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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED MARCH 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 0-17136
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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
(Address of principal executive offices)
77042-2827
(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, 1999 was $11,407,083,207.
As of June 23, 1999, there were outstanding 232,501,059 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 30, 1999 (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 "believes," "expects," "anticipates," "will,"
"contemplates," "would" and similar expressions that contemplate future events.
Numerous important factors, risks and uncertainties affect the Company's
operating results, including, without limitation, those contained in this
report, and could cause the Company's actual results to differ materially from
the results implied by these or any other forward-looking statements made by, or
on behalf of, the Company. There can be no assurance that future results will
meet expectations. Readers 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." Readers should also carefully review the cautionary
statements described in the other documents the Company files from time to time
with the Securities and Exchange Commission, specifically all Quarterly Reports
on Form 10-Q and Current Reports on Form 8-K filed by BMC.
References in this Form 10-K to the "Company" or "BMC" refer to BMC
Software, Inc., and its subsidiaries. BEST/1, COMMAND/POST, Command MQ,
MainView, PATROL, SpaceView and SQL-BackTrack are trademarks of BMC. All other
company and product names may be trademarks of their respective owners.
References to beta versions of software products refer to software products
delivered to select customers for testing or evaluation prior to the general
commercial release of such software products.
PART I
ITEM 1. BUSINESS
OVERVIEW
BMC provides software products on a worldwide basis that significantly
increase the productivity, reliability and recoverability of its customers' core
information technology ("IT") operations, including their software applications
and the systems on which they run. BMC's goal is to help its customers improve
the efficiency and productivity of their mainframe and distributed IT systems.
Founded in 1980, BMC first earned a position of leadership in providing
high performance software tools and utilities for the mainframe computers on
which large enterprises depend. Today, BMC is a major provider of systems
management solutions for both mainframe and distributed information systems and
has established its PATROL(R) application availability and monitoring product
suite as a market leader. Because BMC's products address both mainframe and
distributed information systems, its customers can use the latest technologies
while preserving their substantial investment in legacy hardware, applications
and data.
Traditionally, BMC's customers have been primarily Fortune 1000 industrial
and service corporations and similarly sized organizations worldwide. BMC
believes its potential customer base has been greatly expanded with the
extension of BMC's product offerings into distributed information systems and
with what it perceives as significant recent increases in the affordability and
desirability of new mainframes. BMC intends to exploit this opportunity through
its well-established direct sales organization and through an indirect sales
network of value-added resellers and systems integrators.
BMC's software products address the three predominant operating
environments of enterprise computing: 1) the International Business Machine
("IBM") OS/390 mainframe operating system; 2) the various Unix operating systems
employed by leading hardware manufacturers such as Hewlett Packard Company
("HP"), Sun Microsystems, Inc. ("Sun"), IBM and Compaq Computer Corporation and
3) Microsoft Corporation's ("Microsoft" or "MS") rapidly emerging MS Windows NT
operating system. BMC's core products address the performance, availability and
recovery of these operating systems and the most prevalent database management
systems ("DBMS"s) used with them. DBMSs, when loaded with data, store all of the
information an application generates and requires. In addition to storing and
organizing the data, DBMSs allow an application to access, retrieve, manipulate
and analyze it. The primary DBMSs employed in the three
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enterprise operating environments addressed by BMC are: IBM's IMS and DB2 for
the OS/390 platform ("IMS" and "DB2"); Oracle Corporation ("Oracle"), Informix
Software, Inc. ("Informix"), Sybase, Inc. ("Sybase") and DB2 Universal Database
for the Unix platform; and MS SQL Server and Oracle for the Windows NT platform.
The operating systems and DBMSs form the backbone of the transaction intensive
IT systems that are critical to both the day-to-day operations and the long-term
strategies of BMC's customers. These IT systems are continuously growing in size
and complexity. Since BMC's inception, one of its key focuses and competencies
has been improving the performance, availability, reliability, recoverability
and ease of use of these DBMSs.
