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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED MARCH 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 0-17136
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BMC SOFTWARE, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 74-2126120
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
BMC SOFTWARE, INC.
2101 CITYWEST BOULEVARD
HOUSTON, TEXAS 77042-2827
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (713) 918-8800
Securities Registered Pursuant to Section 12(b) of the Act:
None
Securities Registered Pursuant to Section 12(g) of the Act:
Common Stock, par value $.01 per share
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the registrant's voting stock held by
non-affiliates of the registrant, based upon the last reported sale price of the
registrant's Common Stock on June 27, 1997 was $5,615,519,168.
As of June 27, 1997, there were outstanding 101,374,702 shares of Common
Stock, par value $.01, of the registrant.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the following documents are incorporated by reference in this
report:
Definitive Proxy Statement to be filed in connection with the
registrant's Annual Meeting of Stockholders currently scheduled to be
held on August 25, 1997 (Part III of this Report)
Such Proxy Statement shall be deemed to have been "filed" only to the
extent portions thereof are expressly incorporated by reference.
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This Annual Report contains certain forward looking statements within the
meaning of Section 27A of the Securities Act of 1933, as amended, and Section
21E of the Securities Act of 1934, as amended. Actual results could differ
materially from those indicated by such forward looking statements as a result
of numerous important factors, certain of which are described herein. Readers
should pay particular attention to the risk factors described in the section of
this Report entitled "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Forward Looking Information and Certain
Risks and Uncertainties That Could Affect Future Operating Results." Readers
should also carefully review the cautionary statements described in the other
documents the Company files from time to time with the Securities and Exchange
Commission, specifically all Quarterly Reports on Form 10-Q and Current Reports
on Form 8-K filed by the Company.
PART I
ITEM 1. BUSINESS
OVERVIEW
BMC Software, Inc. ("BMC" or the "Company") is a leading worldwide provider
of high-performance systems management software products for mainframe and
client/server based information systems. BMC also sells and provides
maintenance, enhancement and support services for its products. BMC's principal
customers are transaction and information intensive enterprises that rely
heavily on their computing systems and are typically Fortune 1000 industrial and
service corporations and similarly sized organizations worldwide. From
inception, the Company has focused on addressing these customers' critical
operational problems associated with their computers, databases and networks.
The Company's products are organized into three groups: Data Management,
Application Management and Performance Optimization, which are described under
"Products" below. The Company distributes its products through its
well-established direct sales force, sales agents, and through its network of
indirect channels including value-added resellers, enterprise hardware and
software vendors and systems integrators.
Historically, BMC developed and sold products that enhanced and improved
the operations of IBM's OS/390 (formerly known as "MVS") mainframe operating
system and IMS and DB2 mainframe database management systems. This remains the
Company's principal business. The Company's most important product lines by
revenue and earnings contribution are its high performance utilities for IMS and
DB2 and its database administration products for DB2. The high performance
utilities maximize the availability of large IMS and DB2 databases by providing
core services, such as copying, loading, unloading and reorganizing a database,
far more quickly and efficiently than the utilities native to these databases.
The administrative products for DB2 include a DB2 performance monitor and the
change management products for DB2, which automate routine and repetitive tasks
necessary to the operation of large DB2 databases. The high speed utilities for
IMS and DB2 and the administrative products for DB2 generated approximately 63%
of total revenues in fiscal 1997 and a higher percentage of net earnings.
Beginning in 1994, the Company concentrated its efforts on diversifying
into the client/server systems management market and has invested significantly
in its client/server product strategies to date. The Company now has a portfolio
of over 80 systems management products for client/server systems that operate in
a wide range of operating system environments and with all of the leading
database management systems ("DBMS"). Led by the PATROL family of products,
which monitor and manage client/server operating systems, DBMSs and
applications, the Company's client/server products generated approximately 19%
of total revenues in fiscal 1997. The Company is integrating its mainframe and
client/server product offerings in furtherance of its Cooperative Enterprise
Management Solutions ("CEMS") strategy. CEMS emphasizes enterprise-wide support
of the disparate mix of hardware platforms, DBMSs and applications that
characterizes large-scale computing systems. The Company believes that it is
well positioned to meet customers' requirements for broad-based platform support
based on its leadership position as a vendor of systems management tools and
utilities for mainframe computers and since PATROL is architecturally designed
to support multiple platforms with minimal additional development efforts.
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BMC was organized as a Texas corporation in 1980 and was reincorporated in
Delaware in July 1988. Its principal corporate offices are located at 2101
CityWest Blvd., Houston, TX 77042-2827. Its telephone number is (713) 918-8800.
STRATEGY
Most large commercial and governmental organizations are becoming
increasingly dependent upon information technology to conduct their businesses
competitively and efficiently. Consequently, information systems have become
more complex and both geographically and technologically distributed. So, while
maximum availability and performance of information systems are critical, the
complexity and distributed nature of these systems makes these goals difficult
to achieve. BMC's strategy is to provide enterprise systems management products
that address and solve critical operational problems on the varied platforms
deployed by its customers.
The foundation of the Company's CEMS strategy is its commitment to
heterogeneous platform support. BMC continues to support the OS/390 operating
system for the mainframe environment while investing heavily in new technology
for the client/server operating environments. The Company believes that the
OS/390 mainframe operating system, DBMSs and applications operating therein
continue to represent the most effective computing environment for large scale,
transaction intensive enterprises. This belief has been validated by the
increased demand for mainframe processing capacity over the past 24 months.
Beginning in fiscal 1994, the Company has extended its product offerings into
the open systems market through the acquisition, enhancement and internal
development of technologies for a wide variety of operating systems and
platforms. The following table sets forth a sample of the operating systems,
DBMSs and applications with which the Company's products operate:
OPERATING SYSTEMS DBMSS APPLICATIONS
- ----------------- ----- ------------
- - Netware - ADABAS - Microsoft Exchange
- - OS/390 - CA-Ingres - Lotus Notes
- - OS/2 - DB2 - Oracle Financials
- - Open VMS - IMS/DB - PeopleSoft
- - UNIX - IMS/Fast Path - SAP
- - Windows - Informix
- - Windows NT - Microsoft SQL Server
- Oracle
- Sybase
The success of the CEMS strategy and ultimately the securing of a
competitive advantage in its markets is dependent upon several key initiatives,
including the distribution of BMC technology through third-party sales and
marketing channels, and the integration of BMC technology with complementary
technology from leading third-party systems software vendors. In order to
maximize its reach into the broad open information systems market, the Company
has entered into distribution arrangements with several large scale enterprise
hardware and software vendors such as Digital Equipment Corp. ("DEC"), Groupe
Bull ("Bull"), Hewlett-Packard Corp. ("HP"), and Siemens AG ("Siemens"). In
addition to these distribution arrangements, the Company has also contracted for
the resale of its products through numerous systems integrators and value-added
resellers. These indirect channels increase the awareness of BMC's products in
the marketplace and the Company believes, in many cases, offer a competitive
advantage by introducing BMC products as a component of a larger,
enterprise-wide hardware/software solution. In fiscal 1997, these indirect
distribution channels produced approximately $23 million in client/server
license revenues.
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In recent years, there have been numerous technological advancements and
product introductions in the areas of systems management and security,
internet/intranet applications and data warehousing. The Company believes that
its PATROL products offer key solutions in each of these areas. In order to
effectively address these solutions, BMC has integrated its technology with
and/or partnered with leading vendors in each of these areas to deliver
comprehensive, enterprise-wide solutions. The following table sets forth a
sample of the products and vendors with which the Company has partnered and/or
integrated with in the above mentioned areas of technology:
MANAGEMENT/SECURITY INTERNET/INTRANET DATA WAREHOUSING
------------------- ----------------- ----------------
- - Unicenter (Computer Associates) - Spyglass - DataReach (EMC)
- - OpenView (HP) - Enterprise Server (Netscape) - Red Brick Warehouse
- - TME (IBM) - Cisco* (Red Brick)
- - Command/POST (Boole & Babbage) - Compaq* - CONNECT (Sybase)
- - OmniGuard (AXENT) - Intel*
- - ISM/Open Master (Bull) - Microsoft*
- - VISION (Unify)
- - SPECTRUM (Cabletron)
- ---------------
* These companies, along with BMC, are members of the Web-Based Enterprise
Management ("WBEM") effort; an industry standards effort that will allow
administrators to use any Web browser to manage disparate systems, networks
and applications.
PRODUCT DEVELOPMENT HISTORY
BMC's product development originated with its 3270 OPTIMIZER series for
IBM's IMS/DB and CICS environments. These products provide improved network
response time, thus reducing operating costs and delaying the need for network
upgrades. The 3270 OPTIMIZER series established the Company's reputation for
delivering value-added products which are easy to install and use. This network
optimization line has been systematically enhanced since its introduction,
resulting in the currently marketed ULTRAOPT(TM)/IMS and ULTRAOPT(TM)/CICS
introduced in fiscal 1994 and fiscal 1996, respectively.
From fiscal 1983 to fiscal 1987, the Company introduced its core
reorganization utilities for the IBM IMS/DB environment: SECONDARY INDEX
UTILITY, LOADPLUS(C) and UNLOAD PLUS(C). These utilities, which remain a key
component of many of the largest IMS/DB environments operating currently, reduce
system downtime by dramatically reducing the time necessary to perform database
reorganizations. During the same time period, BMC introduced its DELTA IMS(C)
product line, which speeds and simplifies changes within the IMS/DB environment.
Again, these products deliver technology on which many IMS/DB users rely for the
ongoing operation of their information systems even today. In fiscal 1989, the
Company acquired Trimar Software Systems Ltd. ("Trimar"). Similar to the
Company's IMS/DB utilities, the Trimar technology offers high speed
reorganization for IBM's IMS/VS Fast Path systems for very large, transaction
intensive environments.
From fiscal 1988 to fiscal 1992 BMC extended its high speed reorganization
functionality to the IBM DB2 environment and introduced its DB2 administrative
tools. The key components of the DB2 reorganization suite are REORG PLUS for
DB2(C), LOADPLUS(C) for DB2(C) and UNLOAD PLUS(C) for DB2(C). The DB2(C)
administrative tools, ALTER for DB2(C), CATALOG MANAGER for DB2 and DASD MANAGER
for DB2(C) automate and simplify DB2 maintenance, querying and structural
manipulation. In fiscal 1993, the Company introduced CHANGE MANAGER for DB2(C),
a powerful administrative solution which provides data structure manipulation,
dependency analysis, structure migrations, migration of changes and version
control.
In fiscal 1994, the Company acquired Patrol Software Pty. Ltd and its
PATROL applications management technology. This technology allows for the
automated management by exception of applications, DBMSs and operating systems
distributed throughout an enterprise's computing environment. Since acquiring
the technology, the Company has introduced over 30 additional components to the
PATROL product family. In November 1995, BMC acquired Peer Networks, Inc. and
its technology which adds to PATROL support
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for the Simple Network Management Protocol ("SNMP"), the leading protocol for
network management and the leading standard for information collection in
multi-vendor computing environments.
In March 1995, the Company entered into an agreement with DataTools, Inc.
("DataTools") to act as an exclusive distributor of DataTools' SQL-BackTrack
products which automate and manage the DBMS backup process. The SQL-BackTrack
technology currently supports the DBMS products from Informix Corp.
("Informix"), Oracle Corporation ("Oracle") and Sybase, Inc. ("Sybase"). During
Fiscal 1997, the Company introduced its PATROL SQL-BackTrack KM which integrates
SQL-BackTrack into the PATROL environment, adding a graphical user interface
("GUI") and management capability. In May of 1997, BMC purchased all of the
outstanding shares of DataTools. The Company intends to continue marketing the
SQL-BackTrack products as both a point solution for backup functionality and as
an integrated component of the Company's data management solution set.
In January 1996, BMC acquired HawkNet, Inc. ("HawkNet"), the developer of
NetTUNE PRO which enables network managers to both monitor and tune multiple
network servers across an enterprise. In its original version, NetTUNE PRO was
compatible with only Novell, Inc.'s ("Novell") NetWare operating system. During
fiscal 1997, BMC extended the product's functionality to the Windows NT
environment from Microsoft Corp. ("Microsoft"). Also during fiscal 1997, the
Company introduced its OPERTUNE(C) products for the HP/UX and Solaris UNIX
operating systems from HP and Sun Microsystems, Inc. ("Sun"), respectively.
Similar to NetTUNE PRO, these products provide dynamic tuning capabilities for
the operating system.
In fiscal 1996, the Company introduced the Extended Performance line of
DBMS utilities for IMS/DB and IMS/Fast Path which offer dramatically improved
performance over the native DBMS utilities and exploit IBM's Parallel Sysplex
technology, allowing for the coupling of multiple mainframe central processing
units ("CPUs") for increased processing capacity. In fiscal 1997, BMC introduced
7 additional titles for IBM's OS/390-based DBMSs, including 3 DB2 administrative
tools which use a GUI common to the Company's open systems administrative tools.
This common GUI reduces the complexity of managing multiple DBMSs by rendering
transparent the movement from the OS/390 operating system to the client/server
operating systems.
In June 1996, BMC and IBM entered into a joint technology agreement to
bring the benefits of parallel processing and System/390's Parallel Sysplex
computing technology to customers using batch processing. By integrating the
Company's BATCH ACCELERATOR technology into its SmartBatch for OS/390 product,
IBM provides its Parallel Sysplex customers the ability to transparently and
dynamically split existing batch jobs into individual steps that are then routed
for concurrent execution to other processors based on processor speed and
resource availability. IBM began selling the SmartBatch for OS/390 product under
an exclusive distribution agreement in the fourth quarter of fiscal 1997.
In fiscal 1996, BMC introduced the first of its DBMS administration
products for the client/server systems operating environments. PATROL DB-Voyager
and PATROL DB-Alter provide advanced DBMS query, browsing, schema change and
migration capabilities accessed through an intuitive GUI. By the end of fiscal
1996, these products supported UNIX-based DBMSs from Oracle, Sybase and IBM. In
fiscal 1997, these products were extended to the DBMS products from Informix
Corp. ("Informix") and the SQL Server DBMS from Microsoft, which functions in
the Windows NT operating system environment. During fiscal 1997, BMC also
introduced PATROL DB-Change Manager for the Oracle and Sybase DBMSs. This
product streamlines the process of managing changes to applications at the
application or system level.
Subsequent to March 31, 1997, the Company introduced its PATROL CGI Server
product. CGI, or the Common Gateway Interface, is the de facto industry standard
(API) for applications that must communicate with Web servers to perform dynamic
tasks associated with viewing information over the internet. CGI applications
have a number of inherent limitations that inhibit availability, performance,
scalability and reliability. PATROL CGI Server reduces contention between CGI
applications and other Internet services to
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increase availability and performance of CGI applications, Web server, and
internet pages. Additionally, in April 1997, BMC announced a strategic alliance
with EMC Corporation ("EMC") for joint marketing, sales, support and future
development of EMC's DataReach product. EMC DataReach software provides data
warehouses with faster and more frequent access to mainframe-based data.
PRODUCTS
Data Management
The Company's data management product line includes its high performance
utilities, backup and recovery management and database administration series of
products. These product lines are designed to provide comprehensive management
of the enterprise database resulting in improved integrity, increased
availability and more efficient use of scarce resources within the information
systems environment. The data management products for IMS/DB and DB2 have
historically been the Company's largest revenue source. In each of the last
three fiscal years, these products have generated over 60% of total revenues and
higher percentages of net earnings. The client/server data management offerings
represent the Company's fastest-growing product series. Excluding SQL-BackTrack,
these products accounted for approximately 4% of total revenues for fiscal
1997 -- an increase of over 900% from fiscal 1996. The SQL-BackTrack products
represented approximately 3% of total revenues for the year ended March 31,
1997, and all other data management products accounted for an additional 3% of
total revenues.
Large enterprise DBMSs require periodic maintenance in order to optimize
performance and ensure data integrity. These maintenance processes are time
consuming and often render the DBMS inaccessible to users, thus disrupting
business operations. The Company's high performance utilities dramatically
increase the speed of these maintenance processes and condense the number of
steps required, resulting in higher DBMS availability. In addition to the
utilities for IMS/DB and DB2 discussed above, the Company offers high
performance utilities for the IMS/VS Fast Path environment. These products
contributed approximately 3% of total revenues for fiscal 1997.
