics and problem determination tools
- compatibility with Oracle databases.
As of the date of the acquisition, the Company concluded that the in-process
technology had no alternative future use after taking into consideration the
potential use of the technology in different products, the stage of development
and life cycle of each project, resale of the software, and internal use. As
such, the value of the purchased IPR&D was expensed at the time of the
acquisition. Remaining anticipated development costs in connection with all the
products classified as in-process technology at the time of acquisition are
expected to be approximately $26.5 million. Projected completion dates range
from two to twenty months, at which time the Company expects to begin selling
those developed products. The Company intends to continue devoting effort to
developing commercially viable products from the purchased IPR&D, although it
may not develop such commercially viable products. All of the foregoing
estimates and projections were based on assumptions the Company believed to be
reasonable at the time but which were inherently uncertain and unpredictable.
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
17
<PAGE> 19
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 and venture capital rates of return.
Due to the nature of the forecast and risks associated with the projected
growth, profitability and the developmental nature of the projects, a 20%
discount rate was used to value the New Dimension acquired IPR&D. The Company
used a 15% rate in discounting the cash flows associated with the developed New
Dimension technology. The Company believes these discount rates are 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.
Amortization of Goodwill and Intangibles
In connection with the application of the purchase accounting method to the
Company's acquisitions, portions of the purchase price were allocated to
goodwill, workforce, customer base, software and other intangible assets. The
Company is amortizing these intangibles over 4 to 5 year periods which reflect
the estimated useful lives of the respective assets. The increase in the
quarterly amortization expense is directly related to the acquisition of New
Dimension discussed above.
Merger Related Costs
In conjunction with the Company's merger with Boole in March 1999, the
Company's management approved a formal plan of restructuring (the "Plan") which
included steps to be taken to integrate the operations of the two companies,
consolidate duplicate facilities and streamline operations to achieve reductions
in overhead expenses in future periods. In connection with the Plan, the Company
charged $12.5 million, including transaction costs, to expense during the June
1999 quarter. As of June 30, 1999, the Company has accrued merger related costs
of approximately $49 million comprised principally of the following components:
employee related expenses including severance and other benefits, costs to
eliminate duplicate facilities, transaction costs and impairment of assets to be
disposed of as a result of integrating the combined companies.
OTHER INCOME
For the first quarter of fiscal 2000, other income was $10.9 million,
reflecting a decrease of 19% from $13.5 million of other income in the same
quarter of fiscal 1999. Other income consists primarily of interest earned on
tax-exempt municipal securities, euro bonds, corporate bonds, mortgage
securities and money market funds. The decrease in other income is primarily due
to approximately $6 million in interest expense related to the revolving credit
facility entered into in April 1999.
INCOME TAXES
For the first quarter of fiscal 2000, income tax expense was $2.3 million
compared to $25.1 million for the same quarter in fiscal 1999. The Company's
lower income tax expense related primarily to the benefit of the New Dimension
IPR&D write-off and certain other one-time charges associated with restructuring
efforts. The Company's income tax expense represents the federal statutory rate
of 35%, plus certain foreign and state taxes, reduced primarily by the benefit
from lower income taxes associated with the Company's European operations and
the effect of tax exempt interest earned from cash investments.
18
<PAGE> 20
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its growth through funds generated from
operations. As of June 30, 1999, the Company had cash, cash equivalents and
investment securities of $1.1 billion.
The Company did not repurchase any of its common shares on the open market
during the first quarter of fiscal 2000.
The Company believes that existing cash balances and funds generated from
operations will be sufficient to meet its liquidity requirements for the
foreseeable future.
B. CERTAIN RISKS AND UNCERTAINTIES THAT COULD AFFECT FUTURE OPERATING RESULTS.
Volatility of Stock Price; Risk of Litigation. The Company's stock price
has been and is highly volatile. The Company's stock price is based almost
completely on current expectations of sustained future revenue and earnings
growth rates. Any failure to meet anticipated revenue and earnings levels in a
period or any negative change in perceived long-term growth prospects of the
Company would likely have a significant adverse effect on the Company's stock
price. The growth rates of the Company's license revenues, total revenues, net
earnings and earnings per share, excluding one-time charges, have accelerated in
recent quarters. This growth should not be seen as indicative of future results.
