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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED MARCH 31, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 0-17136
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BMC SOFTWARE, INC.
(Exact name of registrant as specified in its charter)
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<S> <C>
DELAWARE 74-2126120
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
BMC SOFTWARE, INC.
2101 CITYWEST BOULEVARD
HOUSTON, TEXAS 77042-2827
(Address of principal executive offices) (Zip code)
</TABLE>
Registrant's telephone number, including area code: (713) 918-8800
Securities Registered Pursuant to Section 12(b) of the Act:
NONE
Securities Registered Pursuant to Section 12(g) of the Act:
COMMON STOCK, PAR VALUE $.01 PER SHARE
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the registrant's voting stock held by
non-affiliates of the registrant, based upon the last reported sale price of the
registrant's Common Stock on June 23, 2000 was $8,828,368,649.
As of June 23, 2000, there were outstanding 246,544,630 shares of Common
Stock, par value $.01, of the registrant.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the following documents are incorporated by reference in this
report:
Definitive Proxy Statement filed in connection with the registrant's Annual
Meeting of Stockholders currently scheduled to be held on August 28, 2000 (Part
III of this Report)
Such Proxy Statement shall be deemed to have been "filed" only to the extent
portions thereof are expressly incorporated by reference.
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This Annual Report on Form 10-K contains certain forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended, which are
identified by the use of the words "believe," "expect," "anticipate," "will,"
"contemplate," "would" and similar expressions that contemplate future events.
Numerous important factors, risks and uncertainties affect our operating
results, including, without limitation, those contained in this report, and
could cause our actual results to differ materially from the results implied by
these or any other forward-looking statements made by us or on our behalf. There
can be no assurance that future results will meet expectations. You should pay
particular attention to the important risk factors and cautionary statements
described in the section of this Report entitled "Management's Discussion and
Analysis of Results of Operations and Financial Condition -- Certain Risks and
Uncertainties That Could Affect Future Operating Results." You should also
carefully review the cautionary statements described in the other documents we
file from time to time with the Securities and Exchange Commission, specifically
all Quarterly Reports on Form 10-Q and Current Reports on Form 8-K.
PART I
ITEM 1. BUSINESS
OVERVIEW
BMC Software is one of the world's largest independent systems software
vendors, delivering comprehensive systems management solutions. We provide
software solutions that enhance the availability, performance and recoverability
of our customers' business-critical applications to help them better manage
their businesses. Virtually all of our customers are now conducting a
significant portion of their business via the Internet. In the past 12 months,
global e-business has exploded, causing market research analysts to drastically
increase e-business market size estimates. We believe this dramatic increase in
e-business will translate into large amounts of spending on management tools for
e-business infrastructure by established businesses shifting on-line, new
businesses focused on on-line sales and service providers such as applications
service providers ("ASPs"). Our portfolio of systems management solutions allows
our customers to manage the various components and technologies within their
information technology ("IT") systems from end-to-end, from legacy databases and
applications on large mainframes to customer-facing web portals and exchanges.
Founded in 1980, we first earned a position of leadership in providing high
performance software tools and utilities for the mainframe computers on which
large enterprises depend. We began to deliver management solutions for
distributed IT systems in January 1994, when we acquired the PATROL(R) service
level management product suite, which we have established as a market leader.
Today, we are a leading provider of systems management solutions for the entire
IT enterprise, including mainframe, distributed and web-based systems. With the
rapid growth of business conducted over the Internet, companies worldwide are
racing to implement, maintain and manage comprehensive e-business strategies.
Because e-business success is dependent upon the result of the customer
experience, companies cannot afford for their IT systems to be unavailable or
performing poorly. Our focus on Assuring Business Availability(TM) addresses the
continually increasing requirements that customers' applications -- and their
myriad underlying components -- run around the clock, without failure or
downtime. Over the last two years we have also invested significantly in our
professional services group to help customers implement our products and to
deliver our solutions on a more consultative basis.
Our software solutions address the numerous technology layers in the
application stack: operating systems, databases, middleware, web application
servers, transaction servers and the applications themselves. We address all of
the predominant operating environments of enterprise computing, including:
- the International Business Machines ("IBM") OS/390 mainframe operating
system;
- the predominant Unix operating system variants, including Sun Solaris,
HPUX, IBM's AIX, Linux and Compaq's Tru64;
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- Microsoft Corporation's ("Microsoft" or "MS") MS Windows NT and Windows
2000 operating systems; and
- E-business platforms such as IBM's WebSphere and Microsoft's Site Server
Commerce Edition.
During fiscal year 2000 we introduced comprehensive e-business management
solutions which manage the complexity of the IT enterprise end-to-end in the
Internet environment. For example, our solutions monitor and manage the front
end web applications and servers on which they reside, security firewalls and
end-to-end response time of web transactions. In addition, building on our
traditional expertise at managing mainframe computing environments, we
introduced several new solutions that manage the back office e-business systems
behind the security firewall. These include managing network traffic and
middleware as well as legacy mainframe systems and databases that are all linked
together in the e-business enterprise. To further our commitment to providing
solutions for e-business infrastructure, we acquired Evity, Inc. in April 2000.
Evity's SiteAngel 2000(TM) web transactions monitoring service allows companies
engaged in e-business to easily monitor the performance of critical path
transactions through their web sites, such as purchasing a book or tracking a
transaction through a trade exchange, and to measure that performance against
pre-set targets. The combination of SiteAngel(TM) with PATROL now provides a
complete view of an application's service from outside the security firewall on
the Internet to inside the data center.
In June 2000, we introduced a major new version of PATROL, PATROL 2000, a
comprehensive, integrated service level management solution which enables
businesses to measure service in terms of end-user response time and business
transactions and to publish reports on compliance with service level agreements.
PATROL 2000 represents the evolution of PATROL into a true enterprise-wide
service level management solution. PATROL 2000 allows for automated diagnosis of
the root cause of failures and prediction of the impact of business change on
the quality of service delivered. PATROL 2000 further provides for the taking of
corrective actions when performance degradation or failure is detected and
allows for the automation of these corrective actions. The key activities
involved with managing service for both distributed systems and e-business
applications may thus be automated using PATROL 2000. Additional product level
information is provided under the subheading "-- Products" below.
Our professional services organization provides a comprehensive suite of
consulting services and education offerings designed to ensure ongoing business
availability. With our growing professional services business, we have moved
from being a provider of software products to becoming a complete solutions
provider. Towards this end, we have introduced several programs unique to the
industry which provide our customers with the keys to guaranteeing service
quality to their customers. The BMC Service Assurance Center(TM) is a holistic
methodology for a company's IT department that is designed to provide proactive,
continuously improving service to end users. Using a combination of products,
services and business process methodologies, our professional services
consultants implement the SA Center(R) to monitor and manage critical
high-availability business applications. The SA Center automates system
management so that attrition and personnel availability, issues IT departments
are struggling with worldwide, do not negatively impact the ability of the IT
organization to conduct business. In fiscal 2000, we introduced BMC Software
OnSite(TM), a certification program which includes solution implementation and
regular Health Checks performed by our professional services group. By joining
OnSite(TM), customers are able to use the management methodology of BMC Service
Assurance(TM) to deliver optimal service to their own customers, partners and
end users. In April 2000, we introduced our SureStart(TM) program which
guarantees on-time implementation by our professional services group for certain
systems management solutions. Customers receive a 20% rebate on the professional
services fees if we fail to meet the agreed timeframe. This program is aimed at
optimizing the return on investment for a customer by guaranteeing that our
products will be fully implemented within an agreed timeframe.
We were organized as a Texas corporation in 1980 and were reincorporated in
Delaware in July 1988. Since March 1998, we have completed several strategic
acquisitions. We acquired BGS Systems, Inc. ("BGS") in March 1998, Boole &
Babbage, Inc. ("Boole") in March 1999, New Dimension Software Ltd. ("New
Dimension") in April 1999, and Evity, Inc. ("Evity") in April 2000. Our
principal corporate offices are located at 2101 CityWest Blvd., Houston, TX
77042-2827. Our telephone number is (713) 918-8800.
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STRATEGY
Our strategy is to deliver the most comprehensive e-business systems
management software with rapid implementation. The underlying premise of this
strategy is that the success of any enterprise today depends on its IT systems.
E-business companies, for example, are defined by their IT capabilities.
Business-critical applications typically consist of numerous components from
multiple vendors, such as packaged, custom and legacy e-business, manufacturing,
billing, supply chain, management information and payroll applications. Even
routine or baseline applications such as e-mail and calendaring applications
become business critical when an organization depends on them for its day-to-day
operations. Application downtime or performance degradation can halt or greatly
impede an enterprise's daily operations. In addition, the explosive growth of
the Internet as a platform for commerce has placed tremendous pressure on IT
operations to make these applications available on an uninterrupted, full time
basis. Our focus is on the operation of applications and their underlying
components in high stress deployments. Our strategy is to provide end-to-end
enterprise systems management solutions designed to ensure the availability,
performance and recoverability of critical application services with rapid
deployment of the management solution. Examples of the capabilities and benefits
of our solutions include:
- Service Level Management -- providing usage, performance and availability
information about a system that allows the user to monitor, report,
manage and achieve service levels;
- Improving the availability and responsiveness of customers' applications
so they can establish and perform under service level agreements;
- Minimizing or eliminating system outages, whether planned due to system
upgrades or maintenance, or unplanned due to failures;
- Automating many tedious, error prone and costly administrative tasks in
production environments;
- Helping to ensure that storage systems are operating most effectively and
are able to recover from failures quickly, accurately and efficiently;
- Keeping data current and consistent across data stores;
- Helping to ensure data availability, integrity and recoverability;
- Monitoring and event management of many different types of mainframe and
distributed systems applications; and
- Job scheduling, output management and security management.
We believe that major trends such as Internet computing, e-business and
continued reductions in processing, storage and telecommunications costs will
drive further gains in productivity and growing investment in existing and new
software applications and their supporting infrastructure. The current trend
toward business-to-business and business-to-customer e-business adds additional
complexity to our customers' environments. Not only are our customers now
responsible for managing their internal IT systems, but they must ensure that
their business partners' IT systems are available, performing and remain
compatible with their own systems. To assist customers in solving complex
e-business issues, we announced our first set of e-business solutions in October
of 1999. The first of those announced deliverables were introduced to the market
in March 2000. Our strength is that while our solutions can monitor and manage a
customer's specific e-business applications, we also provide solutions that
ensure all of the technology required to generate a transaction is available and
performing as planned, and if it fails, can be recovered quickly. As an example,
if you choose to order a compact disc from a popular web site, you enter via a
web server that is pulling data via middleware from a legacy OS/390 server. Each
server is running a unique operating system, database and an ERP or legacy
application. Our strength is that we provide tools to monitor, manage, control
and optimize the performance of the entire transaction lifecycle. In doing so,
we ensure that our customers' business critical applications provide the level
of service that both their external and internal customers demand.
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We also believe the OS/390 mainframe platform will continue to be a viable
platform for large-scale IT systems for the foreseeable future and will play an
important role in e-business as more established companies implement their
Internet strategies. Contributing to the ongoing viability of the OS/390
platform are enterprises' large investments in their OS/390 applications and
databases and the significant price reductions and performance enhancements
delivered by IBM and other mainframe hardware vendors over the last five years.
In addition, the OS/390 platform is generally perceived as more stable and
reliable than distributed systems alternatives, in part because of its
homogeneity and the many well-established systems management tools provided by
IBM and companies like us.
Additionally, we are committed to delivering superior systems management
products for the Unix, Microsoft NT and Windows 2000 and e-business environments
and the myriad systems and applications software products that comprise large
scale, networked distributed information systems. In many cases, we attempt to
establish a competitive advantage by delivering tools, such as PATROL, that
excel in their breadth of platform support. We believe enterprise software
customers often prefer cross-platform products, as opposed to single domain
products.
As we continue to evolve from a point product vendor to a provider of
complete systems software solutions, we are working to establish more
consultative relationships with our customers. We are investing heavily in our
delivery of our software solutions to customers through direct sales
representatives and pre-sales and post-sales software consultants. Our
professional services group has grown significantly during fiscal 2000. We are
using web-based technologies when feasible to distribute our software and
documentation to our customers and to provide on-line maintenance and support.
Through these efforts, we believe we can increase our customer base and increase
the productivity and effectiveness of our field sales and product support
organizations.
PRODUCTS
Driven by the explosion of e-business, our products empower our customers
in this global economic environment where speed, time to value, and value over
time are critical. Today, it is not simply how quickly a company can get into a
market, but how quickly they can respond to end-user requirements and customer
requests. Our solutions are positioned to move at Internet speed and
aggressively build customer value. As a leading provider of e-business systems
management software solutions, our goal is to deliver the confidence needed to
manage the Internet environment. Our solutions fall into five broad categories:
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PATROL Service Level Management, enhanced
availability, performance monitoring and
management for applications, databases,
middleware and operating systems in
distributed systems operating
environments
Enterprise Data Availability Enhanced availability, schema management
and data propagation solutions across DB2
and distributed database management
systems
S/390 Service Management Enhanced availability, performance
monitoring and management for
applications, databases and subsystems in
the IBM OS/390 operating environment
INCONTROL(TM) Automated production, output and security
management across OS/390 and distributed
systems operating environments
Recovery and Storage Management High-speed, coordinated application and
database backup and recovery and storage
management solutions across OS/390 and
distributed systems operating
environments
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PATROL
Our application service management product offerings comprise the PATROL
application and data management line, the PATROL for Performance Management and
PATROL for Prediction and Capacity Management products acquired from BGS, the
PATROL Enterprise Manager products acquired from Boole and a management suite
for IBM's MQSeries middleware technology.
Our PATROL product line delivers solutions that monitor the availability
and performance of increasingly complex, heterogeneous environments. The
autonomous, intelligent PATROL Agent, which resides on the database management
system, web or application server, is equipped to take independent, corrective
action and can communicate these actions to a centralized console on an
as-needed basis, as defined by the user. The core PATROL products contributed
approximately 15%, 14% and 17% of our license revenues in fiscal years 1998,
1999 and 2000, respectively.
Through the acquisitions of Boole and BGS, we expanded our application
service management offerings to include the PATROL Enterprise Manager, PATROL
for Performance Management and PATROL for Prediction and Capacity Management
products. PATROL Enterprise Manager offers a central point of control for
distributed systems, allowing users to manage their systems by business function
or technology. The product consolidates enterprise management information and
provides real-time problem notification and escalation. The PATROL for
Performance Management and PATROL for Prediction and Capacity Management
products provide both real-time and historical performance analysis and allow
for what-if performance modeling and capacity planning to prevent problems as
system changes are implemented. In aggregate, these three product lines
contributed 7%, 8% and 7% of our license revenues for fiscal years 1998, 1999
and 2000, respectively.
PATROL for E-business Management features sophisticated, easy-to-use
solutions for Web application, site analysis, server, firewall and network
analysis management. PATROL for Internet Services was introduced as a base
product for comprehensive management of the front end of the e-business process,
including the ability to capture true end-to-end response times. PATROL also
provides JARTA(TM), the Java Applet Response Time Analyzer, an advanced
technological component that monitors Web-indexed response time from the end
user's perspective. JARTA optimizes performance and can be added to a Web page
and then downloaded when the page is requested by the end user. PATROL for
Microsoft Site Server Commerce Edition enables users to monitor and manage
catalogs of information as well as search services, and assures e-business site
operations remain at peak availability. This ability to capture and measure the
end-user experience is greatly enhanced with the recently acquired SiteAngel
technology. In contrast to JARTA, SiteAngel is a subscription service that can
monitor web-based transactions at periodic intervals to provide an ongoing
representation of service quality and customer satisfaction.
We introduced PATROL 2000 in the first quarter of fiscal year 2001. This is
the first major integration of the PATROL, PATROL for Performance Management,
PATROL for Prediction and Capacity Management and PATROL Enterprise Manager
products into a comprehensive solution that offers single-point monitoring and
performance management across heterogeneous applications, databases, middleware
and operating system environments. The PATROL 2000 solution includes significant
new automation and reporting functionality that helps organizations monitor,
manage, control, optimize and predict their future business needs. PATROL 2000
also includes service level management and end-to-end response time
capabilities.
Enterprise Data Availability
The Enterprise Data Availability products include our administrative tools
for DB2(R). These products provide navigation and audit functions for the DB2
catalog structure and automate data structure changes, migration and versioning
across multiple, geographically dispersed DB2 subsystems. This automation speeds
the process of implementing application changes and preserves data integrity in
complex DB2 environments. In fiscal years 1998, 1999 and 2000, these products
contributed 6%, 6% and 5%, respectively, of our license revenues.
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The PATROL DB products replicate much of the functionality offered by our
traditional OS/390 administrative tools and utilities into the leading
distributed database management system environments from Oracle, Sybase,
Informix, IBM and Microsoft. The PATROL DB utilities provide high-speed database
loading and reorganization routines with integrity checks and statistical
analysis. The PATROL DB administrative tools provide consistent, reliable
change-control processes when implementing complex database changes. The
products automate and speed the deployment of new applications and application
changes. For fiscal 1998, 1999 and 2000, these products contributed 3%, 2% and
3% of our license revenues, respectively. Recently introduced, Web DBA for
Oracle effectively manages the challenges of web-based database administration.
Web DBA is a browser-based comprehensive tool that speeds and simplifies all
necessary data management tasks that help identify and correct space problems
before end users are affected. Because of its thin-client architecture, Web DBA
users can administer their Oracle database from anywhere -- their own PC, an end
user's PC, from work or home.
In an enterprise-class e-business, the computing topography is a mix of
mainframe and distributed systems. The ChangeDataMove product is a highly
efficient change data propagation solution that captures changes made to IMS,
IMS Fast Path, CICS/VSAM, VSAM Batch and DB2 databases, and propagates those
changes to DB2, Oracle, Sybase and Microsoft SQL Server in near real-time. A
product that shares data transformation changes with ChangeDataMove is DataMove.
This is a high-performance bulk data propagation solution that moves data from
IMS, IMS Fast Path, VSAM and DB2 for MVS source databases to Oracle, Sybase,
Microsoft SQL Server 7.0 and DB2 for MVS target databases. These products result
in savings of time, through real-time updates, and money for our customers.
S/390 Service Management
Our products for the OS/390 operating environments include our high-speed
reorganization utilities and performance management and monitoring tools. The
reorganization utilities automate and speed routine, required database
reorganizations in IMS and DB2 database management system environments. The
performance enhancement products provide real-time database performance
improvements through dynamic database tuning and high-speed data caching. These
products have been and continue to be our largest source of revenues and
operating profits. In the aggregate, these products contributed 24%, 27% and 21%
of our license revenues for fiscal years 1998, 1999 and 2000, respectively.
Through the acquisitions of Boole and BGS, we expanded our OS/390 offerings
to include the MAINVIEW(R) by BMC Software product line and BEST/1(R) for OS/390
products. MAINVIEW provides customers with a proactive approach to monitoring,
managing and automating mainframe systems. The products provide a centralized
view of applications and subsystems across the OS/390 environment and manage
application service levels. MAINVIEW Prediction helps identify system
bottlenecks and predicts the impact of workload growth and OS/390 system
changes. These products contributed 9%, 8% and 7% of our license revenues for
fiscal years 1998, 1999 and 2000, respectively.
MAINVIEW for E-business emerged with comprehensive management of the Web
infrastructure for S/390-based e-business environments. These solutions include
MAINVIEW for WebSphere, MAINVIEW for Network Management and MAINVIEW for Systems
Management. MAINVIEW for WebSphere provides site-use analysis, monitoring and
management utilities for DB2, middleware monitoring, management (MQ Series) and
WebSphere monitoring and management and transaction processing monitoring (CICS
and IMS). The MAINVIEW for Network Management solution optimizes performance of
data streams while providing noninvasive monitoring within negligible overhead.
To complement the set, MAINVIEW for Systems Management allows the system to
automatically respond to requests for information with data-level integration,
enabling the combination of objects into composite views.
In addition to the products discussed above, we also offer a variety of
OS/390 products that offer performance enhancements for batch and online
processing functions, mainframe networks and specialized OS/390 subsystems. In
the aggregate, these products contributed approximately 9%, 9% and 8% of our
license revenues for fiscal years 1998, 1999 and 2000.
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INCONTROL
The INCONTROL products, acquired with our acquisition of New Dimension,
provide for the automation and scheduling of production workloads, distribution
and viewing of system output, and user registration and password administration.
A typical example of a business process that uses the INCONTROL products would
be a semi-monthly payroll process. Numerous steps must be taken to ensure that
each employee gets paid timely and in the proper amount. Each of these steps has
to occur and they must occur in the proper order. The job-scheduling and
automation tools ensure that each step in the payroll application occurs
correctly and in a timely manner. Once the payroll process is complete, one type
of output (the paychecks) must be printed and sent to the correct corporate
locations. Another use of the output is to allow business managers to view
payroll data online. The INCONTROL for Output Management and INCONTROL for
Security Management products ensure that these business processes occur in a
timely manner and that the business manager viewing the data has the proper
security authorization to do so. INCONTROL Security Management enhances and
strengthens the overall security of e-business involvement. In fiscal year 2000
the INCONTROL products contributed approximately 9% of our license revenues.
Recovery and Storage Management
The Recovery and Storage Management products include the application
recovery solutions for both OS/390 and distributed environments. The RECOVERY
MANAGER products for IMS and DB2 and the RESOLVE(R) Recovery Manager products
for distributed database management systems enable an application-centric view
of system recoveries that allows for a coordinated recovery among multiple
database management systems and file systems supporting a single application.
The RECOVERY MANAGER, RESOLVE Recovery Manager and supporting products generated
approximately 15%, 14% and 13% of our license revenues in fiscal years 1998,
1999 and 2000, respectively. The application recovery solutions also include the
SQL-BackTrack(TM) database backup and recovery products. The SQL-BackTrack
products speed up and automate the complex sequential steps that must be
performed in order to back up or recover distributed systems databases. We
continue to market the SQL-BackTrack products as best-of-breed stand-alone
solutions and are also integrating them with our RESOLVE Recovery Manager
automated recovery solutions.
RESOLVE for E-business Management allows customers to leave their databases
open while making backups and recoveries. One component of this solution,
RESOLVE High Speed Transaction Recovery, provides maximum availability and
improved transaction integrity by rapidly applying transaction level updates to
the database during recovery. The solution also offers refined log analysis,
highly specific search abilities and optimal recovery analysis. The other
component, RESOLVE Enterprise Snapshot for SQL-Backtrack, delivers continuous
database availability and enhances database performance by reducing the impact
of backup processing from several hours to a few minutes.
Our Enterprise Snapshot for Storage Systems exploits the features of
third-party storage devices to provide hardware snapshot copy functionality for
our high-speed utilities. If Enterprise Snapshot detects that a dataset targeted
for snapshot processing resides on supported hardware, it will transparently
invoke the hardware's ability to produce near-instantaneous copies of data.
Through the acquisition of Boole, we obtained the RESOLVE Storage Resource
Manager products to complement our offerings in the storage management area. The
RESOLVE Storage Resource Manager products provide a consolidated view of storage
environments across OS/390 and distributed systems, statistical reporting on
resource consumption, and dynamic control of hardware storage use.
SALES AND MARKETING
We market and sell our products principally through our direct sales force.
Over the past three years, we have evolved our Americas sales model from a
centralized one with most of our sales personnel located in Houston, Texas, to a
field sales model with approximately 75% of our sales force located outside of
Houston. We believe this field sales presence should facilitate our evolution
towards a more consultative sales
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relationship with our customers. In addition, the field sales presence should
allow us to license software to a more diverse customer set, including
mid-market accounts.
We supplement the efforts of our direct sales force with an indirect sales
channel for our distributed systems products. We have established channels
operations groups in North America and Europe to promote, negotiate and support
such distribution arrangements and are continuing to invest in our channels
infrastructure. We are also represented by local distributors in geographical
territories in which we have not established a direct sales presence. In
addition, we have established dedicated sales teams focusing on the emerging
application service provider market and the Internet business, or dot com,
market.
INTERNATIONAL OPERATIONS
Approximately 40%, 39% and 36% of our total revenues in fiscal years 1998,
1999 and 2000, respectively, were derived from business outside North America.
Our international operations provide sales, sales support, product support,
marketing and product distribution services for our customers located outside of
North America. We also conduct development activities in Singapore and
Frankfurt, Germany to provide local language support, product
internationalization and integration with local-market hardware and software.
Total revenues and assets attributable to our North American, European and
other international operations (primarily in the Asia Pacific region) are set
forth in Note 11 to the Consolidated Financial Statements contained herein. We
believe that our operations outside the United States are located in countries
that are politically stable and that such operations are not exposed to any
special or unusual risks, except for the INCONTROL product development
operations in Israel, discussed below. Our growth prospects are highly dependent
upon the continued growth of our international license and software maintenance
revenues, and such revenues and expenses have been somewhat unpredictable in the
past.
Revenues from our foreign subsidiaries are denominated in local currencies,
as are operating expenses incurred in these locales. To date, we have not had
any material foreign currency exchange losses. For a discussion of our currency
hedging program and the impact of currency fluctuations on international license
revenues in fiscal 1999 and 2000, see "Management's Discussion and Analysis of
Results of Operations and Financial Condition" and Note 1(f) to the Consolidated
Financial Statements contained herein. We have not previously experienced any
difficulties in exporting our products, but no assurances can be given that such
difficulties will not occur in the future.
