<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________________ to __________________
Commission file number 0-17136
BMC SOFTWARE, INC.
(Exact name of registrant as specified in its charter)
Delaware 74-2126120
(State or other jurisdiction of (IRS Employer identification No.)
incorporation or organization)
BMC Software, Inc.
2101 CityWest Boulevard
Houston, Texas 77042
(Address of principal executive officer) (Zip Code)
Registrant's telephone number including area code: (713)918-8800
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
As of February 10, 1999, there were outstanding 217,059,000 shares of Common
Stock, par value $.01, of the registrant.
<PAGE> 2
BMC SOFTWARE, INC. AND SUBSIDIARIES
Quarter Ended December 31, 1998
INDEX
<TABLE>
<CAPTION>
Page
----
PART I. FINANCIAL INFORMATION
---------------------
<S> <C> <C>
Item 1. Financial Statements 3
Condensed Consolidated Balance Sheets
December 31, 1998 (Unaudited) and March 31, 1998 3
Condensed Consolidated Statements of Earnings Three months and
nine months ended December 31, 1997
and 1998 (Unaudited) 5
Condensed Consolidated Statements of Cash Flows Nine months
ended December 31, 1997 and 1998
(Unaudited) 6
Notes to Condensed Consolidated Financial
Statements 7
Item 2. Management's Discussion and Analysis of Results
of Operations and Financial Condition 9
<CAPTION>
PART II. OTHER INFORMATION
-----------------
<S> <C> <C>
Item 6. Exhibits and Reports on Form 8-K 25
SIGNATURES 26
----------
</TABLE>
2
<PAGE> 3
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
BMC SOFTWARE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
<TABLE>
<CAPTION>
March 31, December 31,
ASSETS 1998 1998
---- ----
(Unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 72,093 $ 123,070
Investment securities 56,174 66,569
Trade accounts receivable, net 170,778 218,443
Income tax receivable 40,805 22,127
Prepaid expenses and other 34,028 34,765
---------- ----------
Total current assets 373,878 464,974
Property and equipment, net 162,996 224,396
Software development costs, net 63,475 86,686
Purchased software, net 32,063 33,287
Investment securities 587,806 835,336
Deferred charges and other assets 28,277 50,187
---------- ----------
$1,248,495 $1,694,866
========== ==========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
3
<PAGE> 4
BMC SOFTWARE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
(continued)
<TABLE>
<CAPTION>
March 31, December 31,
LIABILITIES AND STOCKHOLDERS' EQUITY 1998 1998
---- ----
(Unaudited)
<S> <C> <C>
Current liabilities:
Trade accounts payable $ 11,361 $ 12,556
Accrued liabilities and other 81,352 118,191
Current portion of deferred revenue 242,821 300,385
----------- -----------
Total current liabilities 335,534 431,132
Long-term Liabilities:
Deferred revenue and other 104,986 160,247
Other long-term liabilities 48,818 48,207
----------- -----------
Total long-term liabilities 153,804 208,454
----------- -----------
Total liabilities 489,338 639,586
Stockholders' equity:
Common stock 2,101 2,173
Additional paid-in capital 129,098 110,719
Retained earnings 729,925 962,975
Foreign currency translation adjustment (1,543) (1,298)
Unrealized gain on securities available for sale 3,179 7,007
----------- -----------
862,760 1,081,576
Less treasury stock 99,513 19,957
Less unearned portion of restricted stock compensation 4,090 6,339
----------- -----------
Total stockholders' equity 759,157 1,055,280
----------- -----------
$ 1,248,495 $ 1,694,866
=========== ===========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
4
<PAGE> 5
BMC SOFTWARE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
(in thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
December 31, December 31,
------------------------ -------------------------
1997 1998 1997 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues:
Licenses $140,992 $205,236 $358,939 $532,241
Maintenance 55,010 78,171 158,186 212,669
-------- -------- -------- --------
Total revenues 196,002 283,407 517,125 744,910
-------- -------- -------- --------
Operating expenses:
Selling and marketing 52,836 78,457 146,974 213,005
Research and development 27,152 33,786 71,202 101,440
Cost of maintenance services
and product licenses 17,599 27,832 53,318 76,624
General and administrative 15,433 21,688 39,257 53,278
Acquired research and
development costs -- -- 65,473 17,304
-------- -------- -------- --------
Total operating expenses 113,020 161,763 376,224 461,651
-------- -------- -------- --------
Operating income 82,982 121,644 140,901 283,259
Other income 8,246 13,102 21,542 35,732
-------- -------- -------- --------
Earnings before taxes 91,228 134,746 162,443 318,991
Income taxes 26,451 35,034 63,307 85,918
-------- -------- -------- --------
Net earnings $ 64,777 $ 99,712 $ 99,136 $233,073
======== ======== ======== ========
Basic earnings per share $ .32 $ .46 $ .49 $ 1.08
======== ======== ======== ========
Shares used in computing basic
earnings per share 203,120 216,133 202,864 228,035
======== ======== ======== ========
Diluted earnings per share $ .30 $ .44 $ .46 $ 1.02
======== ======== ======== ========
Shares used in computing diluted 216,086 228,300 216,310 215,111
earnings per share ======== ======== ======== ========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
5
<PAGE> 6
BMC SOFTWARE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
December 31,
1997 1998
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net earnings (loss) $ 99,136 $ 233,073
Adjustments to reconcile net earnings
to net cash provided by operating
activities:
Acquired research and development costs 65,473 17,304
Depreciation and amortization 43,481 49,628
Net change in receivables,
payables and other items (12,063) 108,302
--------- ---------
Total adjustments 96,891 175,234
--------- ---------
Net cash provided by operating activities 196,027 408,307
--------- ---------
Cash flows from investing activities:
Technology acquisitions, net of cash acquired (72,044) (6,638)
Purchased software and related assets (2,480) (4,661)
Capital expenditures (49,436) (78,710)
Capitalization of software development (27,621) (46,350)
Purchases of securities held to maturity (69,547) (293,802)
Proceeds from securities held to maturity 66,629 39,705
Increase in long-term finance receivables (9,181) (24,897)
--------- ---------
Net cash used in investing activities (163,680) (415,353)
--------- =========
Cash flows from financing activities:
Income tax reduction relating to stock options 27,473 38,035
Stock options exercised and other 17,231 19,743
Treasury stock acquired (70,703) --
--------- ---------
Net cash used in financing activities (25,999) 57,778
--------- ---------
Effect of exchange rate changes on cash (664) 245
--------- ---------
Net change in cash and cash equivalents 5,684 50,977
Cash and cash equivalents at beginning of period 79,794 72,093
--------- ---------
Cash and cash equivalents at end of period $ 85,478 $ 123,070
========= =========
Supplemental disclosure of cash flow information:
Cash paid for income taxes $ 37,022 $ 15,774
</TABLE>
See accompanying notes to condensed consolidated financial statements.