The Timing and Size of License Contracts Could Cause Quarterly Revenues and
Earnings to Fluctuate. The Company's revenues and results of operations are
difficult to predict and may fluctuate substantially. 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
sales are closed at the end of each quarter. 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 or multiple
expected transactions could cause the Company's revenues and earnings in a
period to fall short of expectations. The Company generally does not know
whether revenues and earnings will meet expected results until the final days or
day of a quarter.
Year 2000 Concerns Could Reduce Revenues and Earnings. In addition, each
customer's evaluation of its need to achieve Year 2000 compliance may affect its
purchase decision. Many analysts believe that many customers and potential
customers are heavily engaged in testing and correcting system Year 2000
problems, and therefore, such customers may choose to defer system investments
during calendar 1999, negatively impacting the Company's revenues. In addition,
the Company's sales cycles may lengthen in 1999 and future years due to lessened
urgency of customers' system investment decisions. Because Year 2000 related
impacts on customer purchasing decisions are unprecedented, the Company has a
limited ability to forecast accurately the impact of the Year 2000 issue on its
quarter-to-quarter revenues.
High Degree of Operating Leverage. The Company's business model is
characterized by a very high degree of operating leverage. A substantial portion
of the Company's operating costs and expenses consist of employee and facility
related costs, which are relatively fixed over the short term. In addition, the
Company's expense levels and hiring plans are based substantially on the
Company's projections of future revenue. If near term demand weakens in a given
quarter, there would likely be a material adverse effect on operating results
and a resultant drop in the Company's stock price.
Risks Related to Contraction of Operating Margins. There is a risk that the
Company will not be able to sustain its high operating margins which would
adversely affect its earnings. The Company's operating margins, excluding
one-time charges, have varied from the low to mid 30% range in recent quarters,
which is at the high-end of the range for peer companies. The Company does not
compile margin analysis other than on an aggregated basis; however, the Company
believes that the operating margins associated with its distributed systems
products are substantially below those of its traditional mainframe products.
Since the Company's mix of business continues to shift to distributed systems
revenues and since research and
19
<PAGE> 21
development, sales, support and distribution costs for distributed systems
software products are generally higher than for mainframe products, operating
margins will experience more pressure. The Company may be unable to increase or
even maintain its current level of profitability on a quarterly or annual basis
in the future. Additionally, Boole and New Dimension historically experienced
lower operating margins than BMC. Although the Company expects to increase the
profitability from the integrated Boole and New Dimension operations to more
closely resemble BMC's historical margins, there is no guaranty the Company will
be successful or certainty of the length of time which the Company will require
to accomplish this goal.
Increased Competition and Pricing Pressures Could Adversely Affect
Sales. The market for systems management software has been increasingly
competitive for the past number of years and is currently intensifying. The
Company competes with a variety of software vendors including IBM and Computer
Associates International, Inc. ("CA"). If IBM is successful with its efforts to
achieve performance and functional equivalence with the Company's products at a
lower cost, the Company's business will be materially adversely affected. The
Company derived approximately 70% of its total revenues in fiscal 1999 from
software products for IBM and IBM-compatible mainframe computers. IBM continues
to focus on reducing the overall software costs associated with the OS/390
mainframe platform. IBM continues, directly and through third parties, to
aggressively enhance its utilities for IMS and DB2 to provide lower cost
alternatives to the products provided by the Company and other independent
software vendors. IBM has significantly increased its level of activity in the
IMS and DB2 high speed utility markets over the last two years. CA has recently
entered the mainframe database tools and utilities market with its acquisition
of Platinum Technology International, Inc. and has announced its intention to
compete with the Company in these markets.
Capacity-based upgrade fees associated with both current and future
processing capacity contributed approximately one-fourth to one-third of total
BMC revenues each of fiscal years 1997, 1998 and 1999. Historically, these fees
were not separately captured by Boole; however, the Company does not believe
that the addition of Boole would significantly change the contribution of these
fees to total revenues. 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
and particularly the charging of capacity-based upgrade fees is under constant
pressure from customers and competitive vendors. 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 less for its software products. These actions continue to
increase pricing pressures with 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.