We have a significant presence in the State of Israel where our INCONTROL
product development operations are located. We believe that Israel is home to
highly talented and experienced software developers and other personnel and we
intend to continue to invest in our Israeli operations. For a discussion of
various unusual risks associated with Israeli operations and investments, see
"Management's Discussion and Analysis of Results of Operations and Financial
Condition -- Certain Risks and Uncertainties That Could Affect Future Operating
Results -- Conditions in Israel."
RESEARCH AND PRODUCT DEVELOPMENT
In fiscal year 2000, research and development spending, net of capitalized
amounts, represented 12% of total revenues and 18% of total operating expenses
(excluding amortization of goodwill, acquired technology and intangibles and
acquired research and development, legal and merger related costs). These costs
related primarily to the compensation of research and development personnel.
Although we develop many of our products internally, we may acquire technology
from third parties when appropriate and may incur royalty and other payment
obligations in connection with such acquisitions. Traditionally, we have
acquired rights from third parties to use certain technologies that we believed
would accelerate development of new products. Our expenditures on research and
development and on product maintenance and support, including amounts
capitalized, in the last three fiscal years are discussed below under the
headings, "Management's Discussion and Analysis of Results of Operations and
Financial Condition -- Expenses -- Research and Development" and
"-- Expenses -- Cost of Maintenance Services and Product Licenses."
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Our general product strategy is discussed under "Strategy" above. A major
focus of our fiscal year 2000 product development efforts was the integration of
the MAINVIEW OS/390 monitoring and event automation products acquired from Boole
with our database tools and utilities for IMS and DB2. Initial components of
this integration effort were delivered in fiscal year 2000 with more features
and functionality set to be delivered in fiscal year 2001. In the first quarter
of fiscal year 2001, we introduced PATROL 2000, which in addition to delivering
additional functionality, integrated the BGS BEST/1 and Boole COMMAND/ POST(R)
products with PATROL. Development activity on the INCONTROL product line
concentrated on adding new functionality for its core job scheduling, output
management and security administration product lines, and less on integration
with other BMC products. We are also developing major extensions of and
enhancements to our core mainframe product lines.
There can be no assurance that any products currently under development
(including those scheduled for near-term general availability) or product
integration efforts will be successfully completed or made generally available
on dates expected by us, or that when introduced, the products will be free of
defects or achieve market success.
The software industry is characterized by rapid technological change and is
highly competitive with respect to timely product innovation. In order to
maintain the usefulness of our products and their compatibility with modified
and new hardware and software, we must sometimes modify and enhance our products
and incur substantial associated expenses. From time to time, systems vendors
modify existing, or introduce new, hardware, operating system, and other system
software. We must then adapt our products to accommodate such changes. To date,
we have been able to adapt our products to such changes; however, there can be
no guarantee that we will be able to continue to do so.
Our primary research and development activities are based in Houston and
Austin, Texas, Waltham, Massachusetts, San Jose, California and Tel Aviv,
Israel. We internally create and produce all user manuals, sales materials and
other documentation related to our products. Product manufacturing and
distribution is based in Houston, Texas, with European manufacturing and
distribution jointly based in Nieuwegein, The Netherlands and Dublin, Ireland.
Recently, we opened a manufacturing and distribution center in Singapore to
serve our Asia Pacific operations.
MAINTENANCE, ENHANCEMENT AND SUPPORT SERVICES
Revenues from providing maintenance, enhancement and support services
comprised 33%, 29% and 28% of our total revenues in fiscal years 1998, 1999 and
2000, respectively. Payment of maintenance, enhancement and support fees
entitles a customer to telephone and internet support and problem resolution
services, including pro-active notification, electronic support requests and a
resolution database, and enhanced versions of a product released during the
maintenance period, including new versions necessary to run with the most
current release of the operating systems, databases and other software supported
by the product. Such maintenance fees are an important source of recurring
revenue to us, and we invest significant resources in providing maintenance
services and new product versions. These services are important to our customers
who require immediate problem resolution because of their use of our products to
manage their business-critical IT systems. The services are also necessary
because customers require forward compatibility when they install new versions
of the software systems supported by a BMC product.
For our mainframe products, the fee for the first year of product
maintenance services is included with the license fee. Subsequently, licensees
may renew their maintenance agreements each year for an annual fee. The annual
fee for mainframe products is generally 17% to 20% of the then current list
price of the licensed product as adjusted for any applicable discounts. For our
distributed systems products, the initial maintenance period is shorter
(typically 90 days) and the renewal fee varies from 15% to 20% depending on the
level of support selected by the licensee. In addition, customers are entitled
to reduced maintenance percentages for prepayment of annual maintenance fees.
9
<PAGE> 11
PROFESSIONAL SERVICES
Our professional services group consists of a worldwide team of experienced
software consultants. During fiscal 2000, we rapidly grew the professional
services group from less than 200 software consultants at the beginning of the
year to over 450 software consultants today, achieving a critical mass in North
America and Europe. Professional services contributed approximately 3% of our
revenues for fiscal year 2000, and we expect this group to continue to
experience significant growth.
PRODUCT PRICING AND LICENSING
Our mainframe products are generally licensed under enterprise license
agreements under which the customer is licensed to use the products on an
unlimited number of central processing units ("CPUs") of any size, subject to a
limit on the aggregate processing power of such CPUs as measured in millions of
instructions per second ("MIPS"). MIPS capacity based upgrade fees are owed when
and if the stipulated MIPS ceiling is exceeded. Our mainframe products were
historically priced and licensed on a tiered pricing basis whereby the license
fee for a product increases in relation to the processing capacity of the CPU on
which the product is installed. Under tiered pricing, CPUs are classified by CPU
tier according to their processing power as measured in MIPS. More powerful CPUs
fall into higher tiers and carry higher license fees. CPU upgrade fees are
charged if a product is installed on another CPU that falls in a higher CPU
group category. Substantially all of our larger mainframe customers have
converted their CPU tier-based licenses to enterprise license agreements.
We price and license PATROL and other distributed systems solutions on a
CPU tier basis and on an enterprise wide capacity basis. CPU upgrade fees from
PATROL and other distributed systems solutions have been immaterial to date, and
we expect that PATROL revenues will be predominately generated from additional
unit sales rather than CPU upgrade fees. Certain of our other distributed
systems products are also licensed on a tiered basis, while those at lower price
points are licensed on a per unit basis.
We maintain various discount programs for our mainframe and distributed
systems solutions, including discounts for multiple copies of a product and
volume discounts for enterprise license transactions.
Recently, we have introduced new pricing and licensing models to address
the emerging applications service provider, or ASP, market. We license our
products to ASPs on a term basis and charge both a fixed price during the term
and a variable cost based on the number of end users the ASP services. We
recognize this revenue over the term of the license. Also, the recently acquired
SiteAngel 2000 subscription service is provided for a term fee based on the
agreed number of SiteAngels(TM) and monitoring frequencies a customer utilizes.
This revenue will be recognized over the term of the service contract. We
anticipate that we will continue to introduce additional pricing and licensing
models to meet the needs of the marketplace, some of which may require us to
recognize revenue over time.
We recognize revenues from licenses and upgrade fees when both parties are
legally obligated under the terms of the respective agreement, the underlying
software products have been delivered, collection is deemed probable and there
are no remaining material obligations on our part. We recognize maintenance
revenues, including maintenance bundled with perpetual license fees, ratably
over the maintenance period, and we recognize professional services revenues as
the services are provided. For a discussion of enterprise license transactions,
the various components of license and upgrade revenues and our revenue
recognition practices for such components, see the discussion below under the
heading "Management's Discussion and Analysis of Results of Operations and
Financial Condition -- Results of Operations -- Revenues -- Product License
Revenues" and Note 1(h) to the Consolidated Financial Statements contained
herein.
Our products are generally marketed on a trial basis. When a customer
desires to license a trial product, a permanent product copy or a coded password
to convert the trial tape to a permanent tape is provided. Consequently, we do
not have any material backlog of undelivered products. We license our software
products almost exclusively on a perpetual basis.
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<PAGE> 12
COMPETITION; SYSTEM DEPENDENCE
The IT systems management software markets in which we compete are highly
competitive with competition continually increasing, as discussed below and in
the "Management's Discussion and Analysis of Results of Operations and Financial
Condition" section of this report under the heading "Certain Risks and
Uncertainties That Could Affect Future Operating Results."
The mainframe systems software business is highly competitive. Our
mainframe products run primarily with IBM's IMS and DB2 database management
systems, IMS/TM and CICS transaction managers. Certain of our mainframe
products, including our core IMS and DB2 database tools and utilities, are
essentially improved versions of system software utilities that are provided as
part of these integrated IBM system software products. IBM continues to improve
or add to these integrated software packages as part of its strategic initiative
of reducing the overall software costs associated with its mainframe computers.
IBM is also aggressively marketing separately priced competing high performance
utilities in addition to its base utilities. If IBM is successful in duplicating
our products, it could provide them at a much lower cost because of the
different economics of its mainframe business. This would likely have a material
adverse effect on demand for product licenses, license upgrades and recurring
maintenance for our competing products. IBM is significantly increasing the
performance of its tools and utilities for IMS and DB2, both through internal
development efforts and arrangements with third party software developers.
In addition to IBM, we compete in the mainframe tools and utilities market
with Computer Associates International, Inc. ("CA"), Neon Systems, Inc. and
other independent software vendors that have the ability to develop and market
products similar to, and competitive with, our products. CA has acquired
Platinum Technology International, Inc., our primary competitor in the DB2 tools
and utilities market, and Innovative Designs, Inc., to compete in the IMS tools
and utilities market. Product pricing is a key competitive factor in the market
for third-party tools and utilities for IMS and DB2. In addition, with our
acquisitions of Boole and New Dimension, we became much more competitive in
other mainframe product lines with CA, IBM and Candle Corporation. Both IBM and
CA are significantly larger companies than us, with greater resources and
product breadth and larger sales channels.
The distributed systems markets that PATROL and our other systems
management solutions address are also highly competitive. All of the major
mainframe systems software vendors have distributed systems management
strategies that overlap to varying degrees with PATROL. These competitors
include, to differing degrees, IBM's Tivoli subsidiary, CA, Compuware
Corporation and Candle Corporation. The relational database management systems
vendors, such as Oracle and Sybase, and hardware companies such as HP, Sun and
Cabletron, are also providing competitive or potentially competitive products
for their respective platforms that are relatively inexpensive. Selected ERP
vendors also provide systems management tools unique to each of their markets.
The network and systems management framework providers are attempting to extend
their products into PATROL's functional space. In addition, smaller companies
continually enter the distributed systems management software markets, such as
NetIQ Corp. for MS Windows NT management and Quest Software for Oracle
management. We intend to differentiate PATROL from these products and other
competitive products by providing more depth of features and functionality and
by providing broader support for the many different technology components of a
mission-critical distributed IT system. There can be no assurance whether this
strategy will be successful. We expect these markets to continue to increase in
competitiveness.
We believe that the key criteria considered by potential purchasers of our
products are as follows: the operational advantages and cost savings provided by
a product; product quality and capability; product price and the terms on which
the product is licensed; ease of integration of the products with the
purchasers' existing systems; ease of product installation and use; quality of
support and product documentation; and the experience and financial stability of
the vendor.
We continually modify our mainframe products to maintain compatibility with
new IBM hardware and software. To do so and to develop and test new products, we
license IMS/DB, DB2, IMS/TM, CICS and other software systems from IBM on similar
terms as other IBM customers. If IBM were to terminate the current license
arrangements or otherwise deny us access to these systems, or if IBM adopts
technological
11
<PAGE> 13
changes that prevent or make more difficult our access to the systems, we would
be adversely affected. Similarly, if we were unable to acquire and maintain
access to the major ERP applications, distributed database management systems
and other IT system components equivalent to our access to DB2 and other IBM
systems software, our development of distributed systems products would be
impeded.
CUSTOMERS
No single customer accounted for a material portion of our revenues during
any of the past three fiscal years. Because our mainframe solutions are used
with relatively expensive computer hardware, most of our revenues are derived
from companies that have the resources to make a substantial commitment to data
processing and their computer installations. Our software products are generally
used in a broad range of industries, businesses and applications. Our customers
include manufacturers, telecommunications companies, financial services
providers, banks, insurance companies, educational institutions, retailers,
distributors, hospitals, government agencies and value-added resellers.
INTELLECTUAL PROPERTY
We distribute our products in object code form and rely upon contract,
trade secret, copyright and patent laws to protect our intellectual property.
The license agreements under which customers use our products restrict the
customer's use to its own operations and prohibit disclosure to third persons.
We now distribute certain of our distributed systems products on a shrink-wrap
license basis, and the enforceability of such restrictions in a shrink-wrap
license is unproven in certain jurisdictions. Also, notwithstanding those
restrictions, it is possible for other persons to obtain copies of our products
in object code form. We believe that obtaining such copies would have limited
value without access to the product's source code, which we keep highly
confidential. In addition, we employ protective measures such as CPU dependent
passwords, expiring passwords and time-based trials.
EMPLOYEES
As of March 31, 2000, we had 6,677 full-time employees. We believe that our
continued success will depend in part on our ability to attract and retain
highly skilled technical, sales, marketing and management personnel. Competition
continues to increase for well-qualified software sales, development and
consulting personnel. We consider our employee relations to be excellent.
ITEM 2. PROPERTIES
Our headquarters and principal marketing and product development operations
are located in Houston, Texas, where we own and occupy two office buildings
totaling approximately 730,000 square feet and lease an additional 218,000
square feet of office space in other buildings. We are currently constructing an
850,000 square foot expansion to the Houston location. We also maintain
development organizations in Austin, Texas, where we lease a 215,000 square foot
facility, in San Jose, California, where we lease a 207,000 square foot
facility, in Waltham, Massachusetts, where we lease a 176,000 square foot
facility, in Costa Mesa, California, where we lease a 70,000 square foot
facility and in Tel Aviv, Israel, where we lease a 60,000 square foot facility.
We occupy a 60,000 square foot leased sales and support facility in Frankfurt,
Germany, and smaller sales offices in other major cities around the world. We
also lease our principal mainframe computers and telecommunications equipment.
See Notes 1(e) and 10 to the Consolidated Financial Statements contained herein.
ITEM 3. LEGAL PROCEEDINGS
On March 9, 1999, a class action complaint was filed against us and four of
our senior executives alleging violations of Sections 10(b) and 20(a) of the
Securities Exchange Act in connection with our financial statement presentation
following our 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 our announcement that we were restating our
12
<PAGE> 14
historical financial results to include BGS's results in our financial
statements as a condition to the Securities and Exchange Commission declaring
effective our registration statement on Form S-4 relating to our acquisition of
Boole. The plaintiffs seek an unspecified amount of compensatory damages,
interest and costs, including legal fees. The action is subject to the Private
Securities Litigation Reform Act of 1995 (the "PSLRA"). We deny the allegations
of wrongdoing in connection with the matters set forth in the complaint and
intend to vigorously defend the action. We have filed a motion to dismiss the
complaint. An unfavorable judgment or settlement, however, could have a material
adverse effect on our financial position or results of operations. On June 15,
2000, a United States Magistrate Judge issued an Opinion and Recommendation
recommending to the United States District Judge that our motion to dismiss be
granted and that the case be dismissed. On June 29, 2000, an Order was entered
by the United States District Judge granting our motion to dismiss and
dismissing the complaint. The plaintiffs have the right to appeal this Order.
On February 4, 2000, an action styled Dov Klein v. BMC Software, Inc.,
Richard P. Gardner, Stephen B. Solcher, Roy J. Wilson, Kevin M. Weiss, Kevin M.
Klausmeyer, Max P. Watson Jr., William M. Austin, Wayne S. Morris, M. Brinkley
Morse, Robert E. Beauchamp, and Theodore W. Van Duyn, No. 00-CV-359, was filed
in the United States District Court for the Southern District of Texas, Houston
Division. This is a purported class action filed on behalf of all purchasers of
our securities between July 29, 1999 and January 4, 2000. The plaintiff alleges
that BMC Software and eleven current and former senior executives violated
Sections 10(b) and 20(a) of the Securities Exchange Act and Rule 10b-5. The
plaintiff contends that BMC Software and the individual defendants artificially
inflated our stock price prior to the announcement of operating results for the
third quarter of fiscal 2000 by extending unusual payment terms to purchasers of
our products, failing to disclose softening demand and increasing competition
for our products, and failing to disclose difficulties in managing our sales
force. The plaintiff seeks unspecified compensatory damages, interest and costs,
including legal fees. The action is subject to the PSLRA. On March 9, 2000, the
court consolidated four similar actions, ordered that all subsequently filed
similar actions be consolidated, and set out a briefing schedule. Under the
briefing schedule, the defendants are not required to move, plead, or otherwise
respond until 60 days after (1) the court appoints a lead plaintiff and lead
counsel under the PSLRA and (2) an amended complaint is filed by the plaintiffs.
On April 3, 2000, certain plaintiffs filed an application to be appointed lead
plaintiff and lead counsel under the PSLRA. That motion was granted on June 13,
2000. We intend to deny the allegations in the consolidated complaint and defend
the consolidated action vigorously. We anticipate that we will file a motion to
dismiss the case. At this early stage of the litigation, it is not possible to
estimate potential damages, but it appears that if liability were established,
an unfavorable judgment or settlement could have a material adverse effect on
our financial position or results of operations.
We are subject to various other legal proceedings and claims, either
asserted or unasserted, which arise in the ordinary course of business.
Management does not believe that the outcome of any of these legal matters will
have a material adverse effect on our financial position or results of
operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not Applicable.
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<PAGE> 15
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Since August 12, 1988, our Common Stock has been traded in the NASDAQ
National Market System under the symbol "BMCS." At June 23, 2000, there were
1,723 holders of record of Common Stock.
The following table sets forth the high and low bid quotations per share of
Common Stock for the periods indicated.
<TABLE>
<CAPTION>
PRICE RANGE OF
COMMON STOCK
---------------
HIGH LOW
------ ------
<S> <C> <C>
FISCAL 1999
First Quarter............................................. $53.88 $40.19
Second Quarter............................................ 60.25 39.50
Third Quarter............................................. 59.88 34.88
Fourth Quarter............................................ 48.25 30.12
FISCAL 2000
First Quarter............................................. $54.50 $30.00
Second Quarter............................................ 71.88 47.50
Third Quarter............................................. 84.06 50.25
Fourth Quarter............................................ 86.63 36.00
</TABLE>
The only dividends declared or paid since 1988 relate to BGS. BGS paid
dividends of $7.6 million in fiscal 1998, and no dividends were paid since. We
do not intend to pay any cash dividends in the foreseeable future. We currently
intend to retain any future earnings otherwise available for cash dividends on
the Common Stock for use in our operations, for expansion and for stock
repurchases. See "Management's Discussion and Analysis of Results of Operations
and Financial Condition -- Liquidity and Capital Resources."
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<PAGE> 16
ITEM 6. SELECTED FINANCIAL DATA
The following selected consolidated financial data presented under the
captions "Statement of Earnings Data" and "Balance Sheet Data" for, and as of
the end of, each of the years in the five-year period ended March 31, 2000, are
derived from the Consolidated Financial Statements of BMC Software, Inc. and its
subsidiaries. Our historical financial data has been restated to include the
historical financial results of Boole and BGS for each of the periods presented.
As BMC, Boole and BGS had different fiscal year-ends, necessary adjustments have
been made to conform fiscal year-ends for certain periods. See Note 1(c) to the
Consolidated Financial Statements contained herein for further discussion of
consolidated periods and adjustments made. The financial statements of BMC for
all fiscal years presented have been audited by Arthur Andersen LLP, independent
public accountants, except for the consolidated financial statements of Boole
which were audited by Ernst & Young LLP, independent public accountants. The
selected consolidated financial data should be read in conjunction with the
Consolidated Financial Statements as of March 31, 1999 and 2000, and for each of
the three years in the period ended March 31, 2000, the accompanying notes and
the reports of independent public accountants thereon, which are included
elsewhere in this Form 10-K.
<TABLE>
<CAPTION>
YEARS ENDED MARCH 31,
----------------------------------------------
1996 1997 1998 1999 2000
------ ------ ------ -------- --------
(IN MILLIONS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF EARNINGS DATA:
Total revenues................................. $638.9 $791.9 $985.3 $1,303.9 $1,719.2
Operating income............................... 171.8 242.8 253.6 415.3 270.5
Net earnings................................... $126.7 $184.4 $188.5 $ 362.6 $ 242.5
====== ====== ====== ======== ========
Basic earnings per share....................... $ 0.56 $ 0.81 $ 0.82 $ 1.55 $ 1.01
====== ====== ====== ======== ========
Shares used in computing basic earnings per
share........................................ 225.5 226.5 229.8 234.3 241.0
====== ====== ====== ======== ========
Diluted earnings per share..................... $ 0.54 $ 0.76 $ 0.77 $ 1.46 $ 0.96
====== ====== ====== ======== ========
Shares used in computing diluted earnings per
share........................................ 235.4 241.5 244.5 248.6 253.0
====== ====== ====== ======== ========
</TABLE>
<TABLE>
<CAPTION>
AS OF MARCH 31,
--------------------------------------------------
1996 1997 1998 1999 2000
------ -------- -------- -------- --------
(IN MILLIONS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents...................... $ 99.6 $ 127.1 $ 106.0 $ 347.9 $ 152.4
Working capital................................ 83.1 114.5 96.4 222.6 12.3
Total assets................................... 826.4 1,104.8 1,498.1 2,282.7 2,962.1
Stockholders' equity........................... 477.2 659.5 877.7 1,334.4 1,780.9
Dividends declared............................. 7.0 5.8 7.6 -- --
Dividends declared per share................... $ 0.03 $ 0.03 $ 0.03 $ -- $ --
</TABLE>
In April 1998, we announced that the board of directors approved a
two-for-one stock split (in the form of a dividend) that was payable to
stockholders of record on May 1, 1998 and was effective May 15, 1998. Share and
per share data presented here and throughout the Consolidated Financial
Statements, have been adjusted to give effect to this two-for-one split.
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<PAGE> 17
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
INTRODUCTION
This section includes historical information, 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 our future operating results to differ
materially from the results indicated by any forward looking statements made by
us or others. It is important that the business discussion in Item 1 of this
report and the historical discussion below be read together with the discussion
of risks and uncertainties, and that these discussions be read in conjunction
with the accompanying Consolidated Financial Statements and notes thereto.
HISTORICAL INFORMATION
Acquisitions
In March 1998, we acquired BGS in a stock-for-stock merger. We issued 7.2
million shares of Common Stock in the transaction. The transaction was accounted
for using the pooling-of-interests method, and we have restated the prior period
financial results to include those of BGS for the periods presented.
In March 1999, we acquired Boole in a stock-for-stock merger. We issued
19.1 million shares of Common Stock in the transaction. The transaction was
accounted for using the pooling-of-interests method, and we have restated the
prior period financial results to include those of Boole for the periods
presented.
In April 1999, we acquired New Dimension in a cash tender offer. This
transaction was accounted for using the purchase accounting method and
accordingly, New Dimension's post-merger financial results have been included in
our fiscal 2000 financial results since the acquisition date.
In April 2000, we acquired Evity for 1.6 million shares of Common Stock and
cash of $10 million. Stock options to purchase 0.4 million common shares were
issued to replace outstanding Evity stock options. Because the transaction
closed after the end of fiscal 2000 and was accounted for as a purchase
transaction, Evity's financial results are not included in our financial results
through March 31, 2000.
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<PAGE> 18
Results of Operations
The following table sets forth, for the fiscal years indicated, the
percentages that selected items in the Consolidated Statements of Earnings and
Comprehensive Income bear to total revenues.
<TABLE>
<CAPTION>
PERCENTAGE OF
TOTAL REVENUES
YEARS ENDED MARCH 31,
-------------------------
1998 1999 2000
----- ----- -----
<S> <C> <C> <C>
Revenues:
Licenses................................................ 66.8% 69.6% 68.6%
Maintenance and services................................ 33.2 30.4 31.4
----- ----- -----
Total revenues.................................. 100.0 100.0 100.0
Selling and marketing expenses............................ 32.2 32.0 36.9
Research and development expenses......................... 12.3 12.6 12.4
Cost of maintenance services and product licenses......... 13.0 11.7 10.3
General and administrative expenses....................... 7.9 7.3 7.9
Acquired research and development......................... 6.6 1.3 4.7
Amortization of goodwill, acquired technology and
intangibles............................................. 0.4 0.3 8.1
Legal settlement.......................................... -- -- 3.2
Merger related costs...................................... 1.9 3.0 0.8
----- ----- -----
Operating income................................ 25.7 31.8 15.7
Interest expense.......................................... -- -- (1.3)
Interest and other income, net............................ 4.0 4.8 3.7
----- ----- -----
Other income, net............................... 4.0 4.8 2.4
----- ----- -----
Earnings before income taxes.................... 29.7 36.6 18.1
Income taxes.............................................. 10.6 8.7 4.0
----- ----- -----
Net earnings before cumulative effect of
accounting change............................. 19.1 27.9 14.1
Cumulative effect of accounting change, net of taxes...... -- (0.1) --
----- ----- -----
Net earnings.................................... 19.1% 27.8% 14.1%
===== ===== =====
</TABLE>
Earnings
Total revenues in fiscal 2000 were $1.7 billion, a 32% increase over fiscal
1999 total revenues of $1.3 billion. The revenue growth was the result of a 40%
increase in North American product license revenues, a 15% increase in
international product license revenues and a 36% increase in worldwide
maintenance and services revenues. Fiscal 1999 total revenues increased 32% over
fiscal 1998 revenues of $985.3 million due to increases of 39% in North American
license revenues, 35% in international license revenues and 21% in worldwide
maintenance and services revenues. See further discussion under "-- Revenues"
below. Our operating expenses (excluding amortization of goodwill, acquired
technology and intangibles and acquired research and development, legal and
merger related costs) have increased from approximately 65% and 64% of total
revenues in fiscal 1998 and 1999, respectively, to approximately 68% of total
revenues in fiscal 2000, primarily as a result of increased sales and marketing
costs, including sales commissions and personnel costs in our growing
professional services business. Net earnings were $242.5 million in fiscal 2000,
a 33% decrease from net earnings of $362.6 million in fiscal 1999. The decrease
was solely due to increased charges for amortization of goodwill, acquired
technology and intangibles and acquired research and development, legal and
merger related costs, which increased to $289.4 million in fiscal 2000 from
$59.9 million in fiscal 1999, primarily as a result of the New Dimension
acquisition and the settlement of a lawsuit in fiscal 2000. Net income excluding
these charges increased to $444.6 million for fiscal 2000 from $392.4 million in
fiscal 1999. Fiscal 1999 net earnings reflected a 92% increase over fiscal 1998
net earnings of $188.5 million primarily as a result of increased revenues and
interest income, a lower effective tax rate and a decrease in acquired research
and development write-offs from $65.5 million in fiscal 1998 to $17.3 million in
fiscal 1999. The increase in
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<PAGE> 19
earnings from fiscal 1998 to fiscal 1999 was also affected by the restatement of
our financial results to include Boole's financial results, because Boole's
fiscal 1999 yearend had to be conformed to ours as discussed in Note 1(c) to the
Consolidated Financial Statements contained herein. Based upon the unaudited
Boole financial results for the twelve-month period ended March 31, 1998, the
fiscal 1999 total revenue growth would have been approximately 31% and the
growth in net earnings would have been approximately 76%.