Backup and recovery management products automate the process of recovering
databases and restarting applications after an outage. These products provide a
comprehensive approach across multiple platforms and provide assurance that
critical data is recoverable after both a local outage or a disaster. The
products eliminate manual, error-prone steps, reduce redundant reprocessing work
following an outage and provide an audit of recoverability. The Company's
RECOVERY MANAGER product supports coordinated recovery between IMS/DB and DB2
DBMSs eliminating the need for individual DBMS recoveries in these environments.
In fiscal 1996, BMC extended its RECOVERY MANAGER technology to the DBMSs
offered by Oracle and Sybase. This product series also includes the
SQL-BackTrack products from DataTools and the APPLICATION RESTART CONTROL
products, which provide the ability to resume processing of a failed or
interrupted batch application from the most recent successful checkpoint rather
than from the beginning of the job step. This restart capability eliminates
wasted time and resources while improving data availability and ensuring data
integrity.
The database administration products for IBM's DB2 for OS/390 and the
client/server DBMSs provide for the creation, modification, migration and
versioning of database schemas and can initiate the activities of the database
utilities to provide maintenance functions and increase performance. In keeping
with its dedication to heterogeneous support, the Company has created a common
GUI which allows the user to access the administrative tools across multiple
DBMSs. BMC is currently integrating this GUI into its existing administrative
tools for DB2 for OS/390. The Company has also introduced its PATROL DB-Admin KM
which provides integration between the database administration products and the
PATROL management technology.
Application Management
The Company's PATROL management suite of products delivers comprehensive
solutions that improve performance while automating control of increasingly
complex, heterogeneous environments. PATROL uses a unique, three-tiered
architecture comprised of the (1) console, (2) agent and (3) knowledge module
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("KM"). The console graphically depicts all applications, operating systems,
DBMSs and underlying resources being monitored and managed by PATROL. The user
may access this information through the native console or use the PATROLVIEW
product to view information through leading systems management framework
consoles such as OpenView from HP, Unicenter from Computer Associates or TME
from IBM.
The autonomous, intelligent agent, which resides on the DBMS or application
server, is equipped to take corrective action on its own without communication
with the central console. By reducing the amount of communication between the
console and agent, network traffic is reduced, thus the PATROL product is
capable of scaling up to thousands of servers. Exception reporting and
corrective actions are communicated to the console on an "as needed" basis as
defined by the user.
The KM component incorporates knowledge specific to the individual
operating systems, DBMSs and applications. The KM architecture, through the use
of the Patrol Scripting Language, allows for rapid development to extend the
PATROL product's management capabilities to additional platforms. In addition to
its own internal development efforts, the Company is also licensing a KM tool
kit to third parties, allowing for external development of KM technology to fit
into the management suite. Furthermore, BMC is using the extensibility of the KM
architecture to integrate PATROL's management capabilities into its own
products, as evidenced by the PATROL DB-Admin, PATROL SQL-BackTrack and PATROL
CGI Server KMs.
During fiscal 1997, the PATROL management product series contributed
approximately 12% of total revenues.
Performance Optimization
BMC's performance optimization product line includes both its network
optimization and data availability and optimization series. The network
optimization products, which contributed approximately 4% of total revenues in
fiscal 1997, provide performance and availability enhancements for mainframe
networks. These products minimize the number of characters transmitted across
telecommunications networks connecting host mainframe CPUs and end-user
terminals, thus increasing response time and decreasing network traffic.
The data availability and optimization products provide transparent
management of enterprise data, resulting in increased availability and
performance of the operating systems, DBMSs and applications with which they
operate. The DELTA IMS line allows organizations to define IMS system
components, expand user access and increase the size of the network without
extensive programming or impact to IMS/DB application access. The data
compression products for the OS/390-based DBMSs and VSAM data sets deliver
advanced compression techniques and options that maximize storage and
input/output performance. BMC's EXTENDED BUFFER MANAGER ("XBM") products for
IMS/DB and DB2 improve system performance by greatly reducing the input/output
needed to provide access to data frequently used by one or more applications
running in the same operating environment. When coupled with the Company's IMAGE
COPY PLUS or COPY PLUS for DB2 products, XBM allows for the creation of DBMS
backup copies with limited interruption of access to the data stored within the
DBMS.
The Company has introduced several new products in its availability and
optimization series over the past 12 months, including the SmartBatch for
OS/390, OPERTUNE and PATROL CGI Server products discussed above. These products
are focused on providing improved performance for the emerging Parallel Sysplex,
open systems and internet technologies. The availability and optimization series
generated approximately 8% of total revenues for the year ended March 31, 1997.
SALES AND MARKETING
BMC sells its mainframe products primarily through its direct sales force
and its client/server products through its direct sales force and indirect sales
channels. In its direct sales channel, the Company continues to employ
telephonic sales, or "telesales," to sell its products and encourage prospects
to test its products on a free trial basis. The direct sales channel is
organized into mainframe and open systems groups, although the mainframe
representatives cooperate extensively with the open systems representatives in
large account situations. The Company does not employ further product
specialization of its sales force and instead relies
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upon its software consultants for detailed technical knowledge of a given
product. As of March 31, 1997, the Company's direct sales force employed 147
sales representatives in North America and 134 international sales
representatives. The Company employs an additional 39 sales representatives,
worldwide, responsible for managing the indirect sales channels.
The Company employs technically trained software consultants to provide
specialized technical product knowledge to accounts, particularly in the DB2 and
open systems markets. These consultants assist in installing the Company's
products and conducting in-depth technical evaluations of their performance and
features. In many cases, the software consultants provide these services
on-site. The Company has significantly expanded its staff of software
consultants as competition in the DB2 tools and utilities markets has increased
and as open systems sales have grown. As of March 31, 1997, the Company employed
121 software consultants.
The Company's North American sales force is primarily based in Houston,
Texas. The Company has also opened field sales offices in Washington, D.C., Los
Angeles and San Francisco, California, Chicago, Illinois, and New York City to
increase it direct presence in the regions surrounding those cities. The Company
also staffs the offices with software consultants to reduce the overall travel
requirements to these regions. As discussed under "Strategy" above, the Company
is developing indirect channels for its open systems products. The Company has
established a channels operations group to promote, negotiate and support such
distribution arrangements and is continuing to invest in its channels
infrastructure.
INTERNATIONAL OPERATIONS
Approximately 39%, 41% and 38% of the Company's total revenues in fiscal
1995, 1996 and 1997, respectively, was derived from business outside North
America.
The Company conducts its international sales, marketing and support
primarily through 17 wholly-owned subsidiaries worldwide. These offices employ
the same telesales and telephone support strategies the Company employs in North
America, although the international subsidiaries typically conduct more frequent
on-site sales and support calls because of greater geographic proximity to
customers and prospects. In fiscal 1997, the Company established direct sales
subsidiaries in Austria, Hong Kong and Korea. In addition to its subsidiaries,
the Company is represented by numerous independent agents worldwide.
Total revenues, operating profits and identifiable assets attributable to
the Company's North American, European and other international operations
(primarily in the Pacific Rim) are set forth in Note 10 to the Consolidated
Financial Statements contained herein. The Company believes that its operations
outside the United States are located in countries that are politically stable
and that such operations are not exposed to any special or unusual risks. The
Company's growth prospects are highly dependent upon the continued growth of its
international license and software maintenance revenues. The Company's
international license revenues and expenses have, however, been somewhat
unpredictable at times over the last three fiscal years.
Revenues from the Company's foreign subsidiaries are denominated in local
currencies, as are operating expenses incurred in these locales. To date, the
Company has not had any material foreign exchange currency losses. For a
discussion of the Company's currency hedging program and the impact of currency
fluctuations on international license revenues in fiscal 1996 and 1997, see
"Management's Discussion and Analysis of Results of Operations and Financial
Conditions -- Results of Operations -- Expenses -- Risk Management" and Note
1(g) of Notes to Consolidated Financial Statements contained herein. The Company
has not previously experienced any difficulties in exporting its products, but
no assurances can be given that such difficulties will not occur in the future.
RESEARCH AND PRODUCT DEVELOPMENT
The Company continues to invest a significant amount of its resources in
its internal research and development operations. These costs relate primarily
to the compensation of research and development personnel. As of March 31, 1997,
approximately half of the Company's employees were research and development and
support personnel. The Company's expenditures on research and development and on
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product maintenance and support, including amounts capitalized, in the last
three fiscal years are discussed below under the headings, "Management's
Discussion and Analysis of Results of Operations and Financial
Condition -- Expenses -- Research and Development" and "-- Expenses -- Cost of
Maintenance Services and Product Licenses."
The Company's CEMS strategy of supporting a broad variety of open systems
platforms with its products increases the complexity and difficulty of
developing new products and requires greater cooperation between development
teams than its traditional mainframe tools and utilities. The Company has
experienced delays in certain of its product introductions as a result.
The Company's research, development and support teams are organized around
product groups and are led by product authors, who are key developers that
receive incentive commissions on product sales. At March 31, 1997, the Company
employed 52 such product authors. The development of client/server products
generally requires larger teams and a more cooperative development approach, so
that the Company modified its author commission plan to provide performance
incentives to team members beyond the product author. The Company's primary
research and development activities are based in Houston and Austin, Texas. In
addition to its North American development operations, the Company maintains
development centers in Singapore and Frankfurt, Germany. These development
centers are primarily engaged in providing local language support and
integration with local-market hardware and software systems vendors.
MAINTENANCE, ENHANCEMENT AND SUPPORT SERVICES
Revenues from the provision of maintenance, enhancement and support
services comprised 41%, 37% and 32% of total revenues in fiscal 1995, 1996 and
1997, respectively. Payment of maintenance, enhancement and support fees
entitles a company to telephone support and problem resolution services and
enhanced versions of a product released during the maintenance period, including
new versions necessary to run with the most current release of the operating
systems, databases and other software supported by the product. Such maintenance
fees are an important source of recurring revenue to the Company, and the
Company invests significant resources in providing maintenance services and new
product versions. These services are also important to customers, particularly
mainframe customers, who require prompt problem resolution because of their
dependence on the products to run information systems that are central to their
enterprises. The services are also necessary because customers require forward
compatibility when they install new versions of the systems software supported
by a particular BMC product. The Company internally creates and produces all
user manuals, sales materials and other documentation related to its products.
For the Company's mainframe products, the fee for the first year of product
maintenance services is included in the perpetual license fee. Subsequently,
perpetual licensees may renew their maintenance agreements each year for an
annual fee. The annual fee for mainframe products is generally 18% to 20% of the
then current list perpetual license fee of the licensed product as adjusted for
any applicable discounts. For the Company's client/server products, the initial
maintenance period is shorter and the renewal fee varies depending on the level
of support selected by the licensee.
PRODUCT PRICING AND LICENSING
The Company's mainframe products are generally priced and licensed on a
tiered pricing basis whereby the license fee for a product increases in relation
to the processing capacity of the CPU on which the product is installed. Under
tiered pricing, CPUs are classified by CPU tier according to their processing
power as measured in millions of instructions per second ("MIPS"). More powerful
CPUs fall into higher tiers and carry higher license fees. CPU upgrade fees are
charged if a product is installed on another CPU that falls in a higher CPU
group category. Under the Company's enterprise licensing program, customers may
alternatively license products on an enterprise wide basis, whereby the customer
can use the products on an unlimited number of CPUs of any size, subject to a
limit on the aggregate processing power of such CPUs as measured in MIPS. CPU
upgrade fees contributed 20%, 23% and 28% of total revenues in fiscal years
1995, 1996 and 1997, respectively. Because maintenance fees are based on the
license fee for the product as of the annual renewal date, maintenance fees
increase when a product is installed on a larger CPU.
8
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The Company maintains various discount programs for its mainframe and open
systems products, including standard discounts for multiple copies of a product,
discounts for enterprise license transactions and discounts for its DB2
products.
The Company also prices and licenses PATROL on a CPU tier basis. Because
PATROL is a relatively new product and because many of its licensees are still
in a pilot or implementation phase of use, CPU upgrade fees from PATROL have
been immaterial to date. The Company expects that PATROL revenues will be
predominately from additional unit sales rather than CPU upgrade fees, but that
such CPU upgrade fees will increase over time. Certain of the Company's other
client/server products are also licensed on a tiered basis, while those at lower
price points are licensed on a per unit basis.
BMC's products are generally marketed on a trial basis. When a customer
desires to license a trialed product, a permanent product copy or a coded
password to convert the trial tape to a permanent tape is provided.
Consequently, the Company does not have any material product backlog of
undelivered products. The Company licenses its software products almost
exclusively on a perpetual basis.
BMC recognizes revenues from perpetual licenses and upgrade fees when both
parties are legally obligated under the terms of the respective agreement, the
underlying software products have been shipped, collection is deemed probable
and there are no remaining material Company obligations. The Company recognizes
maintenance revenue, including maintenance bundled with perpetual license fees,
ratably over the maintenance period.
For a discussion of enterprise license transactions, the various components
of license and upgrade revenues and the Company's revenue recognition practices
for such components, see the discussion below under the heading "Management's
Discussion and Analysis of Results of Operations and Financial
Condition -- Operating Results -- Revenues -- License Revenues" and Note 1(h) in
Notes to Consolidated Financial Statements.
COMPETITION; SYSTEM DEPENDENCE
The Company's mainframe products run primarily with IBM's IMS/DB and DB2
database management systems and IMS/TM, CICS and VTAM data communications
systems. Certain of these products are essentially improved versions of system
software utilities that are provided as part of these integrated IBM system
software products. IBM continues to improve or add to these integrated software
packages as part of its strategic initiative of reducing the overall software
costs associated with its mainframe computers. If IBM is successful in
duplicating the Company's products, it could provide them at little or nominal
additional cost to the customer. This would likely have a material adverse
effect on demand for new licenses and recurring maintenance of the Company's
competing products.
The mainframe systems software business is highly competitive. BMC's
competitors include IBM and several independent software vendors that have the
ability to develop and market products similar to, and competitive with, the
Company's products. The market for DB2 tools and utilities is far more
competitive than the Company's IMS markets and continues to increase in
competitiveness. Product pricing is a key competitive factor in the market for
third-party tools and utilities for DB2, and the Company has periodically
adjusted its discount structure for its DB2 products to maintain its
competitiveness in this market.
The client/server markets the Company is addressing are competitive to an
even greater degree than the mainframe systems software market. All of the major
mainframe systems software vendors have announced client/server strategies that
appear to overlap to varying degrees with PATROL and BMC's other client/ server
products. The relational DBMS vendors, such as Oracle and Sybase, and hardware
companies such as HP, Sun Microsystems Inc. and Cabletron, are also providing
competitive or potentially competitive products. PATROL overlaps with network
management products, such as HP's OpenView and Cabletron's SPECTRUM, and with
systems management frameworks such as CA-Unicenter and Tivoli's TME. The
Company's strategy is to complement these frameworks by integrating with them.
It is likely, however, that the network and systems management framework
providers will, over time, attempt to extend their products into PATROL's
functional space. In addition, the barriers to entry are far lower in the
client/server software
9
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markets, as computer resources are far less expensive, development skills are
more widespread and venture funding is widely available. The Company expects
these markets to continue to increase in competitiveness.
The Company continually modifies its mainframe products to maintain
compatibility with new IBM hardware and software. To maintain such compatibility
and to develop and test new products, the Company licenses IMS/DB, DB2, IMS/TM,
CICS and other software systems from IBM on similar terms as other IBM
customers. If IBM were to terminate the current license arrangements or
otherwise deny the Company access to these systems, or if IBM adopts
technological changes that prevent or make more difficult access to the systems,
the Company would be adversely affected. Similarly, if the Company is unable to
acquire and maintain access to the major client/server relational DBMSs similar
to its access to DB2 and other IBM systems software, its development of
client/server products would be impeded. Certain of the leading client/server
DBMS vendors are less cooperative in providing technical assistance to
independent systems software vendors.
The Company believes that the key criteria considered by potential
purchasers of its products are as follows: the operational advantages and cost
savings provided by a product; product quality and capability; product price and
the terms on which the product is licensed; ease of integration of the products
with the purchaser's existing systems; quality of support and product
documentation; and the experience and financial stability of the vendor.
CUSTOMERS
No individual customers accounted for a material portion of the Company's
revenues during any of the past three fiscal years. Since the Company's
mainframe packages are used with relatively expensive computer hardware, most of
its revenues are derived from companies that have the resources to make a
substantial commitment to data processing and their computer installations. Most
of the world's major companies use one or more of the Company's software
packages. The Company's software products are generally used in a broad range of
industries, businesses and applications. The Company's customers include
manufacturers, telecommunications companies, financial service providers, banks,
insurance companies, educational institutions, retailers, distributors,
hospitals and value-added resellers.
