-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, NkKRhdFeBa9okydPHT/tD0SHCqfZ6aavZauozG2lgFSMzez3OocyOvlCv5bD2E8s FHnZkBbwslHPgCsPZ/bIxA== 0000950129-99-000682.txt : 19990225 0000950129-99-000682.hdr.sgml : 19990225 ACCESSION NUMBER: 0000950129-99-000682 CONFORMED SUBMISSION TYPE: 10-Q/A PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980630 FILED AS OF DATE: 19990224 FILER: COMPANY DATA: COMPANY CONFORMED NAME: BMC SOFTWARE INC CENTRAL INDEX KEY: 0000835729 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-PREPACKAGED SOFTWARE [7372] IRS NUMBER: 742126120 STATE OF INCORPORATION: DE FISCAL YEAR END: 0331 FILING VALUES: FORM TYPE: 10-Q/A SEC ACT: SEC FILE NUMBER: 000-17136 FILM NUMBER: 99548186 BUSINESS ADDRESS: STREET 1: 2101 CITYWEST BLVD CITY: HOUSTON STATE: TX ZIP: 77042-2827 BUSINESS PHONE: 7139188800 MAIL ADDRESS: STREET 1: 2101 CITYWEST BLVD CITY: HOUSTON STATE: TX ZIP: 77042-2827 10-Q/A 1 BMC SOFTWARE, INC. - DATED 06/30/98 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q/A Amendment 1 (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 1998 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from __________________ to __________________ Commission file number 0-17136 BMC SOFTWARE, INC. (Exact name of registrant as specified in its charter) Delaware 74-2126120 (State or other jurisdiction of (IRS Employer identification No.) incorporation or organization) BMC Software, Inc. 2101 CityWest Boulevard Houston, Texas 77042 (Address of principal executive officer) (Zip Code) Registrant's telephone number including area code: (713)918-8800 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ----- ----- As of August 12, 1998, there were outstanding 215,266,385 shares of Common Stock, par value $.01, of the registrant. 2 BMC SOFTWARE, INC. AND SUBSIDIARIES Quarter Ended June 30, 1998 The Registrant hereby amends the Form 10-Q for the quarterly period ended June 30, 1998. This amendment is the result of an acquisition of BGS Systems, Inc. (BGS) which had been accounted for as an immaterial pooling of interests transaction for which prior periods were not restated to reflect BGS operations in the Registrant's Form 10-Q for the quarterly period ended June 30, 1998. The restatement resulted from a change in the Registrant's evaluation of the materiality of BGS's results of operations and financial position relative to the Registrant's prior period financial statements. INDEX
Page ---- PART I. FINANCIAL INFORMATION Item 1. Financial Statements 3 Condensed Consolidated Balance Sheets March 31, 1998 and June 30, 1998 (Unaudited) 3 Condensed Consolidated Statements of Earnings Three months ended June 30, 1997 and 1998 (Unaudited) 5 Condensed Consolidated Statements of Cash Flows Three months ended June 30, 1997 and 1998 (Unaudited) 6 Notes to Condensed Consolidated Financial Statements 7 Item 2. Management's Discussion and Analysis of Results of Operations and Financial Condition 9 SIGNATURES 23
2 3 Part I. FINANCIAL INFORMATION Item 1. Financial Statements BMC SOFTWARE, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (in thousands)
March 31, June 30, ASSETS 1998 1998 ---------- ---------- (Unaudited) Current assets: Cash and cash equivalents $ 72,093 $ 154,453 Investment securities 56,174 58,483 Trade accounts receivable 170,778 163,483 Income tax receivable 40,805 -- Prepaid expenses and other 34,028 48,014 ---------- ---------- Total current assets 373,878 424,433 Property and equipment, net 162,996 179,315 Software development costs, net 63,475 70,851 Purchased software, net 32,063 33,899 Investment securities 587,806 732,391 Deferred charges and other assets 28,277 33,418 ---------- ---------- $1,248,495 $1,474,307 ========== ==========
See accompanying notes to condensed consolidated financial statements. 3 4 BMC SOFTWARE, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (in thousands) (continued)
March 31, June 30, LIABILITIES AND STOCKHOLDERS' EQUITY 1998 1998 ----------- ----------- (Unaudited) Current liabilities: Trade accounts payable $ 11,361 $ 8,501 Accrued liabilities and other 81,352 107,711 Current portion of deferred revenue 242,821 316,050 ----------- ----------- Total current liabilities 335,534 432,262 Long-term liabilities: Deferred revenue 110,350 156,711 Other long-term liabilities 43,454 48,641 ----------- ----------- Total long-term liabilities 153,804 205,352 ----------- ----------- Total liabilities 489,338 637,614 Stockholders' equity: Common stock 2,101 2,173 Additional paid-in capital 129,134 126,122 Retained earnings 729,889 788,535 Foreign currency translation adjustment (1,543) (1,448) Unrealized gain on securities available for sale 3,179 4,507 ----------- ----------- 862,760 919,889 Less treasury stock 99,513 78,397 Less unearned portion of restricted stock compensation 4,090 4,799 ----------- ----------- Total stockholders' equity 759,157 836,693 ----------- ----------- $ 1,248,495 $ 1,474,307 =========== ===========
See accompanying notes to condensed consolidated financial statements. 4 5 BMC SOFTWARE, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS (in thousands, except per share data) (Unaudited)
Three Months Ended June 30, 1997 1998 --------- -------- Revenues: Licenses $ 113,875 $160,505 Maintenance 56,153 65,100 --------- -------- Total revenues 170,028 225,605 Operating expenses: Selling and marketing 50,337 64,862 Research and development 21,875 33,829 Cost of maintenance services and product licenses 20,982 22,905 General and administrative 12,102 16,202 Acquired research and development and related costs 60,272 17,304 --------- -------- Total operating expenses 165,568 155,102 --------- -------- Operating income 4,460 70,503 Other income 6,276 9,944 --------- -------- Earnings before taxes 10,736 80,447 Income taxes 19,085 21,801 --------- -------- Net earnings (loss) $ (8,349) $ 58,646 ========= ======== Basic earnings (loss) per share $ (.04) $ 0.27 ========= ======== Shares used in computing basic earnings (loss) per share 209,689 214,132 ========= ======== Diluted earnings per share $ (.04) $ 0.26 ========= ======== Shares used in computing diluted earnings per share 223,983 227,414 ========= ========
See accompanying notes to condensed consolidated financial statements. 5 6 BMC SOFTWARE, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) (Unaudited)