Historical performance should not be viewed as indicative of future
performance, as there can be no assurance that operating income or net earnings
as a percentage of revenues will be sustained at these levels. For a discussion
of factors affecting operating margins, see the discussions below under the
heading "Certain Risks and Uncertainties That Could Affect Future Operating
Results."
Earnings per Share
Basic earnings per share was $.82, $1.55 and $1.01 in fiscal 1998, 1999 and
2000, respectively. Diluted earnings per share was $.77, $1.46 and $.96,
respectively. Excluding amortization of goodwill, acquired technology and
intangibles and acquired research and development, legal and merger related
costs, basic earnings per share was $1.16, $1.67 and $1.84 and diluted earnings
per share was $1.09, $1.58 and $1.76 in fiscal 1998, 1999 and 2000,
respectively. The changes in earnings per share over the three years resulted
from the factors discussed under "--Earnings" above and an increase in weighted
average shares outstanding.
Revenues
<TABLE>
<CAPTION>
PERCENTAGE CHANGE
-------------------------
YEARS ENDED MARCH 31, 1999 2000
---------------------------- COMPARED TO COMPARED TO
1998 1999 2000 1998 1999
------ -------- -------- ----------- -----------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C>
Licenses:
North America.................. $400.0 $ 557.1 $ 777.7 39.3% 39.6%
International.................. 258.3 349.8 402.5 35.4% 15.1%
------ -------- --------
Total licenses......... 658.3 906.9 1,180.2 37.8% 30.1%
------ -------- --------
Maintenance and services......... 327.0 397.0 539.0 21.4% 35.8%
------ -------- --------
Total revenues......... $985.3 $1,303.9 $1,719.2 32.3% 31.9%
====== ======== ========
</TABLE>
We generate revenues from product license fees for our computer software
products, product maintenance and support fees for the associated maintenance,
enhancement and support of these products and professional services fees. We
generally recognize revenue from license fees upon the execution of a software
license agreement by both parties, the delivery of the underlying products and
the acceptance of such products by the customer. In transactions wherein certain
of the revenue recognition criteria are not met, license revenue is deferred.
The effect of such deferral is to exclude the deferred license revenues from
license revenues recognized in the period of deferral and to include them in the
period in which the contractual contingencies or obligations that caused
deferral have been fulfilled or have expired. Net deferred license revenues in a
period is the amount of license revenues deferred into future periods reduced by
the amount of previously deferred license revenues recognized in that period.
Absent net deferred license revenues, license revenues would have been $54.4
million higher in each of fiscal 1998 and 1999, and would have been $104.1
million lower in fiscal 2000. Maintenance and support fees are recognized
ratably over the maintenance term as defined in the applicable software license
agreement and professional services fees are recognized as the services are
provided. For further discussion of our revenue recognition policies, refer to
the discussion below and to Note 1(h) to the Consolidated Financial Statements
contained herein.
Total revenue growth of 32.3% in fiscal 1999 resulted from revenues
generated by our mainframe products for the IBM OS/390 operating system and the
IMS and DB2 database management systems, the expansion of our distributed
systems product lines and sales channels and, to a lesser extent, higher growth
rates of product maintenance and services fees. Total revenue growth of 31.9% in
fiscal 2000 resulted from
18
<PAGE> 20
revenues generated by our mainframe products, particularly those for DB2, our
distributed systems product lines, the addition of the New Dimension INCONTROL
products in a purchase accounting transaction and, to a lesser extent, higher
growth rates of product maintenance and services fees. Excluding incremental
revenues associated with New Dimension, total revenue growth was approximately
23% for fiscal 2000. In fiscal 1999, license fees from customers licensing our
mainframe products for current and future additional processing capacity
generated over one-half of overall growth in total license revenues. In fiscal
2000, almost 60% of license revenue growth was generated by distributed systems
license fees, and license fees from customers licensing our mainframe products
for current and future processing capacity generated less than one quarter of
license revenue growth. The growth in product license and maintenance fees in
fiscal 1999 and 2000 was derived principally from products developed prior to
fiscal 1999. Product revenue growth was only nominally impacted by price
increases and inflation in fiscal 1999 and 2000.
No single customer represented greater than 10% of total revenues in fiscal
1998, 1999 and 2000. This customer base is concentrated in the top 1,000 IT
purchasers worldwide and, by industry, in the telecommunications, financial
services and other transaction-intensive sectors. We believe that sales to
repeat customers accounted for the substantial majority of total license and
maintenance revenues in the periods presented.
Product Line Revenues
At March 31, 2000, we marketed over 450 software products designed to
improve the availability, performance and recoverability of enterprise
applications, databases and other IT systems components operating in mainframe,
distributed computing and Internet environments. Our mainframe products
accounted for approximately 73%, 70% and 64% of total revenues for fiscal years
1998, 1999 and 2000, respectively. Total revenues from mainframe products grew
28% from fiscal 1998 to fiscal 1999 and 20% from fiscal 1999 to fiscal 2000. The
revenues from these products are driven largely by the growth in customers'
future processing capacity, as discussed below.
The high performance utilities and administrative tools for IBM's IMS and
DB2 database management systems comprise the largest portion of our
mainframe-based revenues and total revenues. Our tools and utilities for IMS
databases collectively contributed 19%, 20% and 15% of total revenues and 18%,
20% and 14% of license revenues for fiscal years 1998, 1999 and 2000,
respectively. Our tools and utilities for DB2 databases collectively contributed
24% of total revenues and 25% of license revenues for each of the same periods.
Combined total revenues for these product lines grew 36% from fiscal 1998 to
1999 and 15% from fiscal 1999 to 2000. The balance of our mainframe products
represented 30%, 26% and 26% of total revenues for fiscal years 1998, 1999 and
2000, respectively, representing growth of 16% from fiscal 1998 to fiscal 1999
and 30% from fiscal 1999 to fiscal 2000, in part due to the addition of New
Dimension. The decline in relative revenue contribution by the mainframe product
lines reflects the higher growth rates of our distributed systems products in
these periods.
Total revenues from distributed systems products grew 45% from fiscal 1998
to 1999 and 59% from fiscal 1999 to 2000. Distributed systems license revenues
grew 36% and 55% for those same periods, respectively. Distributed systems
product revenue growth was derived primarily from increased market acceptance of
the PATROL application and data management product suite, the addition of the
INCONTROL product family, our significant and growing investment in our
distributed systems direct and indirect sales channels and higher distributed
systems maintenance and services fees. The distributed systems product lines
contributed 27%, 30% and 36% of total revenues and 33%, 33% and 39% of license
revenues for fiscal years 1998, 1999 and 2000, respectively. In fiscal 1999 and
2000, PATROL was the most significant contributor to growth in total and license
revenues for distributed systems products. For fiscal 2000, our principal
distributed systems management product lines were the PATROL application and
data management suite, the BEST/1 performance management products, the INCONTROL
Control-M job scheduling products, Control-D output management products and
Control-SA security administration products, the PATROL DB database
administration products, the SQL-Backtrack application and database recovery
products and the COMMAND/POST, Spaceview and Command/MQ products.
19
<PAGE> 21
The PATROL application and data management products accounted for 13%, 13%
and 17% of total revenues for fiscal years 1998, 1999 and 2000, respectively,
reflecting a 33% increase from fiscal 1998 to fiscal 1999 and a 68% increase
from fiscal 1999 to 2000. The remaining distributed systems products accounted
for 14%, 17% and 19% of total revenues in fiscal years 1998, 1999 and 2000,
respectively, reflecting a 56% increase from fiscal 1998 to 1999 and a 52%
increase from fiscal 1999 to 2000. The revenues from our distributed systems
product offerings depend upon the continued market acceptance of our existing
products and our ability to successfully develop and deliver additional products
for the distributed systems environment. We have experienced rapid growth in our
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.
Product License Revenues
Our product license revenues consist of product license fees and license
upgrade fees. Product license fees are all fees associated with a customer's
licensing of a given software product for the first time. License upgrade fees
are all fees associated with a customer's purchase of the right to run a
previously licensed product on a larger computer or computers. License upgrade
fees are primarily generated by our mainframe products and include fees
associated both with current and future additional processing capacity.
Effective April 1, 1999 we adopted a modified definition of product license and
product upgrade fees as discussed below under the heading "Definitions of
License Revenue Categories."
Our North American operations generated 61%, 61% and 66% of total license
revenues in fiscal 1998, 1999 and 2000, respectively. North American license
revenues increased by 39% from fiscal 1998 to fiscal 1999 and by 40% from fiscal
1999 to 2000. Distributed systems product license fees were the largest
contributor of growth from fiscal 1999 to fiscal 2000, followed by increased
capacity-based license upgrade fees.
International license revenues represented 39%, 39% and 34% of total
license revenues in fiscal 1998, 1999 and 2000, respectively. International
license revenues increased by 35% from fiscal 1998 to fiscal 1999 and by 15%
from fiscal 1999 to 2000. Increased licensing of our distributed systems
products was the largest contributor of growth from fiscal 1999 to fiscal 2000,
followed by capacity-based license upgrade fees. International license revenues
were slightly increased by the strengthening of the dollar against local
currencies from fiscal 1998 to fiscal 1999 and were decreased by 4% due to
foreign currency exchange rate changes from fiscal 1999 to 2000 after giving
effect to our foreign currency hedging program.
The sustainability and growth of our mainframe-based license revenues are
dependent upon capacity-based license upgrade fees, particularly within our
largest customer accounts. During fiscal 2000, license upgrade fees (for current
and future processing capacity) accounted for 30% of our total revenues and 43%
of our total license revenues. Most of our largest customers have entered into
enterprise license agreements allowing them to install our products on any
number of CPUs, subject to a maximum limit on the aggregate processing power of
the CPUs as measured in MIPS. Additional license upgrade 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
customers' current usage levels, and some include product license fees for
additional products. In our typical enterprise license transactions, the fees
associated with future additional mainframe processing capacity comprise from
one-half to substantially all of the license fees received in these
transactions. Over the last several years, we experienced a strong increase in
demand from our mainframe customers for the right to run our products on
increased future mainframe processing capacity. This led to larger single
transactions with higher per MIPS discounts. Although growth in mainframe
capacity-based license upgrade fees slowed in fiscal 2000, we expect that we
will continue to be dependent upon these capacity-related license upgrade fees.
There can be no assurance, however, that the demand for mainframe processing
capacity or the perceived benefits of our core mainframe products will continue.
The slowing of this demand adversely impacts our mainframe license revenues and
operating results. See the discussion below under the heading "Certain Risks and
Uncertainties That Could Affect Future Operating Results."
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<PAGE> 22
Definitions of License Revenue Categories
We license our 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
processing 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.
The definition of product license fees received when a product is licensed
on an aggregate licensed capacity basis became effective for fiscal 2000 and
represents a change from our practices prior to acquiring Boole 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 our internal
characterization of license revenues and has no effect on license revenue
recognition.
Maintenance and Support Revenues; Services Revenues
Maintenance and support revenues represent the ratable recognition of fees
to enroll licensed products in our software maintenance, enhancement and support
program, and services revenues represent fees from professional services,
including implementation, education and complementary services, performed during
the period. 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 discounted
price of the product. In addition, customers are entitled to reduced maintenance
percentages for prepayment of annual maintenance fees. Maintenance revenues also
include the ratable recognition of the bundled fees for any first-year
maintenance services covered by the related perpetual license agreement.
Maintenance revenues have increased over the last three fiscal years as a
result of the continuing growth in the base of installed products and the
processing capacity on which they run. Maintenance fees increase in proportion
to the aggregate processing capacity on which the products are installed;
consequently, we receive higher absolute maintenance fees as customers install
our products on additional processing capacity. Due to the increased discounting
for higher levels of additional processing capacity, the maintenance fees on a
per MIPS basis are typically reduced in enterprise license agreements for
mainframe products. Historically, we have enjoyed high maintenance renewal rates
for our mainframe-based products. Should customers migrate from their mainframe
applications or find alternatives to our products, increased cancellations could
adversely impact the sustainability and growth of our maintenance revenues. To
date, we have been successful in extending our traditional maintenance and
support pricing model to the distributed systems market.
Professional services revenues have increased over the last three fiscal
years, more than doubling from fiscal 1999 to fiscal 2000, as a result of our
heightened focus on this increasingly important element in the value equation
for our customers. Our professional services headcount has grown steadily
throughout fiscal 1999 and 2000 to meet the increasing demand for our expanding
service offerings.
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<PAGE> 23
Expenses
<TABLE>
<CAPTION>
PERCENTAGE CHANGE
-------------------------
YEARS ENDED MARCH 31, 1999 2000
-------------------------- COMPARED TO COMPARED TO
1998 1999 2000 1998 1999
------ ------ -------- ----------- -----------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C>
Selling and marketing..................... $317.3 $417.7 $ 633.8 31.6% 51.7%
Research and development.................. 121.2 163.9 213.2 35.2% 30.1%
Cost of maintenance services and product
licenses................................ 127.7 152.0 177.2 19.0% 16.6%
General and administrative................ 77.4 95.1 135.1 22.9% 42.1%
Acquired research and development......... 65.5 17.3 80.8 (73.6)% 367.1%
Amortization of goodwill, acquired
technology and intangibles.............. 3.6 4.3 139.1 19.4% N/A
Legal settlement.......................... -- -- 55.4 -- --
Merger related costs...................... 19.0 38.3 14.1 101.6% (63.2)%
------ ------ --------
Total operating expenses........ $731.7 $888.6 $1,448.7
====== ====== ========
</TABLE>
Selling and Marketing
Our selling and marketing expenses include personnel and related costs,
sales commissions and costs associated with advertising, industry trade shows
and sales seminars, and represented 32%, 32% and 37% of total revenues in fiscal
1998, 1999 and 2000, respectively. Personnel costs and sales commissions were
the largest single contributor to the expense growth in fiscal 1999 and 2000.
Selling and marketing year-end headcount increased by 31% from fiscal 1998
to fiscal 1999, and by 53% from fiscal 1999 to 2000. The headcount increases
during fiscal 1999 and 2000 were primarily attributable to significant increases
in our professional services business, distributed systems sales representatives
and technical sales support consultants. The fiscal 2000 increase also included
the addition of New Dimension personnel. Sales commissions increased in fiscal
1999 and 2000, as a result of the 38% and 30% increases, respectively, in
license revenues. In fiscal 2000, commission plan adjustments also contributed
to the increased sales commission expense. Marketing costs have continued to
increase to meet the requirements of marketing a greater number of increasingly
complex distributed systems solutions and to support a growing indirect
distribution channel. Selling and marketing expenses were further impacted by a
major re-branding effort which began in the first quarter of fiscal 2000 and
significantly higher levels of expenses for travel and office rent.
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 our data processing center. Increases in our research and
development expenses for fiscal 1999 and 2000 were primarily the result of
increased compensation costs associated with both software developers and
development support personnel, as well as associated benefits and facilities
costs. We increased our headcount in the research and development organization
by 24% from fiscal 1998 to fiscal 1999 and by 25% from fiscal 1999 to 2000,
including the addition of New Dimension personnel. Research and development
costs were reduced in all three fiscal years by amounts capitalized in
accordance with Statement of Financial Accounting Standards (SFAS) No. 86,
"Accounting for the Costs of Computer Software to Be Sold, Leased, or Otherwise
Marketed." We capitalize our software development costs when the projects under
development reach technological feasibility as defined by SFAS No. 86. During
fiscal 1998, 1999 and 2000, we capitalized approximately $46.9 million, $69.6
million and $84.4 million, respectively, of internal software development
22
<PAGE> 24
costs. The growth in capitalized costs is primarily due to increases in
distributed systems product development and platform compatibility efforts.
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 our products and royalty fees.
Maintenance, enhancement and support costs are increasing as a percentage of
maintenance fees as our product revenue mix shifts to distributed systems, which
require a higher level of support. We amortized $23.7 million, $29.7 million and
$32.1 million in fiscal 1998, 1999 and 2000, respectively, of capitalized
internal software development costs pursuant to SFAS No. 86. In these periods,
we expensed $12.0 million, $15.9 million and $8.2 million, respectively, of
capitalized software development costs to accelerate the amortization of certain
software products. These software products were not expected to generate
sufficient future revenues which would be necessary for us to realize the
carrying value of the assets. We expect our cost of maintenance services and
product licenses will continue to increase as we capitalize a higher level of
software development costs and as we build our distributed systems product
support organization, which is less cost-effective than our 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, database
management systems and ERP applications, and require greater ongoing platform
support development activity relative to our 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 our foreign
currency exposure. Growth in general and administrative expenses from fiscal
1999 to fiscal 2000 was primarily attributable to increased personnel costs,
increased professional services fees and higher costs associated with the
infrastructure to support our growth. Fiscal year end headcount within the
general and administrative organizations grew by 11% from fiscal 1998 to fiscal
1999 and 20% from fiscal 1999 to fiscal 2000.
Acquired Research and Development
In executing its product strategies, we employ both internal research and
development and the acquisition of emerging technologies and, in the case of
Boole, BGS and New Dimension, established software companies. We believe that
time-to-market is critical to our success in the rapidly evolving distributed
systems software market, where we must compete with well-established companies
such as IBM, and where our products must integrate with the predominate database
management systems, operating systems, network protocols and applications within
the enterprise computing environment. Accordingly, we must continuously evaluate
whether it is more efficient and effective to develop a given solution
internally or acquire a technology that must be completed and then integrated
into our existing product architecture. The developers of the acquired
technologies are often small, early stage software companies with minimal to no
revenues, quality and documentation standards and name recognition in the
marketplace. This strategy involves a high degree of risk and is costly in that
a premium is typically paid for software code that is incomplete and only
partially contributes to our overall development plans. Over the last several
years, some of the acquired technologies were successfully completed and
integrated, while others were not.
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<PAGE> 25
The following table presents information concerning the purchase price
allocations for the acquisitions accounted for under the purchase method for
fiscal 1998, 1999 and 2000.
<TABLE>
<CAPTION>
ACQUIRED GOODWILL TOTAL
SOFTWARE IPR&D AND OTHER PRICE
-------- -------- --------- ------
(IN MILLIONS)
<S> <C> <C> <C> <C>
Fiscal 1998:
DataTools..................................... $ 15.0 $54.4 $ 3.6 $ 73.0
Others........................................ 3.5 11.1 -- 14.6
------ ----- ------ ------
$ 18.5 $65.5 $ 3.6 $ 87.6
====== ===== ====== ======
Fiscal 1999:
Nastel........................................ $ -- $ 6.0 $ -- $ 6.0
Envive........................................ 3.8 11.3 2.6 17.7
------ ----- ------ ------
$ 3.8 $17.3 $ 2.6 $ 23.7
====== ===== ====== ======
Fiscal 2000:
New Dimension................................. $126.3 $80.8 $465.9 $673.0
------ ----- ------ ------
$126.3 $80.8 $465.9 $673.0
====== ===== ====== ======
</TABLE>
We acquired DataTools in May 1997, for an aggregate purchase price of $73
million. DataTools owned certain database management system-specific back-up
products that were sold as stand-alone products. Its flagship product is called
SQL Backtrack ("SQL-BT"). At the acquisition date, 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 ("SBI") and the
Oracle platform ("SBO"), as well as first generation products for the Microsoft
SQL ("SBM") and Sybase IDR ("SBS/I") platforms.
We allocated approximately $54.4 million to in-process research and
development ("IPR&D"). The four most significant development projects, which
comprised $40.6 million (74%) of the IPR&D, pertained to the products above. The
primary remaining efforts associated with the IPR&D included code completion in
several key areas, such as logical extraction and piecemeal back-up and recovery
("BU&R"), large database support and performance-related functionality. The
following summarizes the status of the four primary projects:
- We completed and released the SBM 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.
- We abandoned the SBS/I project based on concerns over market demand and
the allocation of Sybase resources to the core Sybase product.
- We released version 2.0 of the SBI product in April 1998. The completion
of the in-process technology resulted in added functionality, including
selective recovery of tables, as opposed to full back-ups, which
increases flexibility and efficiency. This version also allows for
incremental restart if a recovery is interrupted, eliminating the need to
run the entire recovery again.
In June 1997, we acquired technology from Sento Technical Innovations, Inc.
We have since abandoned the technology and expensed the entire purchase price.
In July 1997, we acquired certain software code from Software Partners/32,
Inc. for a total purchase price of $6.9 million. We allocated $1.7 million of
the purchase price to completed technology and $5.2 million to IPR&D. The
allocation of purchase price to completed technology reflects the estimated
discounted future cash flows associated with the customers using the existing
technology. This code permits file system back-up and recovery, but was not
competitive with the leading products in this market. We initially planned on
24
<PAGE> 26
completing this code and integrating it into the PATROL Recovery Manager
product. These efforts were unsuccessful and we abandoned this project.
In the latter part of fiscal 1998, we were 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, we 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, we allocated the entire $6.0 million purchase price to IPR&D. We
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, we completed
the initial related product after developing efficient data collection, user
interface and business logic code.
In June 1998, we entered into a technology agreement with Envive
Corporation ("Envive") primarily to strengthen our ERP business management
solutions to provide better diagnostic and correlation ability, service level
management and end-to-end monitoring capability. We also secured the rights to
distribute certain products in the SAP management market. Our committed costs
associated with the transaction approximated $17.7 million. We allocated $6.4
million of the transaction costs 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. We
believe the acquired IPR&D was approximately 45% complete towards development of
end-to-end and service level management functionality across the major ERP
platforms at the acquisition date. We incurred a nominal level of development
costs in fiscal 1999. In fiscal 2000, we evaluated the levels of commitment and
effort required to develop the above-mentioned functionality in the non-SAP
environments and determined such development would not be pursued.
In April 1999, we acquired through a public tender offer in excess of 95%
of the outstanding ordinary shares of New Dimension. Total consideration paid
approximated $673.0 million, including the cost of the remaining outstanding
shares acquired during fiscal 2000 and the historical cost of approximately $2
million for shares of New Dimension previously owned by Boole. Unrealized gains
of approximately $21.0 million related to these New Dimension shares included in
long-term investment securities and accumulated other comprehensive income at
March 31, 1999, were eliminated when the acquisition was recorded. We allocated
$126.3 million to software assets, $435.9 million to goodwill and other
intangibles and $30.0 million to equipment, receivables and other non-software
assets, net of liabilities assumed. We allocated $80.8 million, or 12% of the
purchase price, to IPR&D, which 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 grouped its product lines into five categories: (i)
Enterprise Production Management, (ii) Enterprise Output Management, (iii)
Enterprise Event Management, (iv) Enterprise Security Management and (v) Tandem
Solutions. New Dimension's primary IPR&D efforts can be summarized into four
categories: (i) Integrated Operations Architecture(R) for the Enterprise
("IOA(R)/e"), (ii) Odaiko, (iii) E-business Enablement and (iv) Security. The
following summarizes these efforts at the time of the acquisition and the status
of the development as of March 31, 2000.
Integrated Operations Architecture for the Enterprise. IOA/e was to be the
supporting infrastructure for all of the distributed systems products from New
Dimension, similar to the Integrated Operations Architecture for New Dimension's
mainframe products. This project, as originally intended, has been cancelled as
we determined it was more appropriate to gradually extend the existing
distributed systems infrastructure rather than to replace it.
Odaiko. Odaiko was to be 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. At the time of the acquisition, this product
family supported a document archive only on the mainframe, viewing of reports on
a terminal or a PC and
25
<PAGE> 27
distribution of the reports to network connected printers. Odaiko, renamed
CONTROL-D for Distributed Systems, will not only enable the end user to view the
archived reports via a Web browser but will also 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. Some components
of this product suite were released during fiscal 2000 and the remainder are
scheduled for general availability in September 2000.