INTELLECTUAL PROPERTY
The Company distributes its products in object code form and relies upon
contract, trade secret, copyright and patent laws to protect its intellectual
property. The license agreements under which customers use the Company's
products restrict the customer's use to its own operations and prohibit
disclosure to third persons. The Company is, however, in some cases distributing
its client/server products on a shrink wrap basis and the enforceability of such
restrictions in a shrink wrap license is uncertain. Also, notwithstanding those
restrictions, it is possible for other persons to obtain copies of the Company's
products in object code form. The Company believes that obtaining such copies
would have limited value without access to the product's source code, which the
Company keeps highly confidential. In addition, the Company's products are
generally encoded to run only on a designated CPU, and trial tapes provided to
potential customers generally function only for a limited trial period.
EMPLOYEES
As of March 31, 1997, the Company had 1,813 full-time employees. The
Company believes that its continued success will depend in part on its ability
to attract and retain highly skilled technical, sales, marketing and management
personnel. Competition is particularly intense for client/server sales and
development personnel. The Company considers its employee relations to be
excellent.
ITEM 2. PROPERTIES
The Company's headquarters and principal sales and product development
operations are located in Houston, Texas, where the Company owns and occupies a
450,000 square foot office building. The Company has begun construction of an
additional office facility for its Houston headquarters. The new facility will
have
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approximately 225,000 square feet of space and will cost approximately $43
million. The Company leases a 100,000 square foot product development office in
Austin, Texas and its marketing and support offices in Sao Paulo, Brazil;
Camberley, England; Frankfurt, Germany; Milan and Rome , Italy; Paris, France;
Tokyo, Japan; Madrid and Barcelona, Spain; Melbourne and Sidney, Australia;
Copenhagen, Denmark; Nieuwegein and Hoofddorp, Netherlands; Vienna, Austria;
Zurich, Switzerland; Seoul, Korea; Hong Kong; Singapore and Brussels, Belgium.
The Company leases its principal mainframe computers, an IBM ES9000-952, an IBM
390 600S and a CMOS-1, and its telecommunications equipment. See Notes 1(e) and
9 of Notes to Consolidated Financial Statements below.
ITEM 3. LEGAL PROCEEDINGS
The Company is subject to various legal proceedings and claims, either
asserted or unasserted, which arise in the ordinary course of business. While
the outcome of these claims cannot be predicted with certainty, 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 operations or consolidated financial
position.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not Applicable.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Since August 12, 1988, the Company's Common Stock has been traded in the
NASDAQ National Market System under the symbol "BMCS." At June 27, 1997, the
Company had 645 holders of record of Common Stock.
The following table sets forth the high and low bid quotations per share of
Common Stock for the periods indicated.
PRICE RANGE OF
COMMON STOCK
----------------
HIGH LOW
------ ------
FISCAL 1996
First Quarter............................................. $20.25 $13.81
Second Quarter............................................ 25.75 17.25
Third Quarter............................................. 23.13 16.25
Fourth Quarter............................................ 30.69 18.63
FISCAL 1997
First Quarter............................................. $33.88 $26.63
Second Quarter............................................ 43.13 25.38
Third Quarter............................................. 46.75 39.25
Fourth Quarter............................................ 51.00 39.75
The Company has not paid any dividends since 1988 and does not intend to
pay any cash dividends in the foreseeable future. The Company currently intends
to retain any future earnings otherwise available for cash dividends on the
Common Stock for use in its operations, for expansion and for stock repurchases.
See "Management's Discussion and Analysis of Results of Operations and Financial
Condition -- Liquidity and Capital Resources."
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ITEM 6. SELECTED FINANCIAL DATA
The following selected consolidated financial data presented under the
captions "Statement of Earnings Data" and "Balance Sheet Data" for, and as of
the end of, each of the years in the five-year period ended March 31, 1997, are
derived from the consolidated financial statements of BMC Software, Inc. and
subsidiaries. The financial statements for all fiscal years presented have been
audited by Arthur Andersen LLP, independent public accountants. The selected
consolidated financial data should be read in conjunction with the consolidated
financial statements as of March 31, 1996 and 1997, and for each of the three
years in the period ended March 31, 1997, the accompanying notes and the report
thereon, which are included elsewhere in this Form 10-K.
YEARS ENDED MARCH 31,
--------------------------------------------------------
1993 1994 1995 1996 1997
-------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
STATEMENT OF EARNINGS DATA:
Revenues:
Licenses.......................... $136,901 $167,176 $204,957 $269,022 $380,894
Maintenance....................... 101,599 121,324 140,043 159,828 182,316
-------- -------- -------- -------- --------
Total revenues............ 238,500 288,500 345,000 428,850 563,210
Selling and marketing expenses...... 67,263 75,198 89,724 116,724 154,829
Research and development expenses... 38,131 46,969 55,493 59,011 77,459
Cost of maintenance services and
product licenses.................. 23,289 28,216 31,960 44,854 56,569
General and administrative
expenses.......................... 23,732 26,175 29,935 37,083 46,070
Acquired research and development
costs............................. -- 32,038 29,260 23,589 11,259
-------- -------- -------- -------- --------
Operating income(2)(3)(4)(5)........ 86,085 79,904 108,628 147,589 217,024
Other income........................ 7,323 10,708 11,704 15,446 20,050
-------- -------- -------- -------- --------
Earnings before income
taxes(2)(3)(4)(5)................. 93,408 90,612 120,332 163,035 237,074
Income taxes........................ 28,022 34,123 42,815 57,464 73,202
-------- -------- -------- -------- --------
Net
earnings(2)(3)(4)(5).... $ 65,386 $ 56,489 $ 77,517 $105,571 $163,872
======== ======== ======== ======== ========
Earnings per share(1)(2)(3)(4)(5)... $ 0.62 $ 0.54 $ 0.76 $ 1.01 $ 1.53
======== ======== ======== ======== ========
Shares used in computing earnings
per share(1)...................... 104,708 104,608 101,952 104,572 107,155
======== ======== ======== ======== ========
AS OF MARCH 31,
--------------------------------------------------------
1993 1994 1995 1996 1997
-------- -------- -------- -------- --------
(IN THOUSANDS)
BALANCE SHEET DATA:
Cash and cash equivalents........... $ 44,797 $ 37,814 $ 39,494 $ 62,128 $ 79,794
Working capital..................... 74,449 29,429 35,166 43,775 43,719
Total assets........................ 378,652 417,527 502,649 608,218 844,159
Long-term obligations, including
current portion(6)................ -- -- -- -- --
Stockholders' equity................ 223,386 250,400 306,154 383,708 546,212
- ---------------
(1) See Note 1 to Consolidated Financial Statements for the basis of computing
net earnings per share.
(2) Includes the impact of a one-time charge of $32,038,000 (pre-tax), or
$28,398,000 (net of tax), for the fiscal 1994 acquisition of Patrol
Software. Excluding this one-time charge, fiscal 1994 earnings were
$84,887,000 or $0.81 per share. Operating income was $111,942,000. Earnings
before income taxes were $122,650,000.
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(3) Includes the impact of a one-time charge related to several fiscal 1995
transactions of $29,260,000 (pre-tax), or $25,701,000 (net of tax).
Excluding this one-time charge, fiscal 1995 earnings were $103,218,000 or
$1.01 per share. Operating income was $137,888,000. Earnings before income
taxes were $149,592,000.
(4) Includes the impact of a one-time charge related to several fiscal 1996
technology acquisitions of $23,589,000 (pre-tax), or $22,831,000 (net of
tax). Excluding this one-time charge, fiscal 1996 earnings were $128,402,000
or $1.23 per share. Operating income was $171,178,000. Earnings before
income taxes were $186,624,000.
(5) Includes the impact of a one-time charge related to several fiscal 1997
technology acquisitions of $11,259,000 (pre-tax), or $7,318,000 (net of
tax). Excluding this one-time charge, fiscal 1997 earnings were
$171,190,000, or $1.60 per share. Operating income was $228,283,000.
Earnings before income taxes were $248,333,000.
(6) Excludes deferred revenue.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
INTRODUCTION
This discussion comprises historical information for the periods covered,
followed by certain forward looking information and information about certain
risks and uncertainties that could cause the Company's future operating results
to differ from results indicated by any forward looking statements made by the
Company or others. It is important that the historical discussion be read
together with the discussion of such risks and uncertainties, and that these
discussions are read in conjunction with the accompanying audited financial
statements and notes thereto.
HISTORICAL INFORMATION
Results of Operations
The following table sets forth, for the fiscal years indicated, the
percentages that selected items in the Consolidated Statements of Earnings bear
to total revenues.
PERCENTAGE OF
TOTAL REVENUES
YEAR ENDED MARCH 31,
-----------------------
1995 1996 1997
----- ----- -----
Revenues
Licenses.................................................. 59.4% 62.7% 67.6%
Maintenance............................................... 40.6 37.3 32.4
----- ----- -----
Total revenues.................................... 100.0 100.0 100.0
Selling and marketing expenses.............................. 26.0 27.2 27.5
Research and development expenses........................... 16.1 13.8 13.8
Cost of maintenance services and product licenses........... 9.3 10.5 10.0
General and administrative expenses......................... 8.6 8.6 8.2
Acquired research and development costs..................... 8.5 5.5 2.0
----- ----- -----
Operating income.................................. 31.5 34.4 38.5
Other income................................................ 3.4 3.6 3.6
----- ----- -----
Earnings before income taxes...................... 34.9 38.0 42.1
Income taxes................................................ 12.4 13.4 13.0
Net earnings...................................... 22.5% 24.6% 29.1%
===== ===== =====
Net earnings, excluding acquired research and development
costs..................................................... 29.9% 29.9% 30.4%
===== ===== =====
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EARNINGS
Fiscal 1997's total revenues of $563,210,000 were 31% higher than fiscal
1996 total revenues. The increase was the result of a 50% increase in North
American product license revenues, a 30% increase in international product
license revenues and a 14% increase in worldwide maintenance revenues. Net
earnings in fiscal 1997 were $171,190,000, excluding a one-time write-off of
$7,318,000 (net of income taxes) related to the first quarter acquisitions of
assets of certain technology companies. These results represent a 33% increase
over fiscal 1996 net earnings of $128,402,000 (excluding the acquired research
and development charge related to acquisitions of technology). Increased net
earnings were attributable to the 31% total revenue growth and the reduction in
acquired research and development costs. Operating income as a percentage of
revenues ("Operating Margins") has increased slightly from fiscal 1995 to 1997;
however, there can be no assurance that operating margins will be sustained at
historical levels. For a discussion of factors affecting operating margins, see
the discussions below under the heading "Forward Looking Information and Certain
Risks and Uncertainties That Could Affect Future Operating Results."
REVENUES
PERCENTAGE CHANGE
-------------------------
FISCAL YEAR ENDED MARCH 31, 1996 1997
------------------------------ COMPARED TO COMPARED TO
1995 1996 1997 1995 1996
-------- -------- -------- ----------- -----------
(IN THOUSANDS)
Perpetual Licenses
North America................ $124,382 $156,807 $234,535 26.1% 49.6%
International................ 80,575 112,215 146,359 39.3% 30.4%
-------- -------- --------
Total perpetual
licenses........... 204,957 269,022 380,894 31.3% 41.6%
Maintenance.................... 140,043 159,828 182,316 14.1% 14.1%
-------- -------- --------
Total revenues....... $345,000 $428,850 $563,210 24.3% 31.3%
======== ======== ========
The Company generates revenues from the licensing of its computer software
products and fees for the associated maintenance, enhancement and support of
these products. The Company recognizes revenues in accordance with Statement of
Position 91-1, issued by the American Institute of Certified Public Accountants.
For further discussion of the Company's revenue recognition policies, refer to
Note 1(h) of Notes to Consolidated Financial Statements.
At March 31, 1997, the Company marketed over 160 software products designed
to improve the availability, reliability, accuracy and/or integrity of
enterprise data maintained in IBM mainframe and client/server computing
environments. The mainframe-based products accounted for approximately 96%, 89%
and 81% of total revenues for fiscal years 1995, 1996 and 1997, respectively.
The revenues from these products are driven largely by the growth in customers'
processing capacity, as discussed below. From 1995 to 1996, total revenues from
mainframe-based products grew 16% and from 1996 to 1997, total revenues from
these products grew 20%.
The Company's mainframe-based revenues are heavily concentrated in its high
performance utilities and administrative tools for IBM's IMS and DB2 database
management systems. The IMS Database Utilities contributed 37%, 33% and 32% of
total revenues for fiscal years 1995, 1996 and 1997, respectively, and the
Masterplan for DB2 product series contributed 34%, 36% and 31% of total revenues
for the same periods. Combined revenues for these product lines grew 21% from
fiscal 1995 to 1996 and 19% from fiscal 1996 to 1997. The balance of the
Company's mainframe products represented 25%, 20% and 18% of total revenues for
fiscal years 1995, 1996 and 1997, respectively. The declines in relative revenue
contribution by each of these product lines reflect the increased contribution
by the Company's client/server products in these periods.
Revenues from client/server products grew 197% from 1995 to 1996 and 130%
from 1996 to 1997. Client/server product revenues are driven primarily by the
Company's PATROL management series, the PATROL DB database administration series
(formerly the METASuite family of products) and the SQL
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BackTrack database backup and recovery products from DataTools, Inc.,
("DataTools") for whom the Company acted as an exclusive distributor during
fiscal 1996 and 1997. The PATROL management product line accounted for 4%, 8%
and 12% of total revenues for fiscal years 1995, 1996 and 1997, respectively.
The PATROL DB database administration product line, introduced in fiscal 1996,
accounted for less than 1% and 4% of total revenues in fiscal 1996 and 1997,
respectively. Total revenues from the PATROL management product lines grew 139%
from fiscal 1995 to 1996 and 85% from fiscal 1996 to 1997. Total revenues from
the PATROL DB product line grew 944% from fiscal 1996 to 1997. The Company
entered into an exclusive distributorship arrangement with DataTools on March
31, 1995. Subsequent to March 31, 1997, the Company acquired all of the
outstanding shares of DataTools and has begun the process of fully integrating
the SQL BackTrack products into the PATROL recovery manager product lines. From
fiscal 1996 to fiscal 1997, total SQL BackTrack product revenues grew 137%. The
revenues from the Company's client/server product offerings are dependent 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 client/server environment. The Company has experienced rapid growth in its
client/server product lines since their introduction late in fiscal year 1994.
The client/server market is much more competitive and volatile than the
mainframe market, however, and there can be no assurance that this growth will
continue.
LICENSE REVENUES
The Company's license revenues include product license fees, restructuring
fees and capacity-based license upgrade fees. Product license fees are generated
from the initial licensing of a product and subsequent licenses purchased under
the Company's tier-based licensing program. Restructuring fees increase the
discounts used to calculate future maintenance and upgrade charges for a
customer's installed products. Capacity-based license upgrade fees are charged
when a customer acquires the right to run an already licensed product on
additional processing capacity, which may be measured traditionally by central
processing unit ("CPU") tier or by the aggregate processing capacity measured in
millions of instructions per second ("MIPS") on which the Company's products are
installed. These license upgrade fees include fees associated with currently
installed additional processing capacity and fees associated with a customer's
licensing products to operate with anticipated future processing capacity.
The Company's North American operations generated 58% of total license
revenues in fiscal 1996 and 62% in fiscal 1997. North American license revenues
increased by 26% from fiscal 1995 to fiscal 1996 and by 50% from fiscal 1996 to
fiscal 1997. Increased sales of the Company's client/server products represented
a significant part of North American license revenue growth in both fiscal years
and represented the largest single component of license revenue growth from
fiscal 1995 to fiscal 1996. From fiscal 1996 to fiscal 1997, the largest single
component of North American license revenue growth was increased license upgrade
fees associated with customers' future mainframe processing capacity.
International license revenues represented 42% and 38% of total license
revenues in fiscal years 1996 and 1997, respectively. International license
revenues increased by 39% from fiscal 1995 to fiscal 1996 and by 30% from fiscal
1996 to fiscal 1997. International license revenue growth from fiscal 1995 to
fiscal 1996 was derived principally from upgrade fees associated with future
additional processing capacity and, to a lesser extent, from product license
sales of mainframe and client/server products. From fiscal 1996 to fiscal 1997,
the principal contributors to growth in international license revenues were
mainframe product license fees and license upgrade fees associated with
customers' currently required additional mainframe processing capacity.
International license revenues increased approximately 3% from the weakening of
the dollar from fiscal 1995 to fiscal 1996 and decreased approximately 1.7% from
the strengthening of the dollar from fiscal 1996 to fiscal 1997.