BMC has completed three major strategic acquisitions since March 1998. At
the same time, BMC's internal growth has accelerated because of the OS/390
platform's continued resurgence and the success of PATROL and other distributed
systems products. BMC is now a more significant factor in the enterprise systems
management market. BMC has recently reoriented its product development and
product marketing operations into five teams focused on products which address
common customer IT operational needs and which have similar functionality:
Application Service Management; Enterprise Data Availability; OS/390 Service
Management; Process Automation; and Recovery and Storage Management. The
creation of these product teams is intended to facilitate BMC's evolution from a
vendor of point products to a leading provider of complete systems management
solutions. Of BMC's product lines, the high performance utilities for IMS and
DB2 DBMSs and the administrative tools for DB2 remain its most significant
product lines. These products generated approximately 44% of total revenues in
fiscal 1999. Additional product level information is provided under the
subheading " --Products" below.
BMC was organized as a Texas corporation in 1980 and was reincorporated in
Delaware in July 1988. Its principal corporate offices are located at 2101
CityWest Blvd., Houston, TX 77042-2827. Its telephone number is (713) 918-8800.
STRATEGY
BMC's Applications Service Assurance product strategy ("ASA") is dedicated
to keeping customers' key software applications up and running. The underlying
premise of ASA is that the productivity of any enterprise today greatly depends
on its business-critical applications. These applications include packaged,
custom and legacy e-commerce, 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
can halt or greatly impede an enterprise's daily operations. In addition,
pressure on IT operations continues to build to make these applications
available on an uninterrupted, full time basis. BMC's strategy is to provide
enterprise systems management products designed to ensure the availability,
performance and recoverability of these key applications and the DBMSs,
operating systems and other software platforms on which they run. Examples of
the capabilities and benefits of BMC's products include:
- Managing heterogeneous environments
- 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
- Automation of 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 and efficiently
- Keeping data current and consistent across data stores
- Helping to ensure data availability, integrity and recoverability
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- Monitoring and event management of many different types of mainframe and
distributed systems and applications software
- Job scheduling, output management and security management
BMC believes that major trends such as internet computing, e-commerce 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. A leading investment
bank, for example, has predicted that within the United States enterprise
investment in IT systems will increase from 1% of Gross Domestic Product in 1994
to 6% in 2000. BMC intends to be one of the primary providers of systems
software solutions for these enterprise IT systems.
Towards this goal, BMC has acquired three major independent systems
software companies since March 1998: BGS Systems, Inc. ("BGS") in March 1998;
Boole & Babbage, Inc. ("Boole") in March 1999; and New Dimension Software Ltd.
("New Dimension") in April 1999. With internal growth and these acquisitions,
BMC's revenues, product development staff and direct sales force have nearly
doubled over the last 14 months. BMC believes this growth should give it the
necessary critical mass to increase its market penetration through substantially
greater product breadth and direct sales channel reach. Enterprise information
technology systems are enormously complex and require many different tools for
smooth, economical and reliable operation. Like BMC, all of these acquired
companies have concentrated on solving technically difficult, high value
operational problems and have won solid reputations for high quality, reliable
products that work as advertised and generate readily appreciated benefits. BMC
believes that many of its products are differentiated by their superior "time to
value."
Also like BMC, BGS, Boole and New Dimension are all strong vendors of tools
and utilities for IBM's OS/390 mainframe environment. BMC believes the OS/390
mainframe platform will continue to be the preferred system for large-scale IT
systems for the foreseeable future. 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 BMC, BGS, Boole and New Dimension. BMC's confidence in
the OS/390 platform has been reinforced by the increased demand for mainframe
processing capacity over the past 36 months and projected mainframe processing
capacity growth rates.
BMC is committed to delivering strong systems management products for the
Unix and Microsoft NT environments and the myriad systems and applications
software products that comprise large scale, networked distributed information
systems. In many cases, BMC attempts to establish a competitive advantage by
delivering tools, such as PATROL, that excel in their breadth of platform
support. BGS, Boole and New Dimension have also adopted this multi-platform,
heterogeneous product approach for their distributed systems products. New
Dimension, in particular, has developed very strong technologies such as
communications layers and data repositories that enable true cross-platform
products. BMC believes enterprise customers often prefer cross-platform
products, as opposed to single domain products, primarily because they are more
efficient. First, enterprise IT systems are and are likely to remain complex,
mixed platform environments, and it is more efficient to use a cross-platform
tool to perform critical functions, such as job scheduling or performance
management. Second, with a cross-platform tool, systems administrators need to
learn only one product and are not forced to switch back and forth between
different products that do the same thing for different environments. Third,
many applications and processes span different platforms, so that a cross
platform product is better suited to managing those applications or processes.