6
<PAGE> 7
BMC SOFTWARE, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
Note 1 - Basis of Presentation
The accompanying condensed consolidated financial statements include
the accounts of BMC Software, Inc. and its wholly owned subsidiaries
(collectively, the "Company"). All significant intercompany balances and
transactions have been eliminated in consolidation.
The accompanying unaudited interim condensed consolidated financial
statements reflect all adjustments (consisting of normal recurring accruals)
which, in the opinion of management, are necessary for a fair presentation of
the results for the interim periods presented. These financial statements have
been prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-Q and Article
10 of Regulation S-X. Accordingly, they do not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements.
These financial statements should be read in conjunction with the
Company's annual audited financial statements for the year ended March 31, 1998,
as filed with the Securities and Exchange Commission (SEC) on Form 10-K.
Note 2 - Earnings Per Share
The Company presents its earnings per share in accordance with
Statement of Financial Accounting Standards (SFAS) No. 128, "Earnings Per
Share". SFAS No. 128 requires dual presentation of earnings per share (EPS);
basic EPS and diluted EPS. Basic EPS is computed by dividing net income by the
weighted average number of common shares outstanding for the period. Diluted EPS
reflects the potential dilution that could occur if securities or other
contracts to issue common stock were exercised or converted into common stock.
For purposes of this calculation, outstanding stock options and unearned
restricted stock are considered common stock equivalents using the treasury
stock method.
Note 3 - Stock Split
On April 20, 1998, the Company's board of directors declared a
two-for-one stock split. The stock split was effected in the form of a stock
dividend. The stockholders of record received one share of common stock for each
share held. All stock related data in the condensed consolidated financial
statements and related notes reflect this stock split for all periods presented.
7
<PAGE> 8
BMC SOFTWARE, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
Note 4 - Comprehensive Income
In June 1997, the Financial Accounting Standards Board (FASB) issued
SFAS No. 130, "Reporting Comprehensive Income". SFAS No. 130 requires the
presentation of a Comprehensive Income Statement that is to be presented with
other general financial statements. This statement is effective for the
Company's fiscal year end 1999. The following table sets forth the calculation
of comprehensive income for the following periods:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
December 31, December 31,
(in thousands) (in thousands)
1997 1998 1997 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net earnings $ 64,777 $ 99,712 $ 99,136 $ 233,073
Foreign currency translation
Gains/(losses) (705) (63) (663) 245
Unrealized gain/(loss) on securities
Available for sale (1,479) 482 1,832 3,828
--------- --------- --------- ---------
Total comprehensive income $ 62,593 $ 100,131 $ 100,305 $ 237,146
========= ========= ========= =========
</TABLE>
Note 5 - Accounting for Derivative Instruments and Hedging Activities
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." The Statement establishes accounting and
reporting standards requiring that every derivative instrument be recorded in
the balance sheet as either an asset or liability measured at its fair value.
The Statement also requires that changes in a derivative's fair value be
recognized currently in earnings unless specific hedge accounting criteria are
met. 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.
SFAS No. 133 is effective for the Company at the beginning of its
fiscal year 2000; however the Company will adopt SFAS No. 133 beginning January
1, 1999. One of the Company's principal hedging activities is to purchase
foreign currency option contracts to hedge anticipated revenue transactions.
Upon adopting SFAS No. 133, the Company will reduce deferred option premiums by
approximately $1 million. The Company will report the option contracts at fair
value each reporting period and the change in the intrinsic value of such
contracts will be reported as other comprehensive income. The change in
intrinsic value will be reported as the market value changes in the contract
occur. Accordingly, the effect could increase the volatility of earnings and
other comprehensive income.
Note 6 - Pending Merger
On November 2, 1998, the Company announced its agreement to merge with
Boole & Babbage, Inc. (Boole) (the Merger) through an exchange of common stock
and stock options using an exchange rate of .675 shares of BMC Software common
stock for each share of Boole common stock. The Company expects to account for
this transaction using the pooling of interests method. The Merger is subject to
approval by the Boole stockholders and review by the SEC.
8
<PAGE> 9
BMC SOFTWARE, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of
Results of Operations and Financial Condition
Item 2. Management's Discussion and Analysis of Results of Operations and
Financial Condition
This section of the Form 10-Q includes historical information for the
periods covered, certain forward looking information and the information
provided below under the heading "Certain Risks and Uncertainties that Could
Affect Future Operating Results" about certain risks and uncertainties that
could cause the Company's future operating results to differ from the results
indicated by any forward looking statements made by the Company or others. It is
important that the historical discussion below be read together with the
attached consolidated financial statements and notes thereto, with the
discussion of such risks and uncertainties and with the audited financial
statements and notes thereto, and the Management's Discussion and Analysis of
Results of Operations and Financial Condition, contained in the Company's Form
10-K for fiscal 1998.