Capacity-based upgrade fees include fees for both current and future
additional processing capacity. These fees accounted for 25%, 23% and 29% of
total revenues in fiscal years 1995, 1996 and 1997, respectively. The
sustainability and growth of the Company's mainframe-based license revenues are
dependent upon these capacity-based upgrade fees, particularly within its
largest customer accounts. Most of the Company's largest customers have entered
into enterprise license agreements allowing them to install the Company's
products on an unspecified number of CPUs, subject to a maximum limit on the
aggregate power of the CPUs as measured in MIPS. Substantially all of these
transactions include upgrade charges associated with additional
15
17
processing capacity beyond the customer's current usage level and/or a
restructuring fee, and some include license fees for additional products. In
fiscal 1995, 1996 and 1997, the enterprise license fees for future additional
processing capacity and license restructurings comprised approximately 19%, 20%
and 20% of total revenues, respectively. 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. Over the past two fiscal years, the Company has experienced a
marked increase in demand from its largest customers for current and anticipated
mainframe processing capacity, and the Company expects that it will continue to
be dependent upon these license revenue components. With the rapid advancement
of client/server technology and customers' needs for more functional and open
applications to replace legacy systems, however, there can be no assurance that
the demand for mainframe processing capacity will continue at current levels.
Should this trend slow dramatically or reverse, it would adversely impact the
Company's mainframe-based license revenues and operating results.
MAINTENANCE AND SUPPORT REVENUES
Maintenance and support revenues represent the ratable recognition of
customers' prepaid fees entitling them to product enhancements, technical
support services and ongoing compatibility with third-party operating systems,
database management systems and applications. Maintenance and support charges
are generally 15% to 20% of the list price of the product at the time of
renewal, less any applicable discounts. Maintenance revenues also include the
ratable recognition of the bundled fees for first-year maintenance services
covered by the related perpetual license agreement. The Company continues to
invest heavily in product maintenance and support and believes that maintaining
its reputation for superior product support is a key component of its value
pricing model.
Maintenance revenues have increased over the last three fiscal years as a
result of the continuing growth in the base of installed products and the
processing capacity on which they run. Maintenance fees increase in proportion
to the processing capacity on which the products are installed; consequently,
the Company receives higher absolute maintenance fees as customers install its
products on additional processing capacity. Due to increased discounting at
higher levels of "future MIPS" licensing, however, the maintenance fees per MIPS
are often reduced in enterprise license agreements. Historically, the Company
has enjoyed high maintenance renewal rates for its mainframe-based products.
Should customers migrate from their mainframe applications or find alternatives
to the Company's products, however, 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 client/server market. At this time, there is
insufficient historical data to determine whether customers will continue to
accept this pricing model and renew their maintenance and support contracts at
the levels experienced in the mainframe market.
OTHER INCOME
Other income consists primarily of interest earned on cash and cash
equivalents, financed receivables and marketable securities. Other income
increased by 32% from fiscal 1995 to 1996 and 30% from fiscal 1996 to 1997. The
increase in other income is primarily due to higher interest income earned on
larger invested cash balances
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EXPENSES
PERCENTAGE CHANGES
--------------------------
FISCAL YEAR ENDED MARCH 31, 1996 1997
-------------------------------- COMPARED TO COMPARED TO
1995 1996 1997 1995 1996
-------- -------- -------- ----------- -----------
(IN THOUSANDS)
Selling and marketing................... $ 89,724 $116,724 $154,829 30.1% 32.6%
Research and development................ 55,493 59,011 77,459 6.3% 31.3%
Cost of maintenance services and product
licenses.............................. 31,960 44,854 56,569 40.3% 26.1%
General and administrative.............. 29,935 37,083 46,070 23.9% 24.2%
Acquired research and development....... 29,260 23,589 11,259 (19.4%) (52.3%)
-------- -------- --------
Total operating expenses...... $236,372 $281,261 $346,186
======== ======== ========
SELLING AND MARKETING
The Company's selling and marketing expenses comprise primarily personnel
and related costs, sales commissions and costs associated with advertising,
industry trade shows and sales seminars. Compensation costs were the largest
single contributor to the expense growth in fiscal 1996 and fiscal 1997 due to
the continued hiring of sales and marketing personnel to promote and sell the
Company's increasing number of product offerings. Selling and marketing
headcount increased by 26% from March 31, 1996 to March 31, 1997. Sales
commissions increased in fiscal 1996 and in fiscal 1997 as a result of the 31%
and 42% increases, respectively, in license revenues. Due to productivity
improvements and commission plan changes, however, the commission increases were
lower than the growth in license revenues. Also, marketing costs have continued
to increase to meet the requirements of marketing a greater number of
increasingly complex client/server products and of supporting a growing and
relatively new indirect distribution channel. The primary factors contributing
to increased selling and marketing expenses from fiscal 1995 to 1996 were
increased compensation costs and sales commissions. As a percentage of total
revenues, selling and marketing expenses have increased slightly from 26% in
fiscal 1995 to 27% in fiscal 1996 and 28% in fiscal 1997.
RESEARCH AND DEVELOPMENT
Research and development expenses mainly comprise personnel costs related
to software developers and development support personnel. These expenses also
include computer hardware/software costs and telecommunications expenses
necessary to maintain the Company's data processing center. The Company's net
research and development expenditures during fiscal 1997 increased by 31% over
fiscal 1996. This increase was primarily due to an increase in software
developers and development support personnel, especially in the client/server
area. The Company increased its headcount in the research and development
organization by over 20% from fiscal year end 1996 to fiscal year end 1997. The
Company's net research and development expenses in fiscal 1996 increased by only
6% over fiscal 1995 although the Company's investment in research and
development activities during fiscal 1996 was greater than the indicated growth
because of higher software capitalization costs. A portion of the Company's
research and development expenditures were capitalized as software development
costs in accordance with Statement of Financial Accounting Standards ("SFAS")
No. 86 in all three fiscal years. During fiscal 1995, 1996 and 1997, the Company
capitalized approximately $6,883,000, $19,309,000 and $21,945,000, respectively
of software development costs. The substantial growth in capitalized costs
during fiscal 1996 was due to increases in client/server product development
and, to a lesser degree, the development of mainframe software products that had
reached the stage of development where the costs were capitalizable under SFAS
No. 86. Excluding the effects of capitalized software on research and
development expenses, the growth in research and development from fiscal 1995 to
fiscal 1996 occurred primarily in increased personnel and related costs.
Research and development expenditures, as a percentage of sales, have decreased
from 16% in fiscal 1995 to 14% in fiscal 1996 and 1997.
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COST OF MAINTENANCE SERVICES AND PRODUCT LICENSES
Cost of maintenance services and product licenses consists of compensation
for technical employees providing customer support, amortization of both
purchased and internally developed software and royalty fees paid to third
parties. The increase in cost of maintenance services and product licenses is
mainly due to increases in customer support employees and royalty fees,
primarily those paid to DataTools. The Company acquired DataTools in May of 1997
(refer to Note 2 of Notes to Consolidated Financial Statements). Royalty fees
were not incurred by the Company prior to fiscal 1996. The Company amortized
$5,134,000, $8,667,000 and $8,299,000 in fiscal 1995, 1996 and 1997,
respectively of capitalized software development costs pursuant to SFAS No. 86,
including $2,058,000, $3,865,000 and $3,694,000, respectively, to accelerate the
amortization of certain software products. These software products were not
expected to generate sufficient future revenues which would be required for the
Company to realize the carrying value of the assets. The Company expects its
cost of maintenance services and product licenses to continue increasing as the
Company capitalizes a higher level of software development costs and as the
Company builds its client/server 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. Growth in
cost of maintenance services and product licenses from fiscal 1995 to fiscal
1996 was primarily attributable to amortization of both purchased and internally
developed software and royalty fees. With the acquisition of DataTools in May of
1997, the Company believes that royalty fees in fiscal 1998 should be reduced
over fiscal 1997 levels. As a percentage of total revenues, cost of maintenance
services and product licenses was 9% in fiscal 1995, 11% in fiscal 1996 and 10%
in fiscal 1997.
GENERAL AND ADMINISTRATIVE
General and administrative expenses are comprised primarily of compensation
and personnel costs within executive management, finance and accounting, product
distribution and fulfillment and human resources. Other expenses included in
general and administrative expenses are fees paid for legal services, accounting
services, consulting projects, insurance, travel and costs of managing the
Company's foreign currency exposure. Growth in general and administrative
expenses in fiscal 1996 and fiscal 1997 was primarily attributable to increased
personnel costs, professional fees, management bonuses and costs associated with
managing the Company's foreign currency exposure. The increased personnel costs
primarily relate to the Company's continued infrastructure development.
Headcount within the general and administrative organizations grew by 4% from
the end of fiscal 1996 to the end of fiscal 1997. Growth in general and
administrative expenses from fiscal 1995 to fiscal 1996 was largely due to
personnel costs and costs associated with managing the Company's foreign
currency exposure. As a percentage of total revenues, general and administrative
expenses remained constant at 8% in fiscal years 1995, 1996 and 1997.
ACQUIRED RESEARCH AND DEVELOPMENT
In the first quarter of fiscal 1997, the Company acquired certain
technology assets (and certain in-process technologies) for an aggregate
purchase price of $12,950,000, including direct acquisition costs. The Company
funded these acquisitions with cash. The Company accounted for these
transactions using the purchase method of accounting and recorded a $7,318,000
charge, net of a $3,941,000 income tax benefit, for acquired research and
development costs during the first quarter. As of March 31, 1997, approximately
$1,142,000 of such consideration had not been paid and was included in accrued
liabilities.
The Company completed various technology acquisitions during fiscal 1996.
The aggregate purchase price for these transactions totaled $27,789,000,
including direct acquisition costs. The Company funded these acquisitions
primarily through the issuance of its own common stock, and to a lesser extent,
with cash. The Company used the purchase method of accounting for these
technology acquisitions. The Company recorded a $22,831,000 charge, net of an
income tax benefit of $758,000, for acquired research and development costs
during fiscal 1996.
During the fourth quarter of fiscal 1995, the Company completed the
acquisitions of stock and assets (including in-process research and development)
of several technology companies for an aggregate purchase
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20
price of $24,485,000, including warrants to purchase the Company's stock valued
at approximately $3,280,000 and direct acquisition costs. Also, as of March 31,
1995, the Company obtained exclusive product distribution rights and a purchase
option from DataTools for $10,000,000. The term of the Company's option was
March 31, 1996 through March 31, 1998. The Company exercised its option and
acquired DataTools on May 20, 1997. Refer to Note 2 of Notes to Consolidated
Financial Statements. The Company accounted for all of the acquisition
transactions discussed above using the purchase method and recorded a
$25,701,000 charge, net of an income tax benefit of $3,559,000, for acquired
research and development costs, during the fourth quarter of fiscal 1995.
INCOME TAXES
The Company recorded income tax expense of $42,815,000, $57,464,000 and
$73,202,000 in fiscal 1995, 1996 and 1997, respectively. The Company's effective
tax rates were 36%, 35% and 31% for fiscal years ended 1995, 1996 and 1997,
respectively. An analysis of the differences between the statutory and effective
income tax rates is provided in Note 6 of Notes to Consolidated Financial
Statements.
FOREIGN CURRENCY RATE FLUCTUATIONS
For the fiscal years ended March 31, 1996 and 1997, 41% and 38%,
respectively of the Company's consolidated revenues were derived from customers
outside North America. Substantially all of the Company's sales outside North
America are billed and collected in foreign currencies. Substantially all of the
expenses of operating the Company's foreign subsidiaries and compensating its
independent agents are similarly incurred in foreign currencies. Consequently,
the Company's reported financial results are affected by fluctuations of those
foreign currencies against the U.S. dollar. The Company has adopted a foreign
currency hedging strategy designed to reduce its foreign currency transaction
exposures. For the years ended March 31, 1995, 1996 and 1997 currency rate
fluctuations did not have a material effect on the Company's financial position,
results of operations or cash flows.
RISK MANAGEMENT
The functional currency for most of the Company's international
subsidiaries is the local currency of the country in which the subsidiary
operates. Changes in exchange rates between these currencies and the U.S. dollar
may negatively affect the Company's sales (as expressed in U.S. dollars) and
gross profit margins from the international operations. The Company monitors
this currency risk and attempts to mitigate the exposure through hedging
transactions involving derivative financial instruments. Specifically, with
respect to future revenues, the Company utilizes put options to protect the
majority of anticipated foreign exchange denominated revenues, primarily those
denominated in German deutschemarks and British pounds. The term of the option
contracts is rarely more than one year. The Company does not hold or issue
derivative financial instruments for trading purposes.
The Company also enters into forward exchange contracts to hedge firm
commitments, specifically, accounts receivable, intercompany transactions, cash
balances and certain liabilities. The term of the forward contracts is generally
30 days. The currencies hedged include several European currencies, as well as
the Japanese yen and Australian dollar.
Pursuant to SFAS No. 52, SFAS No. 80, SFAS No. 119 and related literature,
the Company applies hedge accounting treatment to all of its hedging
transactions (i.e., such instruments are effective as and are designated as
hedge instruments). Specifically, gains and losses on forward contracts are
recognized at each month-end in connection with the translation of the related
hedged exposure into U.S. dollars. Gains and premiums associated with purchased
put options are deferred until their maturity or until they are exercised or
when a hedged transaction is no longer expected to occur. All gains and losses
attributable to the Company's current hedging strategy are expected to occur
within one year from the reporting date.
The Company is exposed to credit-related losses in the event of
non-performance by counterparties to financial instruments, but it does not
expect any such counterparties to fail to meet their obligations, given their
high credit ratings. In addition, the Company diversifies this risk across
several counterparties.
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RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
The Company adopted SFAS No. 123, "Accounting for Stock-Based
Compensation," in fiscal 1997. SFAS No. 123 established financial accounting and
reporting standards for stock-based compensation plans. The Company adopted the
"disclosure method" as permitted by SFAS No. 123 and, therefore, its reported
financial results were not changed by this accounting standard. Refer to Note 7
of Notes to Consolidated Financial Statements for disclosure of the net income
and earnings per share effects of stock-based compensation grants made during
fiscal 1996 and 1997.
SFAS No. 128, "Earnings per share," was issued in February 1997.
Implementation of SFAS No. 128 is required for periods ending after December 15,
1997. SFAS No. 128 requires dual presentation of earnings per share ("EPS");
basic EPS and diluted EPS. Refer to Note 1(i) of Notes to Consolidated Financial
Statements for disclosure of the Company's EPS in accordance with SFAS No. 128
for fiscal years ended March 31, 1995, 1996 and 1997.
QUARTERLY RESULTS
The following table sets forth certain unaudited quarterly financial data
for the fiscal years ended March 31, 1996 and 1997. This information has been
prepared on the same basis as the Consolidated Financial Statements and all
necessary adjustments have been included in the amounts stated below to present
fairly the selected quarterly information when read in conjunction with its
Consolidated Financial Statements and Notes thereto.
FISCAL QUARTER ENDED
---------------------------------------------------------------------------------------
JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31,
1995 1995 1995 1996 1996 1996 1996 1997
-------- --------- -------- -------- -------- --------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Total revenues.......................... $ 93,300 $ 88,250 $119,000 $128,300 $126,050 $126,500 $150,060 $160,600
Selling and marketing expenses.......... 24,572 22,247 32,281 37,624 37,526 35,735 40,094 41,474
Research and development expense........ 14,106 13,201 15,729 15,975 17,859 19,833 20,056 19,711
Cost of maintenance services and product
licenses.............................. 10,271 10,456 11,367 12,760 14,014 13,122 13,657 15,776
General and administrative expenses..... 7,938 7,889 11,176 10,080 10,595 11,083 12,343 12,049
Acquired research and development
costs................................. -- -- 23,589 -- 11,259 -- -- --
-------- -------- -------- -------- -------- -------- -------- --------
Operating income........................ 36,413 34,457 24,858 51,861 34,797 46,727 63,910 71,590
-------- -------- -------- -------- -------- -------- -------- --------
Net earnings............................ $ 27,466 $ 26,283 $ 13,065 $ 38,757 $ 27,172 $ 35,186 $ 48,101 $ 53,413
======== ======== ======== ======== ======== ======== ======== ========
Earnings per share (EPS)................ $ 0.27 $ 0.25 $ 0.13 $ 0.37 $ 0.26 $ 0.33 $ 0.45 $ 0.50
======== ======== ======== ======== ======== ======== ======== ========
EPS, excluding acquired research and
development costs..................... $ 0.27 $ 0.25 $ 0.35 $ 0.37 $ 0.32 $ 0.33 $ 0.45 $ 0.50
======== ======== ======== ======== ======== ======== ======== ========
Shares used in computing earnings per
share................................. 102,792 105,334 103,930 105,930 106,238 106,776 107,748 107,858
======== ======== ======== ======== ======== ======== ======== ========
The Company's quarterly results are subject to seasonality and can be
volatile and difficult to predict accurately prior to a quarter's end. See
"Forward Looking Information and Certain Risks and Uncertainties that Could
Affect Future Operating Results."