Decreasing Demand for Mainframe Processing Capacity Could Adversely Affect
Revenues. Fees from enterprise license transactions remain fundamental
components of the Company's revenues and the primary source of mainframe
revenues. These revenues depend upon the Company's customers continuing to
perceive an increasing need to use the Company's existing software products on
substantially greater mainframe processing capacity in future periods. The
Company believes that the demand for enterprise licenses has been driven by
customer's recommitment over the last 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.
Failure to Adapt to Technological Change Could Adversely Affect the
Company's Earnings. If the Company fails to keep pace with technological change
in its industry, such failure would have an adverse effect on its revenues and
earnings. The Company operates in a highly competitive industry characterized by
rapid technological change, evolving industry standards, changes in customer
requirements and frequent new product introductions and enhancements. The
distributed systems and application management markets in which the Company
operates are far more crowded and competitive than its traditional mainframe
systems management markets. The Company's ability to compete effectively and its
growth prospects depend upon many factors, including the success of its existing
client/server systems products, the timely introduction and success of future
software products and the ability of its products to interoperate and perform
well with
20
<PAGE> 22
existing and future leading databases and other platforms supported by its
products. The Company has experienced long development cycles and product delays
in the past, particularly with some of its client/server systems products, and
expects to have delays in the future. Delays in new mainframe or client/server
systems product introductions or less-than-anticipated market acceptance of
these new products are possible and would have an adverse effect on the
Company's revenues and earnings. New products or new versions of existing
products may, despite testing, contain undetected errors or bugs that will delay
the introduction or adversely affect commercial acceptance of such products.
Pricing Practices; Product Lines. The Company may choose in fiscal year
2000 or a future fiscal year to make changes to its product packaging, pricing
or licensing programs. Such changes may have a material adverse impact on
revenues or earnings, and such changes may cause the Company to revise its
guidance on future operating results.
Risks Related To Business Combinations. As part of its overall strategy,
the Company has acquired or invested in, and plans to continue to acquire or
invest in, complementary companies, products, technologies and to enter into
joint ventures and strategic alliances with other companies. The Company's
acquisitions of DataTools in May 1997; BGS Systems, Inc. ("BGS") in March 1998,
Boole in March 1999 and New Dimension in April 1999 are the results of this
strategy. Risks commonly encountered in such transactions include: the
difficulty of assimilating the operations and personnel of the combined
companies; the risk that the Company may not be able to integrate the acquired
technologies or products with its current products and technologies; the
potential disruption of the Company's ongoing business; the inability to retain
key technical and managerial personnel; the inability of management to maximize
the financial and strategic position of the Company through the successful
integration of acquired businesses; and decreases in reported earnings as a
result of charges for in-process research and development and amortization of
acquired intangible assets.
In order for the Company to maximize the return on its investments in BGS,
Boole and New Dimension, the products of these various entities must be
integrated with each other and with the Company's existing products. Integration
of the BEST/1 and COMMAND/POST products with PATROL is also very important. The
Company is integrating the MainView product line with its IMS, DB2 and other
OS/390 products and the BEST/1 products with the COMMAND/POST and MainView
products, adding to the complexity of the task of integration. Each of these
integrations will be difficult and unpredictable, especially given that these
software products are highly complex, have been developed independently and were
designed with no regard to such integration. The difficulties are compounded
when the products involved are well established, as these are, because
compatibility with the existing base of installed products must be preserved.
Successful integration of these product lines also requires coordination of
different development and engineering teams. This too will be difficult and
unpredictable because of possible cultural conflicts and different opinions on
technical decisions and product roadmaps. There can be no assurance that the
Company will be successful in these product integration efforts or that the
Company will realize the expected benefits.
With the acquisitions of BGS, Boole and New Dimension, the Company has
initiated efforts to integrate the disparate cultures, employees, systems and
products of these companies. In all three acquisitions, retention of key
employees is critical to ensure the continued advancement, development, support,
sales and marketing efforts pertaining to the acquired products. The Company has
implemented retention programs to keep many of the key technical, sales and
marketing employees; nonetheless, the Company has lost some key employees.
