1
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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 DECEMBER 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 0-17136
BMC SOFTWARE, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 74-2126120
(State or other jurisdiction of (IRS Employer identification No.)
incorporation or organization)
BMC SOFTWARE, INC.
2101 CITYWEST BOULEVARD
HOUSTON, TEXAS 77042
(Address of principal executive officer) (Zip Code)
Registrant's telephone number including area code: (713) 918-8800
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
As of February 7, 2000, there were outstanding 244,183,392 shares of Common
Stock, par value $.01, of the registrant.
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2
BMC SOFTWARE, INC. AND SUBSIDIARIES
QUARTER ENDED DECEMBER 31, 1999
The Registrant hereby amends the Form 10-Q for the quarterly period ended
December 31, 1999.
This amendment is the result of a computational error discovered by the
Registrant after the Form 10-Q for the quarterly period ended December 31, 1999
was filed. This computational error caused the Company's elimination of
pre-billed deferred maintenance revenue to be overstated. The dollar effect of
the computational error on the December 31, 1999 balance sheet is as follows:
Current portion of deferred revenue increased from $332.4 million to $367.8
million. Deferred revenue and other increased from $302.5 million to $307.6
million and Trade accounts receivable, net increased from $234.9 million to
$275.4 million. Accordingly, the Registrant is voluntarily filing a revised
December 31, 1999 balance sheet reflecting these changes. This computational
error did not result in a change in revenues, earnings per share, cash flows or
any other portion of the financial statements for the quarterly period ended
December 31, 1999 or the financial statements for any previous quarterly
period.
INDEX
PAGE
----
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements................................ 3
Condensed Consolidated Balance Sheets as of
March 31, 1999 and December 31, 1999 (Unaudited).... 3
Condensed Consolidated Statements of Earnings and
Comprehensive Income for the three months and
nine months ended December 31, 1998 and 1999
(Unaudited)......................................... 4
Condensed Consolidated Statements of Cash Flows
for the nine months ended December 31, 1998 and 1999
(Unaudited)......................................... 5
Notes to Condensed Consolidated Financial
Statements.......................................... 6
ITEM 2. Management's Discussion and Analysis of Results of
Operations and Financial Condition.................. 10
ITEM 3. Quantitative and Qualitative Disclosures about
Market Risk......................................... 21
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings................................... 23
ITEM 6. Exhibits and Reports on Form 8-K.................... 23
SIGNATURES.......................................... 24
2
3
PART I.
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
BMC SOFTWARE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
ASSETS
MARCH 31, DECEMBER 31,
1999 1999
---------- ----------
(UNAUDITED)
Current assets:
Cash and cash equivalents ....................................... $ 347,914 $ 105,143
Investment securities ........................................... 106,292 94,025
Trade accounts receivable, net .................................. 178,388 275,353
Trade finance receivables, current .............................. 180,614 165,484
Deferred tax asset .............................................. 19,363 12,641
Prepaid expenses and other ...................................... 40,854 144,518
---------- ----------
Total current assets .................................... 873,425 797,164
Property and equipment, net ....................................... 244,359 316,576
Software development costs, net ................................... 110,136 144,896
Purchased software, net ........................................... 32,766 139,768
Investment securities ............................................. 750,427 847,690
Deferred tax asset ................................................ 7,473 16,455
Long-term finance receivables ..................................... 223,977 206,911
Goodwill and other intangibles, net ............................... 2,494 359,014
Deferred charges and other assets ................................. 37,636 30,759
---------- ----------
Total assets ............................................ $2,282,693 $2,859,233
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Trade accounts payable .......................................... $ 27,310 $ 30,605
Accrued commissions payable ..................................... 31,944 29,632
Accrued liabilities and other ................................... 142,120 109,911
Accrued merger related costs .................................... 38,305 16,891
Short-term debt ................................................. -- 320,000
Current portion of deferred revenue ............................. 411,172 367,763
---------- ----------
Total current liabilities ............................... 650,851 874,802
Deferred revenue and other ...................................... 297,477 307,608
---------- ----------
Total liabilities ....................................... 948,328 1,182,410
Stockholders' equity:
Common stock .................................................... 2,366 2,413
Additional paid-in capital ...................................... 185,831 392,659
Retained earnings ............................................... 1,143,131 1,287,479
Accumulated other comprehensive income (loss) ................... 8,762 (39)
---------- ----------
1,340,090 1,682,552
Less unearned portion of restricted stock compensation .......... 5,725 5,689
---------- ----------
Total stockholders' equity .............................. 1,334,365 1,676,823
---------- ----------
$2,282,693 $2,859,233
========== ==========
See accompanying notes to condensed consolidated financial statements.
3
4
BMC SOFTWARE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
AND COMPREHENSIVE INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
DECEMBER 31, DECEMBER 31,
---------------------------- ----------------------------
1998 1999 1998 1999
----------- ----------- ----------- -----------
Revenues:
Licenses ...................................... $ 240,575 $ 288,257 $ 631,114 $ 850,624
Maintenance ................................... 103,552 138,087 286,231 392,183
----------- ----------- ----------- -----------
Total revenues ........................ 344,127 426,344 917,345 1,242,807
----------- ----------- ----------- -----------
Operating expenses:
Selling and marketing ......................... 105,559 158,567 290,928 455,367
Research and development ...................... 39,182 54,555 117,464 161,365
Cost of maintenance services and product
licenses ................................... 38,339 43,731 106,268 121,880
General and administrative .................... 27,327 37,423 68,545 101,434
Acquired research and development costs ....... -- -- 17,304 80,800
Amortization of goodwill and intangibles ...... 1,058 36,218 3,176 102,837
Legal settlement .............................. -- 16,558 -- 55,384
Merger related costs .......................... -- 433 -- 14,336
----------- ----------- ----------- -----------
Total operating expenses .............. 211,465 347,485 603,685 1,093,403
----------- ----------- ----------- -----------
Operating income ................................ 132,662 78,859 313,660 149,404
Interest expense ................................ -- (5,840) -- (18,980)
Interest and other income ....................... 16,369 16,505 45,772 50,416
----------- ----------- ----------- -----------
Other income, net ............................... 16,369 10,665 45,772 31,436
----------- ----------- ----------- -----------
Earnings before taxes ........................... 149,031 89,524 359,432 180,840
Income taxes .................................... 39,034 20,362 97,243 36,492
----------- ----------- ----------- -----------
Net earnings .......................... $ 109,997 $ 69,162 $ 262,189 $ 144,348
=========== =========== =========== ===========
Basic earnings per share ........................ $ 0.47 $ 0.28 $ 1.12 $ 0.60
=========== =========== =========== ===========
Shares used in computing basic earnings
per share ..................................... 234,831 242,749 234,004 239,956
=========== =========== =========== ===========
Diluted earnings per share ...................... $ 0.44 $ 0.27 $ 1.05 $ 0.57
=========== =========== =========== ===========
Shares used in computing diluted earnings
per share ..................................... 248,830 255,435 248,672 252,786
=========== =========== =========== ===========
Comprehensive Income:
Net earnings .................................. $ 109,997 $ 69,162 $ 262,189 $ 144,348
Foreign currency translation adjustment,
net of taxes of $154, $(616), $1,458
and $1,124 ................................... 438 (1,755) 4,151 3,200
Unrealized gain (loss) on securities
available for sale:
Gross unrealized gain (loss), net of
taxes of $2,846, $(1,176), $3,473 and
$1,904 ...................................... 8,099 (3,347) 9,883 5,418
Realized (gain) loss included in net
earnings, net of taxes of $(60), $210,
$(650) and $(130) ........................... (170) 596 (1,850) (370)
----------- ----------- ----------- -----------
Net unrealized gain (loss) on
securities available for sale ............ 7,929 (2,751) 8,033 5,048
Unrealized gain on derivative instruments:
Gross unrealized gain, net of
taxes of $-- , $(940), $-- and $1,147 ..... -- 2,676 -- 3,264
Realized (gain) loss included in net earnings,
net of taxes of $-- , $320, $-- and
$(115) .................................... -- 910 -- (328)
----------- ----------- ----------- -----------
Net unrealized gain (loss) on
derivative instruments .............. -- 1,766 -- 2,936
----------- ----------- ----------- -----------
Comprehensive income .................. $ 118,364 $ 66,422 $ 274,373 $ 155,532
=========== =========== =========== ===========
See accompanying notes to condensed consolidated financial statements.