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 1997, the Company's cash, cash equivalents and marketable
securities were $541,695,000. The Company's working capital as of March 31,
1997, was $43,719,000. The Company continues to invest cash in securities with
longer maturities yielding higher returns. This has the impact of reducing
working capital. The Company's securities are investment grade and highly
liquid. The Company had no debt as of March 31, 1997, other than normal trade
payables, accrued liabilities and taxes payable. Stockholders' equity as of
March 31, 1997, was $546,212,000.
The Company continues to finance its growth through funds generated from
operations. For the year ended March 31, 1997, net cash provided by operating
activities was $284,847,000. Net cash used in investing
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activities in fiscal 1997 was $264,920,000, primarily related to the acquisition
of computers and related equipment, the purchase of investment securities and
the technology acquisitions discussed above. Net cash used in financing
activities in fiscal 1997 was $1,359,000. The primary uses of cash generated
from operations pertained to the Company's stock repurchase program and to
purchases of investment securities.
During fiscal 1997, the Company repurchased 692,700 shares of its common
stock for an aggregate purchase price of $30,581,000. As of March 31, 1997, the
Company was authorized to acquire 4,877,300 shares of its common stock under its
stock repurchase program. In addition, the Company continues to evaluate
business acquisition opportunities that complement the Company's strategic
plans. The Company believes that its existing cash balances and funds generated
from operations will be sufficient to meet its liquidity requirements for the
foreseeable future.
FORWARD LOOKING INFORMATION AND CERTAIN RISKS AND UNCERTAINTIES THAT COULD
AFFECT FUTURE OPERATING RESULTS
This Annual Report and Management's Discussion and Analysis of Results of
Operations and Financial Condition include certain forward looking statements,
which are identified by the use of the words "believes," "expects" and similar
expressions that contemplate future events. Numerous important factors, risks
and uncertainties affect the Company's operating results and could cause the
Company's actual results to differ materially from the results implied by these
or any other forward looking statements made by, or on behalf of the Company.
There can be no assurance that future results will meet expectations. These
important factors, risks and uncertainties include, but are not limited to,
those described in the following paragraphs and in the discussion above in this
Annual Report under the heading "Business," including, without limitation, the
discussion under the subheading "Competition, System Dependence."
The Company's stock price has historically been highly volatile. Future
revenues, earnings and stock prices may be subject to wide swings, particularly
on a quarterly basis, in response to variations in operating and financial
results, anticipated revenue and/or earnings growth rates and other factors. The
stock price of software companies in general, and the Company in particular, is
based on expectations of future revenue and earnings growth. Any failure to meet
anticipated revenue and earnings levels in a period would likely have a
significant adverse effect on the Company's stock price.
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, and there has been
and continues to be a trend toward larger enterprise license transactions, which
can have sales cycles of up to a year or more and require approval by a
customer's upper management. These transactions are typically difficult to
manage and predict. Failure to close an expected individually significant
transaction could cause the Company's revenues and earnings in a period to fall
short of expectations. Other factors that may cause significant fluctuations in
the Company's quarterly revenues include competition, industry or technological
trends, customer budgetary decisions, mainframe processing capacity growth,
general economic conditions or uncertainties, mainframe industry pricing and
other trends, announcements of new hardware or software products and the timing
of price increases. The Company generally does not know whether revenues and
earnings will meet expected results until the final days or day of a quarter.
The Company's operating expenses are to a large extent fixed in the short
term so that the Company has very limited ability to adjust its planned expenses
if revenues fail to meet expectations.
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Operating Margins have increased from 32% in fiscal 1995 to 39% in fiscal
1997, which is at the high-end of the range for peer companies. The Company does
not expect future margin expansion. Further, since research and development,
sales, support and distribution costs for client/server software products are
generally higher than for mainframe products, Operating Margins will experience
more pressure as the mix of the Company's business continues its shift to
client/server revenues. The Company is continuing to develop indirect channel
relationships to increase its coverage and presence in a cost effective manner.
There can be no assurance, however, that this strategy will be successful. The
Company continues to make progress in implementing reseller and distribution
arrangements, and client/server indirect sales in fiscal 1997 approximated
$23,920,000. If the Company's direct sales force remains the primary channel for
its client/server products, its selling and marketing expenses could increase
and Operating Margins could be reduced.
The Company has historically realized greater revenues and net earnings in
the latter half of its fiscal year; the quarter ending December 31 coincides
with the end of customers' annual budgetary periods and the quarter ending March
31 coincides with the end of the Company's annual sales plans and fiscal year.
For the same reasons, the Company has typically reported lower or flat revenues
in the first two quarters of a fiscal year than in the last two quarters of the
previous year, resulting in lower Operating Margins in the first two quarters.
The Company historically has generated greater revenues in the third and fourth
quarters while maintaining lower rates of expense growth and expanded Operating
Margins. Past financial performance is not a reliable indicator of future
performance, and there can be no assurances that this pattern will be
maintained.
Future operating results are also dependent on sustained performance
improvement by the Company's international offices. In this regard, the economy
in Europe has been somewhat depressed in the past year, with relatively high
unemployment. The Company's operations and financial results could be
significantly adversely affected by issues such as changes in foreign currency
exchange rates, sluggish regional economic conditions and difficulties in
staffing and managing international operations. Many systems and applications
software vendors are experiencing difficulties internationally, particularly in
Europe. The country whose results have been and are expected to be the most
significant to the Company's overall results is Germany, which accounted for
over 33% of total International revenues in each of the prior three fiscal
years.
The Company derived approximately 81% of its revenues in fiscal 1997 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. Further, IBM continues, directly and through third parties,
to enhance its utilities for IMS and DB2 to provide lower cost alternatives to
those provided by the Company and other independent software vendors. The
Company has traditionally maintained sufficient performance and functional
advantages over IBM's base utilities, although there can be no assurance that it
will continue to maintain such advantages.
Fees from enterprise license transactions remain fundamental components of
the Company's revenues. In fiscal 1996 and 1997, enterprise license fees for
future additional processing capacity and license restructurings comprised
approximately 20% of total revenues. These revenues are dependent 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 customers' re-commitment over the last 24
to 36 months to the OS/390 mainframe platform for large scale, transaction
intensive information systems. Whether this trend will continue is difficult to
predict. If the Company's customers' processing capacity growth were to slow
and/or if such customers were to perceive alternatives to relying upon the
Company's current mainframe products, the Company's revenues would be adversely
impacted.
Capacity-based upgrade fees associated with both current and future
processing capacity contributed 20%, 23% and 28% of total revenues in fiscal
years 1995, 1996 and 1997. The increase in these fees is largely the result of
customers acquiring the right to run the Company's products on MIPS levels which
are in excess of their current environments. The charging of upgrade fees based
on CPU tier classifications is standard among mainframe systems software
vendors, including IBM. The pricing of mainframe systems software, including the
charging of tier-based upgrade fees or other capacity-based fees, is under
continued pressure from customers. Although the Company has adopted MIPS-based
pricing for enterprise licenses, it has not
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significantly changed the fact that customers pay more to use its products on
more powerful CPUs. The Company believes its current pricing policies properly
reflect the value provided by its products. IBM provides alternatives to
tier-based pricing with respect to its large mainframe CPUs and is attempting to
reduce the costs of its mainframe systems software to increase the overall cost
competitiveness of its mainframe hardware and software products. These actions
have increased pricing pressures within the mainframe systems software markets.
The Company's growth prospects are dependent upon the success of its
existing client/server products and those anticipated to be introduced in the
future. The Company has experienced long development cycles and product delays
in the past, particularly with some of its client/server products, and expects
to have delays in the future. Delays in new mainframe or client/server 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. The enterprise systems
management market that the Company's client/server products address is
characterized by rapid change and intense competition that continues to increase
as vendors within the broader markets converge. Certain of the Company's
competitors and potential competitors have significantly greater financial,
technical, sales and marketing resources than the Company and greater experience
in client/server development and sales. A key factor in determining the success
of the Company's products, particularly its client/server offerings, will be
their ability to interoperate and perform well with existing and future leading
database management systems and other systems software products supported by the
Company's products. While the Company believes its products that address this
market, including those under development, will compete effectively, this market
will be relatively unpredictable over the next few years and there can be no
assurance that anticipated results will be achieved.
Microsoft Corporation has significantly increased its focus on developing
operating systems, systems management products and databases that will provide
"business-critical" class functionality. Specifically, Microsoft is aggressively
promoting its BackOffice(TM) family of software products, including its Windows
NT Server operating system and its SQL Server relational database management
system, as lower cost alternatives to the UNIX operating systems coupled with
relational database management systems from Oracle Corporation, Sybase, Inc.,
Informix Corporation and other vendors. Microsoft could significantly lower
software price points in some of the Company's markets, which could place
additional pricing pressure on the Company. The Company has invested and intends
to continue to invest in the development of systems management products for
Windows NT and BackOffice environments, but there are numerous uncertainties
associated with the Company's ability to successfully execute this strategy.
Litigation seeking to enforce patents, copyrights and trade secrets is
increasing in the software industry. There can be no assurance that third
parties will not assert that their patent or other proprietary rights are
violated by products offered by the Company. Any such claims, with or without
merit, can be time consuming and expensive to defend and could have an adverse
effect on the Company's business, results of operations, financial position and
cash flows.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The response to this item is submitted as a separate section of this Annual
Report on Form 10-K. See Item 14.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
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PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information relating to the Company's directors and executive officers is
included in the Company's definitive Proxy Statement in connection with its 1997
Annual Meeting of Stockholders (the "1997 Proxy Statement"), which will be filed
with the Securities and Exchange Commission within 120 days after the end of the
fiscal year ended March 31, 1997, under the captions "ELECTION OF
DIRECTORS -- Nominees" and "OTHER INFORMATION -- Directors and Executive
Officers" and is incorporated herein by reference in response to this Item 10.
ITEM 11. EXECUTIVE COMPENSATION
Information relating to executive compensation is set forth in the 1997
Proxy Statement under the captions "ELECTION OF DIRECTORS -- Compensation of
Directors" and "EXECUTIVE COMPENSATION" and is incorporated herein by reference
in response to this Item 11.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information relating to ownership of Registrant's Common Stock by
management and certain other beneficial owners is set forth in the 1997 Proxy
Statement under the caption "OTHER INFORMATION -- Certain Stockholders" and is
incorporated herein by reference in response to this Item 12.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information relating to certain relationships and related transactions is
set forth in the 1997 Proxy Statement under the caption "OTHER
INFORMATION -- Related Transactions" and is incorporated herein by reference in
response to this Item 13.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Documents filed as a part of this Report.
1. The following financial statements of the Company and the related report
of independent public accountants are filed herewith:
PAGE
NUMBER
------
Report of Independent Public Accountants.................... 26
Consolidated Financial Statements:
Balance Sheets as of March 31, 1996 and 1997.............. 27
Statements of Operations for the years ended March 31,
1995, 1996 and 1997.................................... 28
Statements of Stockholders' Equity for the years ended
March 31, 1995, 1996 and 1997.......................... 29
Statements of Cash Flows for the years ended March 31,
1995, 1996 and 1997.................................... 30
Notes to Consolidated Financial Statements................ 31
2. The following financial statement schedule of the Company and the
related report of independent public accountants are filed herewith:
Schedule II -- Valuation Account
All other financial schedules are omitted because (i) such schedules are
not required or (ii) the information required has been presented in the
aforementioned financial statements.
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3. The following Exhibits are filed with this Report or incorporated by
reference as set forth below.
EXHIBIT
NUMBER
-------
3.1 -- Restated Certificate of Incorporation of the Company;
incorporated by reference to Exhibit 3.1 to the Company's
Registration Statement on Form S-1 (Registration No.
33-22892) (the "S-1 Registration Statement").
*3.2 -- Certificate of Amendment of Restated Certificate of
Incorporation.
3.2 -- Bylaws of the Company; incorporated by reference to
Exhibit 3.2 to the S-1 Registration Statement.
4.1 -- Specimen Stock Certificate for the Common Stock of the
Company; incorporated by reference to Exhibit 4.1 to the
S-1 Registration Statement.
4.2 -- Rights Agreement, dated as of May 8, 1995, between the
Company and The First National Bank of Boston, as Rights
Agent (the "Rights Agreement"), specifying the terms of
the Rights, which includes the form of Certificate of
Designation of Series A Junior Participating Preferred
Stock as Exhibit A, the form of Right Certificate as
Exhibit B and the form of the Summary of Rights as
Exhibit C (incorporated by reference to Exhibit 1 to the
registrant's Registration Statement on Form 8-A dated May
10, 1995).
4.3 -- Amendment to the Rights Agreement.
10.1(a) -- Form of BMC Software, Inc. 1994 Employee Incentive Plan;
incorporated by reference to Exhibit 10.7(a) to the
Company's Annual Report on Form 10-K for the fiscal year
ended March 31, 1995 (the "1995 10-K").
10.1(b) -- Form of Stock Option Agreement employed under BMC
Software, Inc. 1994 Employee Plan; incorporated by
reference to Exhibit 10.7(b) to the 1995 10-K.
10.2(a) -- Form of BMC Software, Inc. 1994 Non-employee Directors'
Stock Option Plan; incorporated by reference to Exhibit
10.8(a) to the 1995 10-K.
10.2(b) -- Form of Stock Option Agreement employed under BMC
Software, Inc. 1994 Nonemployee Directors' Stock Option
Plan; incorporated by reference to Exhibit 10.8(b) to the
1995 10-K.
10.3 -- Description of BMC Software, Inc. Executive Officer
Annual Incentive Plan; incorporated by reference to
Exhibit 10.6 to the Company's Annual Report on Form 10-K
for the fiscal year ended March 31, 1994.
10.4(a) -- License Agreement with International Business Machines
Corporation; incorporated by reference to Exhibit 10.12
to the S-1 Registration Statement.
10.4(b) -- License Agreements for Use and Marketing of Program
Materials dated May 13, 1986, with International Business
Machines Corporation; incorporated by reference to
Exhibit 10.13 to the S-1 Registration Statement.
10.4(c) -- Customer Agreement with International Business Machines
Corporation dated April 10, 1991; incorporated by
reference to Exhibit 10.15 to the Company's Annual Report
on Form 10-K for the fiscal year ended March 31, 1992
(the "1992 10-K").
10.5 -- Form of Indemnification Agreement among the Company and
its directors and executive officers; incorporated by
reference to Exhibit 10.11 to the 1995 10-K.
*22.1 -- Subsidiaries of the Company.
*24.1 -- Consent of Arthur Andersen LLP, independent public
accountants.
*27 -- Financial Data Schedule
- ---------------
* Filed herewith.
(b) Reports on Form 8-K
None.
BMC Software is a registered U.S. trademark of BMC Software, Inc. DB2 and
IBM are registered trademarks of International Business Machines Corporation.
All other products and tradenames mentioned herein are trademarks, registered
trademarks or service marks of their respective companies.
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REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To The Board of Directors of
BMC Software, Inc.
