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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED MARCH 31, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 0-17136
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BMC SOFTWARE, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 74-2126120
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
BMC SOFTWARE, INC.
2101 CITYWEST BOULEVARD
HOUSTON, TEXAS 77042-2827
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (713) 918-8800
Securities Registered Pursuant to Section 12(b) of the Act:
NONE
Securities Registered Pursuant to Section 12(g) of the Act:
COMMON STOCK, PAR VALUE $.01 PER SHARE
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the registrant's voting stock held by
non-affiliates of the registrant, based upon the last reported sale price of the
registrant's Common Stock on June 23, 2000 was $8,828,368,649.
As of June 23, 2000, there were outstanding 246,544,630 shares of Common
Stock, par value $.01, of the registrant.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the following documents are incorporated by reference in this
report:
Definitive Proxy Statement filed in connection with the registrant's Annual
Meeting of Stockholders currently scheduled to be held on August 28, 2000 (Part
III of this Report)
Such Proxy Statement shall be deemed to have been "filed" only to the extent
portions thereof are expressly incorporated by reference.
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This Annual Report on Form 10-K contains certain forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended, which are
identified by the use of the words "believe," "expect," "anticipate," "will,"
"contemplate," "would" and similar expressions that contemplate future events.
Numerous important factors, risks and uncertainties affect our operating
results, including, without limitation, those contained in this report, and
could cause our actual results to differ materially from the results implied by
these or any other forward-looking statements made by us or on our behalf. There
can be no assurance that future results will meet expectations. You should pay
particular attention to the important risk factors and cautionary statements
described in the section of this Report entitled "Management's Discussion and
Analysis of Results of Operations and Financial Condition -- Certain Risks and
Uncertainties That Could Affect Future Operating Results." You should also
carefully review the cautionary statements described in the other documents we
file from time to time with the Securities and Exchange Commission, specifically
all Quarterly Reports on Form 10-Q and Current Reports on Form 8-K.
PART I
ITEM 1. BUSINESS
OVERVIEW
BMC Software is one of the world's largest independent systems software
vendors, delivering comprehensive systems management solutions. We provide
software solutions that enhance the availability, performance and recoverability
of our customers' business-critical applications to help them better manage
their businesses. Virtually all of our customers are now conducting a
significant portion of their business via the Internet. In the past 12 months,
global e-business has exploded, causing market research analysts to drastically
increase e-business market size estimates. We believe this dramatic increase in
e-business will translate into large amounts of spending on management tools for
e-business infrastructure by established businesses shifting on-line, new
businesses focused on on-line sales and service providers such as applications
service providers ("ASPs"). Our portfolio of systems management solutions allows
our customers to manage the various components and technologies within their
information technology ("IT") systems from end-to-end, from legacy databases and
applications on large mainframes to customer-facing web portals and exchanges.
Founded in 1980, we first earned a position of leadership in providing high
performance software tools and utilities for the mainframe computers on which
large enterprises depend. We began to deliver management solutions for
distributed IT systems in January 1994, when we acquired the PATROL(R) service
level management product suite, which we have established as a market leader.
Today, we are a leading provider of systems management solutions for the entire
IT enterprise, including mainframe, distributed and web-based systems. With the
rapid growth of business conducted over the Internet, companies worldwide are
racing to implement, maintain and manage comprehensive e-business strategies.
Because e-business success is dependent upon the result of the customer
experience, companies cannot afford for their IT systems to be unavailable or
performing poorly. Our focus on Assuring Business Availability(TM) addresses the
continually increasing requirements that customers' applications -- and their
myriad underlying components -- run around the clock, without failure or
downtime. Over the last two years we have also invested significantly in our
professional services group to help customers implement our products and to
deliver our solutions on a more consultative basis.
Our software solutions address the numerous technology layers in the
application stack: operating systems, databases, middleware, web application
servers, transaction servers and the applications themselves. We address all of
the predominant operating environments of enterprise computing, including:
- the International Business Machines ("IBM") OS/390 mainframe operating
system;
- the predominant Unix operating system variants, including Sun Solaris,
HPUX, IBM's AIX, Linux and Compaq's Tru64;
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- Microsoft Corporation's ("Microsoft" or "MS") MS Windows NT and Windows
2000 operating systems; and
- E-business platforms such as IBM's WebSphere and Microsoft's Site Server
Commerce Edition.
During fiscal year 2000 we introduced comprehensive e-business management
solutions which manage the complexity of the IT enterprise end-to-end in the
Internet environment. For example, our solutions monitor and manage the front
end web applications and servers on which they reside, security firewalls and
end-to-end response time of web transactions. In addition, building on our
traditional expertise at managing mainframe computing environments, we
introduced several new solutions that manage the back office e-business systems
behind the security firewall. These include managing network traffic and
middleware as well as legacy mainframe systems and databases that are all linked
together in the e-business enterprise. To further our commitment to providing
solutions for e-business infrastructure, we acquired Evity, Inc. in April 2000.
Evity's SiteAngel 2000(TM) web transactions monitoring service allows companies
engaged in e-business to easily monitor the performance of critical path
transactions through their web sites, such as purchasing a book or tracking a
transaction through a trade exchange, and to measure that performance against
pre-set targets. The combination of SiteAngel(TM) with PATROL now provides a
complete view of an application's service from outside the security firewall on
the Internet to inside the data center.
In June 2000, we introduced a major new version of PATROL, PATROL 2000, a
comprehensive, integrated service level management solution which enables
businesses to measure service in terms of end-user response time and business
transactions and to publish reports on compliance with service level agreements.
PATROL 2000 represents the evolution of PATROL into a true enterprise-wide
service level management solution. PATROL 2000 allows for automated diagnosis of
the root cause of failures and prediction of the impact of business change on
the quality of service delivered. PATROL 2000 further provides for the taking of
corrective actions when performance degradation or failure is detected and
allows for the automation of these corrective actions. The key activities
involved with managing service for both distributed systems and e-business
applications may thus be automated using PATROL 2000. Additional product level
information is provided under the subheading "-- Products" below.
Our professional services organization provides a comprehensive suite of
consulting services and education offerings designed to ensure ongoing business
availability. With our growing professional services business, we have moved
from being a provider of software products to becoming a complete solutions
provider. Towards this end, we have introduced several programs unique to the
industry which provide our customers with the keys to guaranteeing service
quality to their customers. The BMC Service Assurance Center(TM) is a holistic
methodology for a company's IT department that is designed to provide proactive,
continuously improving service to end users. Using a combination of products,
services and business process methodologies, our professional services
consultants implement the SA Center(R) to monitor and manage critical
high-availability business applications. The SA Center automates system
management so that attrition and personnel availability, issues IT departments
are struggling with worldwide, do not negatively impact the ability of the IT
organization to conduct business. In fiscal 2000, we introduced BMC Software
OnSite(TM), a certification program which includes solution implementation and
regular Health Checks performed by our professional services group. By joining
OnSite(TM), customers are able to use the management methodology of BMC Service
Assurance(TM) to deliver optimal service to their own customers, partners and
end users. In April 2000, we introduced our SureStart(TM) program which
guarantees on-time implementation by our professional services group for certain
systems management solutions. Customers receive a 20% rebate on the professional
services fees if we fail to meet the agreed timeframe. This program is aimed at
optimizing the return on investment for a customer by guaranteeing that our
products will be fully implemented within an agreed timeframe.
We were organized as a Texas corporation in 1980 and were reincorporated in
Delaware in July 1988. Since March 1998, we have completed several strategic
acquisitions. We acquired BGS Systems, Inc. ("BGS") in March 1998, Boole &
Babbage, Inc. ("Boole") in March 1999, New Dimension Software Ltd. ("New
Dimension") in April 1999, and Evity, Inc. ("Evity") in April 2000. Our
principal corporate offices are located at 2101 CityWest Blvd., Houston, TX
77042-2827. Our telephone number is (713) 918-8800.
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STRATEGY
Our strategy is to deliver the most comprehensive e-business systems
management software with rapid implementation. The underlying premise of this
strategy is that the success of any enterprise today depends on its IT systems.
E-business companies, for example, are defined by their IT capabilities.
Business-critical applications typically consist of numerous components from
multiple vendors, such as packaged, custom and legacy e-business, manufacturing,
billing, supply chain, management information and payroll applications. Even
routine or baseline applications such as e-mail and calendaring applications
become business critical when an organization depends on them for its day-to-day
operations. Application downtime or performance degradation can halt or greatly
impede an enterprise's daily operations. In addition, the explosive growth of
the Internet as a platform for commerce has placed tremendous pressure on IT
operations to make these applications available on an uninterrupted, full time
basis. Our focus is on the operation of applications and their underlying
components in high stress deployments. Our strategy is to provide end-to-end
enterprise systems management solutions designed to ensure the availability,
performance and recoverability of critical application services with rapid
deployment of the management solution. Examples of the capabilities and benefits
of our solutions include:
- Service Level Management -- providing usage, performance and availability
information about a system that allows the user to monitor, report,
manage and achieve service levels;
- Improving the availability and responsiveness of customers' applications
so they can establish and perform under service level agreements;
- Minimizing or eliminating system outages, whether planned due to system
upgrades or maintenance, or unplanned due to failures;
- Automating many tedious, error prone and costly administrative tasks in
production environments;
- Helping to ensure that storage systems are operating most effectively and
are able to recover from failures quickly, accurately and efficiently;
- Keeping data current and consistent across data stores;
- Helping to ensure data availability, integrity and recoverability;
- Monitoring and event management of many different types of mainframe and
distributed systems applications; and
- Job scheduling, output management and security management.
We believe that major trends such as Internet computing, e-business and
continued reductions in processing, storage and telecommunications costs will
drive further gains in productivity and growing investment in existing and new
software applications and their supporting infrastructure. The current trend
toward business-to-business and business-to-customer e-business adds additional
complexity to our customers' environments. Not only are our customers now
responsible for managing their internal IT systems, but they must ensure that
their business partners' IT systems are available, performing and remain
compatible with their own systems. To assist customers in solving complex
e-business issues, we announced our first set of e-business solutions in October
of 1999. The first of those announced deliverables were introduced to the market
in March 2000. Our strength is that while our solutions can monitor and manage a
customer's specific e-business applications, we also provide solutions that
ensure all of the technology required to generate a transaction is available and
performing as planned, and if it fails, can be recovered quickly. As an example,
if you choose to order a compact disc from a popular web site, you enter via a
web server that is pulling data via middleware from a legacy OS/390 server. Each
server is running a unique operating system, database and an ERP or legacy
application. Our strength is that we provide tools to monitor, manage, control
and optimize the performance of the entire transaction lifecycle. In doing so,
we ensure that our customers' business critical applications provide the level
of service that both their external and internal customers demand.