Fourth, it can be less expensive to acquire a single product that manages
various domains than to acquire individual point products for each environment.
As BMC continues to evolve from a point product vendor to a provider of
complete systems software solutions, it is working to establish more
consultative relationships with its customers. BMC is investing heavily on its
delivery of its software solutions to customers through direct sales
representatives, pre-sales
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software consultants and post-sales software consultants. BMC has launched a
major initiative to provide professional implementation and training services
for its products. BMC is using web-based technologies to distribute its software
and documentation to its customers and to provide on-line maintenance and
support. Through these efforts, the Company believes it can increase its
customer base and increase the productivity and effectiveness of its field sales
and product support organizations.
PRODUCTS
BMC's products are designed to enhance the availability, performance and
reliability of software applications, databases and subsystems across a variety
of operating environments. These environments include IBM's OS/390 operating
system for the mainframe environment as well as operating systems in the
distributed systems environment, including VMS, MS Windows NT and various
versions of Unix. The Company's solutions fall into five broad categories:
Application Service Enhanced availability, performance monitoring and management
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 DBMSs
OS/390 Service Management Enhanced availability, performance monitoring and management
for applications, databases and subsystems in the IBM OS/390
operating environment
Process Automation Automated production, output and security management across
OS/390 and distributed operating environments
Recovery and Storage High speed, coordinated application and database backup and
Management recovery and storage management solutions across OS/390 and
distributed operating environments
APPLICATION SERVICE MANAGEMENT
The Company's Application Service Management product offerings comprise the
PATROL application and data management suite, the BEST/1 performance management
products acquired from BGS, the COMMAND/POST products acquired from Boole and a
management suite for IBM's MQ Series middleware technology. BMC is currently
working toward integrating PATROL, BEST/1 and COMMAND/POST into a comprehensive
solution that offers single-point monitoring and performance management across
heterogeneous applications, databases, middleware and operating system
environments.
BMC's PATROL applications and data management product suite delivers
solutions that monitor the availability and performance of increasingly complex,
heterogeneous environments. The autonomous, intelligent PATROL agent, which
resides on the DBMS 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 PATROL application management
product suite contributed approximately 12%, 15% and 14% of license revenues in
fiscal 1997, 1998 and 1999, respectively.
Through the acquisitions of Boole and BGS, BMC expanded its Application
Service Management offerings to include the COMMAND/POST and BEST/1 product
lines. COMMAND/POST 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 BEST/1 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 product lines contributed 8%, 7% and 8% of license revenues for
fiscal 1997, 1998 and 1999, respectively.
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ENTERPRISE DATA AVAILABILITY
The Enterprise Data Availability product line includes BMC's administrative
tools for DB2. These products provide navigation and audit functions for the DB2
catalog structure and automate data structure changes, migration and versioning
across multiple DB2 subsystems. This automation speeds the process of
implementing application changes and preserves data integrity in complex DB2
environments. In fiscal 1997, 1998 and 1999, these products contributed 5%, 6%
and 6% of license revenues.
The PATROL DB product family replicates much of the functionality offered
by the Company's traditional OS/390 administrative tools and utilities into the
leading distributed DBMS 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 process of deploying new applications and application changes. For
fiscal 1997, 1998 and 1999, these product lines contributed 2%, 3% and 2% of
license revenues, respectively.
OS/390 SERVICE MANAGEMENT
BMC's product lines for the OS/390 operating environments include its
high-speed reorganization utilities and performance management and monitoring
tools. The reorganization utilities automate and speed routine, required
database reorganizations in IMS and DB2 DBMS 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 BMC's largest source of revenues and operating profits. In
the aggregate, these product lines contributed 27%, 24% and 27% of license
revenues for fiscal 1997, 1998 and 1999, respectively.
Through the acquisitions of Boole and BGS, BMC expanded its OS/390
offerings to include the MainView and BEST/1 product lines. 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.