4
5
BMC SOFTWARE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
NINE MONTHS ENDED
DECEMBER 31,
------------------------
1998 1999
--------- ---------
Cash flows from operating activities:
Net earnings .......................................... $ 262,189 $ 144,348
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Acquired research and development and merger
related costs ..................................... 17,304 80,800
Depreciation and amortization ....................... 56,627 135,959
Loss on sale/disposal of fixed assets ............... 42 --
Gain on sale/disposal of investments ................ (3,449) (1,306)
Stock issued under compensatory stock plans ......... 98 (21)
Net change in receivables, payables, deferred
revenue and other components of working
capital ........................................... 116,666 (206,101)
--------- ---------
Total adjustments ................................ 187,288 9,331
--------- ---------
Net cash provided by operating activities ..... 449,477 153,679
--------- ---------
Cash flows from investing activities:
Technology acquisitions, net of cash acquired ......... (6,638) (635,501)
Purchased software and related assets ................. (4,661) (1,658)
Capital expenditures .................................. (82,769) (72,576)
Capitalization of software development ................ (50,208) (54,435)
Purchases of securities held to maturity .............. (293,802) (168,666)
Proceeds from securities held to maturity ............. 52,988 88,108
(Increase) decrease in long-term finance
receivables ......................................... (7,314) 42,295
--------- ---------
Net cash used in investing activities ......... (392,404) (802,433)
--------- ---------
Cash flows from financing activities:
Proceeds from borrowings .............................. -- 498,825
Repayments of borrowings .............................. (1,366) (180,000)
Stock options exercised and other ..................... 19,743 82,834
Treasury stock acquired ............................... (25,068) --
Proceeds from issuance of Boole common stock .......... 5,921 --
--------- ---------
Net cash provided by financing activities ..... (770) 401,659
--------- ---------
Adjustment to conform quarter end of Boole .............. 7,388 --
Effect of exchange rate changes on cash ................. 4,529 4,324
--------- ---------
Net change in cash and cash equivalents ................. 68,220 (242,771)
Cash and cash equivalents at beginning of period ........ 106,016 347,914
--------- ---------
Cash and cash equivalents at end of period .............. $ 174,236 $ 105,143
========= =========
Supplemental disclosure of cash flow information:
Cash paid for interest ................................ $ 2,508 $ 14,189
Cash paid for income taxes ............................ $ 23,121 $ 30,775
See accompanying notes to condensed consolidated financial statements.
5
6
BMC SOFTWARE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 -- BASIS OF PRESENTATION
The accompanying condensed consolidated financial statements include the
accounts of BMC Software, Inc. and its wholly owned subsidiaries (collectively,
"BMC" or the "Company"). All significant intercompany balances and transactions
have been eliminated in consolidation. Certain reclassifications have been made
to the condensed consolidated financial statements for prior years to conform
with the current presentation.
The accompanying unaudited interim condensed consolidated financial
statements reflect all normal recurring adjustments that, in the opinion of
management, are necessary for a fair presentation of the results for the interim
periods presented. These financial statements have been prepared in accordance
with generally accepted accounting principles for interim financial information
and with the instructions to Form 10-Q and Article 10 of Regulation S-X.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for complete financial statements.
These financial statements should be read in conjunction with the Company's
annual audited financial statements for the year ended March 31, 1999 as filed
with the Securities and Exchange Commission ("SEC") on Form 10-K.
Effective March 30, 1999 the Company merged with Boole & Babbage, Inc.
("Boole") in a pooling of interests transaction. The Company's results of
operations for the three months and nine months ended December 31, 1998 have
been restated to include the historical results of operations of Boole for the
same period.
The Company acquired New Dimension Software, Ltd. ("New Dimension")
effective April 14, 1999, in a purchase transaction. The Company's financial
results for the three months and nine months ended December 31, 1999, include,
respectively, the financial results of New Dimension for the three months ended
December 31, 1999 and for the period beginning April 14, 1999 through December
31, 1999. See Note 3 -- Technology Acquisition for further discussion regarding
the New Dimension acquisition and for the unaudited pro forma financial
information.
NOTE 2 -- EARNINGS PER SHARE
The Company presents its earnings per share in accordance with Statement of
Financial Accounting Standards ("SFAS") No. 128, "Earnings Per Share." SFAS No.
128 requires dual presentation of earnings per share ("EPS"); basic EPS and
diluted EPS. Basic EPS is computed by dividing net income by the weighted
average number of common shares outstanding for the period. Diluted EPS reflects
the potential dilution that could occur if securities or other contracts to
issue common stock were exercised or converted into common stock. For purposes
of this calculation, outstanding stock options and unearned restricted stock are
considered common stock equivalents using the treasury stock method. The
following table summarizes the basic EPS and diluted EPS computations for the
three months and nine months ended December 31, 1998 and 1999 (in thousands,
except per share amounts):
THREE MONTHS ENDED NINE MONTHS ENDED
DECEMBER 31, DECEMBER 31,
--------------------- ---------------------
1998 1999 1998 1999
-------- -------- -------- --------
Basic earnings per share:
Net earnings .................................. $109,997 $ 69,162 $262,189 $144,348
Weighted average number of common shares ...... 234,831 242,749 234,004 239,956
-------- -------- -------- --------
Basic earnings per share ...................... $ 0.47 $ 0.28 $ 1.12 $ 0.60
======== ======== ======== ========
Diluted earnings per share:
Net earnings .................................. $109,997 $ 69,162 $262,189 $144,348
Weighted average number of common shares ...... 234,831 242,749 234,004 239,956
Incremental shares from assumed conversion
of stock options and other .................. 13,999 12,686 14,668 12,830
-------- -------- -------- --------
Adjusted weighted average number of common
shares ..................................... 248,830 255,435 248,672 252,786
-------- -------- -------- --------
Diluted earnings per share .................... $ 0.44 $ 0.27 $ 1.05 $ 0.57
======== ======== ======== ========
6
7
NOTE 3 -- TECHNOLOGY ACQUISITION
On April 14, 1999, the Company acquired, through a public tender offer, in
excess of 95% of the outstanding ordinary shares of New Dimension. Total
consideration paid approximated $673 million, including the cost of the
remaining approximately 5% of the outstanding shares acquired during the quarter
ended September 30, 1999. The acquisition was accounted for as a purchase
transaction, and the purchase price was allocated as follows: $126 million to
software assets, $436 million to goodwill and other intangibles and $30 million
to equipment, receivables and other non-software assets, net of liabilities
assumed. Additionally, BMC allocated $81 million, or 12% of the purchase price,
to purchased in-process research and development ("IPR&D"), which was charged to
expense in the June 1999 quarter. Purchased IPR&D represents the present value
of the estimated after-tax cash flows expected to be generated by purchased
technology that, at the acquisition date, had not yet reached technological
feasibility. The cash flow estimates for revenues were based on estimates of
relevant market sizes and growth factors, expected industry trends, the
anticipated nature and timing of new product introductions by the Company and
its competitors, individual product sales cycles and the estimated life of each
products' underlying technology. Estimated operating expenses and income taxes
were deducted from estimated revenue projections to arrive at estimated
after-tax cash flows. Estimated operating expenses included cost of goods sold,
selling and marketing expenses, general and administrative expenses and research
and development expenses, including estimated costs to maintain the products
once they have been introduced into the market and are generating revenue. The
rates utilized to discount to present value the estimated cash flows were 20%
for in-process technologies and 15% for developed technologies and were based
primarily on venture capital rates of return and the weighted average cost of
capital for BMC at the time of the acquisition.
As of the date of acquisition, the Company concluded that the IPR&D had no
alternative future use after taking into consideration the potential use of the
technology in different products, the stage of development and life cycle of
each project, resale of the software and internal use. Refer to "Acquired
Research and Development and Related Costs" in Management's Discussion and
Analysis of Results of Operations and Financial Condition for further discussion
of the Company's IPR&D charges.
In order to fund the purchase price for New Dimension, the Company entered
into a 364-day, unsecured revolving credit facility with a group of banks on
which the Company drew down approximately $500 million of short-term borrowings.
See Note 5 -- Short-term Borrowings for further discussion regarding the credit
facility. The remaining consideration was satisfied from the Company's existing
working capital. Additionally, the purchase price includes the Company's
historical cost of approximately $2 million for 452,800 shares of New Dimension
held by Boole, a wholly owned subsidiary of the Company, prior to the
acquisition. Such shares would have been valued at approximately $24 million
based on the $52.50 per share tender offer price.
The following unaudited pro forma results of operations for the three
months and nine months ended December 31, 1998 and 1999 are presented as if the
acquisition of New Dimension had occurred at the beginning of each period
presented. The pro forma information includes New Dimension's financial results
for the three months and nine months ended September 30, 1998 and December 31,
1999, respectively, combined with the accounts of the Company for the three
months and nine months ended December 31, 1998 and 1999, respectively.
THREE MONTHS ENDED NINE MONTHS ENDED
DECEMBER 31, DECEMBER 31,
------------------------- -------------------------
1998 1999 1998 1999
---------- ---------- ---------- ----------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Total revenues(1) ................. $ 364,892 $ 426,344 $ 970,748 $1,245,701
Total operating expenses(1)(2) .... $ 262,117 $ 347,485 $ 749,541 $1,021,659
Net earnings(2) ................... $ 73,699 $ 69,162 $ 150,498 $ 188,241
Basic EPS(2) ...................... $ 0.31 $ 0.28 $ 0.64 $ 0.78
Shares used in computing Basic
EPS ............................. 234,831 242,749 234,004 239,956
Diluted EPS(2) .................... $ 0.30 $ 0.27 $ 0.61 $ 0.74
Shares used in computing
Diluted EPS ....................... 248,830 255,435 248,672 252,786
- ----------
(1) Includes the elimination of $3.9 million and $10.2 million for the three
months and nine months, respectively, ended December 31, 1998, of royalties
paid by the Company to New Dimension.