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We also believe the OS/390 mainframe platform will continue to be a viable
platform for large-scale IT systems for the foreseeable future and will play an
important role in e-business as more established companies implement their
Internet strategies. Contributing to the ongoing viability of the OS/390
platform are enterprises' large investments in their OS/390 applications and
databases and the significant price reductions and performance enhancements
delivered by IBM and other mainframe hardware vendors over the last five years.
In addition, the OS/390 platform is generally perceived as more stable and
reliable than distributed systems alternatives, in part because of its
homogeneity and the many well-established systems management tools provided by
IBM and companies like us.
Additionally, we are committed to delivering superior systems management
products for the Unix, Microsoft NT and Windows 2000 and e-business environments
and the myriad systems and applications software products that comprise large
scale, networked distributed information systems. In many cases, we attempt to
establish a competitive advantage by delivering tools, such as PATROL, that
excel in their breadth of platform support. We believe enterprise software
customers often prefer cross-platform products, as opposed to single domain
products.
As we continue to evolve from a point product vendor to a provider of
complete systems software solutions, we are working to establish more
consultative relationships with our customers. We are investing heavily in our
delivery of our software solutions to customers through direct sales
representatives and pre-sales and post-sales software consultants. Our
professional services group has grown significantly during fiscal 2000. We are
using web-based technologies when feasible to distribute our software and
documentation to our customers and to provide on-line maintenance and support.
Through these efforts, we believe we can increase our customer base and increase
the productivity and effectiveness of our field sales and product support
organizations.
PRODUCTS
Driven by the explosion of e-business, our products empower our customers
in this global economic environment where speed, time to value, and value over
time are critical. Today, it is not simply how quickly a company can get into a
market, but how quickly they can respond to end-user requirements and customer
requests. Our solutions are positioned to move at Internet speed and
aggressively build customer value. As a leading provider of e-business systems
management software solutions, our goal is to deliver the confidence needed to
manage the Internet environment. Our solutions fall into five broad categories:
PATROL Service Level Management, enhanced
availability, performance monitoring and
management for applications, databases,
middleware and operating systems in
distributed systems operating
environments
Enterprise Data Availability Enhanced availability, schema management
and data propagation solutions across DB2
and distributed database management
systems
S/390 Service Management Enhanced availability, performance
monitoring and management for
applications, databases and subsystems in
the IBM OS/390 operating environment
INCONTROL(TM) Automated production, output and security
management across OS/390 and distributed
systems operating environments
Recovery and Storage Management High-speed, coordinated application and
database backup and recovery and storage
management solutions across OS/390 and
distributed systems operating
environments
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PATROL
Our application service management product offerings comprise the PATROL
application and data management line, the PATROL for Performance Management and
PATROL for Prediction and Capacity Management products acquired from BGS, the
PATROL Enterprise Manager products acquired from Boole and a management suite
for IBM's MQSeries middleware technology.
Our PATROL product line delivers solutions that monitor the availability
and performance of increasingly complex, heterogeneous environments. The
autonomous, intelligent PATROL Agent, which resides on the database management
system, web or application server, is equipped to take independent, corrective
action and can communicate these actions to a centralized console on an
as-needed basis, as defined by the user. The core PATROL products contributed
approximately 15%, 14% and 17% of our license revenues in fiscal years 1998,
1999 and 2000, respectively.
Through the acquisitions of Boole and BGS, we expanded our application
service management offerings to include the PATROL Enterprise Manager, PATROL
for Performance Management and PATROL for Prediction and Capacity Management
products. PATROL Enterprise Manager offers a central point of control for
distributed systems, allowing users to manage their systems by business function
or technology. The product consolidates enterprise management information and
provides real-time problem notification and escalation. The PATROL for
Performance Management and PATROL for Prediction and Capacity Management
products provide both real-time and historical performance analysis and allow
for what-if performance modeling and capacity planning to prevent problems as
system changes are implemented. In aggregate, these three product lines
contributed 7%, 8% and 7% of our license revenues for fiscal years 1998, 1999
and 2000, respectively.
PATROL for E-business Management features sophisticated, easy-to-use
solutions for Web application, site analysis, server, firewall and network
analysis management. PATROL for Internet Services was introduced as a base
product for comprehensive management of the front end of the e-business process,
including the ability to capture true end-to-end response times. PATROL also
provides JARTA(TM), the Java Applet Response Time Analyzer, an advanced
technological component that monitors Web-indexed response time from the end
user's perspective. JARTA optimizes performance and can be added to a Web page
and then downloaded when the page is requested by the end user. PATROL for
Microsoft Site Server Commerce Edition enables users to monitor and manage
catalogs of information as well as search services, and assures e-business site
operations remain at peak availability. This ability to capture and measure the
end-user experience is greatly enhanced with the recently acquired SiteAngel
technology. In contrast to JARTA, SiteAngel is a subscription service that can
monitor web-based transactions at periodic intervals to provide an ongoing
representation of service quality and customer satisfaction.
We introduced PATROL 2000 in the first quarter of fiscal year 2001. This is
the first major integration of the PATROL, PATROL for Performance Management,
PATROL for Prediction and Capacity Management and PATROL Enterprise Manager
products into a comprehensive solution that offers single-point monitoring and
performance management across heterogeneous applications, databases, middleware
and operating system environments. The PATROL 2000 solution includes significant
new automation and reporting functionality that helps organizations monitor,
manage, control, optimize and predict their future business needs. PATROL 2000
also includes service level management and end-to-end response time
capabilities.
Enterprise Data Availability
The Enterprise Data Availability products include our administrative tools
for DB2(R). These products provide navigation and audit functions for the DB2
catalog structure and automate data structure changes, migration and versioning
across multiple, geographically dispersed DB2 subsystems. This automation speeds
the process of implementing application changes and preserves data integrity in
complex DB2 environments. In fiscal years 1998, 1999 and 2000, these products
contributed 6%, 6% and 5%, respectively, of our license revenues.
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The PATROL DB products replicate much of the functionality offered by our
traditional OS/390 administrative tools and utilities into the leading
distributed database management system environments from Oracle, Sybase,
Informix, IBM and Microsoft. The PATROL DB utilities provide high-speed database
loading and reorganization routines with integrity checks and statistical
analysis. The PATROL DB administrative tools provide consistent, reliable
change-control processes when implementing complex database changes. The
products automate and speed the deployment of new applications and application
changes. For fiscal 1998, 1999 and 2000, these products contributed 3%, 2% and
3% of our license revenues, respectively. Recently introduced, Web DBA for
Oracle effectively manages the challenges of web-based database administration.
Web DBA is a browser-based comprehensive tool that speeds and simplifies all
necessary data management tasks that help identify and correct space problems
before end users are affected. Because of its thin-client architecture, Web DBA
users can administer their Oracle database from anywhere -- their own PC, an end
user's PC, from work or home.
In an enterprise-class e-business, the computing topography is a mix of
mainframe and distributed systems. The ChangeDataMove product is a highly
efficient change data propagation solution that captures changes made to IMS,
IMS Fast Path, CICS/VSAM, VSAM Batch and DB2 databases, and propagates those
changes to DB2, Oracle, Sybase and Microsoft SQL Server in near real-time. A
product that shares data transformation changes with ChangeDataMove is DataMove.
This is a high-performance bulk data propagation solution that moves data from
IMS, IMS Fast Path, VSAM and DB2 for MVS source databases to Oracle, Sybase,
Microsoft SQL Server 7.0 and DB2 for MVS target databases. These products result
in savings of time, through real-time updates, and money for our customers.
S/390 Service Management
Our products for the OS/390 operating environments include our high-speed
reorganization utilities and performance management and monitoring tools. The
reorganization utilities automate and speed routine, required database
reorganizations in IMS and DB2 database management system environments. The
performance enhancement products provide real-time database performance
improvements through dynamic database tuning and high-speed data caching. These
products have been and continue to be our largest source of revenues and
operating profits. In the aggregate, these products contributed 24%, 27% and 21%
of our license revenues for fiscal years 1998, 1999 and 2000, respectively.
Through the acquisitions of Boole and BGS, we expanded our OS/390 offerings
to include the MAINVIEW(R) by BMC Software product line and BEST/1(R) for OS/390
products. MAINVIEW provides customers with a proactive approach to monitoring,
managing and automating mainframe systems. The products provide a centralized
view of applications and subsystems across the OS/390 environment and manage
application service levels. MAINVIEW Prediction helps identify system
bottlenecks and predicts the impact of workload growth and OS/390 system
changes. These products contributed 9%, 8% and 7% of our license revenues for
fiscal years 1998, 1999 and 2000, respectively.
MAINVIEW for E-business emerged with comprehensive management of the Web
infrastructure for S/390-based e-business environments. These solutions include
MAINVIEW for WebSphere, MAINVIEW for Network Management and MAINVIEW for Systems
Management. MAINVIEW for WebSphere provides site-use analysis, monitoring and
management utilities for DB2, middleware monitoring, management (MQ Series) and
WebSphere monitoring and management and transaction processing monitoring (CICS
and IMS). The MAINVIEW for Network Management solution optimizes performance of
data streams while providing noninvasive monitoring within negligible overhead.
To complement the set, MAINVIEW for Systems Management allows the system to
automatically respond to requests for information with data-level integration,
enabling the combination of objects into composite views.
In addition to the products discussed above, we also offer a variety of
OS/390 products that offer performance enhancements for batch and online
processing functions, mainframe networks and specialized OS/390 subsystems. In
the aggregate, these products contributed approximately 9%, 9% and 8% of our
license revenues for fiscal years 1998, 1999 and 2000.
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INCONTROL
The INCONTROL products, acquired with our acquisition of New Dimension,
provide for the automation and scheduling of production workloads, distribution
and viewing of system output, and user registration and password administration.
A typical example of a business process that uses the INCONTROL products would
be a semi-monthly payroll process. Numerous steps must be taken to ensure that
each employee gets paid timely and in the proper amount. Each of these steps has
to occur and they must occur in the proper order. The job-scheduling and
automation tools ensure that each step in the payroll application occurs
correctly and in a timely manner. Once the payroll process is complete, one type
of output (the paychecks) must be printed and sent to the correct corporate
locations. Another use of the output is to allow business managers to view
payroll data online. The INCONTROL for Output Management and INCONTROL for
Security Management products ensure that these business processes occur in a
timely manner and that the business manager viewing the data has the proper
security authorization to do so. INCONTROL Security Management enhances and
strengthens the overall security of e-business involvement. In fiscal year 2000
the INCONTROL products contributed approximately 9% of our license revenues.