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. The beta versions of two of these products are scheduled for release in
fiscal 2001.
Security. At the acquisition date, the security market was 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 technology at the acquisition date
supported the administration of passwords and user IDs 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 SQL 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
console. Customer requirements drive the porting of the agent to each new
operating system and platform as well as to support new RSSs. Key IPR&D projects
at the acquisition date involved the support of new RSSs 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 IDs. These passwords and user IDs
would then be utilized or synchronized across all of the applications and
systems that a user accesses. This technology has been completed, is Web-based
and allows 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(R)
("ECS(TM)") products. The following is a summary of the primary IPR&D related to
these products:
CONTROL-M
- New Two Tier architecture for large 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 Windows NT environment
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<PAGE> 28
CONTROL-SA
- Security for managing users of Internet e-commerce applications
- Enhanced administration of control access rights
- Ability to 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
Certain of these projects were completed during fiscal 2000 and the related
products are generally available; others have been released as beta versions for
customer testing and evaluation; and the remainder are still in process.
As of the date of the New Dimension acquisition, we 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. We intend to continue devoting effort to developing
commercially viable products from the purchased IPR&D, although we may not
develop such commercially viable products. All of the foregoing estimates and
projections were based on assumptions we 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 sizes and growth factors, expected
industry trends, the anticipated nature and timing of new product introductions
by us and our competitors, individual product sales cycles and the estimated
life of each product's underlying technology. Estimated operating expenses and
income taxes were deducted from estimated revenue projections to arrive at
estimated after-tax cash flows. Operating expenses were estimated based on
historical results and anticipated profit margins and included cost of goods
sold, selling and marketing expenses, general and administrative expenses and
research and development expenses, including estimated costs to maintain the
products once they have been introduced into the market and are generating
revenue. 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, discount
rates of 16% to 20% were used to value the acquired IPR&D. A 20% discount rate
was used to value the New Dimension acquired IPR&D and a 15% rate was used in
discounting the cash flows associated with the developed New Dimension
technology. We believe 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, our
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.
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<PAGE> 29
Amortization of Goodwill and Intangibles
In connection with the application of the purchase accounting method to our
acquisitions, portions of the purchase prices were allocated to goodwill,
workforce, customer base, software and other intangible assets. We are
amortizing these intangibles over four to five year periods which reflect the
estimated useful lives of the respective assets. The increase in amortization
expense is directly related to the acquisition of New Dimension in April 1999.
Legal Settlement
In October 1999, we settled all claims in a lawsuit styled BMC Software,
Inc., plaintiff, vs. Peregrine/ Bridge Transfer Corp., Skunkware, Inc., Neon
Systems, Inc., Peregrine Systems, Inc., Wayne E. Fisher and John J. Moores,
defendants, vs. BMC Software, Inc. and Max P. Watson, counter-defendants. See
Note 10 to the Consolidated Financial Statements contained herein.
Merger Related Costs
Pursuant to the close of our merger with Boole in March 1999, 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 redundant positions to achieve reductions in
overhead expenses in future periods. In connection with the merger and the Plan,
at March 31, 1999 we accrued approximately $38.3 million in merger related
costs. This accrual included direct transaction costs, such as investment
banking, legal and accounting fees and approximately $5 million for settlement
of a suit brought against Boole for allegedly breaching a standstill and
exclusive negotiating agreement with Platinum Technology International, Inc. The
remainder of the accrual represented management's best estimate, based on
available information as of March 31, 1999, of identifiable and quantifiable
charges we would incur as a result of the actions to be taken under the Plan.
The accrued restructuring charges at March 31, 1999 included estimates of
involuntary termination benefits for 50 domestic employees and 30 international
employees, located primarily in Europe, including the executive management of
Boole and various redundant administrative and support personnel. The accrual
also included charges for incremental costs to exit certain office lease
arrangements, for idle facilities and for asset writedowns of office furniture
and fixtures and computer hardware. During fiscal 2000, we made certain
revisions to the Plan including the following: the termination of approximately
240 additional employees, primarily in the United States and Europe; the accrual
of other termination benefits which were contingent upon certain performance
criteria; revisions to the original exit strategy for certain operating leases
for office space in the United States and Europe; and the accrual for
termination costs for certain operating leases for computer hardware and
equipment. Additionally, in conjunction with the New Dimension acquisition, we
accrued estimated costs to terminate certain operating leases for duplicate
office space. The activity in the accrual for merger related costs for the year
ended March 31, 2000, was as follows:
<TABLE>
<CAPTION>
PAID OUT OR
BALANCE AT REVISION OF CHARGED AGAINST BALANCE AT
MARCH 31, THE THE RELATED MARCH 31,
1999 ACCRUAL ASSETS 2000
---------- ----------- --------------- ----------
(IN MILLIONS)
<S> <C> <C> <C> <C>
Direct transaction costs............... $20.6 $ 2.5 $(23.1) $ --
Facility costs and write-down of fixed
assets to be disposed of............. 10.2 (1.5) (5.3) 3.4
Employee termination benefits.......... 7.0 10.5 (14.3) 3.2
Other merger related costs............. 0.5 2.6 (3.1) --
----- ----- ------ ----
Total accrual................ $38.3 $14.1 $(45.8) $6.6
===== ===== ====== ====
</TABLE>
The restructuring plan was substantially complete as of March 31, 2000. The
remaining accruals primarily relate to severance and lease payments to be made
in future periods.
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<PAGE> 30
Other Income, net
Other income, net consists primarily of interest earned on cash and cash
equivalents, investment securities and to a lesser degree, financed receivables
and interest expense on short-term borrowings. Other income, net increased by
59% from fiscal 1998 to 1999 and decreased by 35% from fiscal 1999 to 2000. The
increase in fiscal 1999 is primarily due to higher interest income earned on
larger invested cash and investment balances and the decrease in fiscal 2000 is
primarily due to interest expense of $23.4 million incurred on short-term
borrowings to fund the New Dimension acquisition.
Income Taxes
We recorded income tax expense of $104.5 million, $113.8 million and $68.9
million in fiscal 1998, 1999 and 2000, respectively. Our effective tax rates
were 36%, 24% and 22% for fiscal years 1998, 1999 and 2000, respectively. During
fiscal 1999, we recorded a non-recurring benefit to our provision for income
taxes to reflect a settlement with the Internal Revenue Service. During fiscal
2000, the decreased effective income tax rate is the result of lower taxes
associated with our European operations and the effect of tax exempt interest on
certain investments. For further discussion of the non-recurring benefit in
fiscal 1999 and an analysis of the differences between the statutory and
effective income tax rates, see Note 7 to the Consolidated Financial Statements
contained herein.
Recently Issued Accounting Pronouncements
As of April 1, 1998 and 1999 we adopted AICPA Statement of Position ("SOP")
97-2, "Software Revenue Recognition," and SOP 98-9 "Modification of SOP 97-2,
Software Revenue Recognition, With Respect to Certain Transactions,"
respectively. The adoption of these standards did not have a material impact on
our financial position or results of operations.
As of April 1, 1999 we adopted AICPA SOP 98-1, "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use." This standard
requires that certain costs related to the development or purchase of
internal-use software be capitalized and amortized over the estimated useful
life of the software. This SOP also requires that costs related to the
preliminary project stage and the post-implementation/operations stage of an
internal-use computer software development project be expensed as incurred.
Adoption of this standard did not have a material impact on our financial
position or results of operations.
We elected to adopt SFAS No. 133, "Accounting for Derivative Instruments
and Hedging Activities," in the fourth quarter of fiscal 1999. SFAS No. 133
redefines "derivative instruments" and requires that an entity recognize all
derivatives as either assets or liabilities on the balance sheet and to measure
those instruments at fair value, with changes in the instruments' fair value to
be recognized in earnings. SFAS No. 133 also establishes new criteria for
transactions to qualify for hedge accounting. Adoption resulted in a charge for
the cumulative effect of a change in accounting principle of $1.5 million, net
of tax. SFAS No. 138, "Accounting for Certain Derivative Instruments and Certain
Hedging Activities," was issued in June 2000 and amends certain provisions of
SFAS No. 133. SFAS No. 138 is effective for us for all fiscal quarters beginning
after June 15, 2000, and we believe that adoption of SFAS No. 138 will not have
a material effect on our financial position or results of operations.
In December 1999, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin ("SAB") No. 101, "Revenue Recognition in Financial
Statements," which provides guidance related to revenue recognition based on
interpretations and practices followed by the SEC. SAB No. 101 is effective as
of the fourth fiscal quarter of fiscal years beginning after December 15, 1999,
and requires companies to report any changes in revenue recognition as a
cumulative change in accounting principle at the time of implementation. We do
not believe that adoption of SAB No. 101 will have a material effect on our
financial position or results of operations.
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<PAGE> 31
Quarterly Results
The following table sets forth certain unaudited quarterly financial data
for the fiscal years ended March 31, 1999 and 2000. This information has been
prepared on the same basis as the Consolidated Financial Statements and all
necessary adjustments have been included in the amounts stated below to present
fairly the selected quarterly information when read in conjunction with the
Consolidated Financial Statements and Notes thereto. All periods in fiscal 1999
have been restated to include the results of Boole, as required by the
pooling-of-interests method of accounting.
Our quarterly results are subject to seasonality and can be volatile and
difficult to predict accurately prior to a quarter's end as discussed under
"Certain Risks and Uncertainties That Could Affect Future Operating Results."
Historical quarterly financial results and trends may not be indicative of
future results.
<TABLE>
<CAPTION>
QUARTERS ENDED
-----------------------------------------------------------------------------------------
JUNE 30, SEPT. 30, DEC. 31, MARCH 31, JUNE 30, SEPT. 30, DEC. 31, MARCH 31,
1998 1998 1998 1999 1999 1999 1999 2000
-------- --------- -------- --------- -------- --------- -------- ---------
(IN MILLIONS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Total revenues........................ $279.3 $294.0 $344.1 $386.5 $400.7 $415.7 $426.4 $476.4
Selling and marketing expenses........ 89.8 95.6 105.5 126.8 140.4 156.4 158.6 178.4
Research and development
expenses............................. 39.1 39.1 39.2 46.5 57.5 49.3 54.6 51.8
Cost of maintenance services and
product licenses..................... 32.4 35.5 38.4 45.7 37.2 40.9 43.7 55.4
General and administrative
expenses............................. 20.7 20.5 27.3 26.6 34.3 29.7 37.4 33.7
Acquired research and
development.......................... 17.3 -- -- -- 80.8 -- -- --
Amortization of goodwill, acquired
technology and intangibles........... 1.1 1.1 1.0 1.1 30.3 36.3 36.2 36.3
Legal settlement...................... -- -- -- -- -- 38.8 16.6 --
Merger related costs.................. -- -- -- 38.3 12.5 1.4 0.4 (0.2)
------ ------ ------ ------ ------ ------ ------ ------
Operating income...................... 78.9 102.2 132.7 101.5 7.7 62.9 78.9 121.0
------ ------ ------ ------ ------ ------ ------ ------
Net earnings.......................... $ 67.2 $ 85.0 $110.0 $100.4 $ 16.4 $ 58.9 $ 69.2 $ 98.0
====== ====== ====== ====== ====== ====== ====== ======
Basic EPS............................. $ 0.29 $ 0.36 $ 0.47 $ 0.43 $ 0.07 $ 0.25 $ 0.28 $ 0.40
====== ====== ====== ====== ====== ====== ====== ======
Shares used in computing basic
EPS.................................. 233.2 234.0 234.8 235.0 237.6 239.5 242.7 244.1
====== ====== ====== ====== ====== ====== ====== ======
Diluted EPS........................... $ 0.27 $ 0.34 $ 0.44 $ 0.40 $ 0.07 $ 0.23 $ .27 $ 0.39
====== ====== ====== ====== ====== ====== ====== ======
Shares used in computing diluted
EPS.................................. 248.2 249.0 248.8 248.7 249.8 253.1 255.4 253.8
====== ====== ====== ====== ====== ====== ====== ======
</TABLE>
Liquidity and Capital Resources
At March 31, 2000, our cash, cash equivalents and marketable securities
were $1.1 billion, approximately even with the March 31, 1999 balance. Our
working capital as of March 31, 2000, was $12.3 million, reflecting a decrease
from the March 31, 1999 balance of $222.6 million due to the remaining
short-term borrowings of $263.0 million related to the New Dimension acquisition
as discussed below. We continue to invest cash in securities with maturities
beyond one year. While typically yielding greater returns, this reduces reported
working capital. Our securities are investment grade and highly liquid.
Stockholders' equity as of March 31, 2000, was $1.8 billion.
We continue to primarily finance our growth through funds generated from
operations. For the year ended March 31, 2000, net cash provided by operating
activities was $366.7 million. Net cash used in investing activities in fiscal
2000 was $932.7 million, primarily related to the New Dimension acquisition, the
purchase of investment securities, acquisition of computers and related
equipment and construction of an expansion to our corporate headquarters. Net
cash provided by financing activities in fiscal 2000 was $365.4 million, which
derived primarily from short-term borrowings related to the New Dimension
acquisition as discussed below.
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<PAGE> 32
During fiscal 2000, we did not repurchase any shares of our Common Stock.
Our board of directors terminated the share buy-back program in March 1998 prior
to consummation of the BGS merger consistent with the pooling-of-interests
accounting provisions. Subsequent to March 31, 2000, the board of directors
authorized us to purchase up to $500 million in Common Stock. We plan to buy
stock on the open market from time to time, depending on market conditions.
As part of our acquisition of New Dimension in the first quarter of fiscal
year 2000, we entered into a $500 million credit facility with a consortium of
U.S. banks. The facility consists of (a) a 364-day revolving credit facility for
general corporate purposes with renewal options by the lenders and with a
one-year option granted to us to convert the revolving loans into a one-year
term loan, and (b) a competitive bid facility that allows us to request bids
from the lenders for loans on a negotiated basis up to the existing availability
under the credit facility. Interest accrues on the loans under the revolving
credit facility at a margin above LIBOR based on certain of our financial
ratios. As of March 31, 2000, we had $263.0 million in outstanding borrowings
under the credit facility at a weighted average annual interest rate of 6.65%.
The credit facility includes, among others, covenants regarding our maintenance
of at least $300 million in cash and marketable securities and certain financial
ratios. We had no other debt as of March 31, 2000, other than normal trade
payables, accrued liabilities and deferred tax liabilities.
We believe that our existing cash balances and funds generated from
operations will be sufficient to meet our liquidity requirements for the
foreseeable future.
CERTAIN RISKS AND UNCERTAINTIES THAT COULD AFFECT FUTURE OPERATING RESULTS
Our Stock Price is Volatile
Our stock price has been and is highly volatile. Our stock price is highly
influenced by 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 our perceived long-term growth prospects would
likely have a significant adverse effect on our stock price. Our historical
financial results should not be seen as indicative of future results.
The Timing and Size of License Contracts Could Cause Our Quarterly Revenues
and Earnings to Fluctuate
Our revenues and results of operations are difficult to predict and may
fluctuate substantially. The timing and amount of our license revenues are
subject to a number of factors that make estimation of operating results prior
to the end of a quarter extremely uncertain. We generally operate 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 our sales are closed at the end of each quarter. Our business remains
dependent on closing large 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 our revenues and earnings in a period to fall
short of expectations. We generally do not know whether revenues and earnings
will meet expectations until the final days or day of a quarter.
We have a High Degree of Operating Leverage
Our business model is characterized by a very high degree of operating
leverage. A substantial portion of our operating costs and expenses consist of
employee and facility related costs, which are relatively fixed over the short
term. In addition, our expense levels and hiring plans are based substantially
on our projections of future revenues. 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 our stock price.
Our Operating Margins Have Declined Further
There is a risk that our high operating margins may not be sustainable and
may continue to decline, which would adversely affect our earnings. Our
operating margins, excluding amortization of goodwill,
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<PAGE> 33
acquired technology and intangibles and one-time charges, declined during fiscal
2000 as compared to fiscal 1999 and prior periods. We do not compile margin
analysis other than on an aggregated basis; however, we are aware that operating
expenses associated with our distributed systems products are substantially
higher than those associated with our traditional mainframe products. Since our
mix of business continues to shift to distributed systems revenues, operating
margins will experience more pressure. In addition, we are not currently
profitable in our growing professional services business. We may be unable to
increase or even maintain our current level of profitability on a quarterly or
annual basis in the future. Additionally, we have acquired businesses
experiencing lower operating margins than us.
We May Not be Able to Attract and Retain Qualified Personnel
Our future success depends on the continued service of our executive
officers and other key administrative, sales and marketing and support
personnel. There is currently a shortage of personnel possessing the technical
background necessary to sell, support and develop our products effectively.
Competition for skilled personnel is intense, and we may not be able to attract,
assimilate or retain highly qualified personnel in the future. Hiring qualified
sales, marketing, administrative, research and development and customer support
personnel is very competitive in our industry, particularly in some of the
markets where our development teams are located, such as San Jose, California,
Austin, Texas and Waltham, Massachusetts. In addition to our direct competitors,
we are competing for qualified personnel with start-ups and small companies,
many of which are offering significant ownership interests in the form of stock
options to attract employees. In competing with start-ups and other high growth
companies, our recent stock price performance, with our shares trading in the
same price range as a year ago and two years ago, has made it more difficult for
us to attract and retain employees. Consequently, our growth rates may be
limited by our ability to attract qualified personnel.
Decreasing Demand for Mainframe Processing Capacity Could Adversely Affect
Revenues
Fees from enterprise license transactions remain a fundamental component of
our revenues and the primary source of mainframe license revenues. These
revenues depend on our customers planning to grow their mainframe hardware
capacity and continuing to perceive an increasing need to use our existing
software products on substantially greater mainframe processing capacity in
future periods. Over the past nine months, IBM has experienced a decline in
shipments of new mainframe hardware capacity which it attributed primarily to
Year 2000 concerns. In addition, the continued growth of distributed database
management systems may have an adverse effect on growth rates for mainframe
computing systems. Although we believe that businesses will continue to demand
greater mainframe computing capacity and that e-business will be a driver of
this demand, there can be no assurance as to whether future demand for mainframe
capacity will continue to grow or not. Slower growth in our customers' mainframe
processing capacity would adversely affect our revenues.
Increased Competition and Pricing Pressures Could Adversely Affect Our Sales
The market for systems management software has been increasingly
competitive for the past number of years and is currently intensifying. We
compete with a variety of software vendors including IBM and CA. We derived
approximately 64% of our total revenues in fiscal 2000 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 us 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. If IBM is successful with its efforts
to achieve performance and functional equivalence with our IMS, DB2 and other
products at a lower cost, our business will be materially adversely affected. CA
entered the mainframe database tools and utilities market with its acquisition
of Platinum (DB2 tools and utilities) and IDI (IMS tools and utilities) and is
competing with us in these markets.
32
<PAGE> 34
Capacity-based upgrade fees associated with both current and future
processing capacity contributed approximately one-fourth to one-third of our
total revenues in each of fiscal years 1998, 1999 and 2000. Historically, these
fees were not separately captured by Boole; however, the addition of Boole has
not significantly changed the contribution of these fees to total revenues. The
charging of upgrade fees based on the capacity to which the product is licensed
is standard among mainframe systems software vendors, including IBM. While we
believe our current pricing policies properly reflect the value provided by our
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
within the mainframe systems software markets. We have continued to reduce the
cost of our mainframe tools and utilities in response to these and other
competitive pressures.
Maintenance Revenue Growth Could Slow
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,
we receive higher absolute maintenance fees as customers install our products on
additional processing capacity. Due to increased discounting for higher levels
of additional processing capacity, the maintenance fees on a per MIPS basis are
typically reduced in enterprise license agreements for our mainframe products.
Historically, we have enjoyed high maintenance renewal rates for our
mainframe-based products. Should customers migrate from their mainframe
applications or find alternatives to our products, increased cancellations could
adversely impact the sustainability and growth of our maintenance revenues. To
date, we have been successful in extending our traditional maintenance and
support pricing model to the distributed systems market. Renewal rates for
maintenance on our distributed systems products are lower than on our mainframe
products.
Failure to Adapt to Technological Change Could Adversely Affect Our Earnings
If we fail to keep pace with technological change in our industry, such
failure would have an adverse effect on our revenues and earnings. We operate in
a highly competitive industry characterized by rapid technological change,
evolving industry standards, changes in customer requirements and frequent new
product introductions and enhancements. During the past year, funding for new
ventures and start-ups in our industry has been at an all-time high with many
new technological advancements and competing products entering the marketplace.
The distributed systems and application management markets in which we operate
are far more crowded and competitive than our traditional mainframe systems
management markets. Our ability to compete effectively and our growth prospects
depend upon many factors, including the success of our existing distributed
systems products, the timely introduction and success of future software
products, and the ability of our products to interoperate and perform well with
existing and future leading databases and other platforms supported by our
products. We have experienced long development cycles and product delays in the
past, particularly with some of our distributed systems products, and expect to
have delays in the future. Delays in new mainframe or distributed systems
product introductions or less-than-anticipated market acceptance of these new
products are possible and would have an adverse effect on our 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.
Because the Market for E-Business Solutions is New and Evolving, We Cannot
Accurately Predict the Future Growth Rate of this Market or its Ultimate Size
We are increasingly focusing our selling and marketing efforts on providing
solutions for e-business applications. This is a new and evolving market, and
there can be no assurance that customers will perceive a need for or accept our
e-business solutions. In addition, our success in the e-business market may
ultimately depend on the success of the Internet as a medium for conducting
business transactions. As the Internet continues to experience significant
growth in the number of users and the complexity of Web-based
33
<PAGE> 35
applications increases, the Internet infrastructure may not be able to support
the demands placed on it or the performance or reliability of the Internet might
be adversely affected. Failure of a significant market to develop for e-business
application solutions, failure of our e-business solutions to achieve broad
market acceptance, or reduced growth in the Internet as a medium for business
transactions could adversely affect our business, operating results and
financial condition.
Changes in Pricing Practices Could Adversely Affect Revenues and Earnings
We may choose in fiscal 2001 or a future fiscal year to make changes to our
product packaging, pricing or licensing programs. If made, such changes may have
a material adverse impact on revenues or earnings.
Our Customers May Not Accept our Product Strategies
Historically, we have focused on selling software products to address
specific customer problems associated with their applications. We are now
increasingly moving toward integrating multiple software products and offering
packaged solutions for customers' systems. There can be no assurance that
customers will perceive a need for such solutions. In addition, there may be
technical difficulties in integrating individual products into a combined
solution that may delay the introduction of such solutions to the market or
adversely affect the demand for such solutions.
Risks Related to Business Combinations
As part of our overall strategy, we have acquired or invested in, and plan
to continue to acquire or invest in, complementary companies, products, and
technologies and to enter into joint ventures and strategic alliances with other
companies. Our acquisitions of BGS in March 1998, Boole in March 1999, New
Dimension in April 1999 and Evity in April 2000 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 we may not be able to integrate the acquired
technologies or products with our current products and technologies; the
potential disruption of our ongoing business; the inability to retain key
technical and managerial personnel; the inability of management to maximize our
financial and strategic position 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 goodwill and acquired
intangible assets.
In order for us to maximize the return on our investments in acquired
companies, the products of these entities must be integrated with our existing
products. These integrations can be difficult and unpredictable, especially
given the complexity of software and that acquired technology is typically
developed independently and designed with no regard to integration. The
difficulties are compounded when the products involved are well established
because compatibility with the existing base of installed products must be
preserved. Successful integration also requires coordination of different
development and engineering teams. This too can be difficult and unpredictable
because of possible cultural conflicts and different opinions on technical
decisions and product roadmaps. There can be no assurance that we will be
successful in our product integration efforts or that we will realize the
expected benefits.
With each of our acquisitions, we have initiated efforts to integrate the
disparate cultures, employees, systems and products of these companies.
Retention of key employees is critical to ensure the continued advancement,
development, support, sales and marketing efforts pertaining to the acquired
products. We have implemented retention programs to keep many of the key
technical, sales and marketing employees; nonetheless, we have lost some key
employees and may lose others in the future.
Risks Associated With Managing Growth
We have experienced an extended period of: (i) significant revenue growth;
(ii) acquisitions; (iii) expansion of our software product lines and supported
platforms; (iv) significant expansion in our number of employees; (v) increased
pressure on the viability and scope of our operating and financial systems; and
(vi) expansion in the geographic scope of our operations. This growth has
resulted in new and increased
34
<PAGE> 36
responsibilities for management personnel and has placed a significant strain
upon our management, operating and financial controls and resources, including
our information systems and services and development organizations. To
accommodate recent growth, compete effectively and manage potential future
growth, we must continue to implement and improve the speed and quality of our
information decision support systems, management decisions, reporting systems,
procedures and controls. Our personnel, procedures, systems and controls may not
be adequate to support our future operations. During fiscal 2000, we realigned
our 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.
Enforcement of Our Intellectual Property Rights
We rely on a combination of copyright, patent, trademark, trade secrets,
confidentiality procedures and contractual procedures to protect our
intellectual property rights. Despite our efforts to protect our intellectual
property rights, it may be possible for unauthorized third parties to copy
certain portions of our products or to reverse engineer or obtain and use
technology or other information that we regard as proprietary. There can also be
no assurance that our intellectual property rights would survive a legal
challenge to their validity or provide significant protection for us. In
addition, the laws of certain countries do not protect our proprietary rights to
the same extent as do the laws of the United States. Accordingly, there can be
no assurance that we will be able to protect our proprietary technology against
unauthorized third party copying or use, which could adversely affect our
competitive position.