(2) The pro forma results of operations exclude the effects of the $80.8
million ($56.6 million, net of taxes) write-off of IPR&D associated with
the acquisition, in accordance with generally accepted accounting
principles.
7
8
NOTE 4 -- STOCK SPLIT
On April 20, 1998, the Company's board of directors declared a two-for-one
stock split. The stock split was effected in the form of a stock dividend. The
stockholders of record received one additional share of common stock for each
share held. All stock related data in the condensed consolidated financial
statements and related notes reflect this stock split for all periods presented.
NOTE 5 -- SHORT-TERM BORROWINGS
In April 1999, the Company entered into a 364-day unsecured revolving
credit facility (the "Credit Facility") with a group of banks. The Company drew
down approximately $500 million on the Credit Facility during the June 1999
quarter to fund the New Dimension acquisition. Interest on the outstanding
balance is payable monthly and is accrued at LIBOR plus 75 basis points, which
approximated 7.0% as of December 31, 1999, and has averaged 6.4% over the period
outstanding. The Company holds a renewal option on the Credit Facility, which,
if exercised, will enable the Company to convert the outstanding balance at the
end of the initial 364-day period into a one-year term loan. The Company has
repaid $180 million of outstanding principal as of December 31, 1999.
NOTE 6 -- ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
The Company adopted SFAS No. 133, "Accounting for Derivative Instruments
and Hedging Activities" at the beginning of the fourth quarter of fiscal 1999.
The Statement established accounting and reporting standards requiring that
every derivative instrument be recorded in the balance sheet as either an asset
or liability measured at its fair value. The Statement also requires that
changes in a derivative's fair value be recognized currently in earnings unless
specific hedge accounting criteria are met, in which case changes are recognized
in comprehensive income for cash flow hedges. Special accounting for qualifying
hedges allows a derivative's gains and losses to offset related results on the
hedged item in the income statement, and requires that the Company formally
document, designate, and assess the effectiveness of transactions that receive
hedge accounting.
One of the Company's principal hedging activities is to purchase foreign
currency option contracts to hedge anticipated revenue transactions. The Company
has reported the option contracts at fair value each reporting period and the
change in the intrinsic value of such contracts has been reported as other
comprehensive income.
NOTE 7 -- SEGMENT REPORTING
SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information" was issued in June 1997. SFAS No. 131 requires that a public
business enterprise report financial and descriptive information about its
reportable operating segments. Generally, financial information is required to
be reported on the basis used internally for evaluating segment performance and
resource allocation. The Company currently operates in a single segment,
distributing its enterprise systems management software products. Revenues are
tracked by both geography and product categories based upon the predominant
operating environments of enterprise computing: mainframe and distributed
systems. The Company is not organized into business units along these product
categories nor does it capture expenses on this basis. Revenues relating to
product categories are as follows:
THREE MONTHS ENDED NINE MONTHS ENDED
DECEMBER 31, DECEMBER 31,
------------------------- -------------------------
1998 1999 1998 1999
---------- ---------- ---------- ----------
(IN THOUSANDS)
REVENUES
Mainframe:
License ....................................... $ 159,044 $ 180,762 $ 438,121 $ 543,121
Maintenance ................................... 77,494 94,859 220,007 279,149
---------- ---------- ---------- ----------
Total mainframe revenues .............. 236,538 275,621 658,128 822,270
Distributed systems:
License ....................................... 81,531 107,495 192,993 307,503
Maintenance ................................... 26,058 43,228 66,224 113,034
---------- ---------- ---------- ----------
Total distributed systems revenues .... 107,589 150,723 259,217 420,537
---------- ---------- ---------- ----------
Total revenues ........................ $ 344,127 $ 426,344 $ 917,345 $1,242,807
========== ========== ========== ==========
Mainframe revenue represents revenue pertaining to products that operate
primarily on the IBM OS/390 mainframe operating system and databases.
Distributed systems revenue represents revenue pertaining to products that
operate on Unix, MS Windows NT and other distributed systems operating systems
and Oracle, Informix, Sybase, Microsoft SQL Server and other distributed systems
databases. Also classified as distributed systems products are cross-platform
products that operate in both environments. These cross-platform products are
generally licensed based on metrics such as number of users or tasks managed.
8
9
NOTE 8 -- MERGER RELATED COSTS
Pursuant to the close of the Company's merger with Boole in March 1999,
BMC's management approved a formal plan of restructuring to integrate fully the
operations of the two companies, consolidate duplicate facilities and eliminate
redundancies to achieve reductions in overhead expenses in future periods. In
connection with this plan, in March of 1999, the Company accrued approximately
$17.7 million in restructuring related costs and $20.6 million in direct
transaction costs.
During the quarter ended June 30, 1999, the Company made certain revisions
to this restructuring plan. Significant revisions include the following: the
termination of approximately 275 additional employees, primarily in the United
States and Europe, which resulted in an increase in accrued termination benefits
of approximately $11 million; the accrual of other termination benefits which
were contingent upon certain performance criteria of approximately $1 million;
revisions to the original exit strategy for certain operating leases for office
space in the United States and Europe which led to a decrease in the liability
of approximately $3 million; and the accrual for termination costs for certain
operating leases for computer hardware and equipment of approximately $1
million. Additionally, in conjunction with the New Dimension acquisition (see
Note 3 -- Technology Acquisition), the Company has accrued approximately $0.4
million for estimated costs to terminate certain operating leases for duplicate
office space. As of December 31, 1999, the Company had paid approximately $14.4
million for restructuring related charges, comprised mostly of employee
termination benefits.
In addition to the restructuring charges, the Company incurred various
direct transaction costs, such as investment banking, legal and accounting fees,
pursuant to the Boole and New Dimension transactions. As of December 31, 1999,
the Company's accrual for unpaid transaction costs approximated $16.9 million.
The Company expects that payment of these accruals will occur by the end of
fiscal 2000.
The following table summarizes the activity during the quarter ended
December 31, 1999 in the accruals for acquisition and other costs, excluding
direct transaction costs (in millions):
PAID OUT OR
BALANCE AT CHARGED AGAINST REVISION OF THE BALANCE AT
SEPTEMBER 30, 1999 THE RELATED ASSETS ACCRUAL DECEMBER 31, 1999
------------------ ------------------ ------- -----------------
Facility costs and write-down
of fixed assets to be disposed of ... $ 7.0 $(1.4) $ -- $ 5.6
Employee termination benefits ......... 10.5 (1.7) 0.2 9.0
----- ----- ----- -----
Total ....................... $17.5 $(3.1) $ 0.2 $14.6
===== ===== ===== =====
This accrual, which excludes accrued transaction costs, represents
management's best estimate, based on available information as of December 31,
1999 of identifiable and quantifiable charges that the Company anticipates it
will incur as a result of the actions taken under the restructuring plan. The
Company expects to incur other costs which were either not quantifiable or to
which the Company had not committed to a course of action as of December 31,
1999, and therefore, have not been included in the accrual. These costs could
have a material adverse impact on future operating results. In addition to costs
included in the accrual for the merger and restructuring plan, the Company will
incur other incremental expenses in the near term as a direct result of its
integration efforts, but for which classification as restructuring charges is
not allowed under current accounting standards. These items, such as relocation
and retraining of personnel and development or marketing efforts for enhanced or
integrated products, could be significant to future operating results.
NOTE 9 -- LEGAL SETTLEMENT
In October 1999, the Company settled all claims in a lawsuit styled BMC
Software vs. Peregrine/Bridge Transfer Corp., Skunkware, Inc., Neon Systems,
Inc., Wayne E. Fisher and John J. Moores vs. BMC Software, Inc. and Max P.
Watson. 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 $16.6 million charge for legal settlement taken in the December 1999
quarter includes legal fees and other litigation expenses incurred by the
Company during the quarter of $8.6 million and the Company's obligation under
the above-mentioned software distribution agreement. The $38,826,000 charge for
legal settlement taken in the September 1999 quarter includes legal fees and
other litigation expenses incurred by the Company during the quarter of
$8,826,000.
9
10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
FORWARD LOOKING STATEMENTS
In addition to historical information, this Quarterly Report contains
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 "may," "believes,"
"expects," "anticipates," "estimates," "will," "plans," "contemplates," "would"
and similar expressions that contemplate future events. Examples of forward
looking statements include statements regarding the Company's future financial
results, operating results, market positions, product successes, business
strategies, projected costs, future products, competitive positions and plans
and objectives of management for future operations. 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. These important factors, risks and uncertainties include, but are not
limited to, those described in the paragraphs below under the heading "B.
Certain Risks and Uncertainties that Could Affect Future Operating Results" and
those contained in the Company's Annual Report on Form 10-K for the fiscal year
ended March 31, 1999 (the "1999 10-K Annual Report"). Readers are cautioned not
to place undue reliance on these forward looking statements as there can be no
assurance that future results will meet expectations.
You should also read the discussion below together with the Company's
Condensed Consolidated Financial Statements and notes thereto included in this
Quarterly Report.
A. RESULTS OF OPERATIONS AND FINANCIAL CONDITION
The following table sets forth, for the periods indicated, the percentages
that selected items in the Condensed Consolidated Statements of Earnings and
Comprehensive Income bear to total revenues. These comparisons of financial
results are not necessarily indicative of future results.