Recovery and Storage Management
The Recovery and Storage Management products include the application
recovery solutions for both OS/390 and distributed environments. The RECOVERY
MANAGER products for IMS and DB2 and the RESOLVE(R) Recovery Manager products
for distributed database management systems enable an application-centric view
of system recoveries that allows for a coordinated recovery among multiple
database management systems and file systems supporting a single application.
The RECOVERY MANAGER, RESOLVE Recovery Manager and supporting products generated
approximately 15%, 14% and 13% of our license revenues in fiscal years 1998,
1999 and 2000, respectively. The application recovery solutions also include the
SQL-BackTrack(TM) database backup and recovery products. The SQL-BackTrack
products speed up and automate the complex sequential steps that must be
performed in order to back up or recover distributed systems databases. We
continue to market the SQL-BackTrack products as best-of-breed stand-alone
solutions and are also integrating them with our RESOLVE Recovery Manager
automated recovery solutions.
RESOLVE for E-business Management allows customers to leave their databases
open while making backups and recoveries. One component of this solution,
RESOLVE High Speed Transaction Recovery, provides maximum availability and
improved transaction integrity by rapidly applying transaction level updates to
the database during recovery. The solution also offers refined log analysis,
highly specific search abilities and optimal recovery analysis. The other
component, RESOLVE Enterprise Snapshot for SQL-Backtrack, delivers continuous
database availability and enhances database performance by reducing the impact
of backup processing from several hours to a few minutes.
Our Enterprise Snapshot for Storage Systems exploits the features of
third-party storage devices to provide hardware snapshot copy functionality for
our high-speed utilities. If Enterprise Snapshot detects that a dataset targeted
for snapshot processing resides on supported hardware, it will transparently
invoke the hardware's ability to produce near-instantaneous copies of data.
Through the acquisition of Boole, we obtained the RESOLVE Storage Resource
Manager products to complement our offerings in the storage management area. The
RESOLVE Storage Resource Manager products provide a consolidated view of storage
environments across OS/390 and distributed systems, statistical reporting on
resource consumption, and dynamic control of hardware storage use.
SALES AND MARKETING
We market and sell our products principally through our direct sales force.
Over the past three years, we have evolved our Americas sales model from a
centralized one with most of our sales personnel located in Houston, Texas, to a
field sales model with approximately 75% of our sales force located outside of
Houston. We believe this field sales presence should facilitate our evolution
towards a more consultative sales
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relationship with our customers. In addition, the field sales presence should
allow us to license software to a more diverse customer set, including
mid-market accounts.
We supplement the efforts of our direct sales force with an indirect sales
channel for our distributed systems products. We have established channels
operations groups in North America and Europe to promote, negotiate and support
such distribution arrangements and are continuing to invest in our channels
infrastructure. We are also represented by local distributors in geographical
territories in which we have not established a direct sales presence. In
addition, we have established dedicated sales teams focusing on the emerging
application service provider market and the Internet business, or dot com,
market.
INTERNATIONAL OPERATIONS
Approximately 40%, 39% and 36% of our total revenues in fiscal years 1998,
1999 and 2000, respectively, were derived from business outside North America.
Our international operations provide sales, sales support, product support,
marketing and product distribution services for our customers located outside of
North America. We also conduct development activities in Singapore and
Frankfurt, Germany to provide local language support, product
internationalization and integration with local-market hardware and software.
Total revenues and assets attributable to our North American, European and
other international operations (primarily in the Asia Pacific region) are set
forth in Note 11 to the Consolidated Financial Statements contained herein. We
believe that our operations outside the United States are located in countries
that are politically stable and that such operations are not exposed to any
special or unusual risks, except for the INCONTROL product development
operations in Israel, discussed below. Our growth prospects are highly dependent
upon the continued growth of our international license and software maintenance
revenues, and such revenues and expenses have been somewhat unpredictable in the
past.
Revenues from our foreign subsidiaries are denominated in local currencies,
as are operating expenses incurred in these locales. To date, we have not had
any material foreign currency exchange losses. For a discussion of our currency
hedging program and the impact of currency fluctuations on international license
revenues in fiscal 1999 and 2000, see "Management's Discussion and Analysis of
Results of Operations and Financial Condition" and Note 1(f) to the Consolidated
Financial Statements contained herein. We have not previously experienced any
difficulties in exporting our products, but no assurances can be given that such
difficulties will not occur in the future.
We have a significant presence in the State of Israel where our INCONTROL
product development operations are located. We believe that Israel is home to
highly talented and experienced software developers and other personnel and we
intend to continue to invest in our Israeli operations. For a discussion of
various unusual risks associated with Israeli operations and investments, see
"Management's Discussion and Analysis of Results of Operations and Financial
Condition -- Certain Risks and Uncertainties That Could Affect Future Operating
Results -- Conditions in Israel."
RESEARCH AND PRODUCT DEVELOPMENT
In fiscal year 2000, research and development spending, net of capitalized
amounts, represented 12% of total revenues and 18% of total operating expenses
(excluding amortization of goodwill, acquired technology and intangibles and
acquired research and development, legal and merger related costs). These costs
related primarily to the compensation of research and development personnel.
Although we develop many of our products internally, we may acquire technology
from third parties when appropriate and may incur royalty and other payment
obligations in connection with such acquisitions. Traditionally, we have
acquired rights from third parties to use certain technologies that we believed
would accelerate development of new products. Our expenditures on research and
development and on product maintenance and support, including amounts
capitalized, in the last three fiscal years are discussed below under the
headings, "Management's Discussion and Analysis of Results of Operations and
Financial Condition -- Expenses -- Research and Development" and
"-- Expenses -- Cost of Maintenance Services and Product Licenses."
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Our general product strategy is discussed under "Strategy" above. A major
focus of our fiscal year 2000 product development efforts was the integration of
the MAINVIEW OS/390 monitoring and event automation products acquired from Boole
with our database tools and utilities for IMS and DB2. Initial components of
this integration effort were delivered in fiscal year 2000 with more features
and functionality set to be delivered in fiscal year 2001. In the first quarter
of fiscal year 2001, we introduced PATROL 2000, which in addition to delivering
additional functionality, integrated the BGS BEST/1 and Boole COMMAND/ POST(R)
products with PATROL. Development activity on the INCONTROL product line
concentrated on adding new functionality for its core job scheduling, output
management and security administration product lines, and less on integration
with other BMC products. We are also developing major extensions of and
enhancements to our core mainframe product lines.
There can be no assurance that any products currently under development
(including those scheduled for near-term general availability) or product
integration efforts will be successfully completed or made generally available
on dates expected by us, or that when introduced, the products will be free of
defects or achieve market success.
The software industry is characterized by rapid technological change and is
highly competitive with respect to timely product innovation. In order to
maintain the usefulness of our products and their compatibility with modified
and new hardware and software, we must sometimes modify and enhance our products
and incur substantial associated expenses. From time to time, systems vendors
modify existing, or introduce new, hardware, operating system, and other system
software. We must then adapt our products to accommodate such changes. To date,
we have been able to adapt our products to such changes; however, there can be
no guarantee that we will be able to continue to do so.
Our primary research and development activities are based in Houston and
Austin, Texas, Waltham, Massachusetts, San Jose, California and Tel Aviv,
Israel. We internally create and produce all user manuals, sales materials and
other documentation related to our products. Product manufacturing and
distribution is based in Houston, Texas, with European manufacturing and
distribution jointly based in Nieuwegein, The Netherlands and Dublin, Ireland.
Recently, we opened a manufacturing and distribution center in Singapore to
serve our Asia Pacific operations.
MAINTENANCE, ENHANCEMENT AND SUPPORT SERVICES
Revenues from providing maintenance, enhancement and support services
comprised 33%, 29% and 28% of our total revenues in fiscal years 1998, 1999 and
2000, respectively. Payment of maintenance, enhancement and support fees
entitles a customer to telephone and internet support and problem resolution
services, including pro-active notification, electronic support requests and a
resolution database, and enhanced versions of a product released during the
maintenance period, including new versions necessary to run with the most
current release of the operating systems, databases and other software supported
by the product. Such maintenance fees are an important source of recurring
revenue to us, and we invest significant resources in providing maintenance
services and new product versions. These services are important to our customers
who require immediate problem resolution because of their use of our products to
manage their business-critical IT systems. The services are also necessary
because customers require forward compatibility when they install new versions
of the software systems supported by a BMC product.
For our mainframe products, the fee for the first year of product
maintenance services is included with the license fee. Subsequently, licensees
may renew their maintenance agreements each year for an annual fee. The annual
fee for mainframe products is generally 17% to 20% of the then current list
price of the licensed product as adjusted for any applicable discounts. For our
distributed systems products, the initial maintenance period is shorter
(typically 90 days) and the renewal fee varies from 15% to 20% depending on the
level of support selected by the licensee. In addition, customers are entitled
to reduced maintenance percentages for prepayment of annual maintenance fees.
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PROFESSIONAL SERVICES
Our professional services group consists of a worldwide team of experienced
software consultants. During fiscal 2000, we rapidly grew the professional
services group from less than 200 software consultants at the beginning of the
year to over 450 software consultants today, achieving a critical mass in North
America and Europe. Professional services contributed approximately 3% of our
revenues for fiscal year 2000, and we expect this group to continue to
experience significant growth.
PRODUCT PRICING AND LICENSING
Our mainframe products are generally licensed under enterprise license
agreements under which the customer is licensed to use the products on an
unlimited number of central processing units ("CPUs") of any size, subject to a
limit on the aggregate processing power of such CPUs as measured in millions of
instructions per second ("MIPS"). MIPS capacity based upgrade fees are owed when
and if the stipulated MIPS ceiling is exceeded. Our mainframe products were
historically priced and licensed on a tiered pricing basis whereby the license
fee for a product increases in relation to the processing capacity of the CPU on
which the product is installed. Under tiered pricing, CPUs are classified by CPU
tier according to their processing power as measured in MIPS. More powerful CPUs
fall into higher tiers and carry higher license fees. CPU upgrade fees are
charged if a product is installed on another CPU that falls in a higher CPU
group category. Substantially all of our larger mainframe customers have
converted their CPU tier-based licenses to enterprise license agreements.
We price and license PATROL and other distributed systems solutions on a
CPU tier basis and on an enterprise wide capacity basis. CPU upgrade fees from
PATROL and other distributed systems solutions have been immaterial to date, and
we expect that PATROL revenues will be predominately generated from additional
unit sales rather than CPU upgrade fees. Certain of our other distributed
systems products are also licensed on a tiered basis, while those at lower price
points are licensed on a per unit basis.