Possibility of Infringement Claims
From time to time, we receive notices from third parties claiming
infringement by our products of third party patent and other intellectual
property rights. We expect that software products will increasingly be subject
to such claims as the number of products and competitors in our industry
segments grow and the functionality of products overlap. In addition, we expect
to receive more patent infringement claims as companies increasingly seek to
patent their software and business methods, especially in light of recent
developments in the law that extend the ability to patent software and business
methods. Regardless of its merit, responding to any such claim could be
time-consuming, result in costly litigation and require us to enter into royalty
and licensing agreements which may not be offered or available on terms
acceptable to us. If a successful claim is made against us and we fail to
develop or license a substitute technology, our business, results of operations
or financial position could be materially adversely affected.
Risk of Year 2000 Related Problems
Through the six months following January 1, 2000, we have not experienced
any material failures related to Year 2000; however, there remains a risk that
latent Year 2000 problems could affect us or our products. We have tested the
ability of our software products to process Year 2000 data without interruption
or errors and believe that our products are substantially Year 2000 compliant.
Despite these tests, there can be no assurance that undetected errors or defects
do not exist that could cause these software products to fail to process Year
2000 data correctly. There is a risk that such undetected errors or defects
could surface at a later date, and that customers may assert claims against us
for any losses resulting from such errors or defects. To date, we are not aware
of any material claims being asserted or made against us related to Year 2000
failures. However, we cannot predict whether or to what extent any legal claims
will be brought, or whether we will suffer any liability as a result of any
adverse consequences to our customers related to Year 2000 failures.
Risks Related to International Operations and the Euro Currency
We have committed, and expect to continue to commit, substantial resources
and funding to build our international service and support infrastructure.
Operating costs in many countries, including many of those in which we operate,
are higher than in the United States. In order to increase international sales
in fiscal 2001 and subsequent periods, we must continue to globalize our
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
35
<PAGE> 37
territories. Future operating results are dependent on sustained performance
improvement by our international offices, particularly our European operations.
Revenue growth by our European operations has been slower than revenue growth in
North America. There can be no assurance that we will be successful in
accelerating the revenue growth of our European operations. Our 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, our foreign sales are denominated in our
foreign subsidiaries' local currencies. If these foreign currency exchange rates
change unexpectedly, we 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 our European operations. Although the transition will
be phased in over several years, the Euro became Europe's single currency on
January 1, 1999. Our 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 we are not aware of any material
adverse financial consequences of the change from legacy sovereign currencies to
the Euro, conversion may result in problems, which may have an adverse impact on
our business since we may be required to incur unanticipated expenses to remedy
these problems.
Conditions in Israel
Our INCONTROL operations are conducted partially in Israel and,
accordingly, we are 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 our 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 some of the economic and
political problems in the Middle East, we cannot predict whether or in what
manner these problems will be resolved.
In addition, certain of our INCONTROL 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 operated
effectively under these requirements since its inception. However, we cannot
predict the effect of these obligations on INCONTROL's operations in the future.
Possible Adverse Impact Of Recent Accounting Pronouncements
On April 1, 1998 and 1999 we adopted AICPA SOP 97-2, "Software Revenue
Recognition," and SOP 98-9 "Modification of SOP 97-2, Software Revenue
Recognition, With Respect to Certain Transactions," respectively. The adoption
of these standards did not have a material impact on the Company's financial
position or results of operations. Based on our reading and interpretation of
these SOPs, we believe that our 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. Future interpretations of existing
accounting standards or changes in our business practices could result in future
changes in our revenue accounting policies that could have a material adverse
effect on our business, financial condition and results of operations.
36
<PAGE> 38
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to a variety of risks, including foreign currency exchange
rate fluctuations and changes in the market value of our investments. In the
normal course of business, we employ established policies and procedures to
manage these risks including the use of derivative instruments.
Foreign Currency Exchange Rate Risk
We operate globally and the functional currency for most of our non-U.S.
enterprises is the local currency. For the fiscal years 1998, 1999 and 2000,
approximately 40%, 39% and 36% of our total 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
our foreign subsidiaries are incurred in foreign currencies. As a result, our
U.S. dollar earnings and net cash flows from international operations may be
adversely affected by changes in foreign currency exchange rates. To minimize
our risk from changes in foreign currency exchange rates, we utilize certain
derivative financial instruments.
We primarily utilize two types of derivative financial instruments in
managing our foreign currency exchange risk: forward exchange contracts and
purchased option contracts. Forward exchange contracts are used to achieve
hedges of firm commitments that subject us to transaction risk. The terms of
these forward exchange contracts are generally one month or less and are
typically entered into at the prevailing market rate at the end of the month.
Forward exchange contracts and net purchased option contracts, with terms
generally less than one year, are used to hedge anticipated, but not firmly
committed, sales transactions. Principal currencies hedged are the Euro and
British pound, in Europe, and the Japanese yen and Australian dollar in the Asia
Pacific region. We perform comparisons, on a monthly basis, of the forward
exchange contracts and purchased option contracts and the forecasted sales
revenues to determine hedge effectiveness. While we actively manage our foreign
currency risks on an ongoing basis, there can be no assurance our foreign
currency hedging activities will offset the full impact of fluctuations in
currency exchange rates on our results of operations, cash flows and financial
position. Foreign currency fluctuations did not have a material impact on our
results of operations and financial position during fiscal years 1998, 1999 or
2000.
Based on our foreign currency exchange instruments outstanding at March 31,
2000, and our financial position, results of operations and net cash flows for
the year ended March 31, 2000, we estimate that a near-term change in foreign
currency rates would not have a material effect. We 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 could
be incurred.
Interest Rate Risk -- Investments
We adhere to a conservative investment policy, whereby our principle
concern is the preservation of liquid funds while maximizing our yield on such
assets. Cash, cash equivalents and investment securities approximated $1.1
billion at March 31, 2000, and were invested in different types of
investment-grade securities with the intent of holding these securities to
maturity. Although our 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.
Based on our financial position, results of operations and net cash flows
for the year ended March 31, 2000, we estimate that a near-term change in
interest rates would not have a material effect. We used a value-at-risk model
to measure potential market risk on our investment 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 could
be incurred.
37
<PAGE> 39
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The response to this item is submitted as a separate section of this Form
10-K. See Item 14.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
38
<PAGE> 40
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information relating to our directors and executive officers is included in
our definitive Proxy Statement in connection with our 2000 Annual Meeting of
Stockholders (the "2000 Proxy Statement"), which will be filed with the
Securities and Exchange Commission within 120 days after the end of the fiscal
year ended March 31, 2000, under the captions "ELECTION OF
DIRECTORS -- Nominees" and "OTHER INFORMATION -- Directors and Executive
Officers" and is incorporated herein by reference in response to this Item 10.
ITEM 11. EXECUTIVE COMPENSATION
Information relating to executive compensation is set forth in the 2000
Proxy Statement under the captions "ELECTION OF DIRECTORS -- Compensation of
Directors" and "EXECUTIVE COMPENSATION" and is incorporated herein by reference
in response to this Item 11.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information relating to ownership of Registrant's Common Stock by
management and certain other beneficial owners is set forth in the 2000 Proxy
Statement under the caption "OTHER INFORMATION -- Certain Stockholders" and is
incorporated herein by reference in response to this Item 12.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information relating to certain relationships and related transactions is
set forth in the 2000 Proxy Statement under the caption "OTHER
INFORMATION -- Related Transactions" and is incorporated herein by reference in
response to this Item 13.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Documents filed as a part of this Report.
1. The following financial statements of the Company and the related
reports of independent public accountants are filed herewith:
<TABLE>
<CAPTION>
PAGE
NUMBER
------
<S> <C>
Report of Independent Public Accountants -- Arthur Andersen
LLP....................................................... 42
Report of Independent Auditors -- Ernst & Young LLP......... 43
Consolidated Financial Statements:
Balance Sheets as of March 31, 1999 and 2000.............. 44
Statements of Earnings and Comprehensive Income for the
years ended March 31, 1998, 1999 and 2000.............. 45
Statements of Stockholders' Equity for the years ended
March 31, 1998, 1999 and 2000.......................... 46
Statements of Cash Flows for the years ended March 31,
1998, 1999 and 2000.................................... 47
Notes to Consolidated Financial Statements................ 48
</TABLE>
2. The following financial statement schedule of the Company and the
related report of independent public accountants are filed herewith:
<TABLE>
<S> <C>
Report of Independent Public Accountants.................... 73
Schedule II -- Valuation Account............................ 74
</TABLE>
39
<PAGE> 41
All other financial statement schedules are omitted because (i) such
schedules are not required or (ii) the information required has been presented
in the aforementioned financial statements.
3. The following Exhibits are filed with this Report or incorporated
by reference as set forth below.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
3.1 -- Restated Certificate of Incorporation of the Company;
incorporated by reference to Exhibit 3.1 to the Company's
Registration Statement on Form S-1 (Registration No.
33-22892) (the "S-1 Registration Statement").
3.2 -- Certificate of Amendment of Restated Certificate of
Incorporation; incorporated by reference to Exhibit 3.2
to the Company's Annual Report for the fiscal year ended
March 31, 1997 (the "1997 10-K").
3.3 -- Bylaws of the Company; incorporated by reference to
Exhibit 3.2 to the S-1 Registration Statement.
4.1 -- Specimen Stock Certificate for the Common Stock of the
Company; incorporated by reference to Exhibit 4.1 to the
S-1 Registration Statement.
4.2 -- Rights Agreement, dated as of May 8, 1995, between the
Company and The First National Bank of Boston, as Rights
Agent (the "Rights Agreement"), specifying the terms of
the Rights, which includes the form of Certificate of
Designation of Series A Junior Participating Preferred
Stock as Exhibit A, the form of Right Certificate as
Exhibit B and the form of the Summary of Rights as
Exhibit C (incorporated by reference to Exhibit 1 to the
registrant's Registration Statement on Form 8-A dated May
10, 1995).
4.3 -- Amendment to the Rights Agreement; incorporated by
reference to Exhibit 4.3 to the 1997 10-K.
10.1(a) -- Form of BMC Software, Inc. 1994 Employee Incentive Plan;
incorporated by reference to Exhibit 10.7(a) to the
Company's Annual Report on Form 10-K for the fiscal year
ended March 31, 1995 (the "1995 10-K").
10.1(b) -- Form of Stock Option Agreement employed under BMC
Software, Inc. 1994 Employee Incentive Plan; incorporated
by reference to Exhibit 10.7(b) to the 1995 10-K.
10.2(a) -- Form of BMC Software, Inc. 1994 Non-employee Directors'
Stock Option Plan; incorporated by reference to Exhibit
10.8(a) to the 1995 10-K.
10.2(b) -- Form of Stock Option Agreement employed under BMC
Software, Inc. 1994 Non-employee Directors' Stock Option
Plan; incorporated by reference to Exhibit 10.8(b) to the
1995 10-K.
10.3 -- Description of BMC Software, Inc. Executive Officer
Annual Incentive Plan; incorporated by reference to
Exhibit 10.6 to the Company's Annual Report on Form 10-K
for the fiscal year ended March 31, 1994.
10.4 -- Form of Stock Option Agreement employed under BMC
Software, Inc. 1994 Employee Incentive Plan for certain
executive officers.
10.5 -- Form of Restricted Stock Agreement employed under BMC
Software Inc. 1994 Employee Incentive Plan for certain
executive officers.
</TABLE>
40
<PAGE> 42
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
10.6 -- Form of Indemnification Agreement among the Company and
its directors and executive officers; incorporated by
reference to Exhibit 10.11 to the 1995 10-K.
10.7 -- Credit Agreement dated April 13, 1999 among the Company
and various financial institutions; incorporated by
reference to Exhibit 99.1 to the Company's Current Report
on Form 8-K dated April 28, 1999.
10.8(a) -- BMC Software, Inc. 1994 Deferred Compensation Plan;
incorporated by reference to Exhibit 4.1 to the Company's
Current Report on Form 8-K dated April 2, 1999.
10.8(b) -- First Amendment to BMC Software, Inc. 1994 Deferred
Compensation Plan; incorporated by reference to Exhibit
4.2 to the Company's Current Report on Form 8-K dated
April 2, 1999.
10.8(c) -- Form of BMC Software, Inc. 1994 Deferred Compensation
Plan Trust Agreement; incorporated by reference to
Exhibit 4.3 to the Company's Current Report on Form 8-K
dated April 2, 1999.
*21.1 -- Subsidiaries of the Company.
*23.1 -- Consent of Arthur Andersen LLP.
*23.2 -- Consent of Ernst & Young LLP.
*27 -- Financial Data Schedule.
</TABLE>
---------------
* Filed herewith.
(b) Reports on Form 8-K
None
41
<PAGE> 43
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To BMC Software, Inc.
We have audited the accompanying consolidated balance sheets of BMC
Software, Inc. (a Delaware corporation) and subsidiaries as of March 31, 1999
and 2000, and the related consolidated statements of earnings and comprehensive
income, stockholders' equity and cash flows for each of the three years in the
period ended March 31, 2000. These financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audits. We did not audit the
consolidated financial statements of Boole & Babbage, Inc., a company acquired
during 1999 in a transaction accounted for as a pooling of interests, as
discussed in Note 2. Such statements are included in the consolidated financial
statements of BMC Software, Inc. and reflect total assets of 17.4 percent in
1999, and total revenues of 20.0 percent in 1998 and 18.4 percent in 1999, of
the related consolidated totals. These statements were audited by other auditors
whose report has been furnished to us and our opinion, insofar as it relates to
amounts included for Boole & Babbage, Inc. is based solely upon the report of
the other auditors.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits and the report of other
auditors provide a reasonable basis for our opinion.
In our opinion, based on our audits and the report of the other auditors,
the consolidated financial statements referred to above present fairly, in all
material respects, the financial position of BMC Software, Inc. and subsidiaries
as of March 31, 1999 and 2000, and the results of their operations and their
cash flows for each of the three years in the period ended March 31, 2000, in
conformity with accounting principles generally accepted in the United States.
ARTHUR ANDERSEN LLP
Houston, Texas
April 28, 2000
42
<PAGE> 44
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Boole & Babbage, Inc.
We have audited the consolidated balance sheet of Boole & Babbage, Inc. as
of September 30, 1998, and the related consolidated statements of income,
stockholders' equity, and cash flows for each of the two years in the period
ended September 30, 1998 (not presented separately herein). These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. These standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Boole & Babbage, Inc. at September 30, 1998, and the consolidated results of its
operations and its cash flows for each of the two years in the period ended
September 30, 1998, in conformity with accounting principles generally accepted
in the United States.
ERNST & YOUNG LLP
San Jose, California
October 21, 1998
43
<PAGE> 45
BMC SOFTWARE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
MARCH 31,
-----------------------
1999 2000
---------- ----------
(IN MILLIONS,
EXCEPT PER SHARE DATA)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 347.9 $ 152.4
Investment securities..................................... 106.3 102.8
Accounts receivable:
Trade, net of allowance for doubtful accounts of $20.2
and $31.5............................................. 178.4 374.1
Trade finance receivables, current..................... 180.6 158.1
-------- --------
Total accounts receivable......................... 359.0 532.2
Other current assets...................................... 60.2 108.8
-------- --------
Total current assets.............................. 873.4 896.2
Property and equipment, net of accumulated depreciation and
amortization of $136.8 and $179.9......................... 244.4 337.5
Software development costs and related assets, net of
accumulated amortization of $138.8 and $178.3............. 130.7 193.4
Investment securities....................................... 750.4 820.3
Long-term finance receivables............................... 224.0 222.6
Acquired technology, net of accumulated amortization of $9.4
and $35.2................................................. 12.2 109.7
Goodwill and other intangibles, net of accumulated
amortization of $0.8 and $111.1........................... 2.5 329.1
Other long-term assets...................................... 45.1 53.3
-------- --------
$2,282.7 $2,962.1
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Trade accounts payable.................................... $ 27.3 $ 29.3
Accrued commissions payable............................... 31.9 35.4
Accrued liabilities and other............................. 142.1 143.0
Accrued merger related costs.............................. 38.3 6.6
Short-term borrowings..................................... -- 263.0
Current portion of deferred revenue....................... 411.2 406.6
-------- --------
Total current liabilities......................... 650.8 883.9
Deferred revenue and other.................................. 297.5 297.3
-------- --------
Total liabilities................................. 948.3 1,181.2
Commitments and contingencies
Stockholders' equity:
Preferred stock, $.01 par value, 1.0 shares authorized,
none issued and outstanding............................ -- --
Common stock, $.01 par value, 300.0 shares authorized,
236.6 and 244.6 shares issued and outstanding.......... 2.4 2.4
Additional paid-in capital................................ 185.8 401.1
Retained earnings......................................... 1,143.1 1,385.6
Accumulated other comprehensive income.................... 8.8 (3.4)
-------- --------
1,340.1 1,785.7
Less unearned portion of restricted stock compensation.... (5.7) (4.8)
-------- --------
Total stockholders' equity........................ 1,334.4 1,780.9
-------- --------
$2,282.7 $2,962.1
======== ========
</TABLE>
The accompanying notes are an integral part of these Consolidated Financial
Statements.
44
<PAGE> 46
BMC SOFTWARE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS AND COMPREHENSIVE INCOME
<TABLE>
<CAPTION>
YEARS ENDED MARCH 31,
-------------------------------------
1998 1999 2000
--------- ----------- -----------
(IN MILLIONS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
Revenues:
Licenses.................................................. $658.3 $ 906.9 $1,180.2
Maintenance and services.................................. 327.0 397.0 539.0
------ -------- --------
Total revenues.................................... 985.3 1,303.9 1,719.2
Selling and marketing expenses.............................. 317.3 417.7 633.8
Research and development expenses........................... 121.2 163.9 213.2
Cost of maintenance services and product licenses........... 127.7 152.0 177.2
General and administrative expenses......................... 77.4 95.1 135.1
Acquired research and development........................... 65.5 17.3 80.8
Amortization of goodwill, acquired technology and
intangibles............................................... 3.6 4.3 139.1
Legal settlement............................................ -- -- 55.4
Merger related costs........................................ 19.0 38.3 14.1
------ -------- --------
Operating income.................................. 253.6 415.3 270.5
Interest expense............................................ -- -- (23.4)
Interest and other income, net.............................. 39.4 62.6 64.3
------ -------- --------
Other income, net................................. 39.4 62.6 40.9
------ -------- --------
Earnings before income taxes...................... 293.0 477.9 311.4
Income taxes................................................ 104.5 113.8 68.9
------ -------- --------
Net earnings before cumulative effect of
accounting change............................... 188.5 364.1 242.5
Cumulative effect of accounting change, net of taxes of
$0.9...................................................... -- (1.5) --
------ -------- --------
Net earnings...................................... $188.5 $ 362.6 $ 242.5
====== ======== ========
Basic earnings per share.................................... $ 0.82 $ 1.55 $ 1.01
====== ======== ========
Diluted earnings per share.................................. $ 0.77 $ 1.46 $ 0.96
====== ======== ========
Shares used in computing basic earnings per share........... 229.8 234.3 241.0
====== ======== ========
Shares used in computing diluted earnings per share......... 244.5 248.6 253.0
====== ======== ========
Comprehensive income:
Net earnings.............................................. $188.5 $ 362.6 $ 242.5
Foreign currency translation adjustment, net of taxes of
$1.4 , $0.6 and $--.................................... (2.5) (2.0) 5.1
Unrealized gain (loss) on securities available for sale:
Unrealized gain (loss), net of taxes of $4.7, $8.5 and
$0.5.................................................. 8.7 13.3 (7.7)
Realized (gain) included in net earnings, net of taxes
of $--, $0.3
and $0.4............................................. -- (0.8) (1.3)
Elimination of unrealized gain on New Dimension shares
in purchase accounting, net of taxes of $--, $-- and
$8.5.................................................. -- -- (12.7)
------ -------- --------
Net unrealized gain (loss) on securities available for
sale.................................................. 8.7 12.5 (21.7)
Unrealized gain on derivative instruments:
Unrealized gain, net of taxes of $--, $0.2 and $7.8.... -- 0.8 14.5
Realized gain included in net earnings, net of taxes of
$--, $-- and $5.4..................................... -- (0.2) (10.1)
------ -------- --------
Net unrealized gain on derivative instruments.......... -- 0.6 4.4
------ -------- --------
Comprehensive income.............................. $194.7 $ 373.7 $ 230.3
====== ======== ========
</TABLE>
The accompanying notes are an integral part of these Consolidated Financial
Statements.
45
<PAGE> 47
BMC SOFTWARE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED MARCH 31, 1998, 1999 AND 2000
(IN MILLIONS)
<TABLE>
<CAPTION>
UNREALIZED
GAIN (LOSS)
ON UNREALIZED
FOREIGN SECURITIES GAIN ON
COMMON STOCK ADDITIONAL CURRENCY AVAILABLE DERIVATIVE
--------------- PAID-IN RETAINED TRANSLATION FOR SALE, INSTRUMENTS,
SHARES AMOUNT CAPITAL EARNINGS ADJUSTMENT NET OF TAXES NET OF TAXES
------ ------ ---------- -------- ----------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, March 31, 1997............ 219.8 $2.3 $169.8 $ 589.8 $ (1.2) $ (0.4) $ --
Net earnings...................... -- -- -- 188.5 -- -- --
Foreign currency translation
adjustment...................... -- -- -- -- (3.8) -- --
Treasury stock purchased.......... (2.4) -- (2.1) -- -- -- --
Common stock and options issued in
connection with acquisitions.... 0.4 -- 2.5 -- -- -- --
Adjustment to conform fiscal year
end of BGS...................... -- -- -- (8.0) -- -- --
Shares issued for stock-based
compensation.................... 7.5 -- (16.3) -- -- -- --
Tax benefit of stock-based
compensation.................... -- -- 58.5 -- -- -- --
Earned portion of restricted stock
compensation.................... -- -- -- -- -- -- --
Unrealized gain on securities
available for sale.............. -- -- -- -- -- 9.3 --
BGS dividends declared............ -- -- -- (7.6) -- -- --
----- ---- ------ -------- ------ ------ -----
Balance, March 31, 1998............ 225.3 2.3 212.4 762.7 (5.0) 8.9 --
Net earnings...................... -- -- -- 362.6 -- -- --
Foreign currency translation
adjustment...................... -- -- -- -- (2.7) -- --
Common stock and options issued in
connection with acquisitions.... 7.2 0.1 -- -- -- -- --
Adjustment to conform fiscal year
end of Boole.................... 0.1 -- (4.3) 17.8 (3.4) 1.9 --
Shares issued for stock-based
compensation.................... 4.0 -- (71.7) -- -- -- --
Tax benefit of stock-based
compensation.................... -- -- 49.4 -- -- -- --
Earned portion of restricted stock
compensation.................... -- -- -- -- -- -- --
Unrealized gain on securities
available for sale.............. -- -- -- -- -- 8.3 --
Unrealized gain on derivative
instruments..................... -- -- -- -- -- -- 0.8
----- ---- ------ -------- ------ ------ -----
Balance, March 31, 1999............ 236.6 2.4 185.8 1,143.1 (11.1) 19.1 0.8
Net earnings...................... -- -- -- 242.5 -- -- --
Foreign currency translation
adjustment...................... -- -- -- -- 5.1 -- --
Options issued in connection with
acquisitions.................... -- -- 1.0 -- -- -- --
Shares issued for stock-based
compensation.................... 8.0 -- 104.2 -- -- -- --
Tax benefit of stock-based
compensation.................... -- -- 110.1 -- -- -- --
Earned portion of restricted stock
compensation.................... -- -- -- -- -- -- --
Unrealized loss on securities
available for sale.............. -- -- -- -- -- (7.7) --
Realized gain on securities
available for sale.............. -- -- -- -- -- (1.3) --
Elimination of unrealized gain on
New Dimension shares in purchase
accounting...................... -- -- -- -- -- (12.7) --
Unrealized gain on derivative
instruments..................... -- -- -- -- -- -- 14.5
Realized gain on derivative
instruments..................... -- -- -- -- -- -- (10.1)
----- ---- ------ -------- ------ ------ -----
Balance, March 31, 2000............ 244.6 $2.4 $401.1 $1,385.6 $ (6.0) $ (2.6) $ 5.2
===== ==== ====== ======== ====== ====== =====
<CAPTION>
UNEARNED
PORTION OF
RESTRICTED TOTAL
STOCK TREASURY STOCKHOLDERS'
COMPENSATION STOCK EQUITY
------------ -------- -------------
<S> <C> <C> <C>
Balance, March 31, 1997............ $(3.9) $(96.9) $ 659.5
Net earnings...................... -- -- 188.5
Foreign currency translation
adjustment...................... -- -- (3.8)
Treasury stock purchased.......... -- (70.9) (73.0)
Common stock and options issued in
connection with acquisitions.... -- -- 2.5
Adjustment to conform fiscal year
end of BGS...................... -- -- (8.0)
Shares issued for stock-based
compensation.................... (1.7) 68.3 50.3
Tax benefit of stock-based
compensation.................... -- -- 58.5
Earned portion of restricted stock
compensation.................... 1.5 -- 1.5
Unrealized gain on securities
available for sale.............. -- -- 9.3
BGS dividends declared............ -- -- (7.6)
----- ------ --------
Balance, March 31, 1998............ (4.1) (99.5) 877.7
Net earnings...................... -- -- 362.6
Foreign currency translation
adjustment...................... -- -- (2.7)
Common stock and options issued in
connection with acquisitions.... -- -- 0.1
Adjustment to conform fiscal year
end of Boole.................... -- -- 12.0
Shares issued for stock-based
compensation.................... (3.9) 99.5 23.9
Tax benefit of stock-based
compensation.................... -- -- 49.4
Earned portion of restricted stock
compensation.................... 2.3 -- 2.3
Unrealized gain on securities
available for sale.............. -- -- 8.3
Unrealized gain on derivative
instruments..................... -- -- 0.8
----- ------ --------
Balance, March 31, 1999............ (5.7) -- 1,334.4
Net earnings...................... -- -- 242.5
Foreign currency translation
adjustment...................... -- -- 5.1
Options issued in connection with
acquisitions.................... -- -- 1.0
Shares issued for stock-based
compensation.................... (1.8) -- 102.4
Tax benefit of stock-based
compensation.................... -- -- 110.1
Earned portion of restricted stock
compensation.................... 2.7 -- 2.7
Unrealized loss on securities
available for sale.............. -- -- (7.7)
Realized gain on securities
available for sale.............. -- -- (1.3)
Elimination of unrealized gain on
New Dimension shares in purchase
accounting...................... -- -- (12.7)
Unrealized gain on derivative
instruments..................... -- -- 14.5
Realized gain on derivative
instruments..................... -- -- (10.1)
----- ------ --------
Balance, March 31, 2000............ $(4.8) $ -- $1,780.9
===== ====== ========
</TABLE>
The accompanying notes are an integral part of these Consolidated Financial
Statements.