The Company has also elected to retain the principal locations of BGS,
Boole and New Dimension and has reorganized the management structure at all 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 difficulties.
Risks Associated With Managing Growth. The Company has experienced an
extended period of: (i) significant revenue growth; (ii) acquisitions; (iii)
expansion of its software product lines and supported platforms; (iv)
significant expansion in its number of employees; (v) increased pressure on the
viability and scope of its operating and financial systems; and (vi) expansion
in the geographic scope of its operations. This growth has resulted in new and
increased responsibilities for management personnel and has placed a significant
strain upon the Company's management, operating and financial controls and
resources, including
21
<PAGE> 23
its services and development organizations. To accommodate recent growth,
compete effectively and manage potential future growth, the Company must
continue to implement and improve the speed and quality of its information
decision support systems, management decisions, reporting systems, procedures
and controls. The Company's personnel, procedures, systems and controls may not
be adequate to support its future operations. The Company has recently realigned
its product development and marketing operations along five product market
oriented groups. It is uncertain if this reorganization will yield the desired
benefits and whether this organizational structure will prove effective.
Risks Related to Year 2000.
The Company understands the importance of ensuring that its operations will
not be adversely impacted by the Year 2000 problem. The Company's Board of
Directors has been briefed about the Year 2000 problem generally and has
established a Year 2000 Steering Committee composed of members from key
departments within the Company to oversee the adoption and implementation of a
comprehensive Year 2000 plan. The Steering Committee includes representatives
from Boole and New Dimension to ensure that the Company's Year 2000 compliance
efforts are equally directed to the operations recently acquired by the Company.
The Company's Year 2000 plan addresses not only the Year 2000 compliance of the
software products offered by the Company, but extends to the Company's internal
systems, such as facilities, internal information systems, as well as the
Company's relationships with financial institutions, suppliers and other third
parties.
The Company's Year 2000 plan is comprised of four phases: (i) assessment of
all of the Company's systems and technology; (ii) remediation; (iii)
implementation and testing of modifications to or replacements of existing
systems and technology; and (iv) contingency planning.
The Company has tested the ability of its software products to process Year
2000 data without interruption or errors and believes that its products are
substantially Year 2000 compliant. The Company is in the process of verifying
the Year 2000 compliance of certain of the software products offered by Boole
and New Dimension. Despite these tests, there can be no assurance that
undetected errors or defects will not exist that could cause these software
products to fail to process Year 2000 data correctly. The Company has
proactively notified its customers as to the Year 2000 compliance status of its
software products and has encouraged its customers to prepare their systems in
anticipation of Year 2000. Nonetheless, the Company's customers may incur
migration costs relative to systems that are not Year 2000 compliant or who are
using versions of the Company's products that are not Year 2000 compliant. Some
of these customers may assert claims against the Company for such costs.
The Company's software products are typically used in high volume
information systems that are critical to a customer's operations. Consequently,
business interruptions, the loss or corruption of data or other major problems
could result in significant adverse consequences to its customers. The Company
cannot predict whether or to what extent any legal claims will be brought, or
whether the Company will suffer any liability as a result of any such adverse
consequences to its customers.
The Company has initiated communication with certain key business partners
to determine the extent to which the Company is vulnerable to those third
parties' potential failure to remediate their own Year 2000 issues. The Company
has consolidated its banking relationships with top tier financial institutions
around the world who have represented to the Company that their respective
systems are Year 2000 compliant. The bank accounts and banking relationships
maintained by Boole and New Dimension are currently being evaluated to determine
their Year 2000 compliance. Additionally, the Company has identified its
critical suppliers and has requested Year 2000 compliance documentation from
these suppliers respecting their products, services and supply chain. The
Company expects this effort to be completed by September 30, 1999.
The Company believes that, although its risk of operational disruption from
systems failures due to Year 2000 issues is minimal, the Company could suffer
adverse consequences as a result of interruptions in electrical power,
telecommunications or other critical third party infrastructure services. In a
worst case scenario, the Company's computer systems could be rendered
inoperable, and the Company could be unable to develop or support its products.