We maintain various discount programs for our mainframe and distributed
systems solutions, including discounts for multiple copies of a product and
volume discounts for enterprise license transactions.
Recently, we have introduced new pricing and licensing models to address
the emerging applications service provider, or ASP, market. We license our
products to ASPs on a term basis and charge both a fixed price during the term
and a variable cost based on the number of end users the ASP services. We
recognize this revenue over the term of the license. Also, the recently acquired
SiteAngel 2000 subscription service is provided for a term fee based on the
agreed number of SiteAngels(TM) and monitoring frequencies a customer utilizes.
This revenue will be recognized over the term of the service contract. We
anticipate that we will continue to introduce additional pricing and licensing
models to meet the needs of the marketplace, some of which may require us to
recognize revenue over time.
We recognize revenues from licenses and upgrade fees when both parties are
legally obligated under the terms of the respective agreement, the underlying
software products have been delivered, collection is deemed probable and there
are no remaining material obligations on our part. We recognize maintenance
revenues, including maintenance bundled with perpetual license fees, ratably
over the maintenance period, and we recognize professional services revenues as
the services are provided. For a discussion of enterprise license transactions,
the various components of license and upgrade revenues and our revenue
recognition practices for such components, see the discussion below under the
heading "Management's Discussion and Analysis of Results of Operations and
Financial Condition -- Results of Operations -- Revenues -- Product License
Revenues" and Note 1(h) to the Consolidated Financial Statements contained
herein.
Our products are generally marketed on a trial basis. When a customer
desires to license a trial product, a permanent product copy or a coded password
to convert the trial tape to a permanent tape is provided. Consequently, we do
not have any material backlog of undelivered products. We license our software
products almost exclusively on a perpetual basis.
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COMPETITION; SYSTEM DEPENDENCE
The IT systems management software markets in which we compete are highly
competitive with competition continually increasing, as discussed below and in
the "Management's Discussion and Analysis of Results of Operations and Financial
Condition" section of this report under the heading "Certain Risks and
Uncertainties That Could Affect Future Operating Results."
The mainframe systems software business is highly competitive. Our
mainframe products run primarily with IBM's IMS and DB2 database management
systems, IMS/TM and CICS transaction managers. Certain of our mainframe
products, including our core IMS and DB2 database tools and utilities, are
essentially improved versions of system software utilities that are provided as
part of these integrated IBM system software products. IBM continues to improve
or add to these integrated software packages as part of its strategic initiative
of reducing the overall software costs associated with its mainframe computers.
IBM is also aggressively marketing separately priced competing high performance
utilities in addition to its base utilities. If IBM is successful in duplicating
our products, it could provide them at a much lower cost because of the
different economics of its mainframe business. This would likely have a material
adverse effect on demand for product licenses, license upgrades and recurring
maintenance for our competing products. IBM is significantly increasing the
performance of its tools and utilities for IMS and DB2, both through internal
development efforts and arrangements with third party software developers.
In addition to IBM, we compete in the mainframe tools and utilities market
with Computer Associates International, Inc. ("CA"), Neon Systems, Inc. and
other independent software vendors that have the ability to develop and market
products similar to, and competitive with, our products. CA has acquired
Platinum Technology International, Inc., our primary competitor in the DB2 tools
and utilities market, and Innovative Designs, Inc., to compete in the IMS tools
and utilities market. Product pricing is a key competitive factor in the market
for third-party tools and utilities for IMS and DB2. In addition, with our
acquisitions of Boole and New Dimension, we became much more competitive in
other mainframe product lines with CA, IBM and Candle Corporation. Both IBM and
CA are significantly larger companies than us, with greater resources and
product breadth and larger sales channels.
The distributed systems markets that PATROL and our other systems
management solutions address are also highly competitive. All of the major
mainframe systems software vendors have distributed systems management
strategies that overlap to varying degrees with PATROL. These competitors
include, to differing degrees, IBM's Tivoli subsidiary, CA, Compuware
Corporation and Candle Corporation. The relational database management systems
vendors, such as Oracle and Sybase, and hardware companies such as HP, Sun and
Cabletron, are also providing competitive or potentially competitive products
for their respective platforms that are relatively inexpensive. Selected ERP
vendors also provide systems management tools unique to each of their markets.
The network and systems management framework providers are attempting to extend
their products into PATROL's functional space. In addition, smaller companies
continually enter the distributed systems management software markets, such as
NetIQ Corp. for MS Windows NT management and Quest Software for Oracle
management. We intend to differentiate PATROL from these products and other
competitive products by providing more depth of features and functionality and
by providing broader support for the many different technology components of a
mission-critical distributed IT system. There can be no assurance whether this
strategy will be successful. We expect these markets to continue to increase in
competitiveness.
We believe that the key criteria considered by potential purchasers of our
products are as follows: the operational advantages and cost savings provided by
a product; product quality and capability; product price and the terms on which
the product is licensed; ease of integration of the products with the
purchasers' existing systems; ease of product installation and use; quality of
support and product documentation; and the experience and financial stability of
the vendor.
We continually modify our mainframe products to maintain compatibility with
new IBM hardware and software. To do so and to develop and test new products, we
license IMS/DB, DB2, IMS/TM, CICS and other software systems from IBM on similar
terms as other IBM customers. If IBM were to terminate the current license
arrangements or otherwise deny us access to these systems, or if IBM adopts
technological
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changes that prevent or make more difficult our access to the systems, we would
be adversely affected. Similarly, if we were unable to acquire and maintain
access to the major ERP applications, distributed database management systems
and other IT system components equivalent to our access to DB2 and other IBM
systems software, our development of distributed systems products would be
impeded.
CUSTOMERS
No single customer accounted for a material portion of our revenues during
any of the past three fiscal years. Because our mainframe solutions are used
with relatively expensive computer hardware, most of our revenues are derived
from companies that have the resources to make a substantial commitment to data
processing and their computer installations. Our software products are generally
used in a broad range of industries, businesses and applications. Our customers
include manufacturers, telecommunications companies, financial services
providers, banks, insurance companies, educational institutions, retailers,
distributors, hospitals, government agencies and value-added resellers.
INTELLECTUAL PROPERTY
We distribute our products in object code form and rely upon contract,
trade secret, copyright and patent laws to protect our intellectual property.
The license agreements under which customers use our products restrict the
customer's use to its own operations and prohibit disclosure to third persons.
We now distribute certain of our distributed systems products on a shrink-wrap
license basis, and the enforceability of such restrictions in a shrink-wrap
license is unproven in certain jurisdictions. Also, notwithstanding those
restrictions, it is possible for other persons to obtain copies of our products
in object code form. We believe that obtaining such copies would have limited
value without access to the product's source code, which we keep highly
confidential. In addition, we employ protective measures such as CPU dependent
passwords, expiring passwords and time-based trials.
EMPLOYEES
As of March 31, 2000, we had 6,677 full-time employees. We believe that our
continued success will depend in part on our ability to attract and retain
highly skilled technical, sales, marketing and management personnel. Competition
continues to increase for well-qualified software sales, development and
consulting personnel. We consider our employee relations to be excellent.
ITEM 2. PROPERTIES
Our headquarters and principal marketing and product development operations
are located in Houston, Texas, where we own and occupy two office buildings
totaling approximately 730,000 square feet and lease an additional 218,000
square feet of office space in other buildings. We are currently constructing an
850,000 square foot expansion to the Houston location. We also maintain
development organizations in Austin, Texas, where we lease a 215,000 square foot
facility, in San Jose, California, where we lease a 207,000 square foot
facility, in Waltham, Massachusetts, where we lease a 176,000 square foot
facility, in Costa Mesa, California, where we lease a 70,000 square foot
facility and in Tel Aviv, Israel, where we lease a 60,000 square foot facility.
We occupy a 60,000 square foot leased sales and support facility in Frankfurt,
Germany, and smaller sales offices in other major cities around the world. We
also lease our principal mainframe computers and telecommunications equipment.
See Notes 1(e) and 10 to the Consolidated Financial Statements contained herein.
ITEM 3. LEGAL PROCEEDINGS
On March 9, 1999, a class action complaint was filed against us and four of
our senior executives alleging violations of Sections 10(b) and 20(a) of the
Securities Exchange Act in connection with our financial statement presentation
following our acquisition of BGS in March 1998 in a pooling-of-interests
transaction. Four similar actions were filed in the Southern District of Texas.
All of the actions were subsequently consolidated in a single action. The
lawsuits were filed following our announcement that we were restating our
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historical financial results to include BGS's results in our financial
statements as a condition to the Securities and Exchange Commission declaring
effective our registration statement on Form S-4 relating to our acquisition of
Boole. The plaintiffs seek an unspecified amount of compensatory damages,
interest and costs, including legal fees. The action is subject to the Private
Securities Litigation Reform Act of 1995 (the "PSLRA"). We deny the allegations
of wrongdoing in connection with the matters set forth in the complaint and
intend to vigorously defend the action. We have filed a motion to dismiss the
complaint. An unfavorable judgment or settlement, however, could have a material
adverse effect on our financial position or results of operations. On June 15,
2000, a United States Magistrate Judge issued an Opinion and Recommendation
recommending to the United States District Judge that our motion to dismiss be
granted and that the case be dismissed. On June 29, 2000, an Order was entered
by the United States District Judge granting our motion to dismiss and
dismissing the complaint. The plaintiffs have the right to appeal this Order.
On February 4, 2000, an action styled Dov Klein v. BMC Software, Inc.,
Richard P. Gardner, Stephen B. Solcher, Roy J. Wilson, Kevin M. Weiss, Kevin M.
Klausmeyer, Max P. Watson Jr., William M. Austin, Wayne S. Morris, M. Brinkley
Morse, Robert E. Beauchamp, and Theodore W. Van Duyn, No. 00-CV-359, was filed
in the United States District Court for the Southern District of Texas, Houston
Division. This is a purported class action filed on behalf of all purchasers of
our securities between July 29, 1999 and January 4, 2000. The plaintiff alleges
that BMC Software and eleven current and former senior executives violated
Sections 10(b) and 20(a) of the Securities Exchange Act and Rule 10b-5. The
plaintiff contends that BMC Software and the individual defendants artificially
inflated our stock price prior to the announcement of operating results for the
third quarter of fiscal 2000 by extending unusual payment terms to purchasers of
our products, failing to disclose softening demand and increasing competition
for our products, and failing to disclose difficulties in managing our sales
force. The plaintiff seeks unspecified compensatory damages, interest and costs,
including legal fees. The action is subject to the PSLRA. On March 9, 2000, the
court consolidated four similar actions, ordered that all subsequently filed
similar actions be consolidated, and set out a briefing schedule. Under the
briefing schedule, the defendants are not required to move, plead, or otherwise
respond until 60 days after (1) the court appoints a lead plaintiff and lead
counsel under the PSLRA and (2) an amended complaint is filed by the plaintiffs.