46
<PAGE> 48
BMC SOFTWARE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED MARCH 31,
-----------------------------
1998 1999 2000
------- ------- ---------
(IN MILLIONS)
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings.............................................. $ 188.5 $ 362.6 $ 242.5
Adjustments to reconcile net earnings to net cash provided
by operating activities:
Adjustment to conform fiscal year end of BGS............ (8.0) -- --
Adjustment to conform fiscal year end of Boole.......... -- 12.1 --
Acquired research and development and accrued merger
related costs......................................... 73.2 55.6 80.8
Depreciation and amortization........................... 69.2 76.8 235.6
Loss on sale/disposal of property and equipment......... 5.1 11.3 7.7
Gain on sale/disposal of investment securities.......... -- (3.1) (1.7)
Change in allowance for doubtful accounts............... 1.0 4.1 11.3
Deferred income tax provision (benefit)................. 20.0 (41.6) (3.4)
Earned portion of restricted stock compensation......... 1.5 1.4 2.7
Stock issued under compensatory stock plans............. 0.1 -- --
Changes in operating assets and liabilities, net of
acquisitions:
Increase in accounts receivable....................... (115.2) (180.2) (143.7)
Increase (decrease) in current and long-term deferred
revenue and other.................................. 113.9 254.2 (28.3)
Change in other operating assets and liabilities...... 44.1 107.1 (36.8)
------- ------- ---------
Total adjustments.................................. 204.9 297.7 124.2
------- ------- ---------
Net cash provided by operating activities.......... 393.4 660.3 366.7
------- ------- ---------
Cash flows from investing activities:
Cash paid for technology acquisitions, net of cash
acquired................................................ (72.7) (6.7) (649.1)
Purchases of investment securities........................ (262.8) (313.8) (139.5)
Maturities of/proceeds from sales of investment
securities.............................................. 89.0 162.3 80.0
Proceeds from sales of property and equipment............. 1.5 0.8 --
Purchases of property and equipment....................... (71.9) (115.8) (148.0)
Capitalization of software development costs and related
assets.................................................. (49.3) (76.0) (102.7)
(Increase) decrease in long-term finance receivables...... (5.7) (97.5) 26.6
Adjustment to conform fiscal year end of Boole............ -- (32.5) --
------- ------- ---------
Net cash used in investing activities.............. (371.9) (479.2) (932.7)
------- ------- ---------
Cash flows from financing activities:
Treasury stock purchased.................................. (73.0) -- --
Boole treasury stock purchased............................ -- (25.0) --
BGS dividends paid........................................ (7.6) -- --
Stock options exercised................................... 39.4 33.3 103.6
Proceeds from issuance of Boole common stock.............. 6.0 28.5 --
Proceeds from borrowings.................................. -- -- 498.8
Payments on borrowings.................................... (4.4) (1.3) (237.0)
Adjustment to conform fiscal year end of Boole............ -- 30.2 --
------- ------- ---------
Net cash provided by (used in) financing
activities....................................... (39.6) 65.7 365.4
Effect of translation exchange rate changes on cash....... (2.9) (2.5) 5.1
Adjustment to conform fiscal year end of Boole............ -- (2.4) --
------- ------- ---------
Net change in cash and cash equivalents............ (21.0) 241.9 (195.5)
Cash and cash equivalents, beginning of year................ 127.0 106.0 347.9
------- ------- ---------
Cash and cash equivalents, end of year...................... $ 106.0 $ 347.9 $ 152.4
======= ======= =========
Supplementary disclosures of cash flow information:
Cash paid during the year for income taxes................ $ 53.7 $ 15.5 $ 15.0
Noncash consideration in acquisitions..................... $ 8.6 $ -- $ 1.0
Cash paid for interest, net of amounts capitalized........ $ 1.6 $ 3.4 $ 22.6
</TABLE>
The accompanying notes are an integral part of these Consolidated Financial
Statements.
47
<PAGE> 49
BMC SOFTWARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Nature of Operations
BMC Software, Inc. and its wholly-owned subsidiaries (collectively, the
Company or BMC) develop software that provides systems management solutions for
both mainframe and distributed information systems. BMC markets, sells and
supports its solutions primarily through its sales offices around the world, as
well as through its relationships with independent partners. Numerous factors
affect the Company's operating results, including general economic conditions,
market acceptance and demand for its products, its ability to develop new
products, rapidly changing technologies and competition. For a discussion of
certain of these important factors, see the discussion in Management's
Discussion and Analysis of Results of Operations and Financial Condition under
the heading "Certain Risks and Uncertainties That Could Affect Future Operating
Results."
(b) Use of Estimates
The Company's management makes estimates and assumptions in the preparation
of its consolidated financial statements in conformity with generally accepted
accounting principles. These estimates and assumptions may affect the reported
amounts of assets and liabilities and the disclosure of contingent assets and
liabilities as of the date of the consolidated financial statements, and the
reported amounts of revenues and expenses during the respective reporting
periods. Actual results could differ from those results implicit in the
estimates and assumptions.
(c) Basis of Presentation
The accompanying consolidated financial statements include the accounts of
the Company and are comprised of the consolidated financial position and results
of operations of the Company as of March 31, 1999 and 2000 and for the three
years in the period ended March 31, 2000. The Company's consolidated financial
statements for the year ended March 31, 1998 include the consolidated results of
operations of Boole & Babbage, Inc. (Boole) for the year ended September 30,
1997, and of BGS Systems, Inc. (BGS) for the year ended January 31, 1998. The
Company's consolidated financial statements as of and for the year ended March
31, 1999 include the consolidated financial position and results of operations
of Boole and BGS as of and for the period then ended. As a result of certain
adjustments made to conform the fiscal year ends of the Company, Boole and BGS
for only the year ended March 31, 1999, in accordance with SEC regulations, the
consolidated statements of earnings and comprehensive income exclude the results
of operations of Boole for the six months ended March 31, 1998, which included
total revenues of $106.5 million and net earnings of $17.8 million and of BGS
for the two months ended March 26, 1998, which included total revenues of
approximately $6.5 million and net loss of approximately $8.0 million.
Adjustments have been included in the consolidated statements of stockholders'
equity for the net earnings and other comprehensive income attributable to these
periods.
All significant intercompany balances and transactions have been eliminated
in consolidation. Certain amounts previously reported have been reclassified in
order to ensure comparability among the years reported.
(d) Cash Equivalents
The Company considers investments with a maturity of three months or less
when purchased to be cash equivalents. As of March 31, 1999 and 2000, the
Company's cash equivalents were comprised primarily of money market funds. The
Company's cash and cash equivalents are subject to potential credit risk. The
Company's cash management and investment policies restrict investments to
investment quality, highly liquid securities.
48
<PAGE> 50
BMC SOFTWARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(e) Long Lived Assets
Property and Equipment --
Property and equipment are stated at cost. Depreciation on all property and
equipment, with the exception of buildings and leasehold improvements, is
calculated using the straight-line method over the estimated useful lives of the
assets, which range from three to ten years. Depreciation on buildings is
calculated using the straight-line method over the useful lives of the
components of the buildings (twenty years for the infrastructure and thirty
years for the shell). Leasehold improvements are amortized using the
straight-line method over the shorter of the lease term or the estimated useful
lives of the assets, which range from two to seven years. Interest is
capitalized in connection with the construction of major facilities. The
capitalized interest is recorded as part of the asset to which it relates and is
amortized over the asset's estimated useful life. In fiscal 2000, $0.4 million
of interest cost was capitalized. No interest was capitalized in fiscal 1998 and
1999.
A summary of property and equipment is as follows:
<TABLE>
<CAPTION>
MARCH 31,
-----------------
1999 2000
------- -------
(IN MILLIONS)
<S> <C> <C>
Land........................................................ $ 26.7 $ 27.0
Buildings and leasehold improvements........................ 138.4 159.6
Construction in progress.................................... -- 38.2
Computers, software, furniture and equipment................ 216.1 292.6
------- -------
381.2 517.4
Less accumulated depreciation and amortization............ (136.8) (179.9)
------- -------
Net property and equipment.................................. $ 244.4 $ 337.5
======= =======
</TABLE>
As of April 1, 1999, the Company adopted the American Institute of
Certified Public Accountants (AICPA) Statement of Position (SOP) 98-1,
"Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use." This standard requires that certain costs related to the
development or purchase of internal-use software be capitalized and amortized
over the estimated useful life of the software. This SOP also requires that
costs related to the preliminary project stage, data conversion and the
post-implementation/operation stage of an internal-use software development
project be expensed as incurred. Adoption of this standard did not have a
material impact on the Company's financial position or results of operations.
Software Development Costs and Related Assets --
Costs of internally developed software for resale are expensed until the
technological feasibility of the software product has been established.
Thereafter, software development costs are capitalized and subsequently reported
at the lower of unamortized cost or net realizable value. Purchased software and
related assets are recorded at cost. The capitalized software costs are
amortized over the products' estimated useful lives, which is typically five
years, beginning upon the declaration of the underlying products as generally
available for sale. Each quarter, the Company analyzes the realizability of its
recorded software assets. This process occasionally results in accelerated
amortization charges which, over the past few years, has resulted in an
effective amortization period of approximately four years. During the years
ended March 31, 1998, 1999 and 2000, $49.3 million, $76.0 million and $102.7
million, respectively, of software costs were capitalized. Amortization for the
years ended March 31, 1998, 1999 and 2000 was $33.9 million, $40.8 million and
$40.2 million, respectively, including $12.0 million, $15.9 million and $8.2
million, respectively, of accelerated amortization for software products that
were not expected to generate sufficient future revenues necessary for the
Company to realize the carrying value of these assets. These expenses were
reported within cost of
49
<PAGE> 51
BMC SOFTWARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
maintenance services and product licenses in the accompanying consolidated
statements of earnings and comprehensive income.
Acquired Technology --
Acquired technology, representing developed technology of acquired
businesses, is stated at cost and is amortized on a straight line basis over the
products' estimated useful lives, which is typically five years. The portion of
a purchase which pertains to in-process research and development is expensed in
the period of the acquisition.
Goodwill and Other Intangibles --
Goodwill, representing the excess of the cost over the net tangible and
identifiable intangible assets of acquired businesses, and other intangibles are
stated at cost and are amortized on a straight line basis over the estimated
future periods to be benefited, which is primarily four years.
Asset Impairment --
The Company assesses asset impairment based on the guidance set forth in
Statement of Financial Accounting Standards (SFAS) No. 121, "Accounting for the
Impairment of Long-lived Assets and for Long-lived Assets to be Disposed Of."
The Company reviews its long-lived assets and certain identifiable intangibles
for impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. If the sum of the expected
future cash flows from the use of the asset and its eventual disposition is less
than the carrying amount of the asset, an impairment loss is recognized based on
the fair value of the asset.
(f) Foreign Currency Translation and Risk Management
The Company operates globally and the functional currency for most of its
non-U.S. enterprises is the local currency. Financial statements of these
foreign operations are translated into U.S. dollars using the current rate
method in accordance with SFAS No. 52, "Foreign Currency Translation." As a
result, the Company's U.S. dollar net cash flows from international operations
may be adversely affected by changes in foreign currency exchange rates. To
minimize the Company's risk from changes in foreign currency exchange rates, the
Company utilizes certain derivative financial instruments.
Effective January 1, 1999, the Company adopted SFAS No. 133, "Accounting
for Derivative Instruments and Hedging Activities." SFAS No. 133 establishes
accounting and reporting standards requiring that every derivative instrument be
recorded in the balance sheet as either an asset or liability, depending on the
rights or obligations under the contracts, at its fair value. SFAS No. 133 also
requires that changes in a derivative's fair value be recognized currently in
earnings unless specific hedge accounting criteria are met. For a qualifying
cash flow hedge, the changes in fair value of the derivative instrument are
initially recognized in other comprehensive income and then are reclassified
into earnings in the period that the hedged transaction affects earnings. For a
qualifying fair value hedge, the changes in fair value of the derivative
instrument are offset against the corresponding changes for the hedged item
through earnings. Such accounting for qualifying hedges allows a derivative's
gains and losses to offset related results of the hedged item in the income
statement, and requires the Company to formally document, designate and
continuously assess the effectiveness of transactions that receive hedge
accounting. SFAS No. 138, "Accounting for Certain Derivative Instruments and
Certain Hedging Activities," was issued in June 2000 and amends certain
provisions of SFAS No. 133. SFAS No. 138 is effective for all fiscal quarters
beginning after June 15, 2000, and the Company believes that adoption of SFAS
No. 138 will not have a material effect on our financial position or results of
operations.
50
<PAGE> 52
BMC SOFTWARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company primarily utilizes two types of derivative financial
instruments in managing its foreign currency exchange risk: forward exchange
contracts and purchased option contracts. Forward exchange contracts are used to
achieve hedges of firm commitments that subject the Company to transaction risk.
Such commitments include accounts receivable, intercompany receivables/payables,
cash balances, and certain liabilities of foreign operations. The terms of these
forward exchange contracts are generally one month or less and are typically
entered into at the prevailing market rate at the end of the month. As such,
there is no fair value associated with these forward exchange contracts at March
31, 1999 and 2000.
Forward exchange contracts and net purchased option contracts are used by
the Company to hedge anticipated, but not firmly committed, sales transactions,
and generally qualify as cash flow hedges under SFAS No. 133. The Company
believes that the anticipated sales transactions are probable and highly
correlated with the derivative instruments. Probability weightings are applied
to the forecasted quarterly sales amounts up to one year into the future and
contracts are purchased to hedge the foreign currency exchange risk on these
weighted amounts with specified revenues being designated as the hedged item.
The Company performs comparisons, on a monthly basis, of the contracts and the
forecasted sales revenues to determine hedge effectiveness. The Company excludes
the change in the time value of the contracts from its assessment of hedge
effectiveness. In the event a hedge ceases to be highly effective and the
derivative is subsequently sold, or the Company discontinues its hedging
operations, any unrecognized premium costs or deferred gains will be recognized
in earnings in that period. During fiscal 1999 and 2000, the Company did not
recognize any amounts in earnings due to hedge ineffectiveness, as defined in
SFAS No. 133, nor did the Company discontinue its hedging activities. The terms
of the Company's forward exchange contracts and purchased option contracts are
typically one year or less. The fair value, estimated using the Black-Scholes
option pricing model, of these forward exchange contracts and purchased option
contracts at March 31, 1999 and 2000 was $1.9 million and $6.2 million,
respectively, and is included in other current assets in the consolidated
balance sheets. Changes in the intrinsic value of forward exchange contracts and
purchased option contracts are reported as a component of other comprehensive
income.
The balances in other current assets and other comprehensive income related
to derivative instruments as of March 31, 2000 are expected to be recognized in
earnings over the next twelve months. During the years ended March 31, 1998,
1999 and 2000, general and administrative expenses included $1.9 million, $1.5
million and $0.3 million, respectively, related to premium, discount and time
value realization from derivative financial instruments and unhedged immaterial
foreign exchange exposures. The net cash flows from the Company's foreign
exchange financial instruments are netted with the currency gain or loss of the
hedged item in the Company's consolidated statements of cash flows.
Upon adoption of SFAS No. 133 in fiscal 1999, the Company recognized a
cumulative adjustment of $2.4 million ($1.5 million, net of taxes) related
primarily to unrecognized premium costs on the purchased option contracts. Under
the previous accounting method, the Company deferred recognition of these
premiums until the settlement date of the option contracts.
51
<PAGE> 53
BMC SOFTWARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The table below summarizes the contractual amounts of the Company's
derivative financial instruments in U.S. dollars. The Company's foreign exchange
financial instruments are primarily denominated in the major European
currencies, particularly the Euro and the British pound, as well as Pacific Rim
currencies, particularly the Japanese yen and Australian dollar. The "Buy"
amounts in the table below represent the U.S. dollar equivalent of commitments
to purchase foreign currencies and the "Sell" amounts represent the U.S. dollar
equivalent of the Company's right (with respect to purchased option contracts)
and its commitment (with respect to forward exchange contracts) to sell foreign
currencies.
<TABLE>
<CAPTION>
MARCH 31,
-----------------------------
1999 2000
------------- -------------
BUY SELL BUY SELL
---- ------ ---- ------
(IN MILLIONS)
<S> <C> <C> <C> <C>
Purchased options...................................... $ -- $107.3 $ -- $ 46.7
Forward exchange contracts (Europe).................... 0.9 149.1 -- 321.8
Forward exchange contracts (Other)..................... 1.6 14.5 1.9 66.9
---- ------ ---- ------
$2.5 $270.9 $1.9 $435.4
==== ====== ==== ======
</TABLE>
The Company's exposure to credit-related losses from its derivative
financial instruments is minimal. Credit-related losses from the Company's
forward exchange contracts could occur if the Company's foreign customers
default on their trade payable obligations with the Company. The Company has not
experienced and does not expect to experience any significant defaults by its
foreign customers. Exposure from the Company's purchased option contracts is
limited to the premium costs associated with purchasing the instruments as the
Company is not obligated to exercise these options. The Company is also exposed
to credit-related losses in the event of non-performance by counterparties to
financial instruments, but it does not expect any counterparties to fail to meet
their obligations, given their high credit ratings. In addition, the Company
diversifies this risk across several counterparties.
(g) Deferred Revenue and Other
Deferred revenue and other is comprised primarily of deferred maintenance,
license and other revenues. Deferred maintenance and license revenue is not
recorded until it has been collected or is supported by a formal, financing
arrangement. The principal components of deferred revenue as of March 31, 1999
and 2000 are as follows:
<TABLE>
<CAPTION>
MARCH 31,
---------------
1999 2000
------ ------
(IN MILLIONS)
<S> <C> <C>
Current:
Maintenance............................................... $263.5 $335.8
License................................................... 128.2 24.1
Other..................................................... 19.5 46.7
------ ------
Total current deferred revenue.................... 411.2 406.6
Long-Term:
Maintenance............................................... 288.3 280.5
Other..................................................... 9.2 16.8
------ ------
Total long-term deferred revenue and other........ 297.5 297.3
------ ------
Total deferred revenue and other.................. $708.7 $703.9
====== ======
</TABLE>
52
<PAGE> 54
BMC SOFTWARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(h) Revenue Recognition
The Company licenses its software products under perpetual, annual and
monthly licenses. Perpetual licenses include maintenance and enhancements for
periods ranging from ninety days to one year. For those perpetual licenses which
provide maintenance and enhancements, the portion of the license fee associated
with maintenance and enhancements is unbundled and recognized ratably as
maintenance revenue. Maintenance contracts are available annually thereafter and
are generally based on the value (as defined) of the licensed software products.
The Company also generates upgrade revenues as a result of a customer's
migration or anticipated migration to more powerful central processing units and
generates professional services revenue as a result of providing consulting and
education services related to its products.
Revenue from the licensing of software, including upgrade revenue, is
recognized when both the Company and the customer are legally obligated under
the terms of the respective agreement and the underlying software products (if
any in the case of upgrade transactions) have been delivered. Maintenance
revenue is recognized ratably over the term of the underlying maintenance
agreement. Revenues from license and maintenance transactions which are financed
are generally recognized in the same manner as those requiring current payment.
The Company has an established business practice of offering installment
contracts to customers and has a history of successfully enforcing original
payment terms without making concessions. Further, the payment obligations are
unrelated to product implementation or any other post-transaction activity. In
all cases, revenue is recognized only if no significant Company obligations
remain and collection of the resulting receivable is deemed probable. In
connection with term licenses of software, the net present value of the legally
committed payments related to the product license is generally recognized as
revenue upon the commencement of the term. Related interest income and
maintenance revenue are recognized ratably over the lease term. Revenues from
sales through agents, distributors and resellers are recorded either at the
gross amount charged the customer or net of commissions paid, based on the
transaction risks and ongoing product support responsibilities assumed by the
Company. Revenues from professional services are recorded in the period the
services are performed.
On April 1, 1998 and 1999, the Company adopted SOP 97-2, "Software Revenue
Recognition," and SOP 98-9 "Modification of SOP 97-2, Software Revenue
Recognition, With Respect to Certain Transactions," respectively, as reflected
above. The adoption of these standards did not have a material impact on the
Company's financial position or results of operations.
53
<PAGE> 55
BMC SOFTWARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(i) Earnings Per Share
SFAS No. 128, "Earnings Per Share," requires dual presentation of basic and
diluted earnings per share (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 potential common shares using the treasury stock
method. For the years ended March 31, 1999 and 2000, options to purchase 0.3
million and 1.5 million shares, respectively, have been excluded from the
calculation of diluted EPS as they are anti-dilutive. The following table
summarizes the basic and diluted EPS computations for the years ended March 31,
1998, 1999 and 2000:
<TABLE>
<CAPTION>
YEARS ENDED MARCH 31,
------------------------
1998 1999 2000
------ ------ ------
(IN MILLIONS, EXCEPT PER
SHARE AMOUNTS)
<S> <C> <C> <C>
Basic earnings per share:
Net earnings............................................. $188.5 $362.6 $242.5
------ ------ ------
Weighted average number of common shares................. 229.8 234.3 241.0
------ ------ ------
Basic earnings per share................................. $ 0.82 $ 1.55 $ 1.01
====== ====== ======
Diluted earnings per share:
Net earnings............................................. $188.5 $362.6 $242.5
------ ------ ------
Weighted average number of common shares................. 229.8 234.3 241.0
Incremental shares from assumed conversions of stock
options and other..................................... 14.7 14.3 12.0
------ ------ ------
Adjusted weighted average number of common shares........ 244.5 248.6 253.0
------ ------ ------
Diluted earnings per share............................... $ 0.77 $ 1.46 $ 0.96
====== ====== ======
</TABLE>
(j) Stock Splits
On April 20, 1998, the Company's board of directors declared a two-for-one
stock split. This stock split was effected in the form of a stock dividend
whereby stockholders of record received one share of common stock for each share
held. All stock related data in the consolidated financial statements and
related notes reflects this stock split for all periods presented.
(k) Treasury Stock
Under a stock repurchase program, the Company repurchased 2.4 million
shares of its common stock on the open market for an aggregate purchase price of
$70.9 million, in the fiscal year ended March 31, 1998. The Company's board of
directors terminated the share buy-back program, prior to consummation of the
BGS merger in March 1998, consistent with the pooling-of-interests accounting
provisions. Consequently, no shares were repurchased in fiscal 1999 and 2000.
Subsequent to March 31, 2000, the Company's board of directors authorized
the Company to repurchase up to $500 million in common stock.
(l) Comprehensive Income
The Company adopted SFAS No. 130, "Reporting Comprehensive Income,"
effective April 1, 1998. SFAS No. 130 establishes standards for reporting and
displaying comprehensive income and its components. Comprehensive income is the
total of net income and all other non-owner changes in equity, which for the
54
<PAGE> 56
BMC SOFTWARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Company include foreign currency translation adjustments and unrealized gains
and losses on securities available for sale and derivative instruments. A
reconciliation of reported net earnings to comprehensive income is included in
the consolidated statements of earnings and comprehensive income.
(2) TECHNOLOGY ACQUISITIONS
During fiscal 1998, the Company completed its acquisition of DataTools,
Inc. (DataTools) through the exercise of a purchase option. The Company funded
the $73.0 million aggregate purchase price with cash, and to a lesser extent,
debt forgiveness and options to purchase the Company's common stock. This
acquisition was accounted for as a purchase.
DataTools owned certain database management system-specific back-up
products that were sold as stand-alone products. Its flagship product is called
SQL Backtrack (SQL-BT). At the acquisition date, 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 (SBI) and the Oracle
platform (SBO), as well as first generation products for the Microsoft SQL (SBM)
and Sybase IDR (SBS/I) platforms. The Company allocated approximately $18.6
million of the purchase price to developed technology, workforce and goodwill.
The Company allocated approximately $54.4 million to in-process research and
development (IPR&D). The four most significant development projects, which
comprised $40.6 million (74%) of the acquired IPR&D, pertained to the products
above. The primary remaining efforts associated with the IPR&D included code
completion in several key areas, such as logical extraction and piecemeal
back-up and recovery (BU&R), large database support and performance-related
functionality. As of the acquisition date, the expected costs to complete the
IPR&D were, on a calendar year basis, approximately $2.9 million in 1997, $4.7
million in 1998, $2.1 million in 1999, and $0.7 million in 2000. With respect to
the estimated completion costs, the Company incurred less than 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 status of the four primary
projects.