PERCENTAGE OF TOTAL REVENUE
--------------------------------------
THREE MONTHS NINE MONTHS
ENDED ENDED
DECEMBER 31, DECEMBER 31,
---------------- ----------------
1998 1999 1998 1999
----- ----- ----- -----
Revenues:
License ..................................... 69.9% 67.6% 68.8% 68.4%
Maintenance ................................. 30.1 32.4 31.2 31.6
----- ----- ----- -----
100.0 100.0 100.0 100.0
Operating expenses:
Selling and marketing ....................... 30.7 37.2 31.7 36.6
Research and development .................... 11.4 12.8 12.8 13.0
Cost of maintenance services and product
licenses .................................. 11.1 10.3 11.6 9.8
General and administrative .................. 7.9 8.8 7.5 8.2
Acquired research and development costs ..... -- -- 1.9 6.5
Amortization of goodwill and intangibles .... 0.3 8.5 0.3 8.3
Legal settlement ............................ -- 3.9 -- 4.4
Merger related costs ........................ -- 0.1 -- 1.2
----- ----- ----- -----
Operating income .............................. 38.5 18.5 34.2 12.0
Other income .................................. 4.8 2.5 5.0 2.5
----- ----- ----- -----
Earnings before taxes ......................... 43.3 21.0 39.2 14.5
Income taxes .................................. 11.3 4.8 10.6 2.9
----- ----- ----- -----
Net earnings ........................ 32.0% 16.2% 28.6% 11.6%
===== ===== ===== =====
10
11
REVENUES
THREE MONTHS ENDED NINE MONTHS ENDED
DECEMBER 31, DECEMBER 31,
-------------------------- -------------------------
1998 1999 CHANGE 1998 1999 CHANGE
---------- ---------- ------- ---------- ---------- ------
(IN THOUSANDS) (IN THOUSANDS)
North American license revenues ....... $ 138,044 $ 163,662 19% $ 387,510 $ 560,797 45%
International license revenues ........ 102,531 124,595 22 243,604 289,827 19
---------- ---------- ---------- ----------
Total license revenues ...... 240,575 288,257 20 631,114 850,624 35
North American maintenance revenues ... 61,598 82,605 34 168,704 239,723 42
International maintenance revenues .... 41,954 55,482 32 117,527 152,460 30
---------- ---------- ---------- ----------
Total maintenance revenues ............ 103,552 138,087 33 286,231 392,183 37
---------- ---------- ---------- ----------
Total revenues .............. $ 344,127 $ 426,344 24% $ 917,345 $1,242,807 35%
========== ========== ========== ==========
Total Revenues
The Company generates revenues primarily from product license revenues for
its computer software products and product maintenance fees for the associated
maintenance, enhancement and support of these products. For a discussion of the
Company's revenue recognition policies for these types of revenues, see Footnote
1(h) to Notes to Consolidated Financial Statements in the 1999 10-K Annual
Report. The Company also provides fee-based consulting services to its
customers. The Company recognizes consulting services revenues as the services
are performed.
Product License Revenues
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 the Company's mainframe products and include
fees associated both with current and future additional processing capacity.
Effective April 1, 1999 the Company adopted a modified definition of product
license and product upgrade fees as discussed below under the heading
"Definition of License Revenue Categories."
The Company's North American operations generated 57% of total license
revenues in the three months ended December 31, 1998 and 1999 and 61% and 66% of
total license revenues for the nine-month periods ended December 31, 1998 and
1999, respectively. The 19% growth in North American license revenues in the
third quarter of fiscal 2000 as compared to the same period in fiscal 1999 was
derived principally from license upgrade fees associated with future processing
capacity and from increased product license fees from distributed systems
product sales. For the nine months ended December 31, 1999, the 45% increase in
North American license revenues over the comparable prior year nine-month period
is primarily attributable to the same factors.
International license revenues represented 43% of total license revenues
for both of the quarters ended December 31, 1998 and 1999, and 39% and 34% of
total license revenues for the nine months ended December 31, 1998 and 1999,
respectively. International license revenue growth of 22% from the third quarter
of fiscal 1999 to the comparable quarter of fiscal 2000 was principally derived
from increased product license fees generated from the Company's distributed
systems and mainframe products and from license upgrade fees associated with
future processing capacity. For the nine months ended December 31, 1999, the 19%
increase in international license revenues over the prior year was primarily
attributable to product license fees generated from the Company's distributed
systems products. Foreign currency exchange rate changes reduced international
license revenues by 10% and 5% for the three months and nine months ended
December 31, 1999 respectively.
The sustainability and growth of the Company's mainframe-based license
revenues are dependent upon capacity-based license upgrade fees, particularly
within its largest customer accounts. Most of the Company's largest customers
have entered into enterprise license agreements allowing them to install the
Company's products on any number of CPUs, subject to a maximum limit on the
aggregate processing power of the CPUs as measured in millions of instructions
per second ("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 customer's
current usage level and some include product license fees for additional
products. The fees associated with future additional mainframe processing
capacity typically comprise from one-half to substantially all of the license
fees included in the enterprise license transaction. During the quarter ended
December 31, 1999, license upgrade fees (for current and future processing
capacity) accounted for 30% of total revenues. The Company has experienced a
strong increase in demand from its mainframe customers for the right to run its
products on increased future mainframe processing capacity
11
12
as enterprises invest heavily in their core OS/390 mainframe information
systems. This trend has led to larger single transactions with higher per MIPS
discounts. The Company expects that it will continue to be dependent upon these
capacity-related license upgrade fees. With the rapid advancement of distributed
systems technology and customers' needs for more functional and open
applications, such as pre-packaged enterprise resource planning applications, to
replace legacy systems, there can be no assurance that the demand for mainframe
processing capacity or the perceived benefits of the Company's core mainframe
products will continue at current levels. Should this trend slow or reverse, it
would adversely impact the Company's mainframe license revenues and its
operating results. See the discussion below under the heading "Certain Risks and
Uncertainties that Could Affect Future Operating Results."
Definitions of License Revenue Categories
The Company licenses its products primarily in two ways: by copy and on an
enterprise license basis by aggregate licensed capacity. When products are
licensed on a per copy basis, license revenues from the initial licensing of
each copy of the product are product license fees. All revenues from the
customer's licensing of the right to use a previously licensed copy on a larger
computer are license upgrade fees. When products are licensed on an enterprise
aggregate licensed 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 the June 1999
quarter and represents a change from the Company's 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 the Company's
internal characterization of license revenues and has no effect on the Company's
license revenue recognition.
Maintenance and Support Revenues; Services Revenues
Maintenance and support revenues represent the ratable recognition of fees
to enroll licensed products in the Company's software maintenance, enhancement
and support program and recognition of revenues from professional services
performed during the period by the Company's professional services business.
Maintenance and support enrollment entitles customers to product enhancements,
technical support services and ongoing compatibility with third-party operating
systems, database management systems and applications. These fees are generally
charged annually and equal 15% to 20% of the list price of the product at the
time of renewal, less any applicable discounts. Customers that elect to prepay
for multiple years of maintenance coverage receive an additional,
time-value-of-money discount. Maintenance revenues also include the ratable
recognition of the bundled fees for any first-year maintenance services covered
by the related perpetual license agreement.
In the three months and nine months ended December 31, 1999, maintenance
revenues increased 33% to $138 million and 37% to $392 million, respectively, as
compared to the same periods in the prior fiscal year. The growth in both
periods was derived from high maintenance renewal rates, customers' deployment
of the Company's mainframe products on greater processing capacity and rapid
growth of distributed systems licenses. Consulting services fees also
contributed to the maintenance revenue growth.
Product Line Revenues
The Company develops and distributes software products designed to improve
the availability, performance and recoverability of enterprise applications,
databases and other Information Technology ("IT") systems components operating
in mainframe (OS/390) and distributed computing environments. The Company's
mainframe products accounted for 69% and 65%, respectively, of total revenues in
the quarters ended December 31, 1998 and 1999, and 72% and 66% of total
revenues, respectively, for the nine-month periods ended December 31, 1998 and
1999. Total revenues from mainframe products for the three months and nine
months ended December 31, 1999 grew 17% and 25% as compared to the respective
prior year periods. The revenues from these products are driven largely by the
growth in customers' future processing capacity. Including prior period revenues
associated with New Dimension, which the Company acquired in April 1999, total
revenue growth was approximately 17% in the December 1999 quarter and 28% in the
first nine months of fiscal 2000, respectively.
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13
The high performance utilities and administrative tools for IBM's IMS and
DB2 database management systems comprise the largest portion of the Company's
mainframe-based revenues and total revenues. The IMS and DB2 tools and utilities
contributed 43% and 36% of total revenues for the three months ended December
31, 1998 and 1999, respectively, and 44% and 34% of license revenues for the
same periods. The IMS and DB2 tools and utilities contributed 45% and 40% of
total revenues for the nine-month periods ended December 31, 1998 and 1999,
respectively and 46% and 41% of license revenues for the same periods. Total
revenues and license revenues from these product lines combined grew 3% and
declined 9%, respectively, in the third quarter of fiscal 2000, and grew 24% and
19% in the nine-month period of fiscal 2000, as compared to the respective prior
year periods. The Company's other products for the OS/390 mainframe environment
contributed 26% and 29% of total revenues for the three months ended December
31, 1998 and 1999, respectively, and 22% and 29% of license revenues for the
same periods. The products contributed 27% and 26% of total revenues for the
nine-month periods ended December 31, 1998 and 1999, respectively, and 23% of
license revenues for the same periods. Total revenues and license revenues for
these other mainframe products grew 40% and 59%, respectively, in the third
quarter of fiscal 2000 and grew 27% and 33%, respectively, in the nine-month
period of fiscal 2000.