We have audited the accompanying consolidated balance sheets of BMC
Software, Inc., a Delaware corporation, and subsidiaries as of March 31, 1996
and 1997, and the related consolidated statements of earnings, stockholders'
equity and cash flows for each of the three years in the period ended March 31,
1997. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of BMC
Software, Inc. and subsidiaries as of March 31, 1997, and the results of their
operations and their cash flows for each of the three years in the period ended
March 31, 1997, in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Houston, Texas
May 2, 1997
26
28
BMC SOFTWARE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
MARCH 31,
--------------------
1996 1997
-------- --------
(IN THOUSANDS,
EXCEPT SHARE DATA)
Current assets:
Cash and cash equivalents............. $ 62,128 $ 79,794
Securities available for sale......... 8,464 8,433
Securities held to maturity........... 59,566 50,726
Accounts receivable:
Trade, net of allowance for doubtful
accounts of $1,933 and $4,277..... 70,631 77,428
Trade finance receivables,
current........................... 8,668 10,148
-------- --------
Total accounts receivable...... 79,299 87,576
Interest and other receivables........ 7,723 11,247
Prepaid expenses and other............ 10,792 10,606
-------- --------
Total current assets........... 227,972 248,382
Property and equipment, net of
accumulated depreciation and
amortization of $36,818 and $49,364... 107,912 116,296
Software development costs, net of
accumulated amortization of $10,908
and $19,207........................... 25,840 39,486
Purchased software and related assets,
net of accumulated amortization of
$18,953 and $22,746................... 13,400 19,735
Securities available for sale........... 39,281 84,032
Securities held to maturity............. 182,593 318,710
Trade finance receivables, long-term.... 4,146 4,397
Deferred charges and other assets....... 7,074 13,121
-------- --------
$608,218 $844,159
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Trade accounts payable................ $ 8,417 $ 9,439
Accrued securities purchases.......... 19,330 --
Accrued commissions payable........... 10,848 10,983
Accrued liabilities and other......... 22,366 39,042
Taxes payable......................... 16,595 --
Current portion of deferred revenue... 106,641 145,199
-------- --------
Total current liabilities...... 184,197 204,663
Deferred revenue and other............ 40,313 93,284
-------- --------
Total liabilities.............. 224,510 297,947
Commitments and contingencies
Stockholders' equity:
Preferred stock, $.01 par value,
1,000,000 shares authorized, none
issued and outstanding.............. -- --
Common stock, $.01 par value,
300,000,000 shares authorized,
105,040,000 shares issued........... 1,050 1,050
Additional paid-in capital.............. 67,888 82,391
Retained earnings....................... 401,250 565,122
Cumulative foreign currency translation
adjustment............................ 82 (820)
Unrealized gain (loss) on securities
available for sale.................... 82 (750)
-------- --------
470,352 646,993
-------- --------
Less treasury stock, at cost, 5,094,000
and 4,877,000 shares.................. 84,480 96,901
Less unearned portion of restricted
stock compensation.................... 2,164 3,880
-------- --------
Total stockholders' equity..... 383,708 546,212
-------- --------
$608,218 $844,159
======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
27
29
BMC SOFTWARE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
YEARS ENDED MARCH 31,
--------------------------------
1995 1996 1997
-------- -------- --------
(IN THOUSANDS,
EXCEPT SHARE AND PER SHARE DATA)
Revenues:
Licenses.............................. $204,957 $269,022 $380,894
Maintenance........................... 140,043 159,828 182,316
-------- -------- --------
Total revenues................ 345,000 428,850 563,210
Selling and marketing expenses.......... 89,724 116,724 154,829
Research and development expenses....... 55,493 59,011 77,459
Cost of maintenance services and product
licenses.............................. 31,960 44,854 56,569
General and administrative expenses..... 29,935 37,083 46,070
Acquired research and development
costs................................. 29,260 23,589 11,259
-------- -------- --------
Operating income.............. 108,628 147,589 217,024
Other income............................ 11,704 15,446 20,050
-------- -------- --------
Earnings before income
taxes....................... 120,332 163,035 237,074
Income taxes............................ 42,815 57,464 73,202
-------- -------- --------
Net earnings.................. $ 77,517 $105,571 $163,872
======== ======== ========
Earnings per share...................... $ 0.76 $ 1.01 $ 1.53
======== ======== ========
Shares used in computing earnings per
share................................. 101,952 104,572 107,155
======== ======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
28
30
BMC SOFTWARE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED MARCH 31, 1995, 1996 AND 1997
UNREALIZED UNEARNED
FOREIGN GAIN (LOSS) PORTION OF
ADDITIONAL CURRENCY ON SECURITIES RESTRICTED TOTAL
COMMON PAID-IN RETAINED TRANSLATION AVAILABLE FOR TREASURY STOCK STOCKHOLDERS'
STOCK CAPITAL EARNINGS ADJUSTMENT SALE STOCK COMPENSATION EQUITY
------ ---------- -------- ----------- ------------- -------- ------------ -------------
(IN THOUSANDS)
Balance, March 31, 1994.... $1,050 $68,115 $218,162 $(911) $ -- $(31,306) $ (4,710) $250,400
Net earnings............... -- -- 77,517 -- -- -- -- 77,517
Foreign currency
translation adjustment... -- -- -- 629 -- -- -- 629
Treasury stock purchased... -- -- -- -- -- (32,001) -- (32,001)
Stock options exercised and
restricted shares
issued................... -- (4,121) -- -- -- 9,394 (2,599) 2,674
Income tax benefit from
stock options
exercised................ -- 663 -- -- -- -- -- 663
Restricted shares
forfeited................ -- (73) -- -- -- (781) 854 --
Earned portion of
restricted stock
compensation............. -- -- -- -- -- -- 2,992 2,992
Issuance of stock warrants
in association with
certain acquired
technology............... -- 3,280 -- -- -- -- -- 3,280
------ ------- -------- ----- ----- -------- -------- --------
Balance, March 31, 1995.... 1,050 67,864 295,679 (282) -- (54,694) (3,463) 306,154
Net earnings............... -- -- 105,571 -- -- -- -- 105,571
Foreign currency
translation adjustment... -- -- -- 364 -- -- -- 364
Treasury stock purchased... -- -- -- -- -- (64,816) -- (64,816)
Stock options exercised and
restricted shares
issued................... -- (4,838) -- -- -- 35,030 (55) 30,137
Income tax benefit from
stock options
exercised................ -- 4,862 -- -- -- -- -- 4,862
Unrealized gain on
securities available for
sale..................... -- -- -- -- 82 -- -- 82
Earned portion of
restricted stock
compensation............. -- -- -- -- -- -- 1,354 1,354
------ ------- -------- ----- ----- -------- -------- --------
Balance, March 31, 1996.... 1,050 67,888 401,250 82 82 (84,480) (2,164) 383,708
Net earnings............... -- -- 163,872 -- -- -- -- 163,872
Foreign currency
translation adjustment... -- -- -- (902) -- -- -- (902)
Treasury stock purchased... -- -- -- -- -- (31,460) -- (31,460)
Stock options exercised and
restricted shares
issued................... -- 2,033 -- -- -- 19,039 (3,441) 17,631
Unrealized loss on
securities available for
sale..................... -- -- -- -- (832) -- -- (832)
Income tax benefit from
stock options
exercised................ -- 12,470 -- -- -- -- -- 12,470
Earned portion of
restricted stock
compensation............. -- -- -- -- -- -- 1,725 1,725
------ ------- -------- ----- ----- -------- -------- --------
Balance, March 31, 1997.... $1,050 $82,391 $565,122 $(820) $(750) $(96,901) $ (3,880) $546,212
====== ======= ======== ===== ===== ======== ======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
29
31
BMC SOFTWARE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED MARCH 31,
-------------------------------------
1995 1996 1997
-------- -------------- ---------
(IN THOUSANDS)
Cash flows from operating activities:
Net earnings........................................... $ 77,517 $105,571 $ 163,872
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Acquired research and development costs............. 29,260 23,589 11,259
Depreciation and amortization....................... 18,791 28,354 32,523
Change in allowance for doubtful accounts........... (523) 426 2,344
Deferred income tax provision....................... 150 7,392 15,070
Earned portion of restricted stock compensation..... 2,992 1,354 1,725
Changes in operating assets and liabilities:
Increase in accounts receivable................... (10,414) (14,258) (10,621)
Increase in interest and other receivables........ (2,162) (2,080) (3,524)
(Increase) decrease in prepaid expenses and
other.......................................... (3,744) (484) 186
Increase in deferred charges and other assets..... (749) (3,680) (7,453)
Increase (decrease) in trade accounts payable..... 3,718 (3,306) 1,022
Increase (decrease) in accrued commissions
payable........................................ (789) 3,236 135
Increase in accrued liabilities and other......... 2,850 6,138 3,375
Increase (decrease) in taxes payable.............. (563) 13,168 (16,595)
Increase in current and long-term deferred revenue
and other...................................... 26,876 774 91,529
-------- -------- ---------
Total adjustments.............................. 65,693 60,623 120,975
-------- -------- ---------
Net cash provided by operating activities...... 143,210 166,194 284,847
-------- -------- ---------
Cash flows from investing activities:
Cash paid for technology acquisitions.................. (22,055) (18,510) (14,719)
Purchases of marketable securities..................... (101,060) (101,050) (259,682)
Maturities of marketable securities.................... 47,830 64,897 67,523
Proceeds from sales of fixed assets.................... 1,004 1,072 --
Capital expenditures................................... (20,150) (21,586) (26,803)
Capitalization of software development costs........... (6,883) (19,309) (21,945)
Purchased software and related assets.................. -- (2,911) (9,043)
(Increase) decrease in long-term finance receivables... -- 3,901 (251)
-------- -------- ---------
Net cash used in investing activities.......... (101,314) (93,496) (264,920)
-------- -------- ---------
Cash flows from financing activities:
Treasury stock purchased............................... (44,182) (64,816) (31,460)
Stock options exercised................................ 2,674 9,526 17,631
Income tax benefit from stock options exercised........ 663 4,862 12,470
-------- -------- ---------
Net cash used in financing activities.......... (40,845) (50,428) (1,359)
Effect of translation exchange rate changes on cash...... 629 364 (902)
-------- -------- ---------
Net change in cash and cash equivalents........ 1,680 22,634 17,666
Cash and cash equivalents at beginning of year........... 37,814 39,494 62,128
-------- -------- ---------
Cash and cash equivalents at end of year................. $ 39,494 $ 62,128 $ 79,794
======== ======== =========
Supplemental disclosures of cash flow information:
Cash paid during the year for income taxes............. $ 40,236 $ 30,102 $ 63,247
Value of treasury stock issued for technology
acquired............................................ -- 20,611 --
The accompanying notes are an integral part of these consolidated financial
statements.
30
32
BMC SOFTWARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Nature of Operations
BMC Software, Inc. and its wholly-owned subsidiaries (collectively, "the
Company" or "BMC") is a worldwide developer and vendor of software solutions for
automating application and data management processes across host-based and open
systems environments. The Company sells and supports its products primarily
through its sales offices around the world, as well as through its relationships
with independent partners. Numerous factors affect the Company's operating
results, including general economic conditions, market acceptance and demand for
its products, its ability to develop new products, rapidly changing technologies
and increasing competitive pressures. For a discussion of certain of these
important factors, see the discussion in Management's Discussion and Analysis of
Results of Operations and Financial Condition under the heading "Forward Looking
Information and Certain Risks and Uncertainties That Could Affect Future
Operating Results."
(b) Use of Estimates
The Company's management makes estimates and assumptions in the preparation
of its financial statements in conformity with generally accepted accounting
principles. These estimates and assumptions may affect the reported amounts of
assets and liabilities, the disclosure of contingent assets and liabilities as
of the date of the financial statements, and the reported amounts of revenues
and expenses during the respective reporting periods. Actual results could
differ from those results implicit in the estimates and assumptions.
(c) Basis of Presentation
The accompanying consolidated financial statements include the accounts of
the Company. All significant intercompany balances and transactions have been
eliminated in consolidation.
(d) Cash Equivalents
The Company considers investments with a maturity of three months or less
when purchased to be cash equivalents. As of March 31, 1996 and 1997, the
Company's cash equivalents were comprised primarily of money market funds,
commercial paper and repurchase agreements. The Company's cash and cash
equivalents are subject to potential credit risk. The Company's cash management
and investment policies restrict investments to investment quality, highly
liquid securities.
(e) Long Lived Assets
Property and Equipment --
Property and equipment are stated at cost. Depreciation on all property and
equipment, with the exception of building and leasehold improvements, is
calculated on the straight-line method over the estimated useful lives of the
assets which range from three to five years. Depreciation on the building is
calculated on the straight-line method over the useful lives of the components
of the building (twenty years for the infrastructure and thirty years for the
shell). Leasehold improvements are amortized on the straight-line method over
the shorter of the lease term or the estimated useful life of the assets which
range from two to five years.
31
33
BMC SOFTWARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
A summary of property and equipment is as follows:
MARCH 31,
--------------------
1996 1997
-------- --------
(IN THOUSANDS)
Land........................................................ $ 9,100 $ 9,100
Building and leasehold improvements......................... 70,188 73,648
Computers, furniture and equipment.......................... 65,442 82,912
-------- --------
144,730 165,660
Less accumulated depreciation and amortization............ (36,818) (49,364)
-------- --------
Net property and equipment.................................. $107,912 $116,296
======== ========
Software Development Costs --
Costs of internally developed software are expensed until the technological
feasibility of the software has been established. Thereafter, software
development costs are capitalized and subsequently reported at the lower of
unamortized cost or net realizable value. The cost of capitalized software is
amortized over the products' estimated useful lives, which is typically five
years. During the years ended March 31, 1995, 1996 and 1997, $6,883,000,
$19,309,000 and $21,945,000, respectively, of software development costs were
capitalized. The increased capitalization levels beginning in fiscal 1996 are
the result of the significant increases in open systems development work in
areas where technological feasibility has been achieved. Amortization for the
years ended March 31, 1995, 1996 and 1997 was $5,134,000, $8,667,000 and
$8,299,000, respectively. Amortization amounts were reported as cost of
maintenance services and product licenses in the accompanying consolidated
statements of earnings.
Purchased Software and Related Assets --
Purchased software and related assets are recorded at cost. Amortization is
calculated on the straight-line method over the estimated useful lives of the
products, which is typically five years. The portion of a purchase which
pertains to research and development is expensed in the period of the
acquisition. Amortization for the years ended March 31, 1995, 1996 and 1997 was
$2,644,000, $5,742,000 and $5,805,000, respectively. Amortization amounts were
reported as cost of maintenance services and product licenses in the
accompanying consolidated statements of earnings.
On a quarterly basis the Company reviews all of its long-lived assets for
reliability pursuant to Statement of Financial Accounting Standards ("SFAS") No.
121, "Accounting for the impairment of long-lived assets and for long-lived
assets to be disposed of."
(f) Income Taxes
Deferred income taxes are recognized for income and expense items that are
reported for financial reporting purposes in a different year than for income
tax purposes. Research and development tax credits are accounted for as a
reduction of income tax expense in the year realized. The income tax benefit
from nonqualified stock options exercised, wherein the fair market value at date
of issuance is less than that at date of exercise, is credited to additional
paid-in capital.
(g) Foreign Currency Translation and Risk Management
The Company operates globally and the functional currency for most of its
non U.S. enterprises is the local currency. Financial statements of these
foreign operations are translated into U.S. dollars using the current rate
method in accordance with SFAS No. 52, "Foreign Currency Translation." As a
result, the Company's U.S. dollar net cash flows from international operations
my be adversely affected by changes in
32
34
BMC SOFTWARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
foreign currency exchange rates. To minimize the Company's risk from changes in
foreign currency exchange rates, the Company utilizes certain financial
instruments.
The Company utilizes two types of financial instruments in managing its
foreign currency exchange risk, forward exchange contracts and purchased option
contracts. Forward exchange contracts are used to hedge firm commitments that
subject the Company to transaction risk. Such commitments include accounts
receivable, intercompany receivables/payables, cash balances and certain
liabilities of foreign operations. The terms of forward exchange contracts are
generally one month or less.
Purchased option contracts are used by the Company to hedge anticipated,
but not firmly committed, sales transactions. The Company believes that the
anticipated but not yet committed sales transactions are probable and are highly
correlated with the hedge instruments. Probability weightings are applied to the
forecasted quarterly sales amounts. Each month, the Company compares its dollar
amount of purchased option contracts to sales forecasts in order to ascertain
whether the hedge remains highly correlated. In the event the hedge ceases to be
effective, any unamortized premium costs or deferred gains are recognized in
that period. The terms of purchased option contracts are typically one year or
less.
The table below summarizes the contractual amounts of the Company's
financial instruments in U.S. dollars. The Company's foreign exchange financial
instruments are primarily denominated in the major European currencies,
particularly the German deutschemark and the British pound, as well as the
Japanese yen and Australian dollar. The "Buy" amounts in the table below
represent the U.S. dollar equivalent of commitments to purchase foreign
currencies and the "Sell" amounts represent the U.S. dollar equivalent of the
Company's right (with respect to purchased option contracts) and its commitment
(with respect to foreign currency forwards) to sell foreign currencies.