A. RESULTS OF OPERATION AND FINANCIAL CONDITION
The following table sets forth, for the periods indicated, the
percentages that selected items in the Condensed Consolidated Statements of
Earnings bear to total revenues. These comparisons of financial results are not
necessarily indicative of future results.
<TABLE>
<CAPTION>
Percentage of Total Revenues
----------------------------
Three Months Ended Nine Months Ended
December 31, December 31,
------------ ------------
1997 1998 1997 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues:
License 71.9% 72.4% 69.4% 71.5%
Maintenance 28.1 27.6 30.6 28.5
----- ----- ----- -----
Total revenues 100.0 100.0 100.0 100.0
Operating expenses:
Selling and marketing 26.9 27.7 28.4 28.6
Research and development 13.9 11.9 13.8 13.6
Cost of maintenance services
and product licenses 9.0 9.8 10.3 10.3
General and administrative 7.9 7.7 7.6 7.2
Acquired research and development costs -- -- 12.7 2.3
----- ----- ----- -----
Operating income 42.3 42.9 27.2 38.0
Other income 4.2 4.6 4.2 4.8
----- ----- ----- -----
Earnings before taxes 46.5 47.5 31.4 42.8
Income taxes 13.5 12.4 12.2 11.5
----- ----- ----- -----
Net earnings 33.0% 35.2% 19.2% 31.3%
===== ===== ===== =====
</TABLE>
9
<PAGE> 10
BMC SOFTWARE, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of
Results of Operations and Financial Condition
(continued)
<TABLE>
<CAPTION>
REVENUES
Three Months Ended Nine Months Ended
December 31, December 31,
------------ ------------
(in thousands) (in thousands)
1997 1998 Change 1997 1998 Change
---- ---- ------ ---- ---- ------
<S> <C> <C> <C> <C> <C> <C>
North American license revenues $ 84,945 $ 124,221 46% $ 233,344 $ 347,473 49%
International license revenues 56,047 81,015 45% 125,595 184,768 47%
--------- --------- --------- ---------
Total license revenues 140,992 205,236 46% 358,939 532,241 48%
Maintenance revenues 55,010 78,171 42% 158,186 212,669 34%
--------- --------- --------- ---------
Total revenues $ 196,002 $ 283,407 45% $ 517,125 $ 744,910 44%
========= ========= ========= =========
</TABLE>
Product Line Revenues
The Company's products for the IBM OS/390 mainframe environment accounted
for 69% of total revenues in the quarters ended December 31, 1997 and 1998, and
76% and 73% of total revenues, respectively, in the nine-month periods ended
December 31, 1997 and 1998. The database utilities and administrative tools for
IBM's IMS and DB2 database management systems comprise the largest portion of
the Company's mainframe-based revenues. These product lines accounted for 52% of
both total revenues and license revenues in the quarter ended December 31, 1998
and 55% of both total and license revenues in the nine-month period ended
December 31, 1998. Total revenues and license revenues from these product lines
grew 43% and 56%, respectively, in the third quarter of fiscal 1999, and grew
33% and 44%, respectively, in the nine-month period of fiscal 1999 compared to
the prior year period. The Company's other products for the OS/390 mainframe
environment contributed 17% of total revenues and 15% of license revenues for
the quarter ended December 31, 1998 and contributed 18% and 16% of total and
license revenues, respectively, in the nine-month period ended December 31,
1998. Total revenues and license revenues for these other mainframe products
grew 53% and 58%, respectively, in the third quarter of fiscal 1999 and grew 58%
and 72% in the nine-month period of fiscal 1999.
The Company's distributed systems product lines comprise the PATROL
application and database management solutions, the Best/1 performance management
products, the PATROL DB database administration products and the Company's
high-performance database backup and recovery solutions. In total, these product
lines contributed 31% of total revenues for the quarters ended December 31, 1997
and 1998, respectively, and 38% and 33% of license revenues for the same
periods. In the nine months ended December 31, 1997 and 1998, these product
lines contributed 24% and 27% of total revenues and 30% and 29% of license
revenues, respectively. Total revenues for these product lines grew 44% and
license revenues grew 28% in the third quarter of fiscal 1999, and 62% and 46%,
respectively, for the nine-months ended December 31, 1998.
10
<PAGE> 11
BMC SOFTWARE, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of
Results of Operations and Financial Condition
(continued)
License Revenues
The Company's license revenues include product license fees, capacity-based
license upgrade fees and restructuring fees. Product license fees are generated
from the initial licensing of a product and subsequent licenses purchased under
the Company's per copy, central processing unit ("CPU") tier-based licensing
program. Product license fees also include fees associated with the initial
licensing of a product on a MIPS basis. Capacity-based license upgrade fees are
charged when a customer acquires the right to run an already licensed product on
additional processing capacity, as measured by a CPU tier or by the aggregate
processing capacity measured in millions of instructions per second ("MIPS") of
all CPUs for which the Company's products are licensed. These license upgrade
fees include fees associated with customers' purchasing the right to operate a
product on currently installed additional processing capacity and/or on
anticipated future processing capacity. Restructuring fees increase the
discounts associated with a customer's installed base of products, which,
therefore, reduce a customer's future maintenance charges and capacity based
upgrade fees pertaining to such installed products.