On April 3, 2000, certain plaintiffs filed an application to be appointed lead
plaintiff and lead counsel under the PSLRA. That motion was granted on June 13,
2000. We intend to deny the allegations in the consolidated complaint and defend
the consolidated action vigorously. We anticipate that we will file a motion to
dismiss the case. At this early stage of the litigation, it is not possible to
estimate potential damages, but it appears that if liability were established,
an unfavorable judgment or settlement could have a material adverse effect on
our financial position or results of operations.
We are subject to various other legal proceedings and claims, either
asserted or unasserted, which arise in the ordinary course of business.
Management does not believe that the outcome of any of these legal matters will
have a material adverse effect on our financial position or results of
operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not Applicable.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Since August 12, 1988, our Common Stock has been traded in the NASDAQ
National Market System under the symbol "BMCS." At June 23, 2000, there were
1,723 holders of record of Common Stock.
The following table sets forth the high and low bid quotations per share of
Common Stock for the periods indicated.
PRICE RANGE OF
COMMON STOCK
---------------
HIGH LOW
------ ------
FISCAL 1999
First Quarter............................................. $53.88 $40.19
Second Quarter............................................ 60.25 39.50
Third Quarter............................................. 59.88 34.88
Fourth Quarter............................................ 48.25 30.12
FISCAL 2000
First Quarter............................................. $54.50 $30.00
Second Quarter............................................ 71.88 47.50
Third Quarter............................................. 84.06 50.25
Fourth Quarter............................................ 86.63 36.00
The only dividends declared or paid since 1988 relate to BGS. BGS paid
dividends of $7.6 million in fiscal 1998, and no dividends were paid since. We
do not intend to pay any cash dividends in the foreseeable future. We currently
intend to retain any future earnings otherwise available for cash dividends on
the Common Stock for use in our operations, for expansion and for stock
repurchases. See "Management's Discussion and Analysis of Results of Operations
and Financial Condition -- Liquidity and Capital Resources."
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ITEM 6. SELECTED FINANCIAL DATA
The following selected consolidated financial data presented under the
captions "Statement of Earnings Data" and "Balance Sheet Data" for, and as of
the end of, each of the years in the five-year period ended March 31, 2000, are
derived from the Consolidated Financial Statements of BMC Software, Inc. and its
subsidiaries. Our historical financial data has been restated to include the
historical financial results of Boole and BGS for each of the periods presented.
As BMC, Boole and BGS had different fiscal year-ends, necessary adjustments have
been made to conform fiscal year-ends for certain periods. See Note 1(c) to the
Consolidated Financial Statements contained herein for further discussion of
consolidated periods and adjustments made. The financial statements of BMC for
all fiscal years presented have been audited by Arthur Andersen LLP, independent
public accountants, except for the consolidated financial statements of Boole
which were audited by Ernst & Young LLP, independent public accountants. The
selected consolidated financial data should be read in conjunction with the
Consolidated Financial Statements as of March 31, 1999 and 2000, and for each of
the three years in the period ended March 31, 2000, the accompanying notes and
the reports of independent public accountants thereon, which are included
elsewhere in this Form 10-K.
YEARS ENDED MARCH 31,
----------------------------------------------
1996 1997 1998 1999 2000
------ ------ ------ -------- --------
(IN MILLIONS, EXCEPT PER SHARE DATA)
STATEMENT OF EARNINGS DATA:
Total revenues................................. $638.9 $791.9 $985.3 $1,303.9 $1,719.2
Operating income............................... 171.8 242.8 253.6 415.3 270.5
Net earnings................................... $126.7 $184.4 $188.5 $ 362.6 $ 242.5
====== ====== ====== ======== ========
Basic earnings per share....................... $ 0.56 $ 0.81 $ 0.82 $ 1.55 $ 1.01
====== ====== ====== ======== ========
Shares used in computing basic earnings per
share........................................ 225.5 226.5 229.8 234.3 241.0
====== ====== ====== ======== ========
Diluted earnings per share..................... $ 0.54 $ 0.76 $ 0.77 $ 1.46 $ 0.96
====== ====== ====== ======== ========
Shares used in computing diluted earnings per
share........................................ 235.4 241.5 244.5 248.6 253.0
====== ====== ====== ======== ========
AS OF MARCH 31,
--------------------------------------------------
1996 1997 1998 1999 2000
------ -------- -------- -------- --------
(IN MILLIONS, EXCEPT PER SHARE DATA)
BALANCE SHEET DATA:
Cash and cash equivalents...................... $ 99.6 $ 127.1 $ 106.0 $ 347.9 $ 152.4
Working capital................................ 83.1 114.5 96.4 222.6 12.3
Total assets................................... 826.4 1,104.8 1,498.1 2,282.7 2,962.1
Stockholders' equity........................... 477.2 659.5 877.7 1,334.4 1,780.9
Dividends declared............................. 7.0 5.8 7.6 -- --
Dividends declared per share................... $ 0.03 $ 0.03 $ 0.03 $ -- $ --
In April 1998, we announced that the board of directors approved a
two-for-one stock split (in the form of a dividend) that was payable to
stockholders of record on May 1, 1998 and was effective May 15, 1998. Share and
per share data presented here and throughout the Consolidated Financial
Statements, have been adjusted to give effect to this two-for-one split.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
INTRODUCTION
This section includes historical information, certain forward looking
information and the information provided below under the heading "Certain Risks
and Uncertainties That Could Affect Future Operating Results" about certain
risks and uncertainties that could cause our future operating results to differ
materially from the results indicated by any forward looking statements made by
us or others. It is important that the business discussion in Item 1 of this
report and the historical discussion below be read together with the discussion
of risks and uncertainties, and that these discussions be read in conjunction
with the accompanying Consolidated Financial Statements and notes thereto.
HISTORICAL INFORMATION
Acquisitions
In March 1998, we acquired BGS in a stock-for-stock merger. We issued 7.2
million shares of Common Stock in the transaction. The transaction was accounted
for using the pooling-of-interests method, and we have restated the prior period
financial results to include those of BGS for the periods presented.
In March 1999, we acquired Boole in a stock-for-stock merger. We issued
19.1 million shares of Common Stock in the transaction. The transaction was
accounted for using the pooling-of-interests method, and we have restated the
prior period financial results to include those of Boole for the periods
presented.
In April 1999, we acquired New Dimension in a cash tender offer. This
transaction was accounted for using the purchase accounting method and
accordingly, New Dimension's post-merger financial results have been included in
our fiscal 2000 financial results since the acquisition date.
In April 2000, we acquired Evity for 1.6 million shares of Common Stock and
cash of $10 million. Stock options to purchase 0.4 million common shares were
issued to replace outstanding Evity stock options. Because the transaction
closed after the end of fiscal 2000 and was accounted for as a purchase
transaction, Evity's financial results are not included in our financial results
through March 31, 2000.
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Results of Operations
The following table sets forth, for the fiscal years indicated, the
percentages that selected items in the Consolidated Statements of Earnings and
Comprehensive Income bear to total revenues.
PERCENTAGE OF
TOTAL REVENUES
YEARS ENDED MARCH 31,
-------------------------
1998 1999 2000
----- ----- -----
Revenues:
Licenses................................................ 66.8% 69.6% 68.6%
Maintenance and services................................ 33.2 30.4 31.4
----- ----- -----
Total revenues.................................. 100.0 100.0 100.0
Selling and marketing expenses............................ 32.2 32.0 36.9
Research and development expenses......................... 12.3 12.6 12.4
Cost of maintenance services and product licenses......... 13.0 11.7 10.3
General and administrative expenses....................... 7.9 7.3 7.9
Acquired research and development......................... 6.6 1.3 4.7
Amortization of goodwill, acquired technology and
intangibles............................................. 0.4 0.3 8.1
Legal settlement.......................................... -- -- 3.2
Merger related costs...................................... 1.9 3.0 0.8
----- ----- -----
Operating income................................ 25.7 31.8 15.7
Interest expense.......................................... -- -- (1.3)
Interest and other income, net............................ 4.0 4.8 3.7
----- ----- -----
Other income, net............................... 4.0 4.8 2.4
----- ----- -----
Earnings before income taxes.................... 29.7 36.6 18.1
Income taxes.............................................. 10.6 8.7 4.0
----- ----- -----
Net earnings before cumulative effect of
accounting change............................. 19.1 27.9 14.1
Cumulative effect of accounting change, net of taxes...... -- (0.1) --
----- ----- -----
Net earnings.................................... 19.1% 27.8% 14.1%
===== ===== =====
Earnings
Total revenues in fiscal 2000 were $1.7 billion, a 32% increase over fiscal
1999 total revenues of $1.3 billion. The revenue growth was the result of a 40%
increase in North American product license revenues, a 15% increase in
international product license revenues and a 36% increase in worldwide
maintenance and services revenues. Fiscal 1999 total revenues increased 32% over
fiscal 1998 revenues of $985.3 million due to increases of 39% in North American
license revenues, 35% in international license revenues and 21% in worldwide
maintenance and services revenues. See further discussion under "-- Revenues"
below. Our operating expenses (excluding amortization of goodwill, acquired
technology and intangibles and acquired research and development, legal and
merger related costs) have increased from approximately 65% and 64% of total
revenues in fiscal 1998 and 1999, respectively, to approximately 68% of total
revenues in fiscal 2000, primarily as a result of increased sales and marketing
costs, including sales commissions and personnel costs in our growing
professional services business. Net earnings were $242.5 million in fiscal 2000,
a 33% decrease from net earnings of $362.6 million in fiscal 1999. The decrease
was solely due to increased charges for amortization of goodwill, acquired
technology and intangibles and acquired research and development, legal and
merger related costs, which increased to $289.4 million in fiscal 2000 from
$59.9 million in fiscal 1999, primarily as a result of the New Dimension
acquisition and the settlement of a lawsuit in fiscal 2000. Net income excluding
these charges increased to $444.6 million for fiscal 2000 from $392.4 million in
fiscal 1999. Fiscal 1999 net earnings reflected a 92% increase over fiscal 1998
net earnings of $188.5 million primarily as a result of increased revenues and
interest income, a lower effective tax rate and a decrease in acquired research
and development write-offs from $65.5 million in fiscal 1998 to $17.3 million in
fiscal 1999. The increase in
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earnings from fiscal 1998 to fiscal 1999 was also affected by the restatement of
our financial results to include Boole's financial results, because Boole's
fiscal 1999 yearend had to be conformed to ours as discussed in Note 1(c) to the
Consolidated Financial Statements contained herein. Based upon the unaudited
Boole financial results for the twelve-month period ended March 31, 1998, the
fiscal 1999 total revenue growth would have been approximately 31% and the
growth in net earnings would have been approximately 76%.