BEST/1 helps identify systems bottlenecks and predicts the impact of workload
growth and OS/390 system changes. These product lines contributed 9%, 9% and 8%
of license revenues for fiscal 1997, 1998 and 1999, respectively.
In addition to the products discussed above, BMC also offers 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% of license revenues
for fiscal 1997, 1998 and 1999.
PROCESS AUTOMATION
In April 1999, BMC acquired New Dimension. Prior to this time, Boole was
acting as the exclusive distributor of New Dimension products in the European
market. The New Dimension products fall into the Process Automation category and
provide for the automation and scheduling of production workloads, distribution
and viewing of system output and user registration and password administration.
The New Dimension product revenues attributable to Boole contributed
approximately 4%, 4% and 3% of license revenues in fiscal 1997, 1998 and 1999,
respectively.
RECOVERY AND STORAGE MANAGEMENT
The Recovery and Storage Management product line includes the application
recovery solutions for both OS/390 and distributed environments. The Recovery
Manager products for IMS and DB2 and the PATROL Recovery Manager products for
distributed DBMSs enable an application-centric view of system recoveries that
allows for a coordinated recovery among multiple DBMSs and file systems
supporting a single application. The Recovery Manager, PATROL Recovery Manager
and supporting products generated approximately 17%, 15% and 14% of license
revenues in fiscal 1997, 1998 and 1999, respectively. The
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Application Recovery solutions also include the DataTools SQL-BackTrack database
backup and recovery products acquired in May 1997. Prior to acquiring DataTools,
BMC was the exclusive distributor of the SQL-BackTrack products. The
SQL-BackTrack products speed up and automate the complex sequential steps that
must be performed in order to backup or recover distributed systems databases.
BMC is continuing to market the SQL-BackTrack products as best of breed
standalone solutions and is integrating them as well with its PATROL Recovery
Manager automated recovery solutions. The SQL-BackTrack products generated
approximately 3% of license revenues in fiscal 1997, 1998 and 1999.
BMC's Enterprise Snapshot for Storage Systems exploits the features of
third-party storage devices to provide hardware snapshot copy functionality for
BMC's high-speed utilities. If Enterprise Snapshot detects that a data set
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, BMC obtained the SpaceView product
line to complement its offerings in the storage management area. The SpaceView
products provide a consolidated view of storage environments across OS/390 and
distributed systems, statistical reporting on resource consumption and dynamic
control of DASD utilization. These storage management products contributed less
than 2% of license revenues in fiscal 1997, 1998 and 1999.
SALES AND MARKETING
BMC markets and sells its products principally through its direct sales
force, which has doubled in size since March 1998. BMC has been expanding its
distributed systems sales force significantly over the last three years. This
expansion has been accomplished through internal growth and the acquisitions of
BGS, Boole and New Dimension. BMC has integrated its sales forces and sales
management with those of BGS, Boole and New Dimension and has implemented sales
incentive plans designed to encourage cooperation and to maximize cross-selling
opportunities across the product lines.
BMC has evolved its sales model from one based primarily on telephone sales
to one based equally on a strong field sales presence. Over the last two years,
BMC has expanded its field sales offices in North America to 36 offices and
internationally to 63 offices. BMC is currently consolidating field sales
offices in cities in which it now has multiple offices because of the
acquisitions. BMC believes this field sales presence should facilitate its
evolution towards a more consultative sales relationship with its customers.
BMC's sales operations are organized into mainframe and distributed systems
groups, with the mainframe account representatives cooperating with the
distributed systems representatives. Within these groups, there is further
specialization along the Boole, New Dimension, BEST/1, SQL-BackTrack and other
product lines. BMC employs technically trained software consultants to provide
specialized technical product knowledge to accounts. These consultants assist in
justifying BMC's products and conducting in-depth technical evaluations of their
performance and features. The acquisitions of Boole and New Dimension added
significantly to the Company's software consultant staff.
BMC supplements the efforts of its direct sales force with an indirect
sales channel for its distributed systems products. BMC has established channels
operations groups in North America and Europe to promote, negotiate and support
such distribution arrangements and is continuing to invest in its channels
infrastructure. BMC is also represented by local agents in geographical
territories in which it has not established a direct sales presence.