The Company's North American operations generated 60% and 61% of total
license revenues in the quarters ended December 31, 1997 and 1998, respectively,
and 65% of total license revenues in the nine-month periods ending on such
dates. The 46% growth in North American license revenues in the third quarter of
fiscal 1999 over the third quarter of fiscal 1998 was principally derived from
increased capacity-based upgrade fees for future capacity, current capacity and,
to a lesser extent, product license fees generated from new licenses of the
Company's mainframe products. For the nine months ended December 31, 1998, the
49% increase in North American license revenues over the comparable prior year
nine-month period is primarily attributable to increased capacity-based upgrade
fees for future and current capacity and product license fees generated from the
Company's distributed systems products. Capacity based upgrade fees for future
capacity represented the single largest component of North American license
revenues for the nine months ended December 31, 1998. International license
revenues represented 40% and 39% of total license revenues for the quarters
ended December 31, 1997 and 1998, respectively, and 35% of total license
revenues in the nine-month periods ending on such dates. International license
revenue growth of 45% from the third quarter of fiscal 1998 to the comparable
quarter of fiscal 1999 was derived principally from capacity-based upgrade fees
associated with current capacity and, to a lesser extent, product license fees
generated from the Company's distributed systems products. For the nine months
ended December 31, 1998, the 47% increase in international license revenues over
the prior year is primarily attributable to product license fees generated from
the Company's distributed systems products and, to a lesser extent, capacity
based upgrade fees for current capacity.
Capacity-based upgrade fees include fees for both current and future
additional processing capacity. These fees accounted for 29% and 34% of total
revenues for the quarters ended December 31, 1997 and 1998, respectively, and
32% and 37% of total revenues for the respective nine-month
11
<PAGE> 12
BMC SOFTWARE, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of
Results of Operations and Financial Condition
(continued)
periods. The sustainability and growth of the Company's mainframe-based license
revenues are dependent upon these capacity-based upgrade fees, particularly
within its largest customer accounts. Most of the Company's largest customers
have entered into enterprise license agreements allowing them to install the
Company's products on an unspecified number of CPUs, subject to a maximum limit
on the aggregate power of the CPUs as measured in MIPS. Additional fees are due
if this limit is exceeded. Substantially all of these transactions include
upgrade charges associated with additional processing capacity beyond the
customer's current usage level and/or a restructuring fee, and many include
license fees for additional products. In the quarters ended December 31, 1997
and 1998, the enterprise license fees for future additional processing capacity
and license restructurings comprised approximately 25% and 22% of total
revenues, respectively, and comprised 25% and 28% of total revenues in the
respective nine-month periods. The fees associated with future additional
mainframe processing capacity typically comprise from one-half to substantially
all of the license fees included in the enterprise license transaction. The
Company has experienced a strong increase in demand from its largest customers
for the right to run its products on increased current and anticipated mainframe
processing capacity as enterprises invest heavily in their core OS/390 mainframe
information systems. The Company expects that it will continue to be dependent
upon these capacity-related license revenue components. With the rapid
advancement of distributed systems technology and customers' needs for more
functional and open applications, such as pre-packaged ERP applications, to
replace legacy systems, there can be no assurance that the demand for mainframe
processing capacity or the higher operating efficiencies afforded by the
Company's products will continue at current levels. Should this trend slow
dramatically or reverse, it would adversely impact the Company's mainframe
license revenues and its operating results. 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 associated with the Company's
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.
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,
12
<PAGE> 13
BMC SOFTWARE, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of
Results of Operations and Financial Condition
(continued)
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.
<TABLE>
<CAPTION>
OPERATING EXPENSES
Three Months Ended Nine Months Ended
December 31, December 31,
------------ ------------
(in thousands) (in thousands)
1997 1998 Change 1997 1998 Change
---- ---- ------ ---- ---- ------
<S> <C> <C> <C> <C> <C> <C>
Selling and marketing $ 52,836 $ 78,457 48% $146,974 $213,005 45 %
Research and development 27,152 33,786 24% 71,202 101,440 42 %
Cost of maintenance services
and product licenses 17,599 27,832 58% 53,318 76,624 44 %
General and administrative 15,433 21,688 40% 39,257 53,278 36 %
Acquired research and
development -- -- N/A 65,473 17,304 (74)%
-------- -------- -------- --------
Total operating expenses $113,020 $161,763 43% $376,224 $461,651 23 %
======== ======== ======== ========
</TABLE>
Selling and Marketing
The Company's selling and marketing expenses include personnel and
related costs, sales commissions and costs associated with advertising, industry
trade shows and sales seminars. Personnel costs were the largest single
contributor to the expense growth in the three months and nine months ended
December 31, 1998. Selling and marketing headcount increased by 58% from
December 31, 1997 to December 31, 1998. This increase was primarily attributable
to significant hiring of additional open systems sales representatives and
technical sales support consultants. Sales commissions increased in the third
quarter and first nine months of fiscal 1999 as a result of the 46% and 48%
increases, respectively, 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 of supporting a growing
indirect distribution channel. Other contributors to the increase were
significantly higher levels of travel and entertainment expenses.
13
<PAGE> 14
BMC SOFTWARE, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of
Results of Operations and Financial Condition
(continued)
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 third quarter of
fiscal 1999 were the result of increased compensation costs associated with both
software developers and development support personnel, as well as associated
benefits and facilities costs. The Company increased its headcount in the
research and development organization by 60% from December 31, 1997 to December
31, 1998. Research and development costs were reduced by amounts capitalized in
accordance with Statement of Financial Accounting Standards (SFAS) No. 86. The
Company capitalizes its software development costs when the projects under
development reach technological feasibility as defined by SFAS No. 86. During
the third quarter of fiscal 1998 and 1999, the Company capitalized approximately
$8,963,000 and $17,935,000, respectively, of software development costs.
Capitalized software development costs for the nine months ended December 31,
1997 and 1998 were $27,621,000 and $46,350,000, respectively. The growth in
capitalized costs is primarily due to increases in new distributed systems
product development, the porting of distributed systems products to alternate
environments and increased integration development activity.