The Company spent approximately $0.7 million through March 31, 1998 on the
SBM product in addition to the approximate $0.8 million 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 $0.5 million on this technology prior to
deciding to terminate this development project.
The Company spent approximately $1 million on SBI through March 31, 1998,
in addition to the approximate $0.5 million spent by DataTools prior to the
transaction. As a result, Version 2.0 of this product was released in April
1998. The completion of the in-process technology resulted in added
functionality, including selective recovery of tables, as opposed to full
back-ups, which increases flexibility and efficiency. This version also allows
for incremental restart if a recovery is interrupted, eliminating the need to
run the entire recovery again.
In addition to the DataTools acquisition, the Company completed other
acquisitions of assets accounted for as purchases in fiscal 1998. The aggregate
purchase price for these transactions was $14.6 million. The Company recorded a
$9.1 million charge, net of a $2.0 million income tax benefit for acquired
research and development relative to these additional transactions during fiscal
1998.
55
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BMC SOFTWARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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. for a total purchase price of $6.9 million. The Company
allocated $1.7 million of the purchase price to completed technology and $5.2
million to acquired IPR&D. The allocation of purchase price to completed
technology reflects the estimated discounted future cash flows associated with
the customers using the existing technology. This code permits file system
back-up and recovery, but was not competitive with the leading products in this
market. While the acquired code contained certain key functionality, it was
incomplete in various aspects. As a result, the Company attempted to complete
this code by, among other things, developing support for dual network hosts,
enhancing the interface with the SQL-BT object back-up stream interface,
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 has abandoned this project.
During March 1998, the Company completed the acquisition of BGS. This
acquisition was accounted for as a pooling of interests in accordance with
Accounting Principles Board (APB) Opinion No. 16. The Company recorded a $7.7
million charge for merger related costs. The Company exchanged a total of 7.2
million shares of its common stock for all of the outstanding shares of BGS. The
Company also converted BGS employee options into options to purchase 746,000
shares of the Company's common stock. The results of operations for BGS are
included for all periods presented herein.
BGS had previously reported on a January 31 year end. As such, the accounts
of BGS for its 1998 fiscal year have been consolidated with the accounts of the
Company as of March 31, 1998. As a result of certain adjustments made to conform
the fiscal year ends of the Company and BGS for only the year ended March 31,
1999, in accordance with SEC regulations, the consolidated statements of
earnings and comprehensive income exclude the results of BGS for the two months
ended March 26, 1998, which included total revenues of approximately $6.5
million and net loss of approximately $8.0 million (inclusive of approximately
$5.2 million of merger related costs). The revenues and operating results for
this period are not indicative of a full quarter's results since a substantial
amount of license revenues are generated in the last few days of a typical
quarter. An adjustment is included in the consolidated statement of
stockholders' equity for the net earnings attributed to this two-month period.
During fiscal 1999, the Company completed two asset acquisition
transactions. 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 $6.0
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. During fiscal
1999, the Company incurred an additional $3.5 million in development costs to
complete the product.
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 costs 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
56
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BMC SOFTWARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Company believes the acquired IPR&D was approximately 45% complete towards
development of end-to-end and service level management functionality across the
major ERP platforms at the acquisition date. The Company incurred a nominal
level of development costs in fiscal 1999. In fiscal 2000, the Company evaluated
the levels of commitment and effort required to develop the above-mentioned
functionality in the non-SAP environments and determined such development would
not be pursued.
In March, 1999, the Company completed its merger with Boole which was
accounted for as a pooling of interests in accordance with APB Opinion No. 16.
The Company recorded charges of $38.3 million and $13.7 million for merger and
restructuring costs related to the Boole transaction for the years ended March
31, 1999 and 2000, respectively. For further discussion of the components of the
merger and restructuring charge, see Note 12 -- Merger Related Costs. The
Company exchanged a total of 19.1 million shares of its common stock for all of
the outstanding shares of Boole. The Company also converted Boole employee
options into options to purchase 3.9 million shares of the Company's common
stock. The results of operations for Boole are included for all periods
presented herein.
Boole had previously reported on a September 30 year end. As such, the
accounts of Boole for its 1997 fiscal year have been consolidated with the
accounts of the Company as of March 31, 1998. As a result of certain adjustments
made to conform the fiscal year ends of the Company and Boole for only the year
ended March 31, 1999, in accordance with SEC regulations, the consolidated
statements of earnings and comprehensive income exclude the results of Boole for
the six months ended March 31, 1998, which included total revenues of $106.5
million and net earnings of $17.8 million. An adjustment is included in the
consolidated statement of stockholders' equity for the net earnings attributed
to this six-month period.
On April 14, 1999, the Company acquired, through a public tender offer, in
excess of 95% of the outstanding ordinary shares of New Dimension Software, Ltd.
(New Dimension). Total consideration paid approximated $673 million, including
the cost of the remaining outstanding shares acquired during fiscal 2000 and the
Company's historical cost of approximately $2.0 million for shares of New
Dimension previously owned by Boole. Unrealized gains of approximately $21.0
million related to these New Dimension shares included in long-term investment
securities and accumulated other comprehensive income at March 31, 1999, were
eliminated when the acquisition was recorded. The acquisition was accounted for
as a purchase transaction, and the purchase price was allocated as follows:
$126.3 million to software assets, $435.9 million to goodwill and other
intangibles and $30.0 million to 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 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 grouped its product lines into five categories: (i)
Enterprise Production Management, (ii) Enterprise Output Management, (iii)
Enterprise Event Management, (iv) Enterprise Security Management and (v) Tandem
Solutions. 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. The following
summarizes these efforts at the time of the acquisition and the status of the
development as of March 31, 2000.
Integrated Operations Architecture for the Enterprise. IOA/e was to be the
supporting infrastructure for all of the distributed systems products from New
Dimension, similar to the Integrated Operations Architecture for New Dimension's
mainframe products. This project, as originally intended, has been cancelled as
the Company determined it was more appropriate to gradually extend the existing
distributed systems infrastructure rather than to replace it.
Odaiko. Odaiko was to be 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
57
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BMC SOFTWARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
enterprise-wide document and output management product family. At the time of
the acquisition, this product family supported 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, renamed CONTROL-D for Distributed
Systems, will not only enable the end user to view the archived reports via a
Web browser but will also 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. Some components of this product suite were released
during fiscal 2000 and the remainder are scheduled for general availability in
September 2000.
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 new applications with new and important functionality that customers
require. The beta versions of two of these products are scheduled for release
during fiscal 2001.
Security. At the acquisition date, the security market was 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 technology at the acquisition date
supported the administration of passwords and user IDs 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 SQL 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
console. Customer requirements drive the porting of the agent to each new
operating system and platform as well as to support new RSSs. Key IPR&D projects
involve the support of new RSSs 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 IDs. These passwords and user IDs would then be utilized or
synchronized across all of the applications and systems that a user accesses.
This technology has been completed, is Web-based and allows 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 following is a summary of the primary IPR&D related to these
products:
CONTROL-M
- New Two Tier architecture for large 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 Windows NT environment
58
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BMC SOFTWARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CONTROL-SA
- Security for managing users of Internet e-commerce applications
- Enhanced administration of control access rights
- Ability to 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
Certain of these projects were completed in fiscal 2000 and the related
products are generally available; other products have been released as beta
versions for customer testing and evaluation; and the remainder are still in
process.
As of the date of the New Dimension 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. 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 following unaudited pro forma results of operations for the year ended
March 31, 1999, are as if the acquisition of New Dimension has occurred at the
beginning of that period. The pro forma information includes New Dimension's
financial results for the year ended December 31, 1998, combined with the
accounts of the Company for the year ended March 31, 1999. As the acquisition
occurred on April 14, 1999, pro forma results for the year ended March 31, 2000,
are not significantly different than the reported results for that period.
<TABLE>
<CAPTION>
YEAR ENDED
MARCH 31, 1999
----------------
(IN MILLIONS,
EXCEPT PER SHARE
AMOUNTS)
<S> <C>
Total revenues*........................................ $1,384.0
Net earnings........................................... $ 265.2
Basic EPS.............................................. $ 1.13
Diluted EPS............................................ $ 1.07
</TABLE>
---------------
* Excludes $13.5 million of royalties paid by the Company to New Dimension for
the year ended March 31, 1999.
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
59
<PAGE> 61
BMC SOFTWARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
value. The revenue projections used to value the acquired IPR&D 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 product's underlying technology. Estimated operating expenses and income
taxes were deducted from estimated revenue projections to arrive at estimated
after-tax cash flows. Operating expenses were estimated based on historical
results and anticipated profit margins and included cost of goods sold, selling
and marketing expenses, general and administrative expenses and research and
development expenses, including estimated costs to maintain the products once
they have been introduced into the market and are generating revenue. 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, discount
rates of 16% to 20% were used to value the acquired IPR&D. A 20% discount rate
was used to value the New Dimension acquired IPR&D and a 15% rate was used 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.
In April 2000, the Company acquired all of the outstanding shares of Evity,
Inc. (Evity). See Note 13 -- Subsequent Event for further discussion.
(3) MARKETABLE SECURITIES
Management determines the appropriate classification of investments in debt
and equity securities at the time of purchase and re-evaluates such designation
as of each subsequent balance sheet date. The Company has the ability and intent
to hold most of its debt securities to maturity and thus has classified these
securities as "held to maturity" pursuant to SFAS No. 115, "Accounting for
Certain Investments in Debt and Equity Securities." These securities have been
recorded at amortized cost in the Company's consolidated balance sheets.
Securities classified as "available for sale" are recorded at fair value. The
resulting net unrealized gains or losses are recorded as an increase or decrease
to stockholders' equity. The Company holds no securities classified as "trading
securities." Gains and losses, realized and unrealized, are calculated using the
specific
60
<PAGE> 62
BMC SOFTWARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
identification method. The tables below summarize the Company's total investment
securities portfolio as of March 31, 1999 and 2000.
HELD-TO-MATURITY SECURITIES
<TABLE>
<CAPTION>
GROSS GROSS
FAIR UNREALIZED UNREALIZED AMORTIZED
VALUE GAINS LOSSES COST
------ ---------- ---------- ---------
(IN MILLIONS)
<S> <C> <C> <C> <C>
1999
Maturities within 1 year:
Municipal securities............................... $ 60.8 $0.4 $ -- $ 60.4
Corporate bonds.................................... 8.6 0.1 -- 8.5
Euro bonds and other............................... 0.2 -- -- 0.2
------ ---- ----- ------
Total maturities within 1 year............. $ 69.6 $0.5 $ -- $ 69.1
====== ==== ===== ======
Maturities from 1-5 years:
Municipal securities............................... $383.2 $6.5 $ -- $376.7
Corporate bonds.................................... 71.3 0.7 (0.9) 71.5
Euro bonds and other............................... 88.0 0.4 (0.3) 87.9
Mortgage securities................................ 7.2 -- -- 7.2
------ ---- ----- ------
Total maturities from 1-5 years............ $549.7 $7.6 $(1.2) $543.3
====== ==== ===== ======
Maturities from 6-10 years:
Municipal securities............................... $ 21.6 $0.2 $ -- $ 21.4
Euro bonds and other............................... 11.1 0.1 -- 11.0
------ ---- ----- ------
Total maturities from 6-10 years........... $ 32.7 $0.3 $ -- $ 32.4
====== ==== ===== ======
</TABLE>
<TABLE>
<CAPTION>
GROSS GROSS
FAIR UNREALIZED UNREALIZED AMORTIZED
VALUE GAINS LOSSES COST
------ ---------- ---------- ---------
(IN MILLIONS)
<S> <C> <C> <C> <C>
2000
Maturities within 1 year:
Municipal securities............................... $ 78.4 $0.1 $ -- $ 78.3
Corporate bonds.................................... 11.9 -- -- 11.9
Euro bonds and other............................... 5.0 -- -- 5.0
------ ---- ------ ------
Total maturities within 1 year............. $ 95.3 $0.1 $ -- $ 95.2
====== ==== ====== ======
Maturities from 1-5 years:
Municipal securities............................... $346.9 $0.3 $ (3.4) $350.0
Corporate bonds.................................... 118.9 -- (3.2) 122.1
Euro bonds and other............................... 98.5 -- (4.0) 102.5
Mortgage securities................................ 4.7 -- (0.1) 4.8
------ ---- ------ ------
Total maturities from 1-5 years............ $569.0 $0.3 $(10.7) $579.4
====== ==== ====== ======
Maturities from 6-10 years:
Corporate bonds.................................... $ 9.5 $ -- $ (0.1) $ 9.6
------ ---- ------ ------
Total maturities from 6-10 years........... $ 9.5 $ -- $ (0.1) $ 9.6
====== ==== ====== ======
</TABLE>
61
<PAGE> 63
BMC SOFTWARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
AVAILABLE-FOR-SALE SECURITIES
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
--------- ---------- ---------- ------
(IN MILLIONS)
<S> <C> <C> <C> <C>
1999
Maturities within 1 year:
Municipal securities............................... $ 4.5 $ -- $ -- $ 4.5
Auction preferred stock............................ 32.7 -- -- 32.7
------ ----- ----- ------
Total maturities within 1 year............. $ 37.2 $ -- $ -- $ 37.2
====== ===== ===== ======
Maturities from 1-5 years:
Municipal securities............................... $ 40.6 $ 0.8 $ -- $ 41.4
Corporate bonds.................................... 12.1 0.2 -- 12.3
Euro bonds......................................... 38.6 0.2 (0.2) 38.6
Mutual funds and other............................. 18.2 26.6(*) -- 44.8
------ ----- ----- ------
Total maturities from 1-5 years............ $109.5 $27.8 $(0.2) $137.1
====== ===== ===== ======
Maturities from 6-10 years:
Municipal securities............................... $ 37.1 $ 0.5 $ -- $ 37.6
------ ----- ----- ------
Total maturities from 6-10 years........... $ 37.1 $ 0.5 $ -- $ 37.6
====== ===== ===== ======
</TABLE>
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
--------- ---------- ---------- ------
(IN MILLIONS)
<S> <C> <C> <C> <C>
2000
Maturities within 1 year:
Municipal securities............................... $ 4.1 $ -- $ -- $ 4.1
Euro bonds......................................... 3.5 -- -- 3.5
------ ---- ----- ------
Total maturities within 1 year............. $ 7.6 $ -- $ -- $ 7.6
====== ==== ===== ======
Maturities from 1-5 years:
Municipal securities............................... $ 98.2 $ -- $(1.5) $ 96.7
Corporate bonds.................................... 54.1 -- (1.3) 52.8
Euro bonds......................................... 34.9 -- (1.1) 33.8
Mutual funds and other............................. 23.3 2.7 -- 26.0
------ ---- ----- ------
Total maturities from 1-5 years............ $210.5 $2.7 $(3.9) $209.3
====== ==== ===== ======
Maturities from 6-10 years:
Municipal securities............................... $ 16.3 $ -- $(0.3) $ 16.0
Equity securities.................................. 7.5 -- (1.5) 6.0
------ ---- ----- ------
Total maturities from 6-10 years........... $ 23.8 $ -- $(1.8) $ 22.0
====== ==== ===== ======
</TABLE>
---------------
* Includes approximately $21 million of unrealized gain related to ordinary
shares of New Dimension held by Boole prior to the merger. This amount was
eliminated in conjunction with the purchase of New Dimension in April 1999.
See Note 2 -- Technology Acquisitions for further discussion.
The Company's mortgage securities are classified according to the stated
maturities of the securities.
62
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BMC SOFTWARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(4) TRADE FINANCE RECEIVABLES
Trade finance receivables arise in the ordinary course of business to
accommodate customers' cash flow objectives. Most of the trade finance
receivables entered into by the Company are transferred to financing
institutions on a non-recourse basis. The Company records such transfers as
sales of the related accounts receivable when the Company is considered to have
surrendered control of such receivables under the provisions of SFAS No. 125,
"Accounting for Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities." During fiscal 1999 and 2000, the Company transferred financed
receivables of $265.0 million and $451.2 million, respectively, which
approximated fair value, to financing institutions on a non-recourse basis, with
approximately $10 million transferred on a recourse basis during fiscal 1999. As
of March 31, 1999 and 2000, trade finance receivables which have been
transferred to financing institutions and remain outstanding totaled
approximately $448.0 million and $682.7 million, respectively. Such receivables
which have not yet been transferred are classified as trade finance receivables
in the accompanying consolidated balance sheets.
(5) COST OF MAINTENANCE SERVICES AND PRODUCT LICENSES
The components of cost of maintenance services and product licenses for the
years ended March 31, 1998, 1999 and 2000 are as follows:
<TABLE>
<CAPTION>
YEARS ENDED MARCH 31,
------------------------
1998 1999 2000
------ ------ ------
(IN MILLIONS)
<S> <C> <C> <C>
Cost of maintenance services............................... $ 69.0 $ 84.5 $128.0
Amortization of software development costs and related
assets................................................... 33.9 40.8 40.2
Royalties.................................................. 24.8 26.7 9.0
------ ------ ------
$127.7 $152.0 $177.2
====== ====== ======
</TABLE>
(6) SHORT-TERM BORROWINGS
In April 1999, the Company entered into a $500.0 million credit facility
with a consortium of U.S. banks. The facility consists of (a) a 364-day
unsecured revolving credit facility for general corporate purposes with renewal
options by the lenders and with a one-year option granted to the Company to
convert the revolving loans into a one-year term loan, and (b) a competitive bid
facility that allows the Company to request bids from the lenders for loans on a
negotiated basis up to the existing availability under the credit facility.
Interest on the loans under the revolving credit facility is payable monthly and
is accrued at a margin above LIBOR, based on certain financial ratios of the
Company, which approximated 6.75% as of March 31, 2000. The balance outstanding
under the credit facility was $263.0 million as of March 31, 2000, at a weighted
average interest rate of 6.65%, which approximated fair value. The credit
facility includes, among others, covenants regarding maintenance by the Company
of at least $300.0 million in cash and marketable securities and certain
financial ratios.
63
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BMC SOFTWARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(7) INCOME TAXES
Deferred income taxes are recognized for the temporary differences between
the recorded amounts of assets and liabilities for financial reporting purposes
and such amounts for income tax purposes. Research and development tax credits
are accounted for as a reduction of income tax expense in the year realized. The
income tax benefit from nonqualified stock options exercised, wherein the fair
market value at date of issuance is less than that at date of exercise, is
credited to additional paid-in capital.
The provision for income taxes for the years ended March 31, 1998, 1999 and
2000, consisted of the following:
<TABLE>
<CAPTION>
YEARS ENDED MARCH 31,
-----------------------
1998 1999 2000
------ ------ -----
(IN MILLIONS)
<S> <C> <C> <C>
Current:
Federal................................................... $ 65.2 $135.9 $58.7
State..................................................... 1.7 1.8 2.0
Foreign................................................... 17.6 17.7 11.6
------ ------ -----
Total current..................................... 84.5 155.4 72.3
Deferred:
Federal................................................... 20.8 (41.6) (3.4)
State..................................................... (1.1) -- --
Foreign................................................... 0.3 -- --
------ ------ -----
Total deferred.................................... 20.0 (41.6) (3.4)
------ ------ -----
$104.5 $113.8 $68.9
====== ====== =====
</TABLE>
The foreign provision for income taxes is based on foreign pre-tax earnings
of $101.9 million, $131.5 million and $129.8 million for fiscal 1998, 1999 and
2000, respectively.
The income tax provisions for fiscal 1998, 1999 and 2000 differ from the
amounts computed by applying the statutory federal income tax rate of 35% to
consolidated earnings before income taxes as follows:
<TABLE>
<CAPTION>
YEARS ENDED MARCH 31,
------------------------
1998 1999 2000
------ ------ ------
(IN MILLIONS)
<S> <C> <C> <C>
Expense computed at statutory rate......................... $102.5 $167.3 $109.0
Increase (reduction) resulting from:
Foreign tax effect, net.................................. (19.9) (17.8) (37.5)
Tax benefit from foreign sales corporation............... (0.8) (1.2) (1.9)
Income not subject to tax................................ (5.2) (9.9) (8.2)
Non-recurring tax benefit................................ -- (20.0) --
Net change in valuation allowance........................ -- (12.2) --
Other.................................................... 11.8 (4.0) 1.7
------ ------ ------
Subtotal......................................... 88.4 102.2 63.1
Non-deductible charge for acquired research and
development.............................................. 16.1 11.6 5.8
------ ------ ------
$104.5 $113.8 $ 68.9
====== ====== ======
</TABLE>
64
<PAGE> 66
BMC SOFTWARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Deferred income taxes reflect the impact of temporary differences between
the amount of assets and liabilities recognized for financial reporting purposes
and such amounts recognized for income tax purposes. The tax effects of the
temporary differences as of March 31, 1999 and 2000 are presented as follows:
<TABLE>
<CAPTION>
MARCH 31,
---------------
1999 2000
------ ------
(IN MILLIONS)
<S> <C> <C>
Deferred Tax Assets:
Net operating loss carryforwards.......................... $ 16.0 $ 12.7
Deferred revenue.......................................... 35.1 5.7
Acquired research and development......................... 8.0 72.2
Deferred compensation plan................................ 4.4 5.9
Accruals not currently deductible......................... 3.3 1.9
Other..................................................... 5.2 3.3
------ ------
Total gross deferred tax asset.................... 72.0 101.7
------ ------
Valuation allowance....................................... (0.9) (0.9)
------ ------
Total deferred tax asset.......................... 71.1 100.8
------ ------
Deferred Tax Liabilities:
Software capitalization, net.............................. (36.7) (54.1)
Book/tax difference on assets............................. (1.9) (5.0)
Stock compensation plans.................................. (1.3) (1.3)
Foreign earnings and other................................ (4.3) (10.1)
------ ------
Total deferred tax liability...................... (44.2) (70.5)
------ ------
Net deferred tax asset.................................... $ 26.9 $ 30.3
====== ======
As reported:
Net current deferred tax asset......................... $ 19.4 $ 8.6
====== ======
Net long-term deferred tax asset....................... $ 7.5 $ 21.7
====== ======
</TABLE>
Aggregate unremitted earnings of foreign subsidiaries for which U.S.
Federal income taxes have not been provided, totaled approximately $313.1
million and $434.7 million at March 31, 1999 and 2000, respectively. Deferred
income taxes have not been provided on these earnings because the Company
considers them to be indefinitely reinvested.
Prior to the combination, Boole had recorded a valuation allowance to
reflect the estimated amount of deferred tax assets that the Company believed
would not be realized due to the expiration of net operating loss carryforwards.
Due to the combination of BMC and Boole, the Company expects to utilize the net
operating loss carryforwards. Therefore, the tax benefits were recognized and a
portion of the valuation allowance was reduced in fiscal 1999. At March 31,
2000, the Company had federal net operating loss carryforwards of $45.2 million
that will expire between 2003 and 2012. The losses were incurred by a company
acquired by Boole and are subject to limitation.
During fiscal 1999, the Company settled various transfer pricing
adjustments for fiscal years 1993 through 1997 with the Internal Revenue Service
(IRS), for which estimated accruals had been previously established. The Company
recorded a non-recurring benefit to its provision for income taxes for fiscal
1999 to reflect the settlement with the IRS. As of March 31, 2000, the Company
has settled all income tax adjustments with the IRS for all years through fiscal
1995. The Company received a statutory notice of deficiency from the IRS in
December 1999 in which the IRS proposed certain transfer pricing adjustments
that would result in an increase to the Company's federal taxable income for
fiscal 1996. The Company filed a petition in the United
65
<PAGE> 67
BMC SOFTWARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
States Tax Court on March 7, 2000, seeking a determination that the IRS erred in
computing the increases to the Company's federal taxable income for fiscal 1996.
The IRS is examining the Company's federal tax return for fiscal 1997.
Management believes the final resolution of these audits will not have a
material adverse effect on the Company's financial position or results of
operations.
(8) STOCK INCENTIVE PLANS
The Company has adopted numerous stock plans that provide for the grant of
options and restricted stock to employees and directors of the Company. Under
the option plans, all options have been granted at either fair market value or
115% of fair market value as of the date of grant and have a ten-year term. All
options under these plans vest over terms of three to five years. The restricted
stock is subject to transfer restrictions that lapse over five years. Under
these plans, the Company was authorized to grant an additional 7.8 million
shares as of March 31, 2000.