The Company has reviewed the most reasonably likely worst case scenario and is
currently developing contingency plans to address such a situation.
22
<PAGE> 24
The Company operates within a modern infrastructure. Accordingly, as of
August 13, 1999, the Company has not incurred material costs in addressing Year
2000 issues, and the Company does not anticipate incurring material costs in
implementing its Year 2000 plan or developing Year 2000 contingency plans.
However, there can be no assurance that the actual costs of implementing the
Company's Year 2000 plan will not exceed the Company's estimates or that the
Company's business will not be materially adversely affected by Year 2000
issues.
Risks Related to International Operations and the Euro Currency. The
Company has committed, and expects to continue to commit, substantial resources
and funding to build its international service and support infrastructure.
Operating costs in many countries, including many of those in which the Company
operates, are higher than in the United States. In order to increase
international sales in fiscal year 2000 and subsequent periods, the Company must
continue to globalize its software product lines; expand existing and establish
additional foreign operations; hire additional personnel; identify suitable
locations for sales, marketing, customer service and development; and recruit
international distributors and resellers in selected territories. Future
operating results are dependent on sustained performance improvement by the
Company's international offices, particularly its European operations. In this
regard, the economies in Europe and the Pacific Rim regions have been depressed
in the past year. Revenue growth by the Company's European operations has been
slower than revenue growth in North America. There can be no assurance that the
Company will be successful in accelerating the revenue growth of its European
operations. 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. Generally, the Company's
foreign sales are denominated in its foreign subsidiaries' local currencies. If
these foreign currency exchange rates change unexpectedly, the Company could
have significant gains or losses. Many systems and applications software vendors
are experiencing difficulties internationally.
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 became 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, however, failure of any critical technology
components to operate properly post-Euro may adversely affect business
operations or require the Company to incur unanticipated expenses to remedy any
problems. Furthermore, the Company's foreign exchange exposures to legacy
sovereign currencies of the participating countries in the Euro became foreign
exchange exposures to the Euro upon its introduction. Although the Company is
not aware of any material adverse financial risk consequences of the change from
legacy sovereign currencies to the Euro, conversion may result in problems,
which may have an adverse impact on the Company's business since the Company may
be required to incur unanticipated expenses to remedy these problems.
Conditions in Israel. The Company's New Dimension operations are conducted
partially in Israel and, accordingly, the Company is directly affected by
economic, political and military conditions in Israel. Any major hostilities
involving Israel or the interruption or curtailment of trade between Israel and
its present trading partners could materially adversely affect the Company's
business, operating results and financial condition.
Israel's economy has been subject to numerous destabilizing factors,
including a period of rampant inflation in the early to mid-1980's, low foreign
exchange reserves, fluctuations in world commodity prices, military conflicts
and civil unrest. Since the establishment of the State of Israel in 1948, a
state of hostility has existed, varying in degree and intensity, between Israel
and the Arab countries. In addition, Israel and companies doing business with
Israel have been the subject of an economic boycott by the Arab countries since
Israel's establishment. Although Israel has entered into various agreements with
certain Arab countries and the Palestinian Authority, and various declarations
have been signed in connection with efforts to resolve
23
<PAGE> 25
some of the economic and political problems in the Middle East, the Company
cannot predict whether or in what manner these problems will be resolved.
In addition, certain of the Company's New Dimension employees are currently
obligated to perform annual reserve duty in the Israel Defense Forces and are
subject to being called for active military duty at any time. New Dimension has
operated effectively under these requirements since its inception. However, the
Company cannot predict the effect of these obligations on New Dimension's
operations in the future.
Possible Adverse Impact Of Recent Accounting Pronouncements. The American
Institute of Certified Public Accountants issued Statement of Position (SOP)
97-2, "Software Revenue Recognition", SOP 98-4, "Deferral of the Effective Date
of a Provision of SOP 97-2, Software Revenue Recognition", and SOP 98-9,
"Modification of SOP 97-2, Software Revenue Recognition, With Respect to Certain
Transactions" in October 1997, March 1998, and December 1998, respectively.