Cost of Maintenance Services and Product Licenses
Cost of maintenance services and product licenses consists of
amortization of purchased and internally developed software, costs associated
with the maintenance, enhancement and support of the Company's products and
royalty fees. Growth in the cost of maintenance services and product licenses
during the first nine months of fiscal 1999 was due to increases in customer
support employees and capitalized software amortization. The Company amortized
$4,106,000 and $9,626,000 in the third quarter of fiscal 1998 and 1999,
respectively, of capitalized software development costs pursuant to SFAS No. 86.
In these periods, the Company expensed $1,925,000 and $6,258,000, respectively,
of capitalized software development costs to accelerate the amortization of
certain software products. For the nine months ended December 31, 1997 and 1998,
the Company amortized $13,000,000 and $23,139,000, respectively; including
accelerated amortization of $7,564,000 and $10,508,000, respectively. The
Company accelerated the amortization of these software products as they were not
expected to generate sufficient future revenues which would be required for the
Company to realize the carrying value of the assets. The Company expects its
cost of maintenance services and product licenses will continue to increase as
the Company capitalizes a higher level of software development costs and as the
Company builds its distributed systems product support organization, which is
less cost-effective than its mainframe support organization because of the
complexity and variability of the environments in which the products operate.
The distributed systems products operate in a high number of operating
environments, including operating systems, DBMSs and ERP applications and
require greater ongoing platform support development activity relative to the
Company's OS/390 mainframe products.
14
<PAGE> 15
BMC SOFTWARE, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of
Results of Operations and Financial Condition
(continued)
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 for both the three months and nine months ended December
31, 1998 over the same periods ended December 31, 1997 was largely due to
increased personnel costs and higher costs associated with the related
infrastructure to support the Company's growth. Headcount within the general and
administrative organizations grew by 42% from December 31, 1997 to December 31,
1998.
Acquired Research and Development and Related Costs
The Company did not incur acquired in-process research and development
(IPR&D) costs during the quarters ended December 31, 1997 and 1998. Acquired
IPR&D costs for the nine months ended December 31, 1997 and 1998 were
$65,473,000 and $17,304,000, respectively. These technology charges related to
the acquisition of DataTools and acquisitions of in-process technologies.
The following table presents information, in thousands, concerning the
purchase price allocations for the acquisitions accounted for under the purchase
method for the nine months ended December 31, 1997 and 1998.
<TABLE>
<CAPTION>
Total
Company Name Software Acquired IPR&D Goodwill Other Price
------------ -------- -------------- -------- ----- -----
<S> <C> <C> <C> <C> <C>
Fiscal 1998:
DataTools $15,000 $54,372 $ 2,282 $ 1,732 $73,000
Sento 1,800 6,286 -- -- 8,086
Software Partners 1,700 4,815 -- -- 6,515
------- ------- ------- ------- -------
$18,500 $65,473 $ 2,282 $ 1,732 $87,601
======= ======= ======= ======= =======
Fiscal 1999:
Nastel $ -- $ 6,000 $ -- $ -- $ 6,000
Envive 6,400 11,304 -- -- 17,704
------- ------- ------- ------- -------
$ 6,400 $17,304 $ -- $ -- $23,704
======= ======= ======= ======= =======
</TABLE>
The Company acquired DataTools in May 1997, for an aggregate purchase
price of $73 million. DataTools owns certain Relational Database Management
Systems (RDBMS) specific back-up products that were sold as stand-alone
products. Its' flagship product is called SQL Backtrack (SQL-BT). DataTools was
in the process of developing numerous products and enhanced versions of
products, including next generation versions of SQL-BT for the Informix platform
(SQI) and the Oracle platform (SBO), as well as first generation products for
the Microsoft SQL (SBM) and Sybase IDR (SBS/I) platforms. The Company allocated
approximately $18.6 million of the
15
<PAGE> 16
BMC SOFTWARE, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of
Results of Operations and Financial Condition
(continued)
purchase price to developed technology, workforce and goodwill. The Company
allocated approximately $54.4 million to acquired IPR&D. The most significant
four specific development projects, which comprised $40.6 million (74%) of the
acquired IPR&D, pertained to the above mentioned projects. The primary remaining
efforts associated with the IPR&D included code completion in several key areas,
such as logical extraction and piecemeal back-up and recovery, large database
support and performance-related functionality. As of the acquisition date, the
expected costs to complete the IPR&D were, on a calendar year basis,
approximately $2.9 million in 1997, $4.7 million in 1998, $2.1 million in 1999,
and $729,000 in 2000. The Company has made significant progress towards the
completion of most of the underlying IPR&D projects. With respect to the
estimated completion costs, the Company is below these forecasted amounts as a
result of decisions to terminate certain of the IPR&D projects (such as the
SBS/I project noted below) and more efficient development efforts than
anticipated. The following summarizes the four primary projects pertaining to
the DataTools IPR&D.
The Company spent approximately $700,000 through March 31, 1998 on the
SBM product in addition to the approximate $750,000 spent by DataTools prior to
the acquisition. The Company released this product in April 1998.
The SBO product was released in June 1998 for both the NT and Unix
environments. The IPR&D was successfully completed resulting in new
functionality in several areas, including back-up and recovery scheduling,
remote BU&R, archive log management and a graphical user interface. The Company
spent approximately $1.7 million in completing these technologies subsequent to
the DataTools acquisition.
BMC abandoned the SBS/I project, on which DataTools had spent
approximately $1 million in research and development. BMC made this decision
based on concerns over market demand and the allocation of Sybase resources to
the core Sybase product. The Company spent less than $500,000 on this technology
prior to deciding to cancel this development project.
The Company spent approximately $1 million on SBI through March 31,
1998, in addition to the approximate $500,000 spent by DataTools prior to the
transaction. As a result, Version 2.0 of this product was released in April
1998.
In June 1997, the Company acquired technology from Sento Technical
Innovations, Inc. The Company has since abandoned the technology and expensed
the entire purchase price.