Three Months Ended June 30, 1997 1998 --------- --------- Cash flows from operating activities: Net earnings (loss) $ (8,349) $ 58,646 Adjustments to reconcile net earnings to net cash provided by operating activities: Acquired research and development costs 60,272 17,304 Depreciation and amortization 12,084 11,767 Net change in receivables, payables and other items 25,096 163,751 --------- --------- Total adjustments 97,452 192,822 --------- --------- Net cash provided by operating activities 89,103 251,468 Cash flows from investing activities: Technology acquisitions, net of cash acquired (51,187) (2,000) Purchased software and related assets (947) (495) Capital expenditures (13,020) (21,744) Capitalization of software development (9,583) (11,168) Purchases of securities held to maturity (14,973) (154,239) Proceeds from securities held to maturity 9,893 8,673 (Increase) decrease in long-term finance receivables (224) (5,249) --------- --------- Net cash used in investing activities (80,041) (186,222) Cash flows from financing activities: Income tax reduction relating to stock options 6,227 10,138 Dividends paid (1,881) -- Stock options exercised 6,607 6,881 Treasury stock acquired (933) -- --------- --------- Net cash used in financing activities 10,020 17,019 Effect of exchange rate changes on cash 116 95 --------- --------- Net change in cash and cash equivalents 19,198 82,360 Cash and cash equivalents at beginning of period 89,790 72,093 --------- --------- Cash and cash equivalents at end of period $ 108,988 $ 154,453 ========= ========= Supplemental disclosure of cash flow information: Cash paid for income taxes $ 3,362 $ --
See accompanying notes to condensed consolidated financial statements. 6 7 BMC SOFTWARE, INC. AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements Note 1 - Basis of Presentation The accompanying condensed consolidated financial statements include the accounts of BMC Software, Inc. and its wholly owned subsidiaries (collectively, the "Company"). All significant intercompany balances and transactions have been eliminated in consolidation. The accompanying unaudited interim condensed consolidated financial statements reflect all adjustments (consisting of normal recurring accruals) which, in the opinion of management, are necessary for a fair presentation of the results for the interim periods presented. These financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. These financial statements should be read in conjunction with the Company's annual audited financial statements for the year ended March 31, 1998, as filed with the Securities and Exchange Commission on Form 10-K. Note 2 - Earnings Per Share The Company presents its earnings per share in accordance with Statement of Financial Accounting Standards (SFAS) No. 128, "Earnings Per Share". SFAS No. 128 requires dual presentation of earnings per share (EPS); basic EPS and diluted EPS. Basic EPS excludes dilution and is computed by dividing net income by the weighted average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock. For purposes of this calculation, outstanding stock options and unearned restricted stock are considered common stock equivalents using the treasury stock method. The following table summarizes the basic EPS and diluted EPS computations for the three months ended June 30, 1997 and 1998 (in thousands, except per share amounts): 7 8 BMC SOFTWARE, INC. AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements
Three Months Ended June 30, 1997 1998 --------- -------- Basic earnings per share: Net earnings $ (8,349) $ 58,646 --------- -------- Weighted average number of common shares 209,689 214,132 --------- -------- Basic earnings per share $ (.04) $ 0.27 ========= ======== Diluted earnings per share: Net earnings $ (8,349) $ 58,646 --------- -------- Weighted average number of common shares 209,689 214,132 Incremental shares from assumed conversions- stock options and other 14,294 13,282 --------- -------- Adjusted weighted average number of common shares 223,983 227,414 --------- -------- Diluted earnings per share $ (.04) $ 0.26 ========= ========
Note 3 - Stock Split On April 20, 1998, the Company's board of directors declared a two-for-one stock split. The stock split was effected in the form of a stock dividend. The stockholders of record received one share of common stock for each share held. All stock related data in the condensed consolidated financial statements and related notes reflect this stock split for all periods presented. Note 4 - Comprehensive Income In June 1997, the Financial Accounting Standards Board (FASB) issued SGAS No. 130, "Reporting Comprehensive Income". SGAS No. 130 requires the presentation of a Comprehensive Income Statement that is to be presented with other general financial statements. This statement is effective for the Company's fiscal year end 1999. The following table sets forth the calculation of comprehensive income for the following periods:
Three Months Ended June 30, 1997 1998 --------- -------- (in thousands) Net earnings $ (8,349) $ 58,646 Foreign currency translation gains/losses 166 95 Unrealized gain on securities available for sale 2,342 1,328 --------- -------- Total comprehensive income $ (5,841) $ 60,069 ========= ========
8 9 Item 2. Management's Discussion and Analysis of Results of Operations and Financial Condition This section of the Form 10-Q includes historical information for the periods covered, certain forward looking information and the information provided below under the heading "Certain Risks and Uncertainties That Could Affect Future Operating Results" about certain risks and uncertainties that could cause the Company's future operating results to differ from the results indicated by any forward looking statements made by the Company or others. It is important that the historical discussion below be read together with the attached condensed consolidated financial statements and notes thereto, with the discussion of such risks and uncertainties and with the audited financial statements and notes thereto, and the Management's Discussion and Analysis of Results of Operations and Financial Condition, contained in the Company's Form 10-K for fiscal 1998. A. HISTORICAL INFORMATION RESULTS OF OPERATION The following table sets forth, for the periods indicated, the percentages that selected items in the Condensed Consolidated Statements of Earnings bear to total revenues. These comparisons of financial results are not necessarily indicative of future results.