Historical performance should not be viewed as indicative of future
performance, as there can be no assurance that operating income or net earnings
as a percentage of revenues will be sustained at these levels. For a discussion
of factors affecting operating margins, see the discussions below under the
heading "Certain Risks and Uncertainties That Could Affect Future Operating
Results."
Earnings per Share
Basic earnings per share was $.82, $1.55 and $1.01 in fiscal 1998, 1999 and
2000, respectively. Diluted earnings per share was $.77, $1.46 and $.96,
respectively. Excluding amortization of goodwill, acquired technology and
intangibles and acquired research and development, legal and merger related
costs, basic earnings per share was $1.16, $1.67 and $1.84 and diluted earnings
per share was $1.09, $1.58 and $1.76 in fiscal 1998, 1999 and 2000,
respectively. The changes in earnings per share over the three years resulted
from the factors discussed under "--Earnings" above and an increase in weighted
average shares outstanding.
Revenues
PERCENTAGE CHANGE
-------------------------
YEARS ENDED MARCH 31, 1999 2000
---------------------------- COMPARED TO COMPARED TO
1998 1999 2000 1998 1999
------ -------- -------- ----------- -----------
(IN MILLIONS)
Licenses:
North America.................. $400.0 $ 557.1 $ 777.7 39.3% 39.6%
International.................. 258.3 349.8 402.5 35.4% 15.1%
------ -------- --------
Total licenses......... 658.3 906.9 1,180.2 37.8% 30.1%
------ -------- --------
Maintenance and services......... 327.0 397.0 539.0 21.4% 35.8%
------ -------- --------
Total revenues......... $985.3 $1,303.9 $1,719.2 32.3% 31.9%
====== ======== ========
We generate revenues from product license fees for our computer software
products, product maintenance and support fees for the associated maintenance,
enhancement and support of these products and professional services fees. We
generally recognize revenue from license fees upon the execution of a software
license agreement by both parties, the delivery of the underlying products and
the acceptance of such products by the customer. In transactions wherein certain
of the revenue recognition criteria are not met, license revenue is deferred.
The effect of such deferral is to exclude the deferred license revenues from
license revenues recognized in the period of deferral and to include them in the
period in which the contractual contingencies or obligations that caused
deferral have been fulfilled or have expired. Net deferred license revenues in a
period is the amount of license revenues deferred into future periods reduced by
the amount of previously deferred license revenues recognized in that period.
Absent net deferred license revenues, license revenues would have been $54.4
million higher in each of fiscal 1998 and 1999, and would have been $104.1
million lower in fiscal 2000. Maintenance and support fees are recognized
ratably over the maintenance term as defined in the applicable software license
agreement and professional services fees are recognized as the services are
provided. For further discussion of our revenue recognition policies, refer to
the discussion below and to Note 1(h) to the Consolidated Financial Statements
contained herein.
Total revenue growth of 32.3% in fiscal 1999 resulted from revenues
generated by our mainframe products for the IBM OS/390 operating system and the
IMS and DB2 database management systems, the expansion of our distributed
systems product lines and sales channels and, to a lesser extent, higher growth
rates of product maintenance and services fees. Total revenue growth of 31.9% in
fiscal 2000 resulted from
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revenues generated by our mainframe products, particularly those for DB2, our
distributed systems product lines, the addition of the New Dimension INCONTROL
products in a purchase accounting transaction and, to a lesser extent, higher
growth rates of product maintenance and services fees. Excluding incremental
revenues associated with New Dimension, total revenue growth was approximately
23% for fiscal 2000. In fiscal 1999, license fees from customers licensing our
mainframe products for current and future additional processing capacity
generated over one-half of overall growth in total license revenues. In fiscal
2000, almost 60% of license revenue growth was generated by distributed systems
license fees, and license fees from customers licensing our mainframe products
for current and future processing capacity generated less than one quarter of
license revenue growth. The growth in product license and maintenance fees in
fiscal 1999 and 2000 was derived principally from products developed prior to
fiscal 1999. Product revenue growth was only nominally impacted by price
increases and inflation in fiscal 1999 and 2000.
No single customer represented greater than 10% of total revenues in fiscal
1998, 1999 and 2000. This customer base is concentrated in the top 1,000 IT
purchasers worldwide and, by industry, in the telecommunications, financial
services and other transaction-intensive sectors. We believe that sales to
repeat customers accounted for the substantial majority of total license and
maintenance revenues in the periods presented.
Product Line Revenues
At March 31, 2000, we marketed over 450 software products designed to
improve the availability, performance and recoverability of enterprise
applications, databases and other IT systems components operating in mainframe,
distributed computing and Internet environments. Our mainframe products
accounted for approximately 73%, 70% and 64% of total revenues for fiscal years
1998, 1999 and 2000, respectively. Total revenues from mainframe products grew
28% from fiscal 1998 to fiscal 1999 and 20% from fiscal 1999 to fiscal 2000. The
revenues from these products are driven largely by the growth in customers'
future processing capacity, as discussed below.
The high performance utilities and administrative tools for IBM's IMS and
DB2 database management systems comprise the largest portion of our
mainframe-based revenues and total revenues. Our tools and utilities for IMS
databases collectively contributed 19%, 20% and 15% of total revenues and 18%,
20% and 14% of license revenues for fiscal years 1998, 1999 and 2000,
respectively. Our tools and utilities for DB2 databases collectively contributed
24% of total revenues and 25% of license revenues for each of the same periods.
Combined total revenues for these product lines grew 36% from fiscal 1998 to
1999 and 15% from fiscal 1999 to 2000. The balance of our mainframe products
represented 30%, 26% and 26% of total revenues for fiscal years 1998, 1999 and
2000, respectively, representing growth of 16% from fiscal 1998 to fiscal 1999
and 30% from fiscal 1999 to fiscal 2000, in part due to the addition of New
Dimension. The decline in relative revenue contribution by the mainframe product
lines reflects the higher growth rates of our distributed systems products in
these periods.
Total revenues from distributed systems products grew 45% from fiscal 1998
to 1999 and 59% from fiscal 1999 to 2000. Distributed systems license revenues
grew 36% and 55% for those same periods, respectively. Distributed systems
product revenue growth was derived primarily from increased market acceptance of
the PATROL application and data management product suite, the addition of the
INCONTROL product family, our significant and growing investment in our
distributed systems direct and indirect sales channels and higher distributed
systems maintenance and services fees. The distributed systems product lines
contributed 27%, 30% and 36% of total revenues and 33%, 33% and 39% of license
revenues for fiscal years 1998, 1999 and 2000, respectively. In fiscal 1999 and
2000, PATROL was the most significant contributor to growth in total and license
revenues for distributed systems products. For fiscal 2000, our principal
distributed systems management product lines were the PATROL application and
data management suite, the BEST/1 performance management products, the INCONTROL
Control-M job scheduling products, Control-D output management products and
Control-SA security administration products, the PATROL DB database
administration products, the SQL-Backtrack application and database recovery
products and the COMMAND/POST, Spaceview and Command/MQ products.
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The PATROL application and data management products accounted for 13%, 13%
and 17% of total revenues for fiscal years 1998, 1999 and 2000, respectively,
reflecting a 33% increase from fiscal 1998 to fiscal 1999 and a 68% increase
from fiscal 1999 to 2000. The remaining distributed systems products accounted
for 14%, 17% and 19% of total revenues in fiscal years 1998, 1999 and 2000,
respectively, reflecting a 56% increase from fiscal 1998 to 1999 and a 52%
increase from fiscal 1999 to 2000. The revenues from our distributed systems
product offerings depend upon the continued market acceptance of our existing
products and our ability to successfully develop and deliver additional products
for the distributed systems environment. We have experienced rapid growth in our
distributed systems product lines since their introduction in late fiscal 1994.
The distributed systems market is highly competitive and dynamic and there can
be no assurance that this growth will continue.
Product License Revenues
Our product license revenues consist of product license fees and license
upgrade fees. Product license fees are all fees associated with a customer's
licensing of a given software product for the first time. License upgrade fees
are all fees associated with a customer's purchase of the right to run a
previously licensed product on a larger computer or computers. License upgrade
fees are primarily generated by our mainframe products and include fees
associated both with current and future additional processing capacity.
Effective April 1, 1999 we adopted a modified definition of product license and
product upgrade fees as discussed below under the heading "Definitions of
License Revenue Categories."
Our North American operations generated 61%, 61% and 66% of total license
revenues in fiscal 1998, 1999 and 2000, respectively. North American license
revenues increased by 39% from fiscal 1998 to fiscal 1999 and by 40% from fiscal
1999 to 2000. Distributed systems product license fees were the largest
contributor of growth from fiscal 1999 to fiscal 2000, followed by increased
capacity-based license upgrade fees.
International license revenues represented 39%, 39% and 34% of total
license revenues in fiscal 1998, 1999 and 2000, respectively. International
license revenues increased by 35% from fiscal 1998 to fiscal 1999 and by 15%
from fiscal 1999 to 2000. Increased licensing of our distributed systems
products was the largest contributor of growth from fiscal 1999 to fiscal 2000,
followed by capacity-based license upgrade fees. International license revenues
were slightly increased by the strengthening of the dollar against local
currencies from fiscal 1998 to fiscal 1999 and were decreased by 4% due to
foreign currency exchange rate changes from fiscal 1999 to 2000 after giving
effect to our foreign currency hedging program.
The sustainability and growth of our mainframe-based license revenues are
dependent upon capacity-based license upgrade fees, particularly within our
largest customer accounts. During fiscal 2000, license upgrade fees (for current
and future processing capacity) accounted for 30% of our total revenues and 43%
of our total license revenues. Most of our largest customers have entered into
enterprise license agreements allowing them to install our products on any
number of CPUs, subject to a maximum limit on the aggregate processing power of
the CPUs as measured in MIPS. Additional license upgrade fees are due if the
MIPS limit is exceeded. Substantially all of these transactions include license
upgrade fees associated with additional processing capacity beyond the
customers' current usage levels, and some include product license fees for
additional products. In our typical enterprise license transactions, the fees
associated with future additional mainframe processing capacity comprise from
one-half to substantially all of the license fees received in these
transactions. Over the last several years, we experienced a strong increase in
demand from our mainframe customers for the right to run our products on
increased future mainframe processing capacity. This led to larger single
transactions with higher per MIPS discounts. Although growth in mainframe
capacity-based license upgrade fees slowed in fiscal 2000, we expect that we
will continue to be dependent upon these capacity-related license upgrade fees.