In July 1997, the Company acquired certain software code from Software
Partners/32, Inc. (Software Partners) for a total purchase price of $6.5
million. The Company allocated $1.7 million of the purchase price to completed
technology and $4.8 million to acquired IPR&D. This code permits file system
back-up and recovery, but was not competitive with the leading products in this
market. While
16
<PAGE> 17
BMC SOFTWARE, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of
Results of Operations and Financial Condition
(continued)
the acquired code contained certain key functionality, it was incomplete in
various aspects. As a result, the Company attempted to complete this code by,
among other things, developing support for dual network hosts, enhancing the
interface with the SQL-BT object back-up stream interface (OBSI), developing
support for SBI and SBM and developing support for code and integrating it into
its Patrol recovery manager product. These efforts were unsuccessful, and the
Company is now attempting to complete the code and integrate it into a planned
distributed systems application recovery management product scheduled to be
released in the latter part of fiscal 2000. The expected costs to complete the
IPR&D (and to integrate the technology into the application recovery product)
are approximately $720,000 in fiscal 1999 and $1,200,000 in fiscal 2000. The
allocation of purchase price to completed technology reflects the estimated
discounted future cash flows associated with the twenty or so customers using
the existing technology. Cumulative revenues through March 31, 1998 from such
customers were less than $100,000.
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. BMC 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. The Company
incurred approximately $1.6 million in development costs prior to the release of
its middleware management product in the third quarter of fiscal 1999.
In June 1998, BMC 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
17
<PAGE> 18
BMC SOFTWARE, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of
Results of Operations and Financial Condition
(continued)
$6.4 million of the transaction to software assets, prepaid royalties and
interest. The remaining $11.3 million was allocated to acquired IPR&D which had
not reached technological feasibility as of the date of the transaction. The
Company believes the acquired IPR&D is approximately 45% complete towards
development of end-to-end and service level management functionality across the
major ERP platforms, but there is no assurance that it will be successful in
developing such marketable technology. The Company expects costs to complete the
IPR&D will approximate $250,000 in fiscal 1999, $1,900,000 in fiscal 2000 and
$400,000 in fiscal 2001.
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
in-process research and development were based on estimates of relevant market
sizes and growth factors, expected trends in technology, and the nature and
expected timing of new product introductions by the Company and its competitors.
Operating expenses were estimated based on historical results and anticipated
profit margins. Due to purchasing power increases and general economies of
scale, estimated operating expenses as a percentage of revenues were, in some
cases, estimated to decrease after the acquisitions.
The rates utilized to discount the net cash flows to their present
value were based on cost of capital calculations. Due to the nature of the
forecast and risks associated with the projected growth, profitability and the
developmental nature of the projects, discount rates of 16% to 20% were
generally appropriate for the acquired in-process research and development.
These discount rates were commensurate with the respective stage of development
and the uncertainties in the economic estimates described above. If the acquired
IPR&D projects are not successfully completed, the Company's business, operating
results, and financial condition may be materially adversely affected in future
periods. In addition, the value of other intangible assets acquired may become
impaired.
In connection with the normal Securities and Exchange Commission (SEC)
review of BMC Software's registration statement filed pursuant to its planned
merger with Boole & Babbage, Inc., (Boole) the SEC has requested additional
analysis and information pertaining to certain charges for acquired, in-process
research and development (IPR&D). The charges being challenged are the $54.4
million DataTools charge in fiscal 1998 and the $11.3 million Envive charge in
fiscal 1999. The SEC is reviewing such charges utilizing guidance issued by the
SEC in a letter to the American Institute of Certified Public Accountants
(AICPA) dated September 9, 1998. If the Company were to revise its treatment of
these acquisitions, the impact would be to increase long-term assets and net
income in the quarters of the transactions and to increase non-cash amortization
expense in quarters subsequent to the transactions. While it is the Company's
belief that its original treatment of these transactions was appropriate, it may
be required to apply the guidance mentioned above and revise its previously
reported results. If such revision is required, the Company estimates that the
impact would not exceed $.01 per share, per quarter, which the Company believes
is not material to its previously reported results nor its expected future
results.
OTHER INCOME
For the third quarter of fiscal 1999, other income was $13,102,000,
reflecting an increase of 59% over $8,246,000 of other income in the same
quarter of fiscal 1998. Other income consists primarily of interest earned on
tax-exempt municipal securities, euro bonds, corporate bonds, mortgage
securities and money market funds. The increase in other income is primarily due
to an increase of approximately $473,000,000 in cash and investment securities
from December 31, 1997 to December 31, 1998.
INCOME TAXES
For the third quarter of fiscal 1999, income tax expense was
$35,034,000 compared to $26,451,000 for the same quarter in fiscal 1998. The
Company's income tax expense represents the federal statutory rate of 35%, plus
certain foreign and state taxes, reduced primarily by the benefit from lower
income taxes associated with the Company's European operations and the effect of
tax exempt interest earned from cash investments.
18
<PAGE> 19
BMC SOFTWARE, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of
Results of Operations and Financial Condition
(continued)
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its growth through funds generated from
operations. As of December 31, 1998, the Company had cash, cash equivalents and
investment securities of $1,024,975,000.
The Company did not repurchase any shares on the open market during the
first nine months of fiscal 1999 as its stock repurchase program was rescinded
by the Board of Directors in connection with the pooling of interests
transaction with BGS Systems, Inc. As a result of the proposed Boole transaction
noted above, the Company does not expect to reinstate its share repurchase
program.
The Company believes that existing cash balances and funds generated
from operations will be sufficient to meet its liquidity requirements for the
foreseeable future.