Percentage of Total Revenues ---------------------------- Three Months Ended June 30, 1997 1998 ---------- ---------- Revenues: License 67.0% 71.1% Maintenance 33.0 28.9 ---------- ---------- Total revenues 100.0 100.0 Operating expenses: Selling and marketing 29.6 28.7 Research and development 12.9 15.0 Cost of maintenance services and product licenses 12.3 10.1 General and administrative 7.1 7.2 Acquired research and development costs 35.5 7.7 ---------- ---------- Operating income 2.6 31.3 Other income 3.7 4.4 ---------- ---------- Earnings before taxes 6.3 35.7 Income taxes 11.2 9.7 ---------- ---------- Net earnings (loss) (4.9)% 26.0% ========== ==========
9 10 BMC SOFTWARE, INC. AND SUBSIDIARIES Management's Discussion and Analysis of Results of Operations and Financial Condition (continued) REVENUES
Three Months Ended June 30, (in thousands) 1997 1998 Change -------- -------- -------- North American license revenues $ 80,205 $114,252 42.4% International license revenues 33,670 46,253 37.4% -------- -------- Total license revenues 113,875 160,505 40.9% Maintenance revenues 56,153 65,100 15.9% -------- -------- Total revenues $170,028 $225,605 32.7% ======== ========
Product Line Revenues The Company's products for the IBM OS/390 mainframe environment accounted for approximately 81% and 75% of total revenues in the quarters ended June 30, 1997 and 1998. The database utilities and administrative tools for IBM's IMS and DB2 database management systems comprise the largest portion of the Company's mainframe-based and total revenues. These product lines accounted for 61% and 55% of total revenues in the first quarters of fiscal 1998 and 1999, respectively and 62% and 53% of license revenues for the same periods. Total revenues and license revenues from these product lines grew 19% and 22%, respectively in the first quarter of fiscal 1999. The Company's other products for the mainframe environment contributed 20% of total revenues for both periods presented and 16% and 19% of license revenues for the quarters ended June 30, 1997 and 1998, respectively. Total revenues and license revenues for the Company's other mainframe products grew 35% and 70%, respectively, in the first quarter of fiscal 1999. The Company's distributed systems product lines comprise the PATROL application and database management solutions, the BEST/1 performance management products, the PATROL DB database administration products and the Company's high-performance database backup and recovery solutions. In total, these product lines contributed 19% and 25% of total revenues for the quarters ended June 30, 1997 and 1998, respectively and 22% and 28% of license revenues for the same periods. Total revenues for these product lines grew 75% and license revenues grew 72% in the first quarter of fiscal 1999. 10 11 BMC SOFTWARE, INC. AND SUBSIDIARIES Management's Discussion and Analysis of Results of Operations and Financial Condition (continued) License Revenues The Company's license revenues include product license fees and capacity-based license upgrade fees. Product license fees are generated from the initial licensing of a product and subsequent licenses purchased under the Company's per copy, central processing unit ("CPU") tier-based licensing program. Product license fees also include fees associated with the initial licensing of a product on an aggregate processing capacity measured on a millions of instructions per second ("MIPS") basis. Capacity-based license upgrade fees have, to date, been generated almost exclusively by the Company's mainframe products. These fees are charged when a customer acquires the right to run an already licensed product on additional processing capacity, as measured by CPU tier or by MIPS. Customers may purchase this right for current processing capacity or anticipated future processing capacity. The Company's North American operations generated 70% of total license revenues in the quarter ended June 30, 1997 and 71% for the corresponding quarter ended June 30, 1998. The 42% increase in North American license revenues is primarily attributable to increased licensing of the Company's distributed systems products and increased capacity-based license upgrade fees. International license revenues represented 30% and 29% of total license revenues for the quarters ended June 30, 1997 and 1998, respectively. The 37% increase in International license revenues is primarily attributable to increased capacity-based license upgrade fees and increased licensing of the Company's distributed systems products. Capacity-based upgrade fees include fees for both current and future additional processing capacity. The sustainability and growth of the Company's mainframe-based license revenues are dependent upon these capacity-based license upgrade fees, particularly within its largest customer accounts. Most of the Company's largest customers have entered into enterprise license agreements allowing them to install the Company's products on unspecified CPUs, subject to a maximum limit on the aggregate power of the CPUs as measured in MIPS. As companies increase their MIPS within their mainframe environment, they may elect to increase or decrease the number of underlying CPU's. Regardless of which approach is utilized, additional fees are due if the MIPS limit is exceeded. 11 12 BMC SOFTWARE, INC. AND SUBSIDIARIES Management's Discussion and Analysis of Results of Operations and Financial Condition (continued) Substantially all of these transactions include upgrade charges associated with additional processing capacity beyond the customer's current usage level and some include license fees for additional products. The fees associated with future additional mainframe processing capacity typically comprise from one-half to substantially all of the license fees included in the enterprise license transaction. The Company has experienced a strong increase in demand from its largest customers for the right to run its products on increased current and anticipated mainframe processing capacity as enterprises invest heavily in their core OS/390 mainframe IT systems. This trend has led to larger single transactions with higher per MIPS discounts. The Company expects that it will continue to be dependent upon these capacity-related license revenue components. With the rapid advancement of distributed systems technology and customers' needs for more functional and open applications, such as pre-packaged ERP applications, to replace legacy systems, there can be no assurance that the demand for mainframe processing capacity or the higher operating efficiencies afforded by the Company's products will continue at current levels. Should this trend slow dramatically or reverse, it would adversely impact the Company's mainframe license revenues and its operating results. Maintenance and Support Revenues Maintenance and support revenues represent the ratable recognition of fees to enroll licensed products in the Company's software maintenance, enhancement and support program. Enrollment entitles customers to product enhancements, technical support services and ongoing compatibility with third-party operating systems, database management systems and applications. These fees are generally charged annually and equal 15% to 20% of the list price of the product at the time of renewal, less any applicable discounts. Maintenance revenues also include the ratable recognition of the bundled fees for any first-year maintenance services covered by the related perpetual license agreement. The Company continues to invest heavily in product maintenance and support and believes that maintaining its reputation for superior product