There can be no assurance, however, that the demand for mainframe processing
capacity or the perceived benefits of our core mainframe products will continue.
The slowing of this demand adversely impacts our mainframe license revenues and
operating results. See the discussion below under the heading "Certain Risks and
Uncertainties That Could Affect Future Operating Results."
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Definitions of License Revenue Categories
We license our products primarily in two ways: by copy and on an enterprise
license basis by aggregate licensed capacity. When products are licensed on a
per copy basis, license revenues from the initial licensing of each copy of the
product are product license fees. All revenues from the customer's licensing of
the right to use a previously licensed copy on a larger computer are license
upgrade fees. When products are licensed on an enterprise aggregate licensed
processing capacity basis, all license revenues associated with the first time
licensing of such products are product license fees. All revenues associated
with the licensing of a previously licensed product to operate on additional
aggregate processing capacity are license upgrade fees.
The definition of product license fees received when a product is licensed
on an aggregate licensed capacity basis became effective for fiscal 2000 and
represents a change from our practices prior to acquiring Boole and New
Dimension. Previously in aggregate licensed capacity transactions, revenues
associated with the first time licensing of a product were allocated between
revenues associated with the customer's current processing capacity, which were
categorized as product license fees, and revenues associated with future
processing capacity, which were categorized as license upgrade fees. Now all of
these fees are categorized as product license fees. The effect of this change is
to increase the amount of revenues allocated to product license fees and to
decrease the amount of revenues allocated to license upgrade fees. For large
enterprise license transactions that include newly licensed products, the effect
of this change is significant. This change solely impacts our internal
characterization of license revenues and has no effect on license revenue
recognition.
Maintenance and Support Revenues; Services Revenues
Maintenance and support revenues represent the ratable recognition of fees
to enroll licensed products in our software maintenance, enhancement and support
program, and services revenues represent fees from professional services,
including implementation, education and complementary services, performed during
the period. Maintenance and support enrollment entitles customers to product
enhancements, technical support services and ongoing compatibility with
third-party operating systems, database management systems and applications.
These fees are generally charged annually and equal 15% to 20% of the discounted
price of the product. In addition, customers are entitled to reduced maintenance
percentages for prepayment of annual maintenance fees. Maintenance revenues also
include the ratable recognition of the bundled fees for any first-year
maintenance services covered by the related perpetual license agreement.
Maintenance revenues have increased over the last three fiscal years as a
result of the continuing growth in the base of installed products and the
processing capacity on which they run. Maintenance fees increase in proportion
to the aggregate processing capacity on which the products are installed;
consequently, we receive higher absolute maintenance fees as customers install
our products on additional processing capacity. Due to the increased discounting
for higher levels of additional processing capacity, the maintenance fees on a
per MIPS basis are typically reduced in enterprise license agreements for
mainframe products. Historically, we have enjoyed high maintenance renewal rates
for our mainframe-based products. Should customers migrate from their mainframe
applications or find alternatives to our products, increased cancellations could
adversely impact the sustainability and growth of our maintenance revenues. To
date, we have been successful in extending our traditional maintenance and
support pricing model to the distributed systems market.
Professional services revenues have increased over the last three fiscal
years, more than doubling from fiscal 1999 to fiscal 2000, as a result of our
heightened focus on this increasingly important element in the value equation
for our customers. Our professional services headcount has grown steadily
throughout fiscal 1999 and 2000 to meet the increasing demand for our expanding
service offerings.
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Expenses
PERCENTAGE CHANGE
-------------------------
YEARS ENDED MARCH 31, 1999 2000
-------------------------- COMPARED TO COMPARED TO
1998 1999 2000 1998 1999
------ ------ -------- ----------- -----------
(IN MILLIONS)
Selling and marketing..................... $317.3 $417.7 $ 633.8 31.6% 51.7%
Research and development.................. 121.2 163.9 213.2 35.2% 30.1%
Cost of maintenance services and product
licenses................................ 127.7 152.0 177.2 19.0% 16.6%
General and administrative................ 77.4 95.1 135.1 22.9% 42.1%
Acquired research and development......... 65.5 17.3 80.8 (73.6)% 367.1%
Amortization of goodwill, acquired
technology and intangibles.............. 3.6 4.3 139.1 19.4% N/A
Legal settlement.......................... -- -- 55.4 -- --
Merger related costs...................... 19.0 38.3 14.1 101.6% (63.2)%
------ ------ --------
Total operating expenses........ $731.7 $888.6 $1,448.7
====== ====== ========
Selling and Marketing
Our selling and marketing expenses include personnel and related costs,
sales commissions and costs associated with advertising, industry trade shows
and sales seminars, and represented 32%, 32% and 37% of total revenues in fiscal
1998, 1999 and 2000, respectively. Personnel costs and sales commissions were
the largest single contributor to the expense growth in fiscal 1999 and 2000.
Selling and marketing year-end headcount increased by 31% from fiscal 1998
to fiscal 1999, and by 53% from fiscal 1999 to 2000. The headcount increases
during fiscal 1999 and 2000 were primarily attributable to significant increases
in our professional services business, distributed systems sales representatives
and technical sales support consultants. The fiscal 2000 increase also included
the addition of New Dimension personnel. Sales commissions increased in fiscal
1999 and 2000, as a result of the 38% and 30% increases, respectively, in
license revenues. In fiscal 2000, commission plan adjustments also contributed
to the increased sales commission expense. Marketing costs have continued to
increase to meet the requirements of marketing a greater number of increasingly
complex distributed systems solutions and to support a growing indirect
distribution channel. Selling and marketing expenses were further impacted by a
major re-branding effort which began in the first quarter of fiscal 2000 and
significantly higher levels of expenses for travel and office rent.
Research and Development
Research and development expenses mainly comprise personnel costs related
to software developers and development support personnel, including software
programmers, testing and quality assurance personnel and writers of technical
documentation such as product manuals and installation guides. These expenses
also include computer hardware/software costs and telecommunications expenses
necessary to maintain our data processing center. Increases in our research and
development expenses for fiscal 1999 and 2000 were primarily the result of
increased compensation costs associated with both software developers and
development support personnel, as well as associated benefits and facilities
costs. We increased our headcount in the research and development organization
by 24% from fiscal 1998 to fiscal 1999 and by 25% from fiscal 1999 to 2000,
including the addition of New Dimension personnel. Research and development
costs were reduced in all three fiscal years by amounts capitalized in
accordance with Statement of Financial Accounting Standards (SFAS) No. 86,
"Accounting for the Costs of Computer Software to Be Sold, Leased, or Otherwise
Marketed." We capitalize our software development costs when the projects under
development reach technological feasibility as defined by SFAS No. 86. During
fiscal 1998, 1999 and 2000, we capitalized approximately $46.9 million, $69.6
million and $84.4 million, respectively, of internal software development
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costs. The growth in capitalized costs is primarily due to increases in
distributed systems product development and platform compatibility efforts.
Cost of Maintenance Services and Product Licenses
Cost of maintenance services and product licenses consists of amortization
of purchased and internally developed software, costs associated with the
maintenance, enhancement and support of our products and royalty fees.
Maintenance, enhancement and support costs are increasing as a percentage of
maintenance fees as our product revenue mix shifts to distributed systems, which
require a higher level of support. We amortized $23.7 million, $29.7 million and
$32.1 million in fiscal 1998, 1999 and 2000, respectively, of capitalized
internal software development costs pursuant to SFAS No. 86. In these periods,
we expensed $12.0 million, $15.9 million and $8.2 million, respectively, of
capitalized software development costs to accelerate the amortization of certain
software products. These software products were not expected to generate
sufficient future revenues which would be necessary for us to realize the
carrying value of the assets. We expect our cost of maintenance services and
product licenses will continue to increase as we capitalize a higher level of
software development costs and as we build our distributed systems product
support organization, which is less cost-effective than our mainframe support
organization because of the complexity and variability of the environments in
which the products operate. The distributed systems products operate in a high
number of operating environments, including operating systems, database
management systems and ERP applications, and require greater ongoing platform
support development activity relative to our OS/390 mainframe products.
General and Administrative
General and administrative expenses are comprised primarily of compensation
and personnel costs within executive management, finance and accounting, product
distribution, facilities management and human resources. Other expenses included
in general and administrative expenses are fees paid for legal and accounting
services, consulting projects, insurance and costs of managing our foreign
currency exposure. Growth in general and administrative expenses from fiscal
1999 to fiscal 2000 was primarily attributable to increased personnel costs,
increased professional services fees and higher costs associated with the
infrastructure to support our growth. Fiscal year end headcount within the
general and administrative organizations grew by 11% from fiscal 1998 to fiscal
1999 and 20% from fiscal 1999 to fiscal 2000.
Acquired Research and Development
In executing its product strategies, we employ both internal research and
development and the acquisition of emerging technologies and, in the case of
Boole, BGS and New Dimension, established software companies. We believe that
time-to-market is critical to our success in the rapidly evolving distributed
systems software market, where we must compete with well-established companies
such as IBM, and where our products must integrate with the predominate database
management systems, operating systems, network protocols and applications within
the enterprise computing environment. Accordingly, we must continuously evaluate
whether it is more efficient and effective to develop a given solution
internally or acquire a technology that must be completed and then integrated
into our existing product architecture. The developers of the acquired
technologies are often small, early stage software companies with minimal to no
revenues, quality and documentation standards and name recognition in the
marketplace. This strategy involves a high degree of risk and is costly in that
a premium is typically paid for software code that is incomplete and only
partially contributes to our overall development plans. Over the last several
years, some of the acquired technologies were successfully completed and
integrated, while others were not.
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The following table presents information concerning the purchase price
allocations for the acquisitions accounted for under the purchase method for
fiscal 1998, 1999 and 2000.
ACQUIRED GOODWILL TOTAL
SOFTWARE IPR&D AND OTHER PRICE
-------- -------- --------- ------
(IN MILLIONS)
Fiscal 1998:
DataTools..................................... $ 15.0 $54.4 $ 3.6 $ 73.0
Others........................................ 3.5 11.1 -- 14.6
------ ----- ------ ------
$ 18.5 $65.5 $ 3.6 $ 87.6
====== ===== ====== ======
Fiscal 1999:
Nastel........................................ $ -- $ 6.0 $ -- $ 6.0
Envive........................................ 3.8 11.3 2.6 17.7
------ ----- ------ ------
$ 3.8 $17.3 $ 2.6 $ 23.7
====== ===== ====== ======
Fiscal 2000:
New Dimension................................. $126.3 $80.8 $465.9 $673.0
------ ----- ------ ------
$126.3 $80.8 $465.9 $673.0
====== ===== ====== ======
We acquired DataTools in May 1997, for an aggregate purchase price of $73
million. DataTools owned certain database management system-specific back-up
products that were sold as stand-alone products. Its flagship product is called
SQL Backtrack ("SQL-BT"). At the acquisition date, DataTools was in the process
of developing numerous products and enhanced versions of products, including
next generation versions of SQL-BT for the Informix platform ("SBI") and the
Oracle platform ("SBO"), as well as first generation products for the Microsoft
SQL ("SBM") and Sybase IDR ("SBS/I") platforms.