INTERNATIONAL OPERATIONS
Approximately 43%, 40% and 39% of BMC's total revenues in fiscal 1997, 1998
and 1999, respectively, were derived from business outside North America. BMC's
international operations provide sales, sales support, product support,
marketing and product distribution services for its customers located outside of
North America. BMC also conducts development activities in Singapore and
Frankfurt, Germany to provide local language support and integration with
local-market hardware and software systems vendors.
Total revenues, operating profits and identifiable assets attributable to
BMC's North American, European and other international operations (primarily in
the Pacific Rim) are set forth in Note 10 to the Consolidated
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Financial Statements contained herein. BMC believes that its operations outside
the United States are located in countries that are politically stable and that
such operations are not exposed to any special or unusual risks, except for the
New Dimension operations in Israel, discussed below. BMC's growth prospects are
highly dependent upon the continued growth of its international license and
software maintenance revenues, and such revenues and expenses have been somewhat
unpredictable in the past.
Revenues from BMC's foreign subsidiaries are denominated in local
currencies, as are operating expenses incurred in these locales. To date, BMC
has not had any material foreign exchange currency losses. For a discussion of
BMC's currency hedging program and the impact of currency fluctuations on
international license revenues in fiscal 1998 and 1999, see "Management's
Discussion and Analysis of Results of Operations and Financial Condition" and
Note 1(f) of Notes to Consolidated Financial Statements contained herein. BMC
has not previously experienced any difficulties in exporting its products, but
no assurances can be given that such difficulties will not occur in the future.
With the acquisition of New Dimension, BMC now has a significant presence
in the State of Israel. As of June 1, 1999, New Dimension employed approximately
270 employees in Israel. The Company believes that Israel is home to highly
talented and experienced software developers and personnel and intends to
maintain and invest in its New Dimension 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
BMC maintains a relatively high level of investment in its internal
research and development operations. In fiscal 1999, research and development
spending, net of capitalized amounts, represented 13% of total revenues and 19%
of total expenses. These costs relate primarily to the compensation of research
and development personnel. Although BMC develops many of its products
internally, it may acquire technology from third parties when appropriate and
may incur royalty and other payment obligations in connection with such
acquisitions. Traditionally, BMC has acquired rights from third parties to use
certain technologies that BMC believed would accelerate development of new
products. BMC's 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."
BMC's general product strategy is discussed under "Strategy" above. A major
focus of BMC's current product development efforts is the integration of the
Boole MainView OS/390 monitoring and event automation products with BMC's
database tools and utilities for IMS and DB2 and the integration of the BGS
BEST/1 and Boole COMMAND/POST products with PATROL. Development activity on the
New Dimension product lines is concentrated on adding new functionality for its
core job scheduling, output management and security management product lines,
and less on integration with other BMC products. BMC is developing a major new
release of PATROL designed to facilitate the interoperability of these and BMC's
other distributed systems management products. BMC is also developing major
extensions of and enhancements to its core mainframe product lines across the
board as customers continue to rely on them for their most critical IT
operations.
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 BMC, or that when introduced, 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 its products and their compatibility with modified
and new hardware and software, BMC must sometimes modify and enhance its
products and incur substantial associated expenses. From time to time, systems
vendors modify existing, or introduce new,
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hardware, operating system, and other system software. BMC must then adapt its
products to accommodate such changes. To date, BMC has been able to adapt its
products to such changes, however, there can be no guarantee that it will be
able to continue to do so.
BMC's primary research and development activities are based in Houston and
Austin, Texas, Sunnyvale, California (DataTools), Waltham, Massachusetts (BGS),
San Jose, California (Boole) and Tel Aviv, Israel (New Dimension). BMC
internally creates and produces all user manuals, sales materials and other
documentation related to its products. Product manufacturing and distribution is
based in Houston, Texas, with European manufacturing and distribution being
jointly based in Nieuwegein, The Netherlands and Dublin, Ireland.