support is a key component of its value pricing model. Maintenance revenues have increased over the last three fiscal years as a result of the continuing growth in the base of installed products and the processing capacity on which they run. Maintenance fees increase as the processing capacity on which the products are installed increases; consequently, the Company receives higher absolute maintenance fees as customers install its products on additional processing capacity. Due to increased discounting at higher levels of additional processing capacity, the maintenance fees on a per MIPS basis are typically reduced in enterprise license agreements. Historically, the Company has enjoyed high maintenance renewal rates for its mainframe-based products. Should customers migrate from their mainframe applications or find alternatives to the Company's products, increased cancellations could adversely impact the sustainability and growth of the Company's maintenance revenues. To date, the Company has been successful in extending its traditional maintenance and support pricing model to the distributed systems market. At this time, there is insufficient historical data to determine whether customers will continue to accept this pricing model and renew their maintenance and support contracts at the levels experienced in the mainframe market.
Three Months Ended June 30, ------------------ (in thousands) 1997 1998 Change -------- -------- ------ Selling and marketing expenses $ 50,337 $ 64,862 28.9 % Research and development expenses 21,875 33,829 54.6 % Cost of maintenance services and product licenses 20,982 22,905 9.2 % General and administrative expenses 12,102 16,202 33.9 % Acquired research and development 60,272 17,304 (71.3)% -------- -------- Total operating expenses $165,568 $155,102 (6.3)% ======== ========
12 13 BMC SOFTWARE, INC. AND SUBSIDIARIES Management's Discussion and Analysis of Results of Operations and Financial Condition (continued) Selling And Marketing The Company's selling and marketing expenses include personnel and related costs, sales commissions and costs associated with advertising, industry trade shows and sales seminars. Personnel costs were the largest single contributor to the expense growth in the first quarter of fiscal 1999. This increase was primarily attributable to significant increases in the Company's distributed systems sales representatives and technical sales support consultants. Sales commissions increased in the first quarter of fiscal 1999 as a result of the 41% increase in license revenues. Ongoing commission plan adjustments held sales commission expense growth below license revenue growth. Marketing costs have continued to increase to meet the requirements of marketing a greater number of increasingly complex distributed systems products and of supporting a growing indirect distribution channel. Other contributors to the increase were significantly higher levels of travel and trade show activity and the opening of additional field sales offices. Research And Development Research and development expenses mainly comprise personnel costs related to software developers and development support personnel, including software programmers, testing and quality assurance personnel and writers of technical documentation such as product manuals and installation guides. These expenses also include computer hardware/software costs and telecommunications expenses necessary to maintain the Company's data processing center. Increases in the Company's research and development expenses in the first quarter of fiscal 1999 were the result of increased compensation costs associated with both software developers and development support personnel, as well as associated benefits and facilities costs. Research and development costs were reduced by amounts capitalized in accordance with Statement of Financial Accounting Standards (SFAS) No. 86. The Company capitalizes its software development costs when the projects under development reach technological feasibility as defined by SFAS No. 86. During the first quarter of fiscal 1998 and 1999, the Company capitalized approximately $9,584,000 and $11,168,000, respectively, of software development costs. The growth in capitalized costs is primarily due to increases in new distributed systems product development, the porting of distributed systems products to alternate environments and in increased integration development activity. Cost of Maintenance Services and Product Licenses Cost of maintenance services and product licenses consists of amortization of purchased and internally developed software, costs associated with the maintenance, enhancement and support of the Company's products and royalty fees. Growth in the cost of maintenance services and product licenses from the first quarter of fiscal 1998 to the first quarter of fiscal 1999 was primarily attributable to increases in customer support employees and purchased software amortization. Maintenance costs are increasing as a percentage of maintenance fees as the Company's revenue mix shifts to distributed 13 14 BMC SOFTWARE, INC. AND SUBSIDIARIES Management's Discussion and Analysis of Results of Operations and Financial Condition (continued) systems. The Company amortized $4,693,000 and $3,792,000 in the first quarter of fiscal 1998 and 1999, respectively, of capitalized software development costs pursuant to SFAS No. 86. In these periods, the Company expensed $2,900,000 and $1,094,000, respectively, of capitalized software development costs to accelerate the amortization of certain software products. These software products were not expected to generate sufficient future revenues which would be required for the Company to realize the carrying value of the assets. The Company expects its cost of maintenance services and product licenses will continue to increase as the Company capitalizes a higher level of software development costs and as the Company builds its distributed systems product support organization, which is less cost-effective than its mainframe support organization because of the complexity and variability of the environments in which the products operate. The distributed systems products operate in a high number of operating environments, including operating systems, DBMSs and ERP applications and require greater ongoing platform support development activity relative to the Company's OS/390 mainframe products. General and Administrative General and administrative expenses are comprised primarily of compensation and personnel costs within executive management, finance and accounting, product distribution, facilities management and human resources. Other expenses included in general and administrative expenses are fees paid for legal and accounting services, consulting projects, insurance and costs of managing the Company's foreign currency exposure. Growth in general and administrative expenses from the first quarter of fiscal 1998 to the first quarter of fiscal 1999 was largely due to increased personnel costs and higher costs associated with the related infrastructure to support the Company's growth. Acquired Research and Development and Related Costs The Company incurred acquired in-process research and development (IPR&D) costs for the three months ended June 30, 1997 and 1998 of $60,272,000 and $17,304,000, respectively. These technology charges related to the acquisition of DataTools and acquisitions of in-process technologies. The following table presents information, in thousands, concerning the purchase price allocations for the acquisitions accounted for under the purchase method for the three months ended June 30, 1997 and 1998.