MARCH 31,
-------------------------------------
1996 1997
------------------ ---------------
BUY SELL BUY SELL
------ -------- --- --------
(IN THOUSANDS)
Options....................................... $ -- $ 59,789 $-- $ 60,264
Forwards (Europe)............................. -- 47,122 -- 71,499
Forwards (Other).............................. 2,931 1,547 45 7,980
------ -------- --- --------
$2,931 $108,458 $45 $139,743
====== ======== === ========
Gains and losses on forward exchange contracts are recorded as the
contracts expire (typically each month). Premiums from forward exchange
contracts are netted against the related gains and losses. Gains and premiums
associated with purchased option contracts are deferred until the underlying
hedged transactions occur or earlier if a hedged transaction is no longer
expected to occur. As of March 31, 1997, unamortized premium costs totaled
$1,075,000 and net unrecorded deferred gains were $1,478,000.
The Company's exposure to credit-related losses from its financial
instruments is minimal. Exposure from the Company's forward exchange contracts
could occur if the Company's foreign customers default on their trade payable
obligations with the Company. The Company has not experienced and does not
expect to experience any significant defaults by its foreign customers. Also,
exposure from the Company's purchased option contracts is limited to the premium
costs associated with buying the instruments. The Company is not obligated to
exercise its purchased option contracts. The Company is also exposed to
credit-related losses in the event of non-performance by counterparties to
financial instruments, but it does not expect any counterparties to fail to meet
their obligations, given their high credit ratings. In addition, the Company
diversifies this risk across several counterparties.
During fiscal 1995, 1996 and 1997, general and administrative expenses
included net foreign exchange expenses of $848,000, $1,725,000 and $2,297,000,
respectively. The net cash flows from the Company's foreign
33
35
BMC SOFTWARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
exchange financial instruments are netted with the currency gain or loss of the
hedged item in the Company's Consolidated Statements of Cash Flows.
(h) Revenue Recognition
The Company licenses its software products under perpetual, annual and
monthly licenses. Perpetual licenses include maintenance and enhancements for
either a 90 day period or a one year period. For those licenses which provide
maintenance and enhancements for a one year period, the portion of the license
fee associated with maintenance and enhancements is unbundled and recognized
ratably as maintenance revenue. Maintenance contracts are available annually
thereafter and are generally based on the value (as defined) of the licensed
software products. The Company also generates upgrade revenues as a result of a
customer's migration, or a customer's anticipated migration to more powerful
central processing units.
Revenue from the licensing of software, including upgrade revenue, is
recognized when both the Company and the customer are legally obligated under
the terms of the respective agreement and the underlying software products (if
any in the case of upgrade transactions) have been delivered. Maintenance
revenue is recognized ratably over the term of the underlying maintenance
agreement. Revenues from license and maintenance transactions which are financed
are generally recognized in the same manner as those requiring current payment.
The Company has an established business practice of offering installment
contracts to customers and has a history of successfully enforcing original
payment terms without making concessions. Further, the payment obligations are
unrelated to product implementation or any other post-transaction activity. In
all cases, revenue is recognized only if no significant Company obligations
remain and collection of the resulting receivable is deemed probable.
(i) Earnings Per Share
Earnings per share is based on the weighted average number of common shares
and common stock equivalents outstanding for the period. For purposes of this
calculation, outstanding stock options and unearned restricted stock are
considered common stock equivalents using the treasury stock method. Fully
diluted earnings per share is the same as, or not materially different from,
primary earnings per share and, accordingly, is not presented.
SFAS No. 128 "Earnings Per Share" was issued in February 1997.
Implementation of SFAS No. 128 is required for periods ending after December 15,
1997. SFAS No. 128 requires dual presentation of earnings per share (EPS); basic
EPS and diluted EPS. Basic EPS excludes dilution and is computed by dividing net
income by the weighted average number of common shares outstanding for the
period. Diluted EPS reflects the potential dilution that could occur if
securities or other contracts to issue common stock were exercised or converted
into common stock. If the Company had applied SFAS No. 128 for the fiscal years
ended March 31, 1995, 1996 and 1997, the following EPS would have been reported:
1995 1996 1997
----- ----- -----
Basic earnings per share.................................... $0.77 $1.05 $1.63
Diluted earnings per share.................................. $0.76 $1.01 $1.53
(j) Stock Splits
During the last two fiscal years, the Company has declared two stock
splits. On July 16, 1995, the Company declared a two-for-one stock split of its
common stock. The stock split was effected in the form of a stock dividend. The
Company also declared a two-for-one stock split of its common stock on October
24, 1996. This stock split was also effected in the form of a stock dividend. In
each case, stockholders of record received one share of common stock for each
share held. All stock related data in the consolidated financial statements and
related notes reflects both stock splits for all periods presented.
34
36
BMC SOFTWARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(k) Treasury Stock
The Company's Board of Directors has authorized a stock repurchase program.
Under that program, the Company has repurchased 2,414,000, 3,346,000 and 692,700
shares of its common stock on the open market for an aggregate purchase price of
$30,008,000, $63,472,000 and $30,581,000, in the fiscal years ended March 31,
1995, 1996 and 1997, respectively. As of March 31, 1997, the Company was
authorized to repurchase an additional 4,877,300 shares of its common stock
under the current stock repurchase program.
(2) TECHNOLOGY ACQUISITIONS
During the first quarter of fiscal 1997, the Company completed the
acquisition of certain assets (including in-process research and development) of
two technology companies for an aggregate cash purchase price of $12,950,000,
including direct acquisition costs. The Company accounted for these transactions
using the purchase method and recorded a $7,318,000 charge, net of a $3,941,000
income tax benefit, for acquired research and development costs. As of March 31,
1997, approximately $1,142,000 of such consideration had not been paid and was
included in accrued liabilities.
During the third quarter of fiscal 1996, the Company completed the
acquisitions of stock and assets (including in-process research and development)
of certain technology companies for an aggregate purchase price of $27,789,000,
including direct and acquisition costs. The Company funded these acquisitions
primarily through the re-issuance of its own common stock, and to a lesser
extent, with cash. The Company accounted for these transactions using the
purchase method and recorded a $22,831,000 charge, net of a $758,000 income tax
benefit, for acquired research and development costs. During fiscal 1997,
approximately $2,700,000 of the aggregate purchase price relating to these
acquisitions was paid.
During the fourth quarter of fiscal 1995, the Company completed various
technology acquisitions for an aggregate purchase price of $24,485,000,
including warrants to purchase 3,200,000 shares of the Company's stock at an
exercise price of $15 per share and direct acquisition costs. These acquisitions
were funded primarily through the issuance of the Company's common stock and
cash. These acquisitions were recorded using the purchase method. During fiscal
1996, the Company paid the remaining $4,590,000 of the aggregate purchase price
related to these acquisitions.
On March 31, 1995, the Company purchased for $10,000,000, an option to
acquire DataTools, Inc. ("DataTools"), a developer of data management and
recovery software products for the open systems market. In connection with this
transaction, the Company entered into an exclusive right to distribute, sell,
and maintain all software products owned, purchased, or developed by DataTools.
The Company paid a royalty to DataTools for all sales of DataTools products.
Royalties on license sales were paid at 50% and royalties on maintenance sales
were paid at 25%.
During May 1997, the Company exercised its option to acquire all of the
stock of DataTools for an aggregate purchase price of approximately $75,000,000
(unaudited) consisting of cash, BMC stock options, debt forgiveness and direct
acquisition costs. The Company will account for this transaction using the
purchase method of accounting. A substantial portion of the purchase price will
be recorded as acquired research and development costs.
As a result of the various technology acquisitions and the purchase option
transactions completed in fiscal 1995, the Company recorded a $25,701,000
charge, net of a $3,559,000 income tax benefit, for acquired research and
development costs.
In all of the above-mentioned acquisitions, purchase prices were allocated
to identifiable tangible and intangible assets acquired and liabilities assumed
based on their estimated fair values. Amounts allocated to acquired, in-process
research and development costs were expensed at the time of acquisition. To
determine the fair market value of the acquired in-process technology, the
Company relied primarily on the income
35
37
BMC SOFTWARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
approach, whereupon fair market value is a function of the future revenues
expected to be generated by an asset, net of all allocable expenses and charges
for the use of contributory assets. The future net revenue stream is discounted
to present value based upon the specific level of risk associated with achieving
the forecasted asset earnings. Discount rates utilized generally approximated
25%. The income approach focuses on the income producing capability of the
acquired assets and best represents the present value of the future economic
benefits expected to be derived from these assets.
The Company determined that the acquired in-process technologies had not
reached technological feasibility based on the status of design and development
activities which required further refinement, integration and testing. The
development activities required to complete the acquired in-process technologies
included additional coding, cross-platform porting and validation, quality
assurance procedures and customer beta testing.
The acquired technologies represent unique and emerging technologies, the
application of which is limited to the Company's software strategy. Accordingly,
these acquired technologies have no alternative future use.
(3) FINANCIAL INSTRUMENTS
Management determines the appropriate classification of debt and equity
securities at the time of purchase and re-evaluates such designation as of each
subsequent balance sheet date. The Company has the ability and intent to hold
most of its investment securities to maturity and thus has classified these
securities as "held to maturity" pursuant to SFAS No. 115, "Accounting for
Certain Investments in Debt and Equity Securities." These securities have been
recorded at amortized cost in the Company's Consolidated Balance Sheets.
Securities classified as "available for sale" are recorded at fair value. The
resulting net unrealized gains or losses are recorded as an increase or decrease
to stockholders' equity. The Company holds no securities classified as "trading
securities." Gains and losses, realized and unrealized, are calculated using the
specific identification method. The table below summarizes the Company's total
investment securities portfolio as of March 31, 1996 and 1997.
36
38
BMC SOFTWARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
HELD TO MATURITY SECURITIES
GROSS GROSS
UNREALIZED UNREALIZED AMORTIZED
FAIR VALUE GAIN LOSS COST
---------- ---------- ---------- ---------
(IN THOUSANDS)
1996
Maturities Within 1 Year
Municipal Securities.................. $ 28,634 $ 94 $ (17) $ 28,557
Preferred Stock....................... 8,900 -- -- 8,900
Corporate Bonds....................... 16,021 26 (8) 16,003
Euro Bonds and other.................. 6,103 7 (10) 6,106
-------- ------ ------- --------
Total maturities within 1
year........................ $ 59,658 $ 127 $ (35) $ 59,566
======== ====== ======= ========
Maturities From 1-5 Years
Municipal Securities.................. $151,795 $1,222 $ (581) $151,154
Corporate Bonds....................... 25,923 543 -- 25,380
Euro Bonds and other.................. 6,281 222 -- 6,059
-------- ------ ------- --------
Total maturities from 1-5
years....................... $183,999 $1,987 $ (581) $182,593
======== ====== ======= ========
1997
Maturities Within 1 Year
Municipal Securities.................. $ 32,901 $ 92 $ (4) $ 32,813
Corporate Bonds....................... 16,030 144 -- 15,886
Euro Bonds and other.................. 2,028 1 -- 2,027
-------- ------ ------- --------
Total maturities within 1
year........................ $ 50,959 $ 237 $ (4) $ 50,726
======== ====== ======= ========
Maturities From 1-5 Years
Municipal Securities.................. $210,754 $ 736 $(1,145) $211,163
Corporate Bonds....................... 34,125 48 (305) 34,382
Euro Bonds and other.................. 15,607 193 (50) 15,464
Mortgage securities................... 11,353 2 (611) 11,962
-------- ------ ------- --------
Total maturities from 1-5
years....................... $271,839 $ 979 $(2,111) $272,971
======== ====== ======= ========
Maturities From 6-10 Years
Corporate Bonds....................... $ 2,955 $ -- $ (68) $ 3,023
Euro Bonds............................ 3,019 -- (59) 3,078
Mortgage Securities................... 4,789 -- (146) 4,935
Municipal Bonds....................... 34,377 -- (326) 34,703
-------- ------ ------- --------
Total maturities from 6-10
years....................... $ 45,140 $ -- $ (599) $ 45,739
======== ====== ======= ========
37
39
BMC SOFTWARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
AVAILABLE FOR SALE SECURITIES
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAIN LOSS VALUE
--------- ---------- ---------- -------
(IN THOUSANDS)
1996
Maturities Within 1 Year
Municipal Securities.................. $ 8,438 $ 26 $ -- $ 8,464
------- ---- ----- -------
Total maturities within 1
year........................ $ 8,438 $ 26 $ -- $ 8,464
======= ==== ===== =======
Maturities From 1-5 Years
Municipal Securities.................. $35,772 $195 $(139) $35,828
Other................................. 3,453 -- -- 3,453
------- ---- ----- -------
Total maturities from 1-5
years....................... $39,225 $195 $(139) $39,281
======= ==== ===== =======
1997
Maturities Within 1 Year
Municipal Securities.................. $ 8,375 $ 58 $ -- $ 8,433
------- ---- ----- -------
Total maturities within 1
year........................ $ 8,375 $ 58 $ -- $ 8,433
======= ==== ===== =======
Maturities From 1-5 Years
Municipal Securities.................. $43,176 $ 71 $(281) $42,966
Euro Bonds............................ 13,743 -- (159) 13,584
Corporate Bonds....................... 6,686 -- (86) 6,600
Mortgage Securities and other......... 9,340 -- (1) 9,339
------- ---- ----- -------
Total maturities from 1-5
years....................... $72,945 $ 71 $(527) $72,489
======= ==== ===== =======
Maturities From 6-10 Years
Municipal Securities.................. $ 5,644 $ -- $ (92) $ 5,552
Corporate Bonds....................... 2,079 9 -- 2,088
Mortgage Securities and other......... 4,172 -- (269) 3,903
------- ---- ----- -------
Total maturities from 6-10
years....................... $11,895 $ 9 $(361) $11,543
======= ==== ===== =======
The Company's mortgage securities are classified according to the stated
maturities of the securities.
(4) TRADE FINANCE RECEIVABLES
Trade finance receivables arise in the ordinary course of business and are
the result of the Company's decision to hold low risk customer obligations at
interest rates that are attractive to the Company. Customers that finance their
software purchases typically do so for internal budget and cash flow management
purposes. The terms of these financings range from six months to five years.
Interest rates attached to these financings vary depending on several factors
including terms, financial market conditions and credit worthiness of the
customer. In each case involving a Company-financed software license
transaction, the customer must meet various financial and other criteria
established by the Company.
Many of the Company's customers choose to finance their software license
transactions through unrelated, third-party financial institutions. In such
cases, the financial institutions bear all of the credit risk. In the event of a
product performance issue, however, the Company, as in the case on non-financed
license transactions, would be responsible for resolving this issue. If it were
unable to do so, the Company would most likely provide additional products to
the customer or provide a credit or refund. To date, these occurrences
38
40
BMC SOFTWARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
have been insignificant. As of March 31, 1997, amounts owed to third-party
financial institutions as a result of customer transactions with the Company
approximated $170,000,000.
(5) COST OF MAINTENANCE SERVICES AND PRODUCT LICENSES
The components of cost of maintenance services and product licenses for the
years ended March 31, 1995, 1996 and 1997 are as follows:
1995 1996 1997
------- ------- -------
(IN THOUSANDS)
Cost of maintenance services.......................... $24,182 $27,185 $33,763
Amortization of software development costs............ 5,134 8,667 8,299
Amortization of purchased software.................... 2,644 5,742 5,805
Royalties............................................. -- 3,260 8,702
------- ------- -------
$31,960 $44,854 $56,569
======= ======= =======
(6) INCOME TAXES
The provision (benefit) for income taxes for the years ended March 31,
1995, 1996 and 1997 consisted of the following:
1995 1996 1997
------- ------- -------
(IN THOUSANDS)
Current
Federal............................................. $37,480 $40,804 $49,263
Foreign............................................. 5,185 9,268 8,869
------- ------- -------
Total current............................... 42,665 50,072 58,132
Deferred
Federal............................................. (4) 7,392 15,070
Foreign............................................. 154 -- --
------- ------- -------
Total deferred.............................. 150 7,392 15,070
------- ------- -------
$42,815 $57,464 $73,202
======= ======= =======
The foreign provision for income taxes is based on foreign pre-tax earnings
of $29,290,000 for fiscal 1995, $46,474,000 for fiscal 1996 and $67,571,000 for
fiscal 1997.
39
41
BMC SOFTWARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The income tax expense of $42,815,000 for fiscal 1995, $57,464,000 for
fiscal 1996 and $73,202,000 for fiscal 1997 differs from the amount computed by
applying the statutory federal income tax rate of 35% to consolidated earnings
before income taxes as follows:
1995 1996 1997
------- ------- -------
(IN THOUSANDS)
Expense computed at statutory rate.................... $42,116 $57,062 $82,976
Increase (reduction) resulting from:
Foreign tax effect, net............................. (4,701) (4,339) (11,543)
Tax benefit from foreign sales corporation.......... (176) (777) (610)
Income not subject to tax........................... (2,511) (2,908) (2,685)
Other............................................... 2,529 2,403 4,520
------- ------- -------
Subtotal.................................... 37,257 51,441 72,658
Non-deductible charge for acquired research and
development......................................... 5,558 6,023 544
------- ------- -------
$42,815 $57,464 $73,202
======= ======= =======
Aggregate unremitted earnings of foreign subsidiaries for which U.S.