Distributed systems product revenue growth in the quarter was derived
primarily from increased market acceptance of the PATROL application and data
management product suite, the Company's significant and growing investment in
its distributed systems direct and indirect sales channels and higher
distributed systems maintenance fees. In total, the distributed systems product
lines contributed 31% and 35% of total revenues for the quarters ended December
31, 1998 and 1999, respectively, and 34% and 37% of license revenues for the
same periods. In the nine months ended December 31, 1998 and 1999, these product
lines contributed 28% and 34% of total revenues and 31% and 36% of license
revenues, respectively. Total distributed systems revenues grew 40% and license
revenues from distributed systems grew 32% in the third quarter of fiscal 2000,
and 62% and 59%, respectively, for the nine months ended December 31, 1999 as
compared to the respective prior year periods. In the December quarter, the
PATROL product line generated approximately one-half of total revenues generated
by distributed systems products. The revenues from the Company's distributed
systems product offerings depend upon the continued market acceptance of the
Company's existing products and the Company's ability to successfully develop
and deliver additional products for the distributed systems environment. The
Company has experienced rapid growth in its distributed systems product lines
since their introduction in late fiscal 1994. The distributed systems market is
highly competitive and dynamic and there can be no assurance that this growth
will continue.
OPERATING EXPENSES
THREE MONTHS ENDED NINE MONTHS ENDED
DECEMBER 31, DECEMBER 31,
------------------------- -------------------------
1998 1999 CHANGE 1998 1999 CHANGE
---------- ---------- ------ ---------- ---------- -------
(IN THOUSANDS) (IN THOUSANDS)
Selling and marketing ................ $ 105,559 $ 158,567 50% $ 290,928 $ 455,367 57%
Research and development ............. 39,182 54,555 39 117,464 161,365 37
Cost of maintenance services and
product licenses ................... 38,339 43,731 14 106,268 121,880 15
General and administrative ........... 27,327 37,423 37 68,545 101,434 48
Acquired research and development .... -- -- -- 17,304 80,800 367
Amortization of goodwill and
intangibles .......................... 1,058 36,218 N/M 3,176 102,837 N/M
Legal settlement ..................... -- 16,558 N/M -- 55,384 N/M
Merger related costs ................. -- 433 N/M -- 14,336 N/M
---------- ---------- ---------- ----------
Total operating expenses .... $ 211,465 $ 347,485 64% $ 603,685 $1,093,403 81%
========== ========== ========== ==========
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 and sales commissions, were the
largest contributors to the expense growth in the three months and nine months
ended December 31, 1999. This increase was primarily attributable to significant
hiring of additional distributed systems sales representatives and technical
sales support consultants as well as significant growth in the Company's
professional services group. The increase in sales commissions was attributable
to the increase in license revenues. Marketing costs have continued to increase
to meet the requirements of marketing a greater number of increasingly complex
distributed systems products and to support a growing indirect distribution
channel. Marketing expenses were further impacted by a major re-branding effort
which began in the first quarter and continued through the third quarter. Other
contributors to the increase were significantly higher levels of expenses for
travel and office rent.
13
14
Research and Development
Research and development expenses mainly comprise personnel costs related
to software developers and development support personnel, including software
programmers, testing and quality assurance personnel and writers of technical
documentation such as product manuals and installation guides. These expenses
also include computer hardware/software costs and telecommunications expenses
necessary to maintain the Company's data processing center. Increases in the
Company's research and development expenses in the third quarter of fiscal 2000
were the result of increased compensation costs associated with both software
developers and development support personnel, as well as associated benefits and
facilities costs. Research and development costs were reduced by amounts
capitalized in accordance with Statement of Financial Accounting Standards
("SFAS") No. 86. The Company capitalizes its software development costs when the
projects under development reach technological feasibility as defined by SFAS
No. 86. During the third quarter of fiscal 1999 and 2000, the Company
capitalized approximately $19.5 million and $21.4 million, respectively, of
software development costs. Capitalized software development costs for the nine
months ended December 31, 1998 and 1999 were $50.1 million and $54.4 million,
respectively.
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 three
months and nine months ended December 31, 1998 to the three months and nine
months ended December 31, 1999 was due to increases in technical and customer
support employees. The Company amortized $10.5 million and $8.3 million in the
third quarter of fiscal 1999 and 2000, respectively, of capitalized software
development costs pursuant to SFAS No. 86. For the nine months ended December
31, 1998 and 1999, the Company amortized $25.7 million and $19.7 million,
respectively. For the quarter and nine months ended December 31, 1999, the
Company expensed $2.1 million and $2.8 million, respectively, of capitalized
software development costs to accelerate the amortization of certain software
products. The Company accelerated the amortization of these software products as
they were not expected to generate sufficient future revenues which would be
required for the Company to realize the carrying value of the assets. The
Company expects its cost of maintenance services and product licenses will
continue to increase as the Company capitalizes a higher level of software
development costs and as the Company builds its distributed systems product
support organization, which is less cost-effective than its mainframe support
organization because of the complexity and variability of the environments in
which the products operate. The distributed systems products operate in a high
number of operating environments, including operating systems, DBMSs and ERP
applications and require greater ongoing platform support development activity
relative to the Company's OS/390 mainframe products.
General and Administrative
General and administrative expenses are comprised primarily of compensation
and personnel costs within executive management, finance and accounting, product
distribution, facilities management and human resources. Other expenses included
in general and administrative expenses are fees paid for legal and accounting
services, consulting projects, insurance and costs of managing the Company's
foreign currency exposure. The increase in general and administrative expenses
for both the three months and nine months ended December 31, 1999 over the same
periods ended December 31, 1998 was largely due to increased personnel costs,
increased professional service fees and higher costs associated with the related
infrastructure to support the Company's growth.
Acquired Research and Development and Related Costs
The Company did not incur acquired in-process research and development
("IPR&D") costs during the quarters ended December 31, 1998 and 1999. Acquired
IPR&D costs for the nine months ended December 31, 1998 and 1999, were $17.3
million and $80.8 million, respectively. These technology charges related to the
acquisitions of in-process technologies and technology rights in the first
quarter of fiscal 1999 and the acquisition of New Dimension in the first quarter
of fiscal 2000.
The following table presents information, in thousands, concerning the
purchase price allocations for the acquisitions accounted for under the purchase
method for the nine months ended December 31, 1998 and 1999.
14
15
ACQUIRED GOODWILL TOTAL
COMPANY NAME SOFTWARE IPR&D AND OTHER PRICE
- ------------ -------- -------- -------- --------
Fiscal 1999:
Nastel ............ $ -- $ 6,000 $ -- $ 6,000
Envive ............ 6,400 11,304 -- 17,704
-------- -------- -------- --------
$ 6,400 $ 17,304 $ -- $ 23,704
======== ======== ======== ========
Fiscal 2000:
New Dimension ..... $126,300 $ 80,800 $465,946 $673,046
-------- -------- -------- --------
$126,300 $ 80,800 $465,946 $673,046
======== ======== ======== ========
In the latter part of fiscal 1998, the Company was in the process of
designing a middleware management product to assist customers with optimizing
middleware performance and with handling enterprise environmental changes. In
this regard, in April 1998, the Company acquired a license from Nastel
Technologies, Inc. ("Nastel") for certain infrastructure source code for use in
its MQ management product that was under development, but had not yet reached
technological feasibility. Accordingly, the Company allocated the entire $6
million purchase price to IPR&D. The Company completed the acquired IPR&D by
creating an effective installation routine, developing an automated MQ
configuration routine, fortifying the underlying Nastel database and modifying
the code to work in environments with complementary management products. Upon
completion of the IPR&D, the Company completed the initial related product after
developing efficient data collection, user interface and business logic code.
In June 1998, the Company entered into a technology agreement with Envive
Corporation ("Envive") primarily to strengthen its 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 that had not reached technological feasibility as of
the date of the transaction. The Company is in the process of evaluating the
alternative levels of commitment and effort required to develop the
above-mentioned functionality in the non-SAP environments. The range of future
expenditures associated with these alternatives is $0.5 million to $3.5 million.