These standards address software revenue recognition matters, supersede an
earlier SOP and are effective for transactions entered into for fiscal years
beginning after December 15, 1997 and, for SOP 98-99, March 15, 1999. Based on
its reading and interpretation of these SOPs, the Company believes that its
current sales contract terms and business arrangements have been properly
reported. However, the American Institute of Certified Public Accountants and
its Software Revenue Recognition Task Force will continue to issue
interpretations and guidance for applying the relevant standards to a wide range
of sales contract terms and business arrangements that are prevalent in the
software industry. As the Company implements its ASA product strategy, it may
have to change its current sales contract terms and business arrangements to
meet its customers' needs. Future interpretations of existing accounting
standards or changes in the Company's business practices could result in future
changes in the Company's current revenue accounting policies that could have a
material adverse effect on the Company's business, financial condition and
results of operations.
FORWARD-LOOKING INFORMATION
Certain of the information relating to the Company contained or
incorporated by reference in this Form 10-Q is forward-looking in nature. All
statements included or incorporated by reference in this Form 10-Q or made by
management of the Company other than statements of historical fact regarding the
Company are forward-looking statements. Examples of forward-looking statements
include statements regarding the Company's future financial results, operating
results, market positions, product successes, business strategies, projected
costs, future products, competitive positions and plans and objectives of
management for future operations. In some cases, you can identify
forward-looking statements by terminology, such as "may," "will," "should,"
"would," "expects," "plans," "anticipates," "believes," "estimates," "predicts,"
"potential," or "continue" or the negative of such terms or other comparable
terminology. Any expectations based on these forward-looking statements are
subject to risks and uncertainties and other important factors, including those
discussed in this Risk Factors section. These and many other factors could
affect the future financial and operating results of the Company. These factors
could cause actual results to differ materially from expectations based on
forward-looking statements made in this document or elsewhere by or on behalf of
the Company.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to a variety of risks, including foreign currency
exchange rate fluctuations and changes in the market value of its investments.
In the normal course of business, the Company employs established policies and
procedures to manage these risks including the use of derivative instruments.
Foreign Currency Exchange Rates
The Company operates globally and the functional currency for most of its
non-U.S. enterprises is the local currency. For the three months ended June 30,
1998 and 1999, approximately 37% and 31% 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. Similarly, substantially all of
the expenses of operating the Company's foreign subsidiaries are incurred in
foreign currencies. As a result, the Company's U.S. dollar
24
<PAGE> 26
earnings and 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 primarily 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
achieve hedges of firm commitments that subject the Company to transaction risk.
The terms of the forward exchange contracts are generally one month or less and
are entered into at the prevailing market rate. Purchased option contracts, with
terms generally less than one year, are used by the Company to hedge
anticipated, but not firmly committed, sales transactions. Principal currencies
hedged are the German deutschemark, British pound and the French franc, in
Europe; and, the Japanese yen and Australian dollar in the Pacific Rim region.
The Company performs comparisons, on a monthly basis, of the purchased option
contracts and the forecasted sales revenues to determine hedge correlation.
While the Company actively manages its foreign currency risks on an ongoing
basis, there can be no assurance the Company's foreign currency hedging
activities will substantially offset the impact of fluctuations in currency
exchange rates on its results of operations, cash flows and financial position.
Foreign currency fluctuations did not have a material impact on the Company's
results of operations and financial position during the three months ended June
30, 1998 and 1999.
Based on the Company's foreign currency exchange instruments outstanding at
June 30, 1999, Company estimates that a near-term change in foreign currency
rates would not materially affect its financial position, results of operations
or net cash flows for the quarter ended June 30, 1999. The Company used a
value-at-risk (VAR) model to measure potential fair value losses due to foreign
currency exchange rate fluctuations. The VAR model estimates were made assuming
normal market conditions and a 95% confidence level. The VAR model is a risk
estimation tool, and as such, is not intended to represent actual losses in fair
value that will be incurred by the Company.
Interest Rate Risk
The Company adheres to a conservative investment policy, whereby its
principle concern is the preservation of liquid funds while maximizing its yield
on such assets. Cash, cash equivalents and marketable securities approximated
$1.1 billion at June 30, 1999, 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 recognized in earnings unless the instrument was sold.