The following is a summary of the stock option activity for the years ended
March 31, 1998, 1999 and 2000 (shares in millions):
<TABLE>
<CAPTION>
1998 1999 2000
---------------------- ---------------------- ----------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
----------- -------- ----------- -------- ----------- --------
<S> <C> <C> <C> <C> <C> <C>
Options outstanding,
beginning of year.......... 31.0 $ 8 28.3 $14 28.3 $21
Options granted.............. 6.4 29 6.1 42 9.8 46
Options exercised............ (7.3) 6 (4.9) 9 (7.3) 12
Options forfeited or
canceled................... (1.8) 9 (1.2) 16 (2.2) 31
----------- ----------- -----------
Options outstanding, end of
year....................... 28.3 8 28.3 21 28.6 31
=========== =========== ===========
Option price range per
share...................... $0.48-49.87 $0.48-63.44 $0.48-80.94
=========== =========== ===========
Options exercisable.......... 8.9 10 11.8 11 9.7 16
=========== =========== ===========
</TABLE>
The following is a summary of the restricted stock activity for the years
ended March 31, 1998, 1999 and 2000:
<TABLE>
<CAPTION>
1998 1999 2000
---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C>
Shares granted and unearned, beginning of year.............. 294 211 204
Shares granted.............................................. 82 66 86
Shares earned............................................... (45) (73) (93)
Shares forfeited............................................ (120) -- (5)
---- --- ---
Shares granted and unearned, end of year.................... 211 204 192
==== === ===
</TABLE>
In fiscal 1997, the Company adopted the BMC Software, Inc. 1996 Employee
Stock Purchase Plan (the Purchase Plan). A total of 1 million shares of common
stock may be issued under the Purchase Plan to participating employees. Purchase
rights under the Purchase Plan are granted at 85% of the lesser of the market
value of the common stock at the offering date or on the exercise date. During
fiscal 1998, 1999 and 2000, approximately 171,000, 278,100 and 243,300 shares of
stock, respectively, were purchased pursuant to this plan. The Purchase Plan
terminates in 2006.
66
<PAGE> 68
BMC SOFTWARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In 1996, BGS adopted the 1995 Employee Stock Purchase Plan (the BGS ESPP).
Under the BGS ESPP, shares of BGS common stock were reserved for purchase by
qualified employees, at 85% of the appropriate market price. The BGS ESPP had a
two-year term with 18,210 shares being offered for purchase in semi-annual
offerings. The BGS ESPP provided that qualified employees may authorize payroll
deductions from 1% to 10% of their base pay to purchase shares at the lower of
the market price in effect on the day the offering starts or the day the
offering terminates. If more than 18,210 shares qualified to be purchased in an
offering, employees received shares on a pro rata basis. During fiscal 1998, BGS
issued 24,077 shares pursuant to this plan. This plan was terminated in
connection with BGS's merger with the Company. Shares previously acquired
pursuant to the plan were converted to the Company's common shares.
SFAS No. 123, "Accounting for Stock-Based Compensation," allows the Company
to account for its employee stock-based compensation plans under APB Opinion No.
25 and the related interpretations. In accordance with APB Opinion No. 25,
deferred compensation is recorded for stock-based compensation grants based on
the excess of the market value of the common stock on the measurement date over
the exercise price. The deferred compensation is amortized to expense over the
vesting period of each unit of stock-based compensation granted. If the exercise
price of the stock-based compensation is equal to or exceeds the market price of
the Company's stock on the date of grant, no compensation expense is recorded.
For fiscal years ended March 31, 1998, 1999 and 2000, the Company recorded
compensation expense of $1.5 million, $2.3 million and $2.7 million,
respectively, for restricted stock grants. The weighted average grant date fair
value per share of restricted stock grants was $52.86, $47.47 and $46.40 for
fiscal 1998, 1999 and 2000, respectively. The Company was not required to record
compensation expense for stock option grants and stock issued under the Purchase
Plan during the same periods.
Had the compensation cost for these plans been determined pursuant to the
alternative method permitted under SFAS No. 123, the Company's net earnings and
earnings per share would have been reduced to the following pro forma amounts:
<TABLE>
<CAPTION>
YEARS ENDED MARCH 31,
------------------------
1998 1999 2000
------ ------ ------
(IN MILLIONS, EXCEPT
PER SHARE DATA)
<S> <C> <C> <C> <C>
Net earnings: As Reported.................................. $188.5 $362.6 $242.5
Pro Forma.................................... $177.1 $332.0 $199.6
Basic EPS: As Reported.................................. $ 0.82 $ 1.55 $ 1.01
Pro Forma.................................... $ 0.77 $ 1.42 $ 0.83
Diluted EPS: As Reported.................................. $ 0.77 $ 1.46 $ 0.96
Pro Forma.................................... $ 0.72 $ 1.34 $ 0.81
</TABLE>
In computing the above pro forma amounts, the fair values of each option
grant and each purchase right under the BGS ESPP and the Purchase Plan are
estimated using the Black-Scholes option pricing model with the following
weighted average assumptions used for grants in fiscal 1998, 1999 and 2000,
respectively: risk-free interest rate of 6%, 6% and 6.7%, expected life of 5
years for options and 6 months for purchase rights under the Purchase Plan,
expected volatility of 40%, 40% and 50% and no expected dividend yields. The
weighted average grant date fair value per share of options granted in fiscal
1998, 1999 and 2000 was $13.36, $21.45 and $23.56, respectively. The weighted
average grant date fair value per share of purchase rights granted under the
Purchase Plan in fiscal 1998, 1999 and 2000 was $6.97, $10.33 and $17.55,
respectively.
67
<PAGE> 69
BMC SOFTWARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company's outstanding options as of March 31, 2000, are segregated into
the following five categories in accordance with SFAS No. 123 (shares in
millions):
<TABLE>
<CAPTION>
OUTSTANDING OPTIONS EXERCISABLE OPTIONS
-------------------------------------------- -------------------------
WEIGHTED
AVERAGE
RANGE OF WEIGHTED AVERAGE REMAINING WEIGHTED AVERAGE
EXERCISE PRICE SHARES EXERCISE PRICE CONTRACTUAL LIFE SHARES EXERCISE PRICE
-------------- ------ ---------------- ---------------- ------ ----------------
<S> <C> <C> <C> <C> <C>
$ 0.48 - 8.38.................. 6.1 $ 6 5 5.0 $ 6
$ 9.06 - 31.72.................. 7.9 $25 7 3.6 $23
$31.74 - 45.96.................. 5.5 $42 9 1.0 $42
$45.97 - 46.09.................. 8.3 $46 10 -- $46
$46.13 - 80.94.................. 0.8 $54 9 0.1 $49
</TABLE>
(9) RETIREMENT PLANS
The Company maintains a salary reduction profit sharing plan, or 401(k)
plan, available to all domestic employees. The 401(k) plan is based on a
calendar year end and allows employees to contribute up to 15% of their annual
compensation with a maximum contribution of $9,500 in calendar year 1997, and
$10,000 in calendar years 1998 and 1999. In each of the calendar years 1997,
1998 and 1999, the board of directors authorized contributions to the 401(k)
plan that would match the employee's contribution up to a maximum of $5,000. The
costs of these contributions to the Company amounted to $7.0 million, $9.8
million and $16.5 million for the fiscal years ended March 31, 1998, 1999 and
2000, respectively. The Company contributions vest to the employee in increments
of 20% per year beginning with the third year of employment and ending with the
seventh.
In addition to the Company's 401(k) plan, the Company maintains a deferred
compensation plan for certain employees. At March 31, 1999 and 2000, a total of
approximately $16.9 million and $24.7 million, respectively, is included in
long-term investment securities, with a corresponding aggregate amount included
in accrued liabilities and unrealized gain (loss) on securities available for
sale. Employees participating in this plan receive their respective balances
based on predetermined payout schedules or upon termination or death.
(10) COMMITMENTS AND CONTINGENCIES
Leases --
The Company has several noncancelable operating leases for office space,
computer equipment and software. Rent is recognized equally over the lease term.
Total expenses incurred under these leases during the years ended March 31,
1998, 1999 and 2000, were approximately $23.8 million, $27.3 million and $38.5
million, respectively.
Future minimum lease payments under noncancelable operating leases as of
March 31, 2000 are:
<TABLE>
<CAPTION>
YEARS
ENDING
MARCH 31,
-------------
(IN MILLIONS)
<S> <C>
2001.................................................... $ 52.7
2002.................................................... 46.0
2003.................................................... 42.0
2004.................................................... 35.1
2005.................................................... 28.2
2006 and thereafter..................................... 70.8
------
Total minimum lease payments.................. $274.8
======
</TABLE>
68
<PAGE> 70
BMC SOFTWARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company leases certain computer equipment under long-term capital
leases. At March 31, 1999 and 2000, obligations under these capital leases were
not significant.
Litigation --
On March 9, 1999, a class action complaint was filed against the Company
and four senior executives alleging violations of Sections 10(b) and 20(a) of
the Securities 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 announcement that the Company was
restating its historical financial results to include BGS's results in the
Company's financial statements as a condition to the Securities and Exchange
Commission declaring effective the registration statement on Form S-4 relating
to the Company's acquisition of Boole. The plaintiffs seek an unspecified amount
of compensatory damages, interest and costs, including legal fees. The action is
subject to the Private Securities Litigation Reform Act of 1995 (the "PSLRA").
The Company denies the allegations of wrongdoing in connection with the matters
set forth in the complaint and intends to vigorously defend the action. The
Company has filed a motion to dismiss the complaint. An unfavorable judgment or
settlement, however, could have a material adverse effect on the Company's
financial position or results of operations. On June 15, 2000, a United States
Magistrate Judge issued an Opinion and Recommendation recommending to the United
States District Judge that the Company's motion to dismiss be granted and that
the case be dismissed. On June 29, 2000, an Order was entered by the United
States District Judge granting the Company's motion to dismiss and dismissing
the complaint. The plaintiffs have the right to appeal this Order.
On February 4, 2000, an action styled Dov Klein v. BMC Software, Inc.,
Richard P. Gardner, Stephen B. Solcher, Roy J. Wilson, Kevin M. Weiss, Kevin M.
Klausmeyer, Max P. Watson Jr., William M. Austin, Wayne S. Morris, M. Brinkley
Morse, Robert E. Beauchamp, and Theodore W. Van Duyn, No. 00-CV-359, was filed
in the United States District Court for the Southern District of Texas, Houston
Division. This is a purported class action filed on behalf of all purchasers of
the Company's securities between July 29, 1999 and January 4, 2000. The
plaintiff alleges that BMC and eleven current and former senior executives
violated Sections 10(b) and 20(a) of the Securities Exchange Act and Rule 10b-5.
The plaintiff contends that BMC and the individual defendants artificially
inflated the Company's stock price prior to the announcement of operating
results for the third quarter of fiscal 2000 by extending unusual payment terms
to purchasers of its products, failing to disclose softening demand and
increasing competition for its products, and failing to disclose difficulties in
managing its sales force. The plaintiff seeks unspecified compensatory damages,
interest and costs, including legal fees. The action is subject to the PSLRA. On
March 9, 2000, the court consolidated four similar actions, ordered that all
subsequently filed similar actions be consolidated, and set out a briefing
schedule. Under the briefing schedule, the defendants are not required to move,
plead, or otherwise respond until 60 days after (1) the court appoints a lead
plaintiff and lead counsel under the PSLRA and (2) an amended complaint is filed
by the plaintiffs. On April 3, 2000, certain plaintiffs filed an application to
be appointed lead plaintiff and lead counsel under the PSLRA. That motion was
granted on June 13, 2000. The Company intends to deny the allegations in the
consolidated complaint and defend the consolidated action vigorously. The
Company anticipates that it will file a motion to dismiss the case. At this
early stage of the litigation, it is not possible to estimate potential damages,
but it appears that if liability were established, an unfavorable judgment or
settlement could have a material adverse effect on the Company's financial
position or results of operations.
The Company is subject to various other legal proceedings and claims,
either asserted or unasserted, which arise in the ordinary course of business.
Management does not believe that the outcome of any of these legal matters will
have a material adverse effect on the Company's financial position or results of
operations.
69
<PAGE> 71
BMC SOFTWARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In October 1999, the Company settled all claims in a lawsuit styled BMC
Software, Inc., plaintiff, vs. Peregrine/Bridge Transfer Corp., Skunkware, Inc.,
Neon Systems, Inc., Peregrine Systems, Inc., Wayne E. Fisher and John J. Moores,
defendants, vs. BMC Software, Inc. and Max P. Watson, counter-defendants. The
settlement comprised a $30 million payment by the Company to certain defendants
and an $8.6 million payment to Neon Systems, Inc. under a software distribution
agreement entered into in connection with the settlement. The $55.4 million
charge for legal settlement in the consolidated statements of earnings and
comprehensive income for fiscal 2000 includes the payments above and legal fees
and other litigation expenses of $16.8 million.
(11) SEGMENT REPORTING
SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information," 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 operates
in a single segment, distributing its enterprise systems management software
products. Although the Company operates in a single segment, 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. Revenue relating to
product categories is as follows:
<TABLE>
<CAPTION>
YEARS ENDED MARCH 31,
----------------------------
1998 1999 2000
------ -------- --------
(IN MILLIONS)
<S> <C> <C> <C>
REVENUES
Mainframe:
License............................................... $440.0 $ 610.5 $ 722.1
Maintenance and services.............................. 275.9 303.3 377.3
------ -------- --------
Total mainframe revenues...................... 715.9 913.8 1,099.4
------ -------- --------
Distributed systems:
License............................................... 218.3 296.4 458.1
Maintenance and services.............................. 51.1 93.7 161.7
------ -------- --------
Total distributed systems revenues............ 269.4 390.1 619.8
------ -------- --------
Total revenues................................ $985.3 $1,303.9 $1,719.2
====== ======== ========
</TABLE>
Mainframe revenues relate to products which operate primarily on the IBM
OS/390 mainframe operating system and databases. Distributed systems revenues
relate to products which operate on Unix and MS Windows NT distributed systems
operating systems and Oracle, Informix, Sybase and SQL distributed systems
databases.
70
<PAGE> 72
BMC SOFTWARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The table below summarizes selected financial information with respect to
the Company's operations by geographic region.
<TABLE>
<CAPTION>
YEARS ENDED MARCH 31,
------------------------------
1998 1999 2000
-------- -------- --------
(IN MILLIONS)
<S> <C> <C> <C>
Revenues:
North America........................................ $ 591.4 $ 792.9 $1,104.5
Europe, Middle East and Africa....................... 329.7 427.0 478.0
Asia Pacific and Other............................... 64.2 84.0 136.7
-------- -------- --------
Consolidated................................. $ 985.3 $1,303.9 $1,719.2
======== ======== ========
Total Assets:
North America........................................ $1,099.8 $1,655.1 $2,237.1
Europe, Middle East and Africa....................... 220.3 592.4 658.4
Asia Pacific and Other............................... 178.0 35.2 66.6
-------- -------- --------
Consolidated................................. $1,498.1 $2,282.7 $2,962.1
======== ======== ========
</TABLE>
Revenues from external customers and long-lived assets (excluding financial
instruments and deferred tax assets) attributed to the United States, the
Company's country of domicile, and all other countries are as follows.
<TABLE>
<CAPTION>
YEARS ENDED MARCH 31,
----------------------------
1998 1999 2000
------ -------- --------
(IN MILLIONS)
<S> <C> <C> <C>
Revenues:
United States......................................... $576.3 $ 761.8 $1,085.9
International......................................... 409.0 542.1 633.3
------ -------- --------
$985.3 $1,303.9 $1,719.2
====== ======== ========
Long-lived Assets:
United States......................................... $ 409.5 $ 945.4
International......................................... 27.2 55.9
-------- --------
$ 436.7 $1,001.3
======== ========
</TABLE>
(12) MERGER RELATED COSTS
Pursuant to the close of BMC'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 redundant positions to achieve
reductions in overhead expenses in future periods. In connection with the merger
and the Plan, at March 31, 1999 the Company accrued approximately $38.3 million
in merger related costs. This accrual included direct transaction costs, such as
investment banking, legal and accounting fees and approximately $5 million for
settlement of a suit brought against Boole for allegedly breaching a standstill
and exclusive negotiating agreement with Platinum Technology International, Inc.
The remainder of the accrual represented management's best estimate, based on
available information as of March 31, 1999, of identifiable and quantifiable
charges that the Company would incur as a result of the actions to be taken
under the Plan. The accrued restructuring charges at March 31, 1999 included
estimates of involuntary termination benefits for 50 domestic employees and 30
international employees, located primarily in Europe, including the executive
management of Boole and various redundant administrative and support personnel.
The accrual also included charges
71
<PAGE> 73
BMC SOFTWARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
for incremental costs to exit certain office lease arrangements, for idle
facilities and for asset writedowns of office furniture and fixtures and
computer hardware. During fiscal 2000, the Company made certain revisions to the
Plan including the following: the termination of approximately 240 additional
employees, primarily in the United States and Europe; the accrual of other
termination benefits which were contingent upon certain performance criteria;
revisions to the original exit strategy for certain operating leases for office
space in the United States and Europe; and the accrual for termination costs for
certain operating leases for computer hardware and equipment. Additionally, in
conjunction with the New Dimension acquisition in fiscal 2000, the Company
accrued $0.4 million for estimated costs to terminate certain operating leases
for duplicate office space. The activity in the accrual for merger related costs
for the year ended March 31, 2000, was as follows:
<TABLE>
<CAPTION>
PAID OUT OR
BALANCE AT REVISION OF CHARGED AGAINST BALANCE AT
MARCH 31, THE THE RELATED MARCH 31,
1999 ACCRUAL ASSETS 2000
---------- ----------- --------------- ----------
(IN MILLIONS)
<S> <C> <C> <C> <C>
Direct transaction costs............... $20.6 $ 2.5 $(23.1) $ --
Facility costs and write-down of fixed
assets to be disposed of............. 10.2 (1.5) (5.3) 3.4
Employee termination benefits.......... 7.0 10.5 (14.3) 3.2
Other merger related costs............. 0.5 2.6 (3.1) --
----- ----- ------ ----
Total accrual................ $38.3 $14.1 $(45.8) $6.6
===== ===== ====== ====
</TABLE>
The restructuring plan was substantially complete as of March 31, 2000. The
remaining accruals primarily relate to severance and lease payments to be made
in future periods.
(13) SUBSEQUENT EVENTS (UNAUDITED)
In April 2000, the Company acquired all of the outstanding shares of Evity
in a transaction accounted for as a purchase. The aggregate purchase price
approximated $67 million, including transaction costs, which will be allocated
primarily to goodwill, acquired technology and intangibles. The transaction
included the issuance of 1.6 million shares of the Company's common stock and
0.4 million stock options issued in replacement of Evity stock options, and
payment of $10.0 million in cash. Of the common stock issued, 0.6 million shares
represent compensation for future services.
In May 2000, the Company entered a definitive merger agreement to acquire
all of the ordinary shares of OptiSystems Solutions, Ltd. for cash of $10 per
share. The transaction is expected to close in August 2000, subject to
OptiSystems shareholder approval, regulatory approval in Israel and other
customary closing conditions.
72
<PAGE> 74
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
We have audited in accordance with auditing standards generally accepted in
the United States, the consolidated financial statements of BMC Software, Inc.
and subsidiaries included in this Form 10-K and have issued our report thereon
dated April 28, 2000. Our audits were made for the purpose of forming an opinion
on the basic consolidated financial statements taken as a whole. This Schedule
is the responsibility of the Company's management and is presented for purposes
of complying with the Securities and Exchange Commission's rules and is not part
of the basic consolidated financial statements. This Schedule has been subjected
to the auditing procedures applied in the audits of the basic consolidated
financial statements and, in our opinion, fairly states in all material respects
the financial data required to be set forth therein in relation to the basic
consolidated financial statements taken as a whole.
ARTHUR ANDERSEN LLP
Houston, Texas
April 28, 2000
73
<PAGE> 75
SCHEDULE II
BMC SOFTWARE, INC. AND SUBSIDIARIES
VALUATION ACCOUNT
YEARS ENDED MARCH 31, 1998, 1999 AND 2000
(IN MILLIONS)
<TABLE>
<CAPTION>
ADJUSTMENT TO
BALANCE AT CHARGED CHARGED CONFORM FISCAL
BEGINNING (CREDIT) TO TO OTHER YEAR END OF BALANCE AT
DESCRIPTION OF YEAR EXPENSES ACCOUNTS DEDUCTION BOOLE & BABBAGE END OF YEAR
----------- ---------- ----------- -------- --------- --------------- -----------
<S> <C> <C> <C> <C> <C> <C>
1998
Allowance for
doubtful
accounts..........
$15.0 $1.5 -- $ (0.4) -- $16.1
1999
Allowance for
doubtful
accounts..........
16.1 5.1 -- (0.9) (0.1) 20.2
2000
Allowance for
doubtful
accounts..........
20.2 21.7 -- (10.4) -- 31.5
</TABLE>
74
<PAGE> 76
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, on June 28, 2000.
BMC SOFTWARE, INC.
By: /s/ MAX P. WATSON JR.
----------------------------------
Max P. Watson Jr.
Chairman of the Board, President
and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURES TITLE DATE
---------- ----- ----
<C> <S> <C>
/s/ MAX P. WATSON JR Chairman of the Board, June 28, 2000
----------------------------------------------------- President and Chief
Max P. Watson Jr. Executive Officer
(Principal Executive
Officer)
/s/ WILLIAM M. AUSTIN Senior Vice President and June 28, 2000
----------------------------------------------------- Chief Financial Officer
William M. Austin
/s/ JOHN W. COX Vice President, Controller June 28, 2000
----------------------------------------------------- (Chief Accounting Officer)
John W. Cox
/s/ JOHN W. BARTER Director June 28, 2000
-----------------------------------------------------
John W. Barter
/s/ B. GARLAND CUPP Director June 28, 2000
-----------------------------------------------------
B. Garland Cupp
/s/ MELDON K. GAFNER Director June 28, 2000
-----------------------------------------------------
Meldon K. Gafner
/s/ L. W. GRAY Director June 28, 2000
-----------------------------------------------------
L. W. Gray
/s/ GEORGE F. RAYMOND Director June 28, 2000
-----------------------------------------------------
George F. Raymond
/s/ TOM C. TINSLEY Director June 28, 2000
-----------------------------------------------------
Tom C. Tinsley
</TABLE>
75
<PAGE> 77
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
3.1 -- Restated Certificate of Incorporation of the Company;
incorporated by reference to Exhibit 3.1 to the Company's
Registration Statement on Form S-1 (Registration No.
33-22892) (the "S-1 Registration Statement").
3.2 -- Certificate of Amendment of Restated Certificate of
Incorporation; incorporated by reference to Exhibit 3.2
to the Company's Annual Report for the fiscal year ended
March 31, 1997 (the "1997 10-K").
3.3 -- Bylaws of the Company; incorporated by reference to
Exhibit 3.2 to the S-1 Registration Statement.
4.1 -- Specimen Stock Certificate for the Common Stock of the
Company; incorporated by reference to Exhibit 4.1 to the
S-1 Registration Statement.
4.2 -- Rights Agreement, dated as of May 8, 1995, between the
Company and The First National Bank of Boston, as Rights
Agent (the "Rights Agreement"), specifying the terms of
the Rights, which includes the form of Certificate of
Designation of Series A Junior Participating Preferred
Stock as Exhibit A, the form of Right Certificate as
Exhibit B and the form of the Summary of Rights as
Exhibit C (incorporated by reference to Exhibit 1 to the
registrant's Registration Statement on Form 8-A dated May
10, 1995).
4.3 -- Amendment to the Rights Agreement; incorporated by
reference to Exhibit 4.3 to the 1997 10-K.
10.1(a) -- Form of BMC Software, Inc. 1994 Employee Incentive Plan;
incorporated by reference to Exhibit 10.7(a) to the
Company's Annual Report on Form 10-K for the fiscal year
ended March 31, 1995 (the "1995 10-K").
10.1(b) -- Form of Stock Option Agreement employed under BMC
Software, Inc. 1994 Employee Incentive Plan; incorporated
by reference to Exhibit 10.7(b) to the 1995 10-K.
10.2(a) -- Form of BMC Software, Inc. 1994 Non-employee Directors'
Stock Option Plan; incorporated by reference to Exhibit
10.8(a) to the 1995 10-K.
10.2(b) -- Form of Stock Option Agreement employed under BMC
Software, Inc. 1994 Non-employee Directors' Stock Option
Plan; incorporated by reference to Exhibit 10.8(b) to the
1995 10-K.
10.3 -- Description of BMC Software, Inc. Executive Officer
Annual Incentive Plan; incorporated by reference to
Exhibit 10.6 to the Company's Annual Report on Form 10-K
for the fiscal year ended March 31, 1994.
10.4 -- Form of Stock Option Agreement employed under BMC
Software, Inc. 1994 Employee Incentive Plan for certain
executive officers.
10.5 -- Form of Restricted Stock Agreement employed under BMC
Software Inc. 1994 Employee Incentive Plan for certain
executive officers.
10.6 -- Form of Indemnification Agreement among the Company and
its directors and executive officers; incorporated by
reference to Exhibit 10.11 to the 1995 10-K.
10.7 -- Credit Agreement dated April 13, 1999 among the Company
and various financial institutions; incorporated by
reference to Exhibit 99.1 to the Company's Current Report
on Form 8-K dated April 28, 1999.
10.8(a) -- BMC Software, Inc. 1994 Deferred Compensation Plan;
incorporated by reference to Exhibit 4.1 to the Company's
Current Report on Form 8-K dated April 2, 1999.
</TABLE>
<PAGE> 78
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
10.8(b) -- First Amendment to BMC Software, Inc. 1994 Deferred
Compensation Plan; incorporated by reference to Exhibit
4.2 to the Company's Current Report on Form 8-K dated
April 2, 1999.
10.8(c) -- Form of BMC Software, Inc. 1994 Deferred Compensation
Plan Trust Agreement; incorporated by reference to
Exhibit 4.3 to the Company's Current Report on Form 8-K
dated April 2, 1999.
*21.1 -- Subsidiaries of the Company.
*23.1 -- Consent of Arthur Andersen LLP.
*23.2 -- Consent of Ernst & Young LLP.
*27 -- Financial Data Schedule.
</TABLE>
---------------
* Filed herewith.