On April 14, 1999, the Company acquired through a public tender offer in
excess of 95% of the outstanding ordinary shares of New Dimension for
approximately $673 million in total consideration. The purchase price includes
the Company's historical cost of approximately $2 million for shares of New
Dimension previously owned by Boole. Unrealized gains related to these New
Dimension shares of approximately $22 million included in long term marketable
securities and accumulated other comprehensive income at March 31, 1999 were
eliminated at the closing of the purchase. In order to fund the purchase price,
the Company entered into a 364-day unsecured revolving credit facility with a
group of banks from which the Company drew down approximately $500 million of
short-term borrowings. The remaining consideration was funded from the Company's
existing working capital. The acquisition was accounted for as a purchase
transaction, and the purchase price was allocated as follows: $126 million to
software assets, $436 million to goodwill and other intangibles, and $30 million
to equipment, receivables and other non-software assets, net of liabilities
assumed. Additionally, the Company allocated $80.8 million, or 12% of the
purchase price, to IPR&D, which was charged to expense in the June 1999 quarter.
Purchased IPR&D represents the present value of the estimated after-tax cash
flows expected to be generated by the purchased technology, which, at the
acquisition date, had not yet reached technological feasibility nor had
alternative future use. Refer to the June 1999 Form 10-Q for a description of
the acquired New Dimension IPR&D.
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. Remaining anticipated development costs in connection with
all the products classified as in-process technology at the time of acquisition
are expected to be approximately $24.5 million. Projected completion dates range
from two to twenty months, at which time the Company expects to begin selling
those developed products. The Company intends to continue devoting effort to
developing commercially viable products from the purchased IPR&D, although it
may not develop such commercially viable products. All of the foregoing
estimates and projections were based on assumptions the Company believed to be
reasonable at the time but which were inherently uncertain and unpredictable.
15
16
The values assigned to acquired IPR&D were generally determined by
estimating the costs to develop the purchased in-process technology into
commercially viable products, estimating the resulting net cash flows from the
projects and discounting the net cash flows to their present value. The revenue
projections used to value the acquired IPR&D were based on estimates of relevant
market sizes and growth factors, expected trends in technology, and the nature
and expected timing of new product introductions by the Company and its
competitors. Operating expenses were estimated based on historical results and
anticipated profit margins. Due to purchasing power increases and general
economies of scale, estimated operating expenses as a percentage of revenues
were, in some cases, estimated to decrease after the acquisition.
The rates utilized to discount the net cash flows to their present value
were based on cost of capital calculations and venture capital rates of return.
Due to the nature of the forecast and risks associated with the projected
growth, profitability and the developmental nature of the projects, a 20%
discount rate was used to value the New Dimension acquired IPR&D. The Company
used a 15% rate in discounting the cash flows associated with the developed New
Dimension technology. The Company believes these discount rates are commensurate
with the respective stage of development and the uncertainties in the economic
estimates described above. If the acquired IPR&D projects are not successfully
completed, the Company's business, operating results, and financial condition
may be materially adversely affected in future periods. In addition, the value
of other intangible assets acquired may become impaired.
Amortization of Goodwill and Intangibles
In connection with the application of the purchase accounting method to the
Company's acquisitions, portions of the purchase price were allocated to
goodwill, workforce, customer base, software and other intangible assets. The
Company is amortizing these intangibles over 4 to 5 year periods which reflect
the estimated useful lives of the respective assets. The increase in the
quarterly amortization expense is directly related to the acquisition of New
Dimension discussed above.
Legal Settlement
In October 1999, the Company settled all claims in a lawsuit styled BMC
Software vs. Peregrine/Bridge Transfer Corp., Skunkware, Inc., Neon Systems,
Inc., Wayne E. Fisher and John J. Moores vs. BMC Software, Inc. and Max P.
Watson. See Note 9-- Legal Settlement in the Notes to Condensed Consolidated
Financial Statements.
Merger Related Costs
In conjunction with the Company's merger with Boole in March 1999, the
Company's management approved a formal plan of restructuring which included
steps to be taken to integrate the operations of the two companies, consolidate
duplicate facilities and streamline operations to achieve reductions in overhead
expenses in future periods. As of December 31, 1999, the Company has accrued
merger related costs of approximately $16.9 million comprised principally of the
following components: employee related expenses including severance and other
benefits, costs to eliminate duplicate facilities, transaction costs and
impairment of assets to be disposed of as a result of integrating the combined
companies.
OTHER INCOME
For the third quarter of fiscal 2000, other income was $10.7 million,
reflecting a decrease of 35% from $16.4 million of other income in the same
quarter of fiscal 1999. Other income consists primarily of interest earned on
tax-exempt municipal securities, Euro bonds, corporate bonds, mortgage
securities and money market funds. The decrease in other income is primarily due
to approximately $5.8 million in interest expense related to the revolving
credit facility entered into in April 1999.
INCOME TAXES
For the three months and nine months ended December 31, 1999, income tax
expense was $20.4 million and $36.5 million, respectively, compared to $39.0
million and $97.2 million for the same respective periods in fiscal 1999. The
Company's lower income tax expense related primarily to the tax benefits
resulting from the amortization of goodwill and other intangibles and the
write-off of IPR&D in the first quarter of fiscal 2000 stemming from the New
Dimension acquisition in April 1999. The Company's income tax expense represents
the federal statutory rate of 35%, plus certain foreign and state taxes, reduced
primarily by the benefit from lower income taxes associated with the Company's
European operations and the effect of tax exempt interest earned from cash
investments.
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17
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its growth through funds generated from
operations. As of December 31, 1999, the Company had cash, cash equivalents and
investment securities of $1.05 billion. As of December 31, 1999, the Company
owed $320 million under its $500 million credit facility established in
connection with the Company's acquisition of New Dimension in April 1999.
The Company did not repurchase any of its common shares on the open market
during the third quarter of fiscal 2000.
The Company believes that existing cash balances and funds generated from
operations will be sufficient to meet its liquidity requirements for the
foreseeable future. While operating cash flow for the nine months ended December
31, 1999 was $153.7 million, the Company's operations for the three months ended
December 31, 1999 generated negative cash flows of $5.2 million. Operating
cash flow for the three months ended December 31, 1999 was negatively impacted
by the reduction in deferred revenue and by a legal settlement payment. See Note
9 - Legal Settlement in the Notes to Condensed Consolidated Financial
Statements.
B. CERTAIN RISKS AND UNCERTAINTIES THAT COULD AFFECT FUTURE OPERATING RESULTS.
Volatility of Stock Price. The Company's stock price has been and is highly
volatile. The Company's 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
perceived long-term growth prospects of the Company would likely have a
significant adverse effect on the Company's stock price. The Company's
historical financial results should not be seen as indicative of future results.
The Timing and Size of License Contracts Could Cause Quarterly Revenues and
Earnings to Fluctuate. The Company's revenues and results of operations are
difficult to predict and may fluctuate substantially. The timing and amount of
the Company's license revenues are subject to a number of factors that make
estimation of operating results prior to the end of a quarter extremely
uncertain. The Company generally operates with little or no sales backlog and,
as a result, license revenues in any quarter are dependent upon contracts
entered into or orders booked and shipped in that quarter. Most of the Company's
sales are closed at the end of each quarter. There has been and continues to be
a trend toward larger enterprise license transactions, which can have sales
cycles of up to a year or more and require approval by a customer's upper
management. These transactions are typically difficult to manage and predict.
Failure to close an expected individually significant transaction or multiple
expected transactions could cause the Company's revenues and earnings in a
period to fall short of expectations. The Company generally does not know
whether revenues and earnings will meet expected results until the final days or
day of a quarter.
High Degree of Operating Leverage. The Company's business model is
characterized by a very high degree of operating leverage. A substantial portion
of the Company's operating costs and expenses consist of employee and facility
related costs, which are relatively fixed over the short term. In addition, the
Company's expense levels and hiring plans are based substantially on the
Company's projections of future revenue. If near term demand weakens in a given
quarter, there would likely be a material adverse effect on operating results
and a resultant drop in the Company's stock price.
Risks Related to Contraction of Operating Margins. There is a risk that the
Company will not be able to sustain its high operating margins which would
adversely affect its earnings. The Company's operating margins, excluding
one-time charges, have varied from the low to mid 30% range in recent quarters,
which is at the high-end of the range for peer companies. The Company does not
compile margin analysis other than on an aggregated basis; however, the Company
believes that the operating margins associated with its distributed systems
products are substantially below those of its traditional mainframe products.
Since the Company's mix of business continues to shift to distributed systems
revenues and since research and development, sales, support and distribution
costs for distributed systems software products are generally higher than for
mainframe products, operating margins will experience more pressure. The Company
may be unable to increase or even maintain its current level of profitability on
a quarterly or annual basis in the future. Additionally, Boole and New Dimension
historically experienced lower operating margins than the Company. Although the
Company's objective is to increase the profitability from the integrated Boole
and New Dimension operations to more closely resemble the Company's historical
margins, there is no guarantee the Company will be successful or as to the
length of time which the Company will require to accomplish this goal.
Increased Competition and Pricing Pressures Could Adversely Affect Sales.
The market for systems management software has been increasingly competitive for
the past number of years and is currently intensifying. The Company competes
with a variety of software vendors including IBM and Computer Associates
International, Inc. ("CA"). The Company derived approximately 70% of its total
revenues in fiscal 1999 from software products for IBM and IBM-compatible
mainframe computers. IBM continues to focus on reducing the overall software
costs associated with the OS/390 mainframe platform. IBM continues, directly and
through third parties, to aggressively enhance its utilities for IMS and DB2 to
provide lower cost alternatives to the products provided by the Company and
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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 the Company's IMS, DB2 and other products at a lower cost, the
Company's business will be materially adversely affected. CA has recently
entered the mainframe database tools and utilities market with its acquisitions
of Platinum Technology International, Inc. (DB2 tools and utilities) and IDI,
Inc. (IMS tools and utilities) and is competing with the Company in these
markets.