Goodwill and Total Company Name Software Acquired IPR&D Other Price ------------ -------- -------------- -------- ----- Fiscal 1998: DataTools $15,000 $54,372 $ 3,628 $73,000 Sento 1,800 5,900 -- 7,700 ------- ------- ------- ------- $16,800 $60,272 $ 3,628 $80,700 ======= ======= ======= ======= Fiscal 1999: Nastel $ -- $ 6,000 $ -- $ 6,000 Envive 6,400 11,304 -- 17,704 ------- ------- ------- ------- $ 6,400 $17,304 $ -- $23,704 ======= ======= ======= =======
The Company acquired DataTools in May 1997, for an aggregate purchase price of $73 million. DataTools owns certain Relational Database Management Systems (RDBMS) specific back-up products that were sold as stand-alone products. Its' flagship product is called SQL Backtrack (SQL-BT). DataTools was in the process of developing numerous products and enhanced versions of products, including next generation versions of SQL-BT for the Informix platform (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 14 15 purchase price to developed technology, workforce and goodwill. The Company allocated approximately $54.4 million to acquired IPR&D. The most significant four specific development projects, which comprised $40.6 million (74%) of the acquired IPR&D, pertained to the above mentioned projects. The primary remaining efforts associated with the IPR&D included code completion in several key areas, such as logical extraction and piecemeal back-up and recovery, large database support and performance-related functionality. As of the acquisition date, the expected costs to complete the IPR&D were, on a calendar year basis, approximately $2.9 million in 1997, $4.7 million in 1998, $2.1 million in 1999, and $729,000 in 2000. The Company has made significant progress towards the completion of most of the underlying IPR&D projects. With respect to the estimated completion costs, the Company is below these forecasted amounts as a result of decisions to terminate certain of the IPR&D projects (such as the SBS/I project noted below) and more efficient development efforts than anticipated. The following summarizes the four primary projects pertaining to the DataTools IPR&D. The Company spent approximately $700,000 through March 31, 1998 on the SBM product in addition to the approximate $750,000 spent by DataTools prior to the acquisition. The Company released this product in April 1998. The SBO product was released in June 1998 for both the NT and Unix environments. The IPR&D was successfully completed resulting in new functionality in several areas, including back-up and recovery scheduling, remote BU&R, archive log management and a graphical user interface. The Company spent approximately $1.7 million in completing these technologies subsequent to the DataTools acquisition. BMC abandoned the SBS/I project, on which DataTools had spent approximately $1 million in research and development. BMC made this decision based on concerns over market demand and the allocation of Sybase resources to the core Sybase product. The Company spent less than $500,000 on this technology prior to deciding to cancel this development project. The Company spent approximately $1 million on SBI through March 31, 1998, in addition to the approximate $500,000 spent by DataTools prior to the transaction. As a result, Version 2.0 of this product was released in April 1998. In June 1997, the Company acquired technology from Sento Technical Innovations, Inc. The Company has since abandoned the technology and expensed the entire purchase price. In the latter part of fiscal 1998, the Company was in the process of designing a middleware management product to assist customers with optimizing middleware performance and with handling enterprise environmental changes. In this regard, in April 1998, the Company acquired a license from Nastel Technologies, Inc. (Nastel) for certain infrastructure source code for use in its MQ management product that was under development, but had not yet reached technological feasibility. Accordingly, the Company allocated the entire $6 million purchase price to IPR&D. BMC completed the acquired IPR&D by creating an effective installation routine, developing an automated MQ configuration routine, fortifying the underlying Nastel database and modifying the code to work in environments with complementary management products. Upon completion of the IPR&D, the Company completed the initial related product after developing efficient data collection, user interface and business logic code. The Company expects to incur approximately $1.6 million in development costs prior to the planned release of its middleware management product in the third quarter of fiscal 1999. In June 1998, BMC entered into a technology agreement with Envive Corporation (Envive) primarily to strengthen BMC's ERP business management solutions to provide better diagnostic and correlation ability, service level management and end-to-end monitoring capability. The Company also secured the rights to distribute certain products in the SAP management market. The Company's committed costs associated with the transaction approximated $17.7 million. The Company allocated 15 16 $6.4 million of the transaction to software assets, prepaid royalties and interest. The remaining $11.3 million was allocated to acquired IPR&D which had not reached technological feasibility as of the date of the transaction. The Company believes the acquired IPR&D is approximately 45% complete towards development of end-to-end and service level management functionality across the major ERP platforms, but there is no assurance that it will be successful in developing such marketable technology. The Company expects costs to complete the IPR&D will approximate $250,000 in fiscal 1999, $1,900,000 in fiscal 2000 and $400,000 in fiscal 2001. The values assigned to acquired IPR&D in the above mentioned transactions were generally determined by estimating the costs to develop the purchased in-process technology into commercially viable products, estimating the resulting net cash flows from the projects and discounting the net cash flows to their present value. The revenue projections used to value the acquired in-process research and development were based on estimates of relevant market sizes and growth factors, expected trends in technology, and the nature and expected timing of new product introductions by the Company and its competitors. Operating expenses were estimated based on historical results and anticipated profit margins. Due to purchasing power increases and general economies of scale, estimated operating expenses as a percentage of revenues were, in some cases, estimated to decrease after the acquisitions. The rates utilized to discount the net cash flows to their present value were based on cost of capital calculations. Due to the nature of the forecast and risks associated with the projected growth, profitability and the developmental nature of the projects, discount rates of 16% to 20% were used to value the acquired IPR&D. These discount rates were commensurate with the respective stage of development and the uncertainties in the economic estimates described above. If the acquired IPR&D projects are not successfully completed, the Company's business, operating results, and financial condition may be materially adversely affected in future periods. In addition, the value of other intangible assets acquired may become impaired. 