MAINTENANCE, ENHANCEMENT AND SUPPORT SERVICES
Revenues from the provision of maintenance, enhancement and support
services comprised 36%, 33%, and 30% of total revenues in fiscal 1997, 1998 and
1999, respectively. Payment of maintenance, enhancement and support fees
entitles a company 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 BMC, and BMC invests significant resources in providing maintenance
services and new product versions. These services are important to customers,
particularly mainframe customers, who require immediate problem resolution
because of their use of the products to run IT systems that are central to their
enterprises. 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 BMC's mainframe products, the fee for the first year of product
maintenance services is included in the perpetual license fee. Subsequently,
perpetual licensees may renew their maintenance agreements each year for an
annual fee. The annual fee for mainframe products is generally 15% to 20% of the
then current list perpetual license fee of the licensed product as adjusted for
any applicable discounts. For BMC's 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.
PRODUCT PRICING AND LICENSING
BMC's mainframe products were initially priced and licensed on a tiered
pricing basis whereby the license fee for a product increases in relation to the
processing capacity of the CPU on which the product is installed. Under tiered
pricing, CPUs are classified by CPU tier according to their processing power as
measured in millions of instructions per second ("MIPS"). More powerful CPUs
fall into higher tiers and carry higher license fees. CPU upgrade fees are
charged if a product is installed on another CPU that falls in a higher CPU
group category. Most of BMC's larger mainframe customers have converted their
CPU tier-based licenses to enterprise wide product licenses, under which the
customer is licensed to use the products on an unlimited number of CPUs of any
size, subject to a limit on the aggregate processing power of such CPUs as
measured in MIPS. Capacity-based license upgrade fees from BMC mainframe
products contributed approximately one-fourth to one-third of BMC total revenues
in fiscal years 1997, 1998, and 1999, respectively. The BGS and Boole mainframe
products are generally licensed on similar capacity based terms. Historically,
capacity-based license upgrade fees were not separately captured by Boole;
however, the Company does not believe that the addition of Boole will
significantly change the contribution of these fees to total revenues.
BMC maintains various discount programs for its mainframe and distributed
systems products, including discounts for multiple copies of a product and
volume discounts for enterprise license transactions.
BMC also prices and licenses PATROL and other distributed systems products
on a CPU tier basis. CPU upgrade fees from PATROL have been immaterial to date,
and BMC expects that PATROL revenues will be predominately from additional unit
sales rather than CPU upgrade fees. Certain of BMC's other
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distributed systems products are also licensed on a tiered basis, while those at
lower price points are licensed on a per unit basis.
BMC's products are generally marketed on a trial basis. When a customer
desires to license a trial product, a permanent product copy or a coded password
to convert the trial tape to a permanent tape is provided. Consequently, BMC
does not have any material product backlog of undelivered products. BMC licenses
its software products almost exclusively on a perpetual basis.
BMC recognizes revenues from perpetual licenses and upgrade fees when both
parties are legally obligated under the terms of the respective agreement, the
underlying software products have been delivered, collection is deemed probable
and there are no remaining material Company obligations. BMC recognizes
maintenance revenues, including maintenance bundled with perpetual license fees,
ratably over the maintenance period.
For a discussion of enterprise license transactions, the various components
of license and upgrade revenues and BMC's revenue recognition practices for such
components, see the discussion below under the heading "Management's Discussion
and Analysis of Results of Operations and Financial Condition -- Operating
Results -- Revenues -- License Revenues" and Note (1) in Notes to Consolidated
Financial Statements.
COMPETITION; SYSTEM DEPENDENCE
The mainframe and distributed systems management software markets in which
BMC competes are highly competitive, 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."
BMC's mainframe products run primarily with IBM's IMS and DB2 DBMSs and
IMS/TM, CICS transaction managers and VTAM. Certain of these BMC products are
essentially improved versions of system software utilities that are provided as
part of these integrated IBM system software products. IBM continues to improve
or add to these integrated software packages as part of its strategic initiative
of reducing the overall software costs associated with its mainframe computers.
IBM is also aggressively marketing separately priced competing high performance
utilities in addition to its base utilities. If IBM is successful in duplicating
BMC's 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 of BMC's 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.
The mainframe systems software business is highly competitive. BMC's
competitors include IBM as well as Computer Associates International, Inc.