Federal income taxes have not been provided, totaled approximately $84,846,000
at March 31, 1997. Deferred income taxes have not been provided on these
earnings because the Company considers them to be indefinitely reinvested.
Deferred income taxes for 1997 reflect the impact of temporary differences
between the amount of assets and liabilities recognized for financial reporting
purposes and such amounts recognized for tax purposes. The tax effects of the
temporary differences that give rise to the significant portions of the net
deferred tax assets as of March 31, 1996 (included in prepaid expenses and other
in the Consolidated Balance Sheets) and net deferred tax liabilities as of March
31, 1997 (included in accrued liabilities and other in the Consolidated Balance
Sheets) are presented as follows:
1996 1997
-------- --------
(IN THOUSANDS)
Deferred Tax Assets
Deferred revenue.......................................... $ 24,681 $ 17,014
Accruals not currently deductible......................... 76 403
Acquired research and development......................... 3,696 5,513
Other..................................................... 3,560 6,320
-------- --------
Total deferred tax assets......................... 32,013 29,250
Deferred Tax Liabilities
Software capitalization, net.............................. (9,044) (13,820)
Stock compensation plans.................................. (7,075) (2,130)
Book/tax difference on assets............................. (3,243) (3,499)
Foreign earnings and other................................ (7,781) (20,001)
-------- --------
Total deferred tax liability...................... (27,143) (39,450)
-------- --------
Net current deferred tax asset (liability)........ $ 4,870 $(10,200)
======== ========
(7) STOCK INCENTIVE PLANS
The Company has adopted numerous stock plans that provide for the grant of
options and restricted stock to employees and directors of the Company. Under
these plans, all options have been granted at fair market value as of the date
of grant and have a ten year term. All grants under these plans vest over terms
of either
40
42
BMC SOFTWARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
three, four or five years. The restricted stock is subject to transfer
restrictions that lapse over ten years or in prescribed increments if the
Company obtains certain objectives for EPS growth. Under these plans, the
Company was authorized to grant a total of 40,520,000 shares.
The following is a summary of the stock option activity for the years ended
March 31, 1995, 1996 and 1997:
1995 1996 1997
---------------------- ---------------------- ----------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
----------- -------- ----------- -------- ----------- --------
Options outstanding at
beginning of year............ 4,823,156 $ 9 12,433,252 $10 13,016,648 $12
Options granted................ 9,868,800 $11 2,068,500 $19 1,698,500 $43
Options exercised.............. (483,744) $ 6 (1,263,894) $ 8 (1,471,824) $11
Options forfeited or
canceled..................... (1,774,960) $15 (221,210) $13 (297,110) $16
----------- ----------- -----------
Options outstanding at end of
year......................... 12,433,252 $10 13,016,648 $12 12,946,214 $16
=========== =========== ===========
Option price range per share... $0.17-16.72 $0.17-21.69 $0.63-48.38
=========== =========== ===========
Options exercisable............ 2,049,280 $ 5 2,569,674 $ 8 3,453,177 $10
=========== =========== ===========
The following is a summary of the restricted stock activity for the years
ended March 31, 1995, 1996 and 1997:
1995 1996 1997
-------- -------- --------
Shares granted and unearned at beginning of year... 712,000 260,000 163,396
Shares granted..................................... 180,000 3,396 84,803
Shares earned...................................... (544,500) (100,000) (101,132)
Shares forfeited................................... (87,500) -- --
-------- -------- --------
Shares granted and unearned at end of year......... 260,000 163,396 147,067
======== ======== ========
In fiscal 1997, the Company adopted the BMC Software, Inc. 1996 Employee
Stock Purchase Plan (the "Purchase Plan"). A total of 500,000 shares of common
stock may be issued under the Purchase Plan to participating employees. Purchase
rights under the Purchase Plan are granted at 85% of the lesser of the market
value at the offering date or on the exercise date. During fiscal 1997, 49,000
shares of stock were issued pursuant to this plan. The Purchase Plan terminates
in the year 2006.
In October 1995, the Financial Accounting Standards Board issued SFAS No.
123 "Accounting for Stock-Based Compensation," which allows the Company to adopt
one of two methods for accounting for stock options. The Company has elected the
method that requires disclosure only of stock-based compensation. Because of
this election, the Company continues to account for its employee stock-based
compensation plans under Accounting Principles Board Opinion ("APB") No. 25 and
the related interpretations. Accordingly, deferred compensation is recorded for
stock-based compensation grants based on the excess of the market value of the
common stock on the measurement date over the exercise price. The deferred
compensation is amortized over the vesting period of each unit of stock-based
compensation grant. If the exercise price of the stock-based compensation grants
is equal to the market price of the Company's stock on the date of grant, no
compensation expense is recorded.
41
43
BMC SOFTWARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
For fiscal years ended March 31, 1995, 1996 and 1997, the Company has
recorded compensation expense of $2,992,000, $1,354,000 and $1,725,000,
respectively for restricted stock grants. The Company was not required under APB
No. 25 to record compensation expense for stock option grants during the same
period.
The fair values of each option grant and Purchase Plan discounts are
estimated using the Black-Scholes option pricing model with the following
weighted average assumptions used for grants in both 1996 and 1997: risk-free
interest rate of 6 percent, expected life of 5 years for options and restricted
stock, expected life of 6 months for Purchase Plan shares, expected volatility
of 40 percent and no expected dividend yields. The weighted average fair value
of options granted in fiscal 1996 and 1997 was $8.47 and $19.26, respectively.
Had the compensation cost for these plans been determined pursuant to the
alternative method under SFAS No. 123, the Company's net income and earnings per
share would have been reduced to the following pro forma amounts:
1996 1997
-------- --------
Net Income: As Reported $105,571 $163,872
Pro Forma $104,890 $160,251
EPS: As Reported $ 1.01 $ 1.53
Pro Forma $ 1.00 $ 1.50
Because the SFAS No. 123 method of accounting has not been applied to
options granted prior to April 1, 1995, the resulting pro forma compensation
cost may not be representative of that to be expected in future years.
Additionally, the 1997 pro forma amounts include $403,000 related to the
purchase discount offered under the 1996 Employee Stock Purchase Plan. The
weighted average fair value of shares granted to employees in fiscal year 1997
was $9.06.
The Company's outstanding options are segregated into the following three
categories in accordance with SFAS No. 123:
WEIGHTED AVERAGE
OUTSTANDING EXERCISABLE RANGE OF WEIGHTED AVERAGE REMAINING
SHARES SHARES EXERCISE PRICE EXERCISE PRICE CONTRACTUAL LIFE
- ----------- ----------- -------------- ---------------- ----------------
10,423,000 3,399,000 $.63 -- 19.16 $11 6.8 years
1,269,000 54,000 $21.13 -- 40.56 $25 8.9 years
1,254,000 -- $43.13 -- 48.38 $48 10 years
(8) RETIREMENT PLAN
The Company maintains a salary reduction profit sharing plan or 401(k) plan
("the Plan") available to all domestic employees. The Plan is based on a
calendar year end and allows employees to contribute up to 15% of their annual
compensation with a maximum contribution of $9,240 in calendar years 1994 and
1995 and $9,500 in calendar year 1996. In each of the calendar years 1994, 1995
and 1996, the Board of Directors authorized contributions to the Plan that would
match the employee's contribution up to a maximum of $5,000. The costs of these
contributions to the Company amounted to $2,769,000, $3,211,000 and $3,956,000
for the fiscal years ended March 31, 1995, 1996 and 1997, respectively. The
Company contributions vest to the employee in increments of 20% per year
beginning with the third year of employment and ending with the seventh.
In addition to the Company's 401(k) plan, the Company maintains a deferred
compensation plan for certain employees of the Company. At March 31, 1997, a
total of approximately $6,000,000 is included in long term securities that are
available for sale and accrued liabilities. Employees participating in this plan
may receive their respective amounts upon request.
42
44
BMC SOFTWARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(9) COMMITMENTS AND CONTINGENCIES
The Company has several noncancelable operating leases for office space and
computer equipment that expire in the fiscal years ending March 31, 2002, and
provide for various renewal options. Rent expense for office space is recognized
equally over the lease term. Total rent expense incurred during the years ended
March 31, 1995, 1996 and 1997 was approximately $16,595,000, $13,715,000 and
$14,946,000, respectively.
Future minimum lease payments under noncancelable operating leases as of
March 31, 1997 are:
FISCAL YEARS
ENDING
MARCH 31,
--------------
(IN THOUSANDS)
1998........................................................ $ 9,950
1999........................................................ 6,454
2000........................................................ 2,119
2001........................................................ 1,249
2002........................................................ 156
-------
Total minimum lease payments...................... $19,928
=======
The Company is subject to various legal proceedings and claims, either
asserted or unasserted, which arise in the ordinary course of business. While
the outcome of these claims cannot be predicted with certainty, 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 operations or financial position.
(10) FOREIGN OPERATIONS
The table below summarizes selected financial information with respect to
the Company's operations by geographic locations. Within the European
marketplace, the Company's German operations are the most significant with total
revenues accounting for over 40% of total European revenues in each of the three
fiscal years presented.
YEARS ENDED MARCH 31,
--------------------------------
1995 1996 1997
-------- -------- --------
(IN THOUSANDS)
REVENUES
North America.................................... $209,504 $253,593 $346,875
Europe........................................... 113,760 143,630 180,303
Pacific Rim and other............................ 21,736 31,627 36,032
-------- -------- --------
Consolidated.................................. $345,000 $428,850 $563,210
======== ======== ========
OPERATING PROFITS*
North America**.................................. $ 28,008 $ 49,310 $ 90,468
Europe........................................... 74,974 84,802 108,207
Pacific Rim and other............................ 5,646 13,477 18,349
-------- -------- --------
Consolidated.................................. $108,628 $147,589 $217,024
======== ======== ========
IDENTIFIABLE ASSETS
North America.................................... $391,026 $462,946 $656,014
Europe........................................... 88,257 120,319 73,712
Pacific Rim and other............................ 23,366 24,953 114,433
-------- -------- --------
Consolidated.................................. $502,649 $608,218 $844,159
======== ======== ========
43
45
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, on June 30, 1997.
BMC SOFTWARE, INC.
By: /s/ MAX P. WATSON JR.
------------------------------------
Max P. Watson Jr.
Chairman of the Board, President
and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons on behalf of the Registrant and
in the capacities and on the dated indicated.
SIGNATURES TITLE DATE
---------- ----- ----
/s/ MAX P. WATSON JR. Chairman of the Board, President and
- ------------------------------------------ Chief Executive Officer (Principal
Max P. Watson Jr. Executive Officer)
/s/ WILLIAM M. AUSTIN Senior Vice President and Chief
- ------------------------------------------ Financial Officer
William M. Austin
/s/ JOHN W. BARTER Director
- ------------------------------------------
John W. Barter
/s/ B. GARLAND CUPP Director
- ------------------------------------------
B. Garland Cupp
/s/ MELDON K. GAFNER Director
- ------------------------------------------
Meldon K. Gafner
/s/ L. W. GRAY Director
- ------------------------------------------
L. W. Gray
/s/ KEVIN M. KLAUSMEYER Controller (Chief Accounting Officer)
- ------------------------------------------
Kevin M. Klausmeyer
/s/ GEORGE F. RAYMOND Director
- ------------------------------------------
George F. Raymond
/s/ TOM C. TINSLEY Director
- ------------------------------------------
Tom C. Tinsley
44
46
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
We have audited in accordance with generally accepted auditing standards,
the consolidated financial statements of BMC Software, Inc. and subsidiaries
included in this Form 10-K and have issued our report thereon dated May 2, 1997.
Our audits were made for the purpose of forming an opinion on the basic
consolidated financial statements taken as a whole. This Schedule is the
responsibility of the Company's management and is presented for purposes of
complying with the Securities and Exchange Commission's rules and is not part of
the basic consolidated financial statements. This Schedule has been subjected to
the auditing procedures applied in the audits of the basic consolidated
financial statements and, in our opinion, fairly states in all material respects
the financial data required to be set forth therein in relation to the basic
consolidated financial statements taken as a whole.
ARTHUR ANDERSEN LLP
Houston, Texas
May 2, 1997
45
47
SCHEDULE II
BMC SOFTWARE, INC. AND SUBSIDIARIES
VALUATION ACCOUNT
YEARS ENDED MARCH 31, 1995, 1996 AND 1997
(IN THOUSANDS)
BALANCE AT CHARGED CHARGED TO
BEGINNING OF (CREDIT) TO OTHER BALANCE AT
YEAR DESCRIPTION YEAR EXPENSES ACCOUNTS DEDUCTION END OF YEAR
- ---- ----------- ---- -------- ---------- --------- -----------
1995 Allowance for doubtful $2,234 $ (723) $ -- $ -- $1,511
accounts...................
1996 Allowance for doubtful 1,511 776 -- (354) 1,933
accounts...................
1997 Allowance for doubtful 1,933 2,344 -- -- 4,277
accounts...................
46
48
EXHIBIT INDEX
EXHIBIT
NUMBER
-------
3.1 -- Restated Certificate of Incorporation of the Company;
incorporated by reference to Exhibit 3.1 to the Company's
Registration Statement on Form S-1 (Registration No.
33-22892) (the "S-1 Registration Statement").
*3.2 -- Certificate of Amendment of Restated Certificate of
Incorporation.
3.2 -- Bylaws of the Company; incorporated by reference to
Exhibit 3.2 to the S-1 Registration Statement.
4.1 -- Specimen Stock Certificate for the Common Stock of the
Company; incorporated by reference to Exhibit 4.1 to the
S-1 Registration Statement.
4.2 -- Rights Agreement, dated as of May 8, 1995, between the
Company and The First National Bank of Boston, as Rights
Agent (the "Rights Agreement"), specifying the terms of
the Rights, which includes the form of Certificate of
Designation of Series A Junior Participating Preferred
Stock as Exhibit A, the form of Right Certificate as
Exhibit B and the form of the Summary of Rights as
Exhibit C (incorporated by reference to Exhibit 1 to the
registrant's Registration Statement on Form 8-A dated May
10, 1995).
*4.3 -- Amendment to the Rights Agreement.
10.1(a) -- Form of BMC Software, Inc. 1994 Employee Incentive Plan;
incorporated by reference to Exhibit 10.7(a) to the
Company's Annual Report on Form 10-K for the fiscal year
ended March 31, 1995 (the "1995 10-K").
10.1(b) -- Form of Stock Option Agreement employed under BMC
Software, Inc. 1994 Employee Plan; incorporated by
reference to Exhibit 10.7(b) to the 1995 10-K.
10.2(a) -- Form of BMC Software, Inc. 1994 Non-employee Directors'
Stock Option Plan; incorporated by reference to Exhibit
10.8(a) to the 1995 10-K.
10.2(b) -- Form of Stock Option Agreement employed under BMC
Software, Inc. 1994 Nonemployee Directors' Stock Option
Plan; incorporated by reference to Exhibit 10.8(b) to the
1995 10-K.
10.3 -- Description of BMC Software, Inc. Executive Officer
Annual Incentive Plan; incorporated by reference to
Exhibit 10.6 to the Company's Annual Report on Form 10-K
for the fiscal year ended March 31, 1994.
10.4(a) -- License Agreement with International Business Machines
Corporation; incorporated by reference to Exhibit 10.12
to the S-1 Registration Statement.
10.4(b) -- License Agreements for Use and Marketing of Program
Materials dated May 13, 1986, with International Business
Machines Corporation; incorporated by reference to
Exhibit 10.13 to the S-1 Registration Statement.
10.4(c) -- Customer Agreement with International Business Machines
Corporation dated April 10, 1991; incorporated by
reference to Exhibit 10.15 to the Company's Annual Report
on Form 10-K for the fiscal year ended March 31, 1992
(the "1992 10-K").
10.5 -- Form of Indemnification Agreement among the Company and
its directors and executive officers; incorporated by
reference to Exhibit 10.11 to the 1995 10-K.
21.1 -- Subsidiaries of the Company.
23.1 -- Consent of Arthur Andersen LLP, independent public
accountants.
*27 -- Financial Data Schedule
- ---------------
* Filed herewith.