Capacity-based upgrade fees associated with both current and future
processing capacity contributed approximately one-fourth to one-third of the
Company's total revenues in each of fiscal years 1997, 1998 and 1999.
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 the Company believes its current pricing policies properly
reflect the value provided by its products, the pricing of mainframe systems
software and particularly the charging of capacity-based upgrade fees is under
constant pressure from customers and competitive vendors. IBM continues to
reduce the costs of its mainframe systems software to increase the overall cost
competitiveness of its mainframe hardware and software products. IBM also
generally charges less for its software products. These actions continue to
increase pricing pressures with the mainframe systems software markets. The
Company has continued to reduce the cost of its mainframe tools and utilities in
response to these and other competitive pressures.
Decreasing Demand for Mainframe Processing Capacity Could Adversely Affect
Revenues. Fees from enterprise license transactions remain fundamental
components of the Company's revenues and the primary source of mainframe license
revenues. These revenues depend upon the Company's customers continuing to
perceive an increasing need to use the Company's existing software products on
substantially greater mainframe processing capacity in future periods. The
Company believes that the demand for enterprise licenses has been driven by
customer's recommitment over the last 36 months to the OS/390 mainframe platform
for large scale, transaction intensive information systems. Whether this trend
will continue is difficult to predict. If the Company's customers' processing
capacity growth were to 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.
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, the Company receives higher absolute
maintenance fees as customers install its 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 the Company's mainframe products.
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. Renewal rates for maintenance on the Company's
distributed systems products are lower than on its mainframe products.
Failure to Adapt to Technological Change Could Adversely Affect the
Company's Earnings. If the Company fails to keep pace with technological change
in its industry, such failure would have an adverse effect on its revenues and
earnings. The Company operates in a highly competitive industry characterized by
rapid technological change, evolving industry standards, changes in customer
requirements and frequent new product introductions and enhancements. The
distributed systems and application management markets in which the Company
operates are far more crowded and competitive than its traditional mainframe
systems management markets. The Company's ability to compete effectively and its
growth prospects depend upon many factors, including the success of its existing
client/server systems products, the timely introduction and success of future
software products and the ability of its products to interoperate and perform
well with existing and future leading databases and other platforms supported by
its products. The Company has experienced long development cycles and product
delays in the past, particularly with some of its client/server systems
products, and expects to have delays in the future. Delays in new mainframe or
client/server systems product introductions or less-than-anticipated market
acceptance of these new products are possible and would have an adverse effect
on the Company's revenues and earnings. New products or new versions of existing
products may, despite testing, contain undetected errors or bugs that will delay
the introduction or adversely affect commercial acceptance of such products.
Uncertainty of Operating in Emerging Area. Despite the tremendous growth in
emerging areas such as the Internet, on-line services and electronic commerce,
the impact on the Company of this growth is uncertain. The Company has recently
announced that it will expand its technology into supporting Internet/electronic
commerce. This area is relatively new to the Company's product development and
sales and marketing personnel. There is no assurance that the Company will
compete effectively or will generate significant revenues in this new area.
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Changes in Pricing Practices Could Adversely Affect Revenues and Earnings.
The Company may choose in fiscal year 2001 or a future fiscal year to make
changes to its product packaging, pricing or licensing programs. If made, such
changes may have a material adverse impact on revenues or earnings, and such
changes may cause the Company to revise its guidance on future operating
results.
Risks Related To Business Combinations. As part of its overall strategy,
the Company has acquired or invested in, and plans to continue to acquire or
invest in, complementary companies, products, technologies and to enter into
joint ventures and strategic alliances with other companies. The Company's
acquisitions of DataTools in May 1997; BGS Systems, Inc. ("BGS") in March 1998,
Boole in March 1999 and New Dimension in April 1999 are the results of this
strategy. Risks commonly encountered in such transactions include: the
difficulty of assimilating the operations and personnel of the combined
companies; the risk that the Company may not be able to integrate the acquired
technologies or products with its current products and technologies; the
potential disruption of the Company's ongoing business; the inability to retain
key technical and managerial personnel; the inability of management to maximize
the financial and strategic position of the Company through the successful
integration of acquired businesses; and decreases in reported earnings as a
result of charges for in-process research and development and amortization of
acquired intangible assets.
In order for the Company to maximize the return on its investments in BGS,
Boole and New Dimension, the products of these various entities must be
integrated with each other and with the Company's existing products. Integration
of the BEST/1 and COMMAND/POST products with PATROL is also very important. The
Company is integrating the MainView product line with its IMS, DB2 and other
OS/390 products and the BEST/1 products with the COMMAND/POST and MainView
products, adding to the complexity of the task of integration. Each of these
integrations will be difficult and unpredictable, especially given that these
software products are highly complex, have been developed independently and were
designed with no regard to such integration. The difficulties are compounded
when the products involved are well established, as these are, because
compatibility with the existing base of installed products must be preserved.
Successful integration of these product lines also requires coordination of
different development and engineering teams. This too will be difficult and
unpredictable because of possible cultural conflicts and different opinions on
technical decisions and product roadmaps. There can be no assurance that the
Company will be successful in these product integration efforts or that the
Company will realize the expected benefits.
With the acquisitions of BGS, Boole and New Dimension, the Company has
initiated efforts to integrate the disparate cultures, employees, systems and
products of these companies. In all three acquisitions, retention of key
employees is critical to ensure the continued advancement, development, support,
sales and marketing efforts pertaining to the acquired products. The Company has
implemented retention programs to keep many of the key technical, sales and
marketing employees; nonetheless, the Company has lost some key employees and
may lose others in the future.
The Company has also elected to retain the principal locations of BGS,
Boole and New Dimension and has reorganized the management structure at all of
these locations. The Company has not historically managed significant, fully
staffed business units at locations different from the Company's headquarters.
As a result, the Company may experience difficulties.
Risks Associated With Managing Growth. The Company has experienced an
extended period of: (i) significant revenue growth; (ii) acquisitions; (iii)
expansion of its software product lines and supported platforms; (iv)
significant expansion in its number of employees; (v) increased pressure on the
viability and scope of its operating and financial systems; and (vi) expansion
in the geographic scope of its operations. This growth has resulted in new and
increased responsibilities for management personnel and has placed a significant
strain upon the Company's management, operating and financial controls and
resources, including its services and development organizations. To accommodate
recent growth, compete effectively and manage potential future growth, the
Company must continue to implement and improve the speed and quality of its
information decision support systems, management decisions, reporting systems,
procedures and controls. The Company's personnel, procedures, systems and
controls may not be adequate to support its future operations. The Company
realigned its product development and marketing operations in the June quarter
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 the Company's Intellectual Property Rights. The Company
relies on a combination of copyright, patent, trademark, trade secrets,
confidentiality procedures and contractual procedures to protect its
intellectual property rights. Despite the Company's efforts to protect its
intellectual property rights, it may be possible for unauthorized third parties
to copy certain portions of the Company's products or to reverse engineer or
obtain and use technology or other information that the Company regards as
proprietary. There can also be no assurances that the Company's intellectual
property rights would survive a legal challenge to their validity or provide
significant protection for the Company. In addition, the laws of certain
countries do not protect the Company's proprietary
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rights to the same extent as do the laws of the United States. Accordingly,
there can be no assurance that the Company will be able to protect its
proprietary technology against unauthorized third party copying or use, which
could adversely affect the Company's competitive position.
Possibility of Infringement Claims. The Company from time to time receives
notices from third parties claiming infringement by the Company's products of
third party patent and other intellectual property rights. The Company expects
that software products will increasingly be subject to such claims as the number
of products and competitors in the Company's industry segments grow and the
functionality of products overlaps. In addition, the Company expects to receive
more patent infringement claims as companies increasingly seek to patent their
software, especially in light of recent developments in the law that extend the
ability to patent software. Regardless of its merit, responding to any such
claim could be time-consuming, result in costly litigation and require the
Company to enter into royalty and licensing agreements which may not be offered
or available on terms acceptable to the Company. If a successful claim is made
against the Company and the Company fails to develop or license a substitute
technology, the Company's business, results of operations or financial position
could be materially adversely affected.
Risk of Year 2000 Related Problems. Although the Company has not
experienced any material failures related to Year 2000 to date, there remains a
risk that Year 2000 problems could affect the Company or the Company's products.
The Company has tested the ability of its software products to process Year 2000
data without interruption or errors and believes that its products are
substantially Year 2000 compliant. 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 a
customer may assert claims against the Company for any losses resulting from
such errors or defects. To date, the Company is not aware of any material claims
being asserted or made against it related to Year 2000 failures. However, the
Company cannot predict whether or to what extent any legal claims will be
brought, or whether the Company will suffer any liability as a result of any
adverse consequences to its customers related to Year 2000 failures.
Risks Related to International Operations and the Euro Currency. The
Company has committed, and expects to continue to commit, substantial resources
and funding to build its international service and support infrastructure.