COMPARATIVE INFORMATION
In connection with the above mentioned SEC review of the proposed
merger with Boole, the SEC has indicated that it disagrees with the Company's
position and that of its independent accountants, Arthur Andersen LLP, that the
BGS Systems, Inc. (BGS) pooling transaction in March of 1998 did not warrant
restatement of prior period results on the basis of materiality. The Company
intends to discuss this matter further with the SEC. However, the Company may
be required to restate its fiscal 1998 Form 10K and its three fiscal 1999
Form 10Q's (inclusive) to reflect BGS's results of operations and financial
position for all periods presented. Such restatement would affect presentation
matters only and have no impact on the Company's current and future results of
operations.
B. CERTAIN RISKS AND UNCERTAINTIES THAT COULD AFFECT FUTURE OPERATING
RESULTS.
BMC's Stock Price is Volatile. BMC's stock price has been and is highly
volatile. BMC'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 combined company would likely have a
significant adverse effect on the combined company's stock price. The growth
rates of BMC's license revenues, total revenues, net earnings and earnings per
share, excluding one-time charges, have accelerated over the last seven
quarters. BMC may not achieve, in future periods, these relatively higher rates
of growth.
BMC's Earnings Associated with License Revenues May Fluctuate. The
timing and amount of BMC'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. BMC 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 BMC's sales
are closed at the end of each quarter, and there has been and continues to be a
trend toward larger enterprise license transactions, which can have sales
cycles of up to a year or more and require approval by a customer's upper
management. These transactions are typically difficult to manage and predict.
Failure to close an expected individually significant transaction could cause
BMC's revenues and earnings in a period to fall short of expectations. BMC
generally does not know whether revenues and earnings will meet expected
results until the final days or day of a quarter.
BMC May Receive Less Revenues From Enterprise Licenses. Fees from
enterprise license transactions remain a fundamental component of BMC's
revenues. There is a risk that BMC's revenues could be adversely affected
because of a reduction in fees from enterprise licenses. Enterprise license fees
continue to represent an increasingly greater percentage of BMC's total
mainframe license revenues. In fiscal 1998, enterprise license fees for future
additional processing capacity and license restructurings comprised
approximately 24% of BMC's total revenues. These revenues are dependent upon
BMC's customers' continuing to perceive an increasing need to use BMC's existing
software products on substantially greater mainframe processing capacity in
future periods. If BMC's customers' processing capacity
19
<PAGE> 20
BMC SOFTWARE, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of
Results of Operations and Financial Condition
(continued)
growth were to slow and/or if such customers were to perceive alternatives to
relying upon BMC's current mainframe products, BMC's revenues would be adversely
impacted.
Prices for BMC's Mainframe Products Could Decline. There is a risk that
pricing pressures within the mainframe systems software markets could have an
adverse effect on BMC's revenues and earnings. BMC's capacity-based upgrade fees
associated with both current and future processing capacity contributed 33% of
total revenues in fiscal 1998. The charging of upgrade fees based on running
previously licensed software on more powerful computers is standard among
mainframe systems software vendors, including IBM. The pricing of these
processing capacity-based fees is under constant pressure from customers, and
IBM is aggressively seeking to reduce the costs of its mainframe systems
software.
BMC's High Operating Margins Could Decline. There is a risk that BMC
will not be able to sustain its high operating margins which would adversely
affect its earnings. BMC's operating margins, excluding one-time charges, have
ranged from 37% to 45% in recent quarters, which is at the high-end of the
range for peer companies. Since BMC's mix of business continues to shift to
distributed systems revenues and since research and development, sales, support
and distribution costs for distributed systems software products are generally
higher than for mainframe products, operating margins will experience more
pressure.
IBM Could Affect BMC's Business. If IBM is successful in achieving
performance and functional equivalence with BMC's products at a lower cost,
BMC's business will be materially adversely affected. BMC derived approximately
74% of its total revenues in fiscal 1998 from software products for IBM and
IBM-compatible mainframe computers. IBM continues to focus on reducing the
overall software costs associated with the OS/390 mainframe platform. IBM
continues, directly and through third parties, to aggressively enhance its
utilities for IMS and DB2 to provide lower cost alternatives to the products
provided by BMC and other independent software vendors. IBM has significantly
increased its level of activity in the IMS and DB2 high speed utility markets
over the last twelve months.
Rapid Technological Change Could Adversely Affect BMC's Business. BMC's
inability to keep pace with technological change in its industry would have an
adverse effect on its revenues and earnings. BMC operates in a highly
competitive industry characterized by rapid technological change. The
distributed systems and application management markets in which BMC operates are
far more crowded and competitive than its traditional mainframe systems
management markets. BMC'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 BMC's products to interoperate and perform well with
existing and future leading databases and other platforms supported
by its products.
BMC 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 BMC's revenues and
earnings. New products or new versions of existing products
20
<PAGE> 21
BMC SOFTWARE, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of
Results of Operations and Financial Condition
(continued)
may, despite testing, contain undetected errors or bugs that will delay the
introduction or adversely affect commercial acceptance of such products.
BMC Could Have Difficulty Developing Products for Microsoft
Platforms. Microsoft could significantly lower software price points in some of
BMC's markets, which could place additional pricing pressure on BMC. BMC has
invested and intends to continue to invest in the development of systems
management products for Windows NT and BackOffice environments, but there are
numerous uncertainties associated with BMC's ability to successfully execute
this strategy. Microsoft Corporation has significantly increased its focus on
developing operating systems, systems management products and databases that
will provide business-critical class functionality. Specifically, Microsoft is
aggressively promoting its BackOffice family of software products, including its
Windows NT operating system and its SQL Server relational database management
system, as lower cost alternatives to the UNIX operating systems, coupled with
relational database management systems from Oracle Corporation, Sybase, Inc.,
Informix Corporation and other vendors.