We allocated approximately $54.4 million to in-process research and
development ("IPR&D"). The four most significant development projects, which
comprised $40.6 million (74%) of the IPR&D, pertained to the products above. The
primary remaining efforts associated with the IPR&D included code completion in
several key areas, such as logical extraction and piecemeal back-up and recovery
("BU&R"), large database support and performance-related functionality. The
following summarizes the status of the four primary projects:
- We completed and released the SBM product in April 1998.
- The SBO product was released in June 1998 for both the NT and Unix
environments. The IPR&D was successfully completed resulting in new
functionality in several areas, including back-up and recovery
scheduling, remote BU&R, archive log management and a graphical user
interface.
- We abandoned the SBS/I project based on concerns over market demand and
the allocation of Sybase resources to the core Sybase product.
- We released version 2.0 of the SBI product in April 1998. The completion
of the in-process technology resulted in added functionality, including
selective recovery of tables, as opposed to full back-ups, which
increases flexibility and efficiency. This version also allows for
incremental restart if a recovery is interrupted, eliminating the need to
run the entire recovery again.
In June 1997, we acquired technology from Sento Technical Innovations, Inc.
We have since abandoned the technology and expensed the entire purchase price.
In July 1997, we acquired certain software code from Software Partners/32,
Inc. for a total purchase price of $6.9 million. We allocated $1.7 million of
the purchase price to completed technology and $5.2 million to IPR&D. The
allocation of purchase price to completed technology reflects the estimated
discounted future cash flows associated with the customers using the existing
technology. This code permits file system back-up and recovery, but was not
competitive with the leading products in this market. We initially planned on
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completing this code and integrating it into the PATROL Recovery Manager
product. These efforts were unsuccessful and we abandoned this project.
In the latter part of fiscal 1998, we were in the process of designing a
middleware management product to assist customers with optimizing middleware
performance and with handling enterprise environmental changes. In this regard,
in April 1998, we acquired a license from Nastel Technologies, Inc. ("Nastel")
for certain infrastructure source code for use in its MQ management product that
was under development, but had not yet reached technological feasibility.
Accordingly, we allocated the entire $6.0 million purchase price to IPR&D. We
completed the acquired IPR&D by creating an effective installation routine,
developing an automated MQ configuration routine, fortifying the underlying
Nastel database and modifying the code to work in environments with
complementary management products. Upon completion of the IPR&D, we completed
the initial related product after developing efficient data collection, user
interface and business logic code.
In June 1998, we entered into a technology agreement with Envive
Corporation ("Envive") primarily to strengthen our ERP business management
solutions to provide better diagnostic and correlation ability, service level
management and end-to-end monitoring capability. We also secured the rights to
distribute certain products in the SAP management market. Our committed costs
associated with the transaction approximated $17.7 million. We allocated $6.4
million of the transaction costs to software assets, prepaid royalties and
interest. The remaining $11.3 million was allocated to acquired IPR&D that had
not reached technological feasibility as of the date of the transaction. We
believe the acquired IPR&D was approximately 45% complete towards development of
end-to-end and service level management functionality across the major ERP
platforms at the acquisition date. We incurred a nominal level of development
costs in fiscal 1999. In fiscal 2000, we evaluated the levels of commitment and
effort required to develop the above-mentioned functionality in the non-SAP
environments and determined such development would not be pursued.
In April 1999, we acquired through a public tender offer in excess of 95%
of the outstanding ordinary shares of New Dimension. Total consideration paid
approximated $673.0 million, including the cost of the remaining outstanding
shares acquired during fiscal 2000 and the historical cost of approximately $2
million for shares of New Dimension previously owned by Boole. Unrealized gains
of approximately $21.0 million related to these New Dimension shares included in
long-term investment securities and accumulated other comprehensive income at
March 31, 1999, were eliminated when the acquisition was recorded. We allocated
$126.3 million to software assets, $435.9 million to goodwill and other
intangibles and $30.0 million to equipment, receivables and other non-software
assets, net of liabilities assumed. We allocated $80.8 million, or 12% of the
purchase price, to IPR&D, which represents the present value of the estimated
after-tax cash flows expected to be generated by the purchased technology,
which, at the acquisition date, had not yet reached technological feasibility
nor had alternative future use.
New Dimension grouped its product lines into five categories: (i)
Enterprise Production Management, (ii) Enterprise Output Management, (iii)
Enterprise Event Management, (iv) Enterprise Security Management and (v) Tandem
Solutions. New Dimension's primary IPR&D efforts can be summarized into four
categories: (i) Integrated Operations Architecture(R) for the Enterprise
("IOA(R)/e"), (ii) Odaiko, (iii) E-business Enablement and (iv) Security. The
following summarizes these efforts at the time of the acquisition and the status
of the development as of March 31, 2000.
Integrated Operations Architecture for the Enterprise. IOA/e was to be the
supporting infrastructure for all of the distributed systems products from New
Dimension, similar to the Integrated Operations Architecture for New Dimension's
mainframe products. This project, as originally intended, has been cancelled as
we determined it was more appropriate to gradually extend the existing
distributed systems infrastructure rather than to replace it.
Odaiko. Odaiko was to be the next major release of the Output Management
family of products focused specifically on broadening this product family from
purely a mainframe output management system to an enterprise-wide document and
output management product family. At the time of the acquisition, this product
family supported a document archive only on the mainframe, viewing of reports on
a terminal or a PC and
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distribution of the reports to network connected printers. Odaiko, renamed
CONTROL-D for Distributed Systems, will not only enable the end user to view the
archived reports via a Web browser but will also give them the ability to
customize the view of the data, making it easier for the customer to create
e-business applications. This requires the interpretation of a variety of
document formats (e.g., Xerox, IBM, Microsoft) and transformation of those
formats into JPEG or HTML formats easily read via a Web browser. Some components
of this product suite were released during fiscal 2000 and the remainder are
scheduled for general availability in September 2000.
E-business Enablement. E-business Enablement is the development of the
infrastructure necessary to "Internet-ize" the entire New Dimension product
family. Each of the products that will utilize E-business Enablement are
Internet applications which not only provide a browser-based front-end but also
are brand new applications with new and important functionality that customers
require. The beta versions of two of these products are scheduled for release in
fiscal 2001.
Security. At the acquisition date, the security market was new for New
Dimension. Customers have accepted the technology offered in current products
and are asking for additional features and add-on applications to enable them to
make better use of these applications. The technology at the acquisition date
supported the administration of passwords and user IDs of security systems
(e.g., RACF, TopSecret, ACF2, SEOS), applications (e.g., Lotus Notes, SAP R/3,
Microsoft Exchange), databases (e.g., Oracle, Informix, MS SQL Server) and
operating systems (e.g., UNIX, Microsoft Windows NT). It does this by placing an
agent on each managed node along with a module, which understands how to
communicate with each Resident Security System ("RSS"). These agent/module
combinations communicate with a repository and the Enterprise Security Station
console. Customer requirements drive the porting of the agent to each new
operating system and platform as well as to support new RSSs. Key IPR&D projects
at the acquisition date involved the support of new RSSs including firewalls,
ERP applications, and other security systems and platforms (e.g., Tandem).
Additional features within the IPR&D project include the ability to have users
request and create new passwords and user IDs. These passwords and user IDs
would then be utilized or synchronized across all of the applications and
systems that a user accesses. This technology has been completed, is Web-based
and allows end-users to enter their user ID and password and automatically
register it with the appropriate applications, then trigger the synchronization
job, while allowing for the system to monitor access.
A significant portion of the IPR&D value also relates to the (i) CONTROL-M,
(ii) CONTROL-D, (iii) CONTROL-SA, and (iv) Enterprise Controlstation(R)
("ECS(TM)") products. The following is a summary of the primary IPR&D related to
these products:
CONTROL-M
- New Two Tier architecture for large SYSPLEX environments
- An independent database layer (one source code for all supported
databases)
- Functionality allowing for the ability to perform actions on a group of
projects
CONTROL-D
- Repository for providing multi-level, global indexing of data
- SYSPLEX support
- CONTROL-D technology for the Windows NT environment
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CONTROL-SA
- Security for managing users of Internet e-commerce applications
- Enhanced administration of control access rights
- Ability to access and manage various enterprise applications
- Password synchronization
ECS
- Functionality allowing for the ability to perform actions on a group of
projects
- Mass environment management on Windows NT platform
- Enhanced diagnostics and problem determination tools
- Compatibility with Oracle databases
Certain of these projects were completed during fiscal 2000 and the related
products are generally available; others have been released as beta versions for
customer testing and evaluation; and the remainder are still in process.
As of the date of the New Dimension acquisition, we concluded that the
in-process technology had no alternative future use after taking into
consideration the potential use of the technology in different products, the
stage of development and life cycle of each project, resale of the software and
internal use. As such, the value of the purchased IPR&D was expensed at the time
of the acquisition. We intend to continue devoting effort to developing
commercially viable products from the purchased IPR&D, although we may not
develop such commercially viable products. All of the foregoing estimates and
projections were based on assumptions we believed to be reasonable at the time,
but which were inherently uncertain and unpredictable.
The values assigned to acquired IPR&D in the above mentioned transactions
were generally determined by estimating the costs to develop the purchased
in-process technology into commercially viable products, estimating the
resulting net cash flows from the projects and discounting the net cash flows to
their present value. The revenue projections used to value the acquired IPR&D
were based on estimates of relevant market sizes and growth factors, expected
industry trends, the anticipated nature and timing of new product introductions
by us and our competitors, individual product sales cycles and the estimated
life of each product's underlying technology. Estimated operating expenses and
income taxes were deducted from estimated revenue projections to arrive at
estimated after-tax cash flows. Operating expenses were estimated based on
historical results and anticipated profit margins and included cost of goods
sold, selling and marketing expenses, general and administrative expenses and
research and development expenses, including estimated costs to maintain the
products once they have been introduced into the market and are generating
revenue. Due to purchasing power increases and general economies of scale,
estimated operating expenses as a percentage of revenues were, in some cases,
estimated to decrease after the acquisitions.
The rates utilized