Operating costs in many countries, including many of those in which the Company
operates, are higher than in the United States. In order to increase
international sales in fiscal year 2000 and subsequent periods, the Company must
continue to globalize its software product lines; expand existing and establish
additional foreign operations; hire additional personnel; identify suitable
locations for sales, marketing, customer service and development; and recruit
international distributors and resellers in selected territories. Future
operating results are dependent on sustained performance improvement by the
Company's international offices, particularly its European operations. Revenue
growth by the Company's European operations has been slower than revenue growth
in North America. There can be no assurance that the Company will be successful
in accelerating the revenue growth of its European operations. The Company's
operations and financial results internationally could be significantly
adversely affected by several risks such as changes in foreign currency exchange
rates, sluggish regional economic conditions and difficulties in staffing and
managing international operations. Generally, the Company's foreign sales are
denominated in its foreign subsidiaries' local currencies. If these foreign
currency exchange rates change unexpectedly, the Company could have significant
gains or losses. Many systems and applications software vendors are experiencing
difficulties internationally.
The European Union's adoption of the Euro single currency raises a variety
of issues associated with the Company's European operations. Although the
transition will be phased in over several years, the Euro became Europe's single
currency on January 1, 1999. The Company's foreign exchange exposures to legacy
sovereign currencies of the participating countries in the Euro became foreign
exchange exposures to the Euro upon its introduction. Although the Company is
not aware of any material adverse financial risk consequences of the change from
legacy sovereign currencies to the Euro, conversion may result in problems,
which may have an adverse impact on the Company's business since the Company may
be required to incur unanticipated expenses to remedy these problems.
Conditions in Israel. The Company's New Dimension operations are conducted
partially in Israel and, accordingly, the Company is directly affected by
economic, political and military conditions in Israel. Any major hostilities
involving Israel or the interruption or curtailment of trade between Israel and
its present trading partners could materially adversely affect the Company's
business, operating results and financial condition.
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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, the Company cannot predict whether or in
what manner these problems will be resolved.
In addition, certain of the Company's New Dimension employees are currently
obligated to perform annual reserve duty in the Israel Defense Forces and are
subject to being called for active military duty at any time. New Dimension has
operated effectively under these requirements since its inception. However, the
Company cannot predict the effect of these obligations on New Dimension's
operations in the future.
Possible Adverse Impact of Recent Accounting Pronouncements. The American
Institute of Certified Public Accountants issued Statement of Position (SOP)
97-2, "Software Revenue Recognition", SOP 98-4, "Deferral of the Effective Date
of a Provision of SOP 97-2, Software Revenue Recognition", and SOP 98-9,
"Modification of SOP 97-2, Software Revenue Recognition, With Respect to Certain
Transactions" in October 1997, March 1998, and December 1998, respectively.
These standards address software revenue recognition matters, supersede an
earlier SOP and are effective for transactions entered into for fiscal years
beginning after December 15, 1997 and, for SOP 98-99, March 15, 1999. Based on
its reading and interpretation of these SOPs, the Company believes that its
current sales contract terms and business arrangements have been properly
reported. However, the American Institute of Certified Public Accountants and
its Software Revenue Recognition Task Force will continue to issue
interpretations and guidance for applying the relevant standards to a wide range
of sales contract terms and business arrangements that are prevalent in the
software industry. Future interpretations of existing accounting standards or
changes in the Company's business practices could result in future changes in
the Company's current revenue accounting policies that could have a material
adverse effect on the Company's business, financial condition and results of
operations.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to a variety of risks, including foreign currency
exchange rate fluctuations and changes in the market value of its investments.
In the normal course of business, the Company employs established policies and
procedures to manage these risks, including the use of derivative instruments.
Foreign Currency Exchange Rate Risks
The Company operates globally and the functional currency for most of its
non-U.S. enterprises is the local currency. For the three months ended December
31, 1998 and 1999, approximately 42% of the Company's consolidated revenues were
derived from customers outside of North America, substantially all of which were
billed and collected in foreign currencies. Similarly, substantially all of the
expenses of operating the Company's foreign subsidiaries are incurred in foreign
currencies. As a result, the Company's U.S. dollar earnings and net cash flows
from international operations may be adversely affected by changes in foreign
currency exchange rates. To minimize the Company's risk from changes in foreign
currency exchange rates, the Company utilizes certain derivative financial
instruments.
The Company utilizes primarily two types of derivative financial
instruments in managing its foreign currency exchange risk: forward exchange
contracts and purchased option contracts. Forward exchange contracts are used to
achieve hedges of firm commitments that subject the Company to transaction risk.
The terms of the forward exchange contracts are generally one month or less and
are entered into at the prevailing market rate. Purchased option contracts, with
terms generally less than one year, are used by the Company to hedge
anticipated, but not firmly committed, sales transactions. Principal currencies
hedged are the German deutschemark, British pound and the French franc in Europe
and the Japanese yen and Australian dollar in the Pacific Rim region. The
Company performs comparisons, on a monthly basis, of the purchased option
contracts and the forecasted sales revenues to determine hedge effectiveness.
While the Company actively manages its foreign currency risks on an ongoing
basis, there can be no assurance the Company's foreign currency hedging
activities will offset the full impact of fluctuations in currency exchange
rates on its results of operations, cash flows and financial position. For the
three months ended December 31, 1999, foreign currency rate fluctuations reduced
license revenues and EPS by 3%, respectively. Foreign currency fluctuations did
not have a material impact on the Company's results of operations and financial
position during the nine months ended December 31, 1998 and 1999, respectively.
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Based on the Company's foreign currency exchange instruments outstanding at
December 31, 1999, the Company estimates that a near-term change in foreign
currency rates would not materially affect its financial position, results of
operations or net cash flows for the quarter or six-month period ended December
31, 1999. The Company used a value-at-risk ("VAR") model to measure potential
fair value losses due to foreign currency exchange rate fluctuations. The VAR
model estimates were made assuming normal market conditions and a 95% confidence
level. The VAR model is a risk estimation tool, and as such, is not intended to
represent actual losses in fair value that could be incurred by the Company.
Interest Rate Risk
The Company adheres to a conservative investment policy, whereby its
principle concern is the preservation of liquid funds while maximizing its yield
on such assets. Cash, cash equivalents and marketable securities approximated
$1.05 billion at December 31, 1999, and were invested in different types of
investment-grade securities with the intent of holding these securities to
maturity. Although the Company's portfolio is subject to fluctuations in
interest rates and market conditions, no gain or loss on any security would
actually be recognized in earnings unless the instrument was sold.
The Company estimates that a near-term change in interest rates would not
materially affect its financial position, results of operations or net cash
flows for the quarter ended December 31, 1999. The Company used a VAR model to
measure potential market risk on its marketable securities due to interest rate
fluctuations. The VAR model estimates were made assuming normal market
conditions and a 95% confidence level. The VAR model is a risk estimation tool,
and as such, is not intended to represent actual losses in fair value that could
be incurred by the Company.
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PART II
OTHER INFORMATION
BMC SOFTWARE, INC. AND SUBSIDIARIES
ITEM 1. LEGAL PROCEEDINGS.
On March 9, 1999, a class action complaint was filed against the Company
and four senior executives of the Company alleging violations of Sections 10(b)
and 20(a) of the Exchange Act in connection with the Company's financial
statement presentation following its acquisition of BGS in March 1998 in a
pooling-of-interests transaction. Four similar actions were filed in the
Southern District of Texas. All of the actions were subsequently consolidated in
a single action. The lawsuits were filed following the Company's announcement
that it was restating its historical financial results to include BGS's
financial results in the Company's financial statements as a condition to the
Securities and Exchange Commission declaring effective the Company's
registration statement on Form S-4 relating to its acquisition of Boole. The
plaintiffs seek an unspecified amount of compensatory damages, interest and
costs, including legal fees. The Company denies the allegations of wrongdoing in
connection with the matters set forth in the complaint and intends to vigorously
defend the action. An unfavorable judgement or settlement, however, could have a
material adverse effect on the financial results of the Company.
In October 1999, the Company settled all claims in a lawsuit styled BMC
Software vs. Peregrine/Bridge Transfer Corp., Skunkware, Inc., Neon Systems,
Inc., Wayne E. Fisher and John J. Moores vs. BMC Software Inc. and Max P.
Watson. 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 Company is subject to various other legal proceedings and claims,
either asserted or unasserted, which arise in the ordinary course of business.
Management does not believe that the outcome of any of these legal matters will
have a material adverse effect on the Company's results of operation or
consolidated financial position.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
27 -- Financial Data Schedule
(b) Reports on Form 8-K.
None
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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.
February 25, 2000 By: /s/ MAX P. WATSON JR.
-------------------------------------
Max P. Watson Jr.
Chairman of the Board, President and
Chief Executive Officer
February 25, 2000 By: /s/ WILLIAM M. AUSTIN
-------------------------------------
William M. Austin
Senior Vice President and
Chief Financial Officer
February 25, 2000 By: /s/ JOHN W. COX
--------------------------------------
John W. Cox
Chief Accounting Officer
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INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------
27 -- Financial Data Schedule