There Are Risks Associated with BMC's International Operations. BMC's
operations and financial results could be significantly adversely affected by
changes in foreign currency exchange rates, sluggish regional economic
conditions, particularly in Europe and the Pacific Rim, and difficulties in
staffing and managing international operations. BMC's future operating results
depend on sustained performance improvement by its international offices. In
this regard, the economies in Europe and the Pacific Rim regions have been
depressed in the past year.
There Are Risks Related to Year 2000 Compliance. The impact of Year
2000 issues on future BMC revenue is difficult to assess, but is a risk to be
considered in evaluating BMC's future growth. BMC believes the current versions
of its products are Year 2000 compliant. BMC does not intend to make all prior
versions of its products Year 2000 compliant and has notified its customers as
to which versions will and will not be Year 2000 compliant. BMC has developed
transition plans for customers who expect to be using noncompliant versions of
BMC's products on or after January 1, 2000 and does not expect to incur
significant costs in accommodating them.
BMC is unaware of any potential material liabilities or operational
difficulties associated with Year 2000 compliance of its own internal
information systems, which are based on Oracle Corporation's enterprise resource
planning system.
Efforts by customers to address Year 2000 issues may absorb a
substantial part of their information technology budgets in the near term.
There is much speculation that the cost of Year 2000 compliance efforts will
significantly reduce spending on non-Year 2000 products through January 1,
2000. BMC believes that its core customers are well into their Year 2000
compliance programs and that this trend has not materially adversely affected
demand for its products to date.
Pending Acquisition. On November 2, 1998, the Company announced its
agreement to acquire Boole through an exchange of common stock and stock options
using an exchange rate of .675 shares of the Company's common stock for each
share of Boole common stock. The acquisition is subject to approval by the Boole
stockholders and to review by the SEC. The Company faces significant technical
and organizational challenges in integrating Boole operations with those of the
Company. The Company has plans to implement retention programs to keep many of
the key technical, sales and marketing employees. Integration of the Boole
products and organizational structure will be difficult, and there can be no
assurance that the integration efforts will be successful. Boole is a party to
the litigation described in Item 1. Legal Proceedings. If the merger is
completed, the combined company will be responsible for any liabilities with
respect to such litigation. For discussion of additional risks related to the
proposed merger, see the Company's Registration Statement on Form S-4 filed with
the SEC on February 3, 1999.
FORWARD-LOOKING INFORMATION
Certain of the information relating to BMC 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
BMC other than statements of historical fact regarding
21
<PAGE> 22
BMC SOFTWARE, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of
Results of Operations and Financial Condition
(continued)
BMC are forward-looking statements. Examples of forward-looking statements
include statements regarding BMC'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 BMC. 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 BMC.
22
<PAGE> 23
BMC SOFTWARE, INC. AND SUBSIDIARIES
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
On November 13, 1998, Platinum Technology, Inc. ("Platinum") filed a
complaint against the Company and Boole & Babbage, Inc. ("Boole") and a motion
for preliminary injunction in the Circuit Court of the Eighteenth Circuit
Chancery Division, DuPage County, Wheaton, Illinois. The complaint alleged that
Boole was in breach of a standstill and exclusive negotiation agreement with
Platinum, and that the Company tortiously interfered with that alleged agreement
when it negotiated and executed the merger agreement with Boole. Based upon its
complaint, Platinum sought to enjoin the merger between the Company and Boole
and require Boole to negotiate exclusively with Platinum for a full and
uninterrupted 120-day period.
In early January 1999, Platinum withdrew its motion for preliminary
injunction by which it sought to enjoin the merger and to require Boole to
negotiate exclusively with Platinum for a full and uninterrupted 120-day period,
and filed under seal a motion for permission to amend its complaint. On January
5, 1999, Platinum announced that by its proposed amended complaint, it would
seek damages of at least $30 million as its remedy against Boole and it would
dismiss the Company as a defendant in its lawsuit.
On January 22, 1998, the court granted Platinum permission to amend
its complaint to seek damages against Boole and to dismiss the Company from the
litigation.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits.
None
(b) Reports on Form 8-K.
January 8, 1999 - Change in status regarding further
developments in the ongoing litigation among Platinum, Boole and BMC.
23
<PAGE> 24
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
BMC SOFTWARE, INC.
Date: February 15, 1999 By: /S/ Max P. Watson Jr.
---------------------- ----------------------------------------
Max P. Watson Jr.
Chairman of the Board, President and
Chief Executive Officer
Date: February 15, 1999 By: /S/ William M. Austin
----------------------- ----------------------------------------
William M. Austin
Senior Vice President and
Chief Financial Officer
Date: February 15, 1999 By: /S/ Kevin M. Klausmeyer
---------------------- ----------------------------------------
Kevin M. Klausmeyer
Chief Accounting Officer
24
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE NINE
MONTHS ENDED DECEMBER 31, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS INCLUDED IN THE COMPANY'S FORM 10-Q FOR THE PERIOD
ENDING DECEMBER 31, 1998.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> MAR-31-1999
<PERIOD-START> APR-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 123,070
<SECURITIES> 901,905
<RECEIVABLES> 228,202
<ALLOWANCES> 11,402
<INVENTORY> 0
<CURRENT-ASSETS> 464,974
<PP&E> 318,355
<DEPRECIATION> 93,959
<TOTAL-ASSETS> 1,694,866
<CURRENT-LIABILITIES> 431,132
<BONDS> 0
0
0
<COMMON> 2,173
<OTHER-SE> 1,053,107
<TOTAL-LIABILITY-AND-EQUITY> 1,694,866
<SALES> 532,241
<TOTAL-REVENUES> 744,910
<CGS> 76,624
<TOTAL-COSTS> 461,651
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 318,991
<INCOME-TAX> 85,918
<INCOME-CONTINUING> 233,073
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 233,073
<EPS-PRIMARY> 1.08
<EPS-DILUTED> 1.02
</TABLE>