The Company estimates that a near-term change in interest rates would not
materially affect its financial position, results of operations or net cash
flows for the quarter ended June 30, 1999. The Company used a value-at-risk
("VAR") model to measure potential market risk on its marketable securities due
to interest rate fluctuations. The VAR model estimates were made assuming normal
market conditions and a 95% confidence level. The VAR model is a risk estimation
tool, and as such, is not intended to represent actual losses in fair value that
will be incurred by the Company.
25
<PAGE> 27
PART II
OTHER INFORMATION
BMC SOFTWARE, INC. AND SUBSIDIARIES
ITEM 1. LEGAL PROCEEDINGS.
On March 9, 1999, a class action complaint was filed against the Company
and four senior executives of the Company alleging violations of Sections 10(b)
and 20(a) of the Exchange Act in connection with the Company's financial
statement presentation following its acquisition of BGS in March 1998 in a
pooling-of-interests transaction. Four similar actions were filed in the
Southern District of Texas. All of the actions were subsequently consolidated in
a single action. The lawsuits were filed following the Company's announcement
that it was restating its historical financial results to include BGS's
financial results in the Company's financial statements as a condition to the
Securities and Exchange Commission declaring effective the Company's
registration statement on Form S-4 relating to its acquisition of Boole. The
plaintiffs seek an unspecified amount of compensatory damages, interest and
costs, including legal fees. The Company denies the allegations of wrongdoing in
connection with the matters set forth in the complaint and intends to vigorously
defend the action. An unfavorable judgement or settlement, however, could have a
material adverse effect on the financial results of the Company.
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 counterclaims 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
consolidated financial position or results of operations.
The Company is subject to various other legal proceeding 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 operation or
consolidated financial position.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
None
(b) Reports on Form 8-K.
Report on Form 8-K announcing close of Boole & Babbage, Inc. merger
filed with the Commission on April 13, 1999
Report on Form 8-K announcing close of New Dimension Software, Ltd.
acquisition filed with the Commission on April 28, 1999
Report on Form 8-K/A incorporating financial information for Boole &
Babbage, Inc. filed with the Commission on June 14, 1999
Report on Form 8-K/A incorporating financial information for New
Dimension Software, Ltd. filed with the Commission on June 14, 1999
26
<PAGE> 28
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
BMC SOFTWARE INC.
By: /s/ MAX P. WATSON JR.
----------------------------------
Max P. Watson Jr.
Chairman of the Board, President and
Chief Executive Officer
August 16, 1999
By: /s/ WILLIAM M. AUSTIN
----------------------------------
William M. Austin
Senior Vice President and
Chief Financial Officer
August 16, 1999
By: /s/ KEVIN M. KLAUSMEYER
----------------------------------
Kevin M. Klausmeyer
Chief Accounting Officer
August 16, 1999
27
<PAGE> 29
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT NUMBER DESCRIPTION
-------------- -----------
<S> <C>
27 Financial Data Schedule
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S UNAUDITIED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE
MONTHS ENDED JUNE 30, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS INCLUDED IN THE COMPANY'S FORM 10-Q FOR THE PERIOD
ENDING JUNE 30, 1999.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAR-31-2000
<PERIOD-START> APR-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 313,114
<SECURITIES> 832,496
<RECEIVABLES> 588,133
<ALLOWANCES> 30,660
<INVENTORY> 0
<CURRENT-ASSETS> 866,213
<PP&E> 420,883
<DEPRECIATION> 155,076
<TOTAL-ASSETS> 2,779,918
<CURRENT-LIABILITIES> 1,116,415
<BONDS> 0
0
0
<COMMON> 2,377
<OTHER-SE> 1,359,997
<TOTAL-LIABILITY-AND-EQUITY> 2,779,918
<SALES> 279,782
<TOTAL-REVENUES> 400,731
<CGS> 37,199
<TOTAL-COSTS> 393,051
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 6,133
<INCOME-PRETAX> 18,629
<INCOME-TAX> 2,271
<INCOME-CONTINUING> 16,358
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 16,358
<EPS-BASIC> 0.07
<EPS-DILUTED> 0.07
</TABLE>