16 17 BMC SOFTWARE, INC. AND SUBSIDIARIES Management's Discussion and Analysis of Results of Operations and Financial Condition (continued) OTHER INCOME For the first quarter of fiscal 1999, other income was $9,944,000, reflecting an increase of 59% over $6,270,000 of other income in the same quarter of fiscal 1998. Other income consists primarily of interest earned on tax-exempt municipal securities, euro bonds, corporate bonds, mortgage securities and money market funds. The increase in other income is primarily due to an increase of approximately 63% in cash and investment securities from June 30, 1997 to June 30, 1998. INCOME TAXES For the first quarter of fiscal 1999, income tax expense was $21,801,000 compared to $19,085,000 for the same quarter in fiscal 1998. The Company's income tax expense represents the federal statutory rate of 35%, plus certain state taxes, reduced by the benefit from the Company's Foreign Sales Corporation, the effect of tax exempt interest earned from cash investments, the effect of tax deductions on certain technology acquisitions and foreign income taxes. LIQUIDITY AND CAPITAL RESOURCES The Company has financed its growth through funds generated from operations. As of June 30, 1998, the Company had cash, cash equivalents and investment securities of $945,327,000. The Company did not repurchase any shares on the open market during the first quarter of fiscal 1999 as its stock repurchase program was rescinded by the board of directors in connection with the pooling of interests transaction with BGS Systems, Inc. As of June 30, 1998, the Company has authorization from its Board of Directors, to acquire up to 3,764,800 shares of its common stock pursuant to the Company's stock repurchase program. The Company believes that existing cash balances and funds generated from operations will be sufficient to meet its liquidity requirements for the foreseeable future. B. CERTAIN RISKS AND UNCERTAINTIES THAT COULD AFFECT FUTURE OPERATING RESULTS. Management's Discussion and Analysis of Results of Operations and Financial Condition contain certain forward looking statements within the meaning of Sections 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Act of 1934, as amended, which are identified by the use of the words "believes," "expects," "anticipates," "will," "contemplates" and "would" and similar expressions that contemplate future events. Numerous important factors, risks and uncertainties affect the Company's operating results and could cause the Company's actual results to differ materially from the results implied by these or any other forward looking statements made by, or on behalf, of the Company. There can be no assurance that future results will meet expectations. These important factors, risks and uncertainties include, but are not limited to, those described in the following paragraphs and in the discussion in the Company's March 31, 1998 Annual Report under the heading 17 18 BMC SOFTWARE, INC. AND SUBSIDIARIES Management's Discussion and Analysis of Results of Operations and Financial Condition (continued) "Business," including, without limitation, the discussion under the subheading "Competition, System Dependence." The Company's stock price has historically been highly volatile. Future revenues, earnings and stock prices may be subject to wide swings in response to variations in operating and financial results, anticipated revenue and/or earnings growth rates, competitive pressures and other factors. The stock price of software companies in general, and the Company in particular, is based on expectations of sustained future revenue and earnings growth rates. Any failure to meet anticipated revenue and earnings levels in a period or any negative change in the Company's perceived long-term growth prospects would likely have a significant adverse effect on the Company's stock price. The growth rates of the Company's license revenues, total revenues, net earnings and earnings per share, excluding charges for acquired research and development and merger costs, have accelerated over the last 24 months. The Company's current valuation reflects expectations based on these higher rates of growth. The Company may not achieve, in future periods, these relatively higher rates of growth. The timing and amount of the Company's license revenues are subject to a number of factors that make estimation of operating results prior to the end of a quarter extremely uncertain. The Company generally operates with little or no sales backlog and, as a result, license revenues in any quarter are dependent upon contracts entered into or orders booked and shipped in that quarter. Most of the Company's mainframe and distributed systems license sales are closed at the end of each quarter, and there has been and continues to be a trend toward larger enterprise license transactions, which can have sales cycles of up to a year or more and require approval by a customer's upper management. These transactions are typically difficult to manage and predict. Failure to close an expected individually significant transaction could cause the Company's revenues and earnings in a period to fall short of expectations. Other factors that may cause significant fluctuations in the Company's quarterly revenues include competition, industry or technological trends, customer budgetary decisions, mainframe processing capacity growth, general economic conditions or uncertainties, mainframe industry pricing and other trends, announcements of new hardware or software products, the timing of price increases and the factors described in this section of the Form 10-Q. The Company generally does not know whether revenues and earnings will meet expected results until the final days or day of a quarter. The Company derived approximately 72% of its total revenues in fiscal 1998 from software products for IBM and IBM-compatible mainframe computers; approximately 54% of total revenues and a higher percentage of earnings were contributed by the Company's high availability utilities for IMS and DB2 administration products. IBM continues to focus on reducing the overall software costs associated with the OS/390 mainframe platform. Further, IBM continues, directly and through third parties, to improve its base and enhanced utilities for IMS and DB2 to provide lower cost alternatives to those provided by the Company and other independent software vendors. IBM has significantly increased its level of activity in the IMS and DB2 high speed utility markets over the last twelve months. The Company has traditionally maintained sufficient performance and functional advantages over 18 19 BMC SOFTWARE, INC. AND SUBSIDIARIES Management's Discussion and Analysis of Results of Operations and Financial Condition (continued) IBM's base utilities to justify its pricing differential although there can be no assurance that it will continue to maintain such advantages. Fees from enterprise license transactions remain fundamental components of the Company's revenues and the primary source of mainframe revenues. These revenues depend on the Company's customers' continuing to perceive an increasing need to use the Company's existing software products on substantially greater mainframe processing capacity in future periods. The Company believes that the demand for enterprise licenses has been driven by customers' recommitment over the last 24 to 36 months to the OS/390 mainframe platform for large scale, transaction intensive information systems. Whether