("CA"), Innovative Designs, Inc., Neon Systems, Inc. and other independent
software vendors that have the ability to develop and market products similar
to, and competitive with, BMC's products. CA has recently acquired Platinum
Technology International, Inc., which is the Company's primary competitor in the
DB2 tools and utilities market, and has announced its intention to compete in
the IMS tools and utilities market as well. Product pricing is a key competitive
factor in the market for third-party tools and utilities for IMS and DB2, and
BMC has periodically adjusted its discount structures to reflect this
competition.
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Many of Boole's and New Dimension's mainframe products are competitive
replacements of IBM's, CA's and other companies' products. Boole and New
Dimension have been successful with their products in the past; nonetheless, the
markets are highly competitive and price sensitive. BMC's acquisitions of Boole
and New Dimension have made it a much more direct competitor of IBM and CA. Both
IBM and CA are significantly larger companies than BMC, with greater resources
and product breadth and larger sales channels.
The distributed systems markets that PATROL, COMMAND/POST and BMC's other
systems management products address are also highly competitive. All of the
major mainframe systems software vendors have announced 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 DBMS 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. BMC's strategy is to
complement these frameworks and alternative systems management products by
integrating with them. The network and systems management framework providers
are, however, attempting to extend their products into PATROL's functional
space. In addition, start up companies continually enter the distributed systems
management software markets, such as NetIQ Corp. for MS Windows NT management.
BMC intends to differentiate PATROL from these other products in part by
providing broader support of the many different components of a distributed IT
system, although there can be no assurance whether this strategy will be
successful. BMC expects these markets to continue to increase in
competitiveness.
BMC continually modifies its mainframe products to maintain compatibility
with new IBM hardware and software. To do so and to develop and test new
products, BMC licenses IMS/DB, DB2, IMS/TM, CICS and other software systems from
IBM on similar terms as other IBM customers. If IBM were to terminate the
current license arrangements or otherwise deny BMC access to these systems, or
if IBM adopts technological changes that prevent or make more difficult access
to the systems, BMC would be adversely affected. Similarly, if BMC were unable
to acquire and maintain access to the major ERP applications, distributed DBMSs
and other IT system components equivalent to its access to DB2 and other IBM
systems software, its development of client/server products would be impeded.
BMC believes that the key criteria considered by potential purchasers of
its products are as follows: the operational advantages and cost savings
provided by a product; product quality and capability; product price and the
terms on which the product is licensed; ease of integration of the products with
the purchaser's existing systems; quality of support and product documentation;
and the experience and financial stability of the vendor.
CUSTOMERS
No individual customers accounted for a material portion of BMC's revenues
during any of the past three fiscal years. Because BMC's mainframe packages are
used with relatively expensive computer hardware, most of its revenues are
derived from companies that have the resources to make a substantial commitment
to data processing and their computer installations. Most of the world's major
companies use one or more of BMC's software packages. BMC's software products
are generally used in a broad range of industries, businesses and applications.
BMC's customers include manufacturers, telecommunications companies, financial
service providers, banks, insurance companies, educational institutions,
retailers, distributors, hospitals and value-added resellers.
INTELLECTUAL PROPERTY
BMC distributes its products in object code form and relies upon contract,
trade secret, copyright and patent laws to protect its intellectual property.
The license agreements under which customers use BMC's products restrict the
customer's use to its own operations and prohibit disclosure to third persons.
BMC now distributes certain of its distributed systems products on a shrink-wrap
basis, and the enforceability of such restrictions in a shrink wrap license is
unproven in certain jurisdictions. Also, notwithstanding those
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restrictions, it is possible for other persons to obtain copies of BMC's
products in object code form. BMC believes that obtaining such copies would have
limited value without access to the product's source code, which BMC keeps
highly confidential. In addition, BMC's products are generally encoded to run
only on a designated CPU, and trial tapes provided to potential customers
generally function only for a limited trial period.
EMPLOYEES
As of March 31, 1999, BMC had 4,914 full-time employees. This increased to
approximately 5,500 employees upon the April 14, 1999 closing of the New
Dimension acquisition. BMC believes that its continued success will depend in
part on its ability to attract and retain highly skilled technical, sales,
marketing and management personnel. Competition continues to increase for
well-qualified software sales, development and consulting service personnel. BMC
considers its employee relations to be excellent