this trend will continue is difficult to predict. If the Company's customers' processing capacity growth were too slow and/or if such customers were to perceive less relative benefit from the Company's current mainframe products, the Company's revenues would be adversely affected. The charging of upgrade fees based on CPU tier classifications is standard among mainframe systems software vendors, including IBM. While the Company believes its current pricing policies properly reflect the value provided by its products, the pricing of mainframe systems software is under constant pressure from customers and competitive vendors, including IBM. IBM continues to reduce the costs of its mainframe systems software to increase the overall cost competitiveness of its mainframe hardware and software products. IBM also generally charges significantly less for its software products. These actions continue to increase pricing pressures within the mainframe systems software markets. The Company has continued to reduce the cost of its mainframe tools and utilities in response to these and other competitive pressures. The Company's operating expenses are to a large extent fixed in the short term so that the Company has very limited ability to adjust its planned expenses if revenues fail to meet expectations. If near-term demand for the Company's products weakens in a given quarter or if forecasted large transactions fail to close, there would likely be an immediate, material adverse effect on net revenues and operating results and a resultant drop in its stock price. The Company's operating margins (exclusive of charges for acquired research and development and merger costs) have ranged between 39% and 40% for fiscal years ended March 31, 1996, 1997 and 1998, which is at the high-end of the range for peer companies. The Company does not expect future margin expansion. Further, since research and development, sales, support and distribution costs for distributed systems software products are higher than for mainframe products, operating margins will experience more pressure as the mix of the Company's business continues its shift to distributed systems revenues. The Company has historically realized greater revenues and net earnings in the latter half of its fiscal year; the quarter ending December 31 coincides with the end of customers' annual budgetary periods and the quarter ending March 31 coincides with the end of the Company's annual sales plans and fiscal year. For the same reasons, the Company has typically reported lower or flat revenues in 19 20 ] BMC SOFTWARE, INC. AND SUBSIDIARIES Management's Discussion and Analysis of Results of Operations and Financial Condition (continued) the first two quarters of a fiscal year compared to the last two quarters of the previous year, resulting in lower operating margins in the first two quarters. The Company historically has generated greater revenues in the third and fourth quarters while maintaining lower rates of expense growth and expanded operating margins in the first two quarters. Past financial performance is not a reliable indicator of future performance, and there can be no assurance that this pattern will be maintained. Future operating results are also dependent on sustained performance by the Company's international offices, particularly its European operations. Revenue growth by the Company's European operations has been slower than revenue growth in North America. There can be no assurance that the Company will be successful in accelerating the revenue growth of its European operations. The Company's operations and financial results internationally could be significantly adversely affected by several risks such as changes in foreign currency exchange rates, sluggish regional economic conditions and difficulties in staffing and managing international operations. Many systems and applications software vendors are experiencing difficulties internationally. In particular, the recent Asian economic crisis has resulted in customer budget cuts and financial uncertainty. Less than 5% of the Company's revenues are generated in the Pacific Rim region. In fiscal 1998, the Company announced several executive management and organizational changes involving its Chief Operating Officer, Senior Vice President, Research and Development, and Senior Vice President, European Sales. The Company may make other management and organizational changes in the future. Organizational and management changes are intended to enhance competitiveness, productivity and execution; however, there can be no assurance that they will produce the desired results. The Company's growth prospects depend heavily on the continued success of its existing distributed systems products, including PATROL, the recently acquired BGS and DataTools products and those anticipated to be introduced in the future. The distributed systems and application management markets in which the Company operates are emerging, fragmented and highly competitive. The Company has experienced long development cycles and product delays in the past, particularly with certain of its distributed systems products, and expects to have delays in the future. Delays in new mainframe or distributed systems product introductions or less-than-anticipated market acceptance of these new products are possible and would have an adverse affect on the Company's revenues and earnings. New products or new versions of existing products may, despite testing, contain undetected errors or bugs that will delay the introduction or adversely affect commercial acceptance of such products. The enterprise systems management market that the Company's distributed systems products address is characterized by rapid change and intense competition that continues to increase as vendors within the broader markets converge. Certain of the Company's competitors and potential competitors have significantly greater financial, technical, sales and marketing resources than the Company and greater experience in distributed systems development and sales. A key factor in determining the success of the Company's products, particularly its 20 21 BMC SOFTWARE, INC. AND SUBSIDIARIES Management's Discussion and Analysis of Results of Operations and Financial Condition (continued) distributed systems offerings, will be their ability to interoperate and perform well with existing and future leading database management systems and other systems software products supported by the Company's products. Maintaining this interoperability has greatly increased the complexity and cost of the Company's product development and support activities. While the Company believes its products that address this market, including those under development, will compete effectively, this market will be relatively unpredictable over the next few years and there can be no assurance that anticipated results will be achieved. When the Company acquired BGS, it also announced its ASA strategy. The ASA strategy contemplates the development of solutions suites that will ensure the availability, performance and recoverability of an ERP, DBMS or operating system. These solution suites will contain several of the Company's existing products as well as those acquired in the BGS acquisition. The Company intends to design these solution suites to provide customers with a common look and feel for all included products. There can be no assurance that these integration efforts involving separate and distinct products, including those acquired from BGS, will be successful. Also, given the recent announcement of this strategy, the Company cannot predict its acceptance by customers. With the acquisition of DataTools in May 1997 and BGS in March 1998, the Company has initiated efforts to integrate the disparate cultures, employees, systems and products. In both acquisitions, retention of key employees is critical to ensure the continued advancement, development, support, sales and marketing efforts pertaining to the acquired products. The Company has implemented retention programs to keep many of the key technical, sales and marketing employees. The Company has also elected to retain the principal offices of both DataTools and BGS and has reorganized the management structure at both of these locations. The Company has not historically managed significant, fully staffed business units at locations different from the Company's headquarters. As a result, the Company may experience additional difficulties in integrating its management policies and practices into DataTool's and BGS's operations. The Company has lost key employees that were acquired in these acquisitions, especially at DataTools. The loss of the key employees to date has not been detrimental to the Company's product integration plans, although further losses could cause the product integrations to be significantly delayed. Integration of DataTools SQL-BackTrack products is critical to the completion of the Company's backup, recovery, and restoration strategy. As noted above, integration of BGS's BEST/1 products with PATROL is also critically important to the ASA Strategy. Successful integration of these complex software products having different origins is difficult to predict and achieve. There can be no assurance that these product integrations will meet expectations or be successful. Microsoft has continued its focus on developing operating systems, systems management products and databases that will provide "business-critical" levels of functionality and reliability. Specifically, Microsoft is aggressively promoting its BackOffice family of software products, including its MS Windows NT operating system and its SQL Server relational database management systems, as lower cost alternatives to the Unix operating systems coupled with relational database management systems from Oracle, Sybase, Informix and other vendors. Microsoft has significantly lower software 21 22 BMC SOFTWARE, INC. AND SUBSIDIARIES Management's Discussion and Analysis of Results of Operations and Financial Condition (continued) price points in some of the Company's markets, which could place additional pricing pressure on the Company. Further, Microsoft could choose to develop competing products for use within MS Windows NT environments. The Company has invested and intends to continue to invest in the development of systems management products for MS Windows NT and BackOffice environments, but there are numerous uncertainties associated with the Company's ability to successfully execute this strategy. Litigation seeking to enforce patents, copyrights and trade secrets is increasing in the software industry. There can be no assurance that third parties will not assert that their patent or other proprietary rights are violated by products offered by the Company. Any such claims, with or without merit, can be time consuming and expensive to defend and could have an adverse effect on the Company's business, results of operations, financial position and cash flows. The Company recognizes the need to ensure its operations will not be adversely impacted by the Year 2000. Software failures due to processing errors potentially arising from calculations using the Year 2000 date are a known risk. The Company is designing and testing the most current versions of its products to process Year 2000 data without interruption or errors and believes that these versions are substantially Year 2000 compliant. The Company may experience migration costs for customers who are not running current versions of its products. The Company is continually testing its products to ensure Year 2000 support and compliance; there can be no assurance, however, that despite such testing, undetected errors or defects will not exist that could cause a product to fail to process Year 2000 data correctly. The Company's products are typically used in high volume information systems that are critical to a customer's operations, so that business interruptions, loss or corruption of data or other major problems could have significant adverse consequences to the customer. At this time, the Company is not aware of any material operational issues or costs associated with Year 2000 compliance of its own products. The Company is also addressing the Year 2000 risk to the availability, integrity and the reliability of its own internal information systems. The Company has a low volume of transactions and operates within a modern infrastructure. Accordingly, the Company does not believe that the cost of Year 2000 remediation will have a material adverse effect on the Company's results of operations or financial condition. There are no assurances, however, that there will not be a delay in, or increased cost associated with, the implementation of such changes, and the Company's inability to implement such changes could have an adverse effect on future results of operations. Factors that could cause unusual costs and delays include the availability and cost of personnel trained in this area, the ability to locate and correct all relevant computer code and other uncertainties. The European Union's adoption of the euro single currency raises a variety of issues associated with the Company's European operations. Although the transition will be phased in over several years, the euro will become Europe's single currency on January 1, 1999. The Company is assessing euro issues related to its product pricing, contracts, treasury operations and accounting systems. Although the evaluation of these items is still in process, the Company believes that the hardware and software systems it uses internally will accommodate this transition and any required policy or operating changes will not have a material adverse effect on future results. 22 23 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. BMC SOFTWARE, INC. Date: February 22, 1999 By:/S/ Max P. Watson Jr. ------------------ --------------------- Max P. Watson Jr. Chairman of the Board, President and Chief Executive Officer Date: February 22, 1999 By:/S/ William M. Austin ------------------ --------------------- William M. Austin Senior Vice President and Chief Financial Officer Date: February 22, 1999 By:/S/ Kevin M. Klausmeyer ------------------ ----------------------- Kevin M. Klausmeyer Chief Accounting Officer 23 24 INDEX TO EXHIBITS
EXHIBIT NUMBER DESCRIPTION - ------- ----------- EX-27 Financial Data Schedule
EX-27 2 RESTATED FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE COMPANY'S UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE MONTHS ENDED JUNE 30, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 3-MOS MAR-31-1999 APR-01-1998 JUN-30-1998 154,453 790,874 197,484 (10,534) 0 424,433 261,076 (81,761) 1,474,307 432,262 0 0 0 2,173 834,520 1,474,307 160,505 225,605 22,905 155,102 0 0 0 80,447 21,801 58,646 0 0 0 58,646 0.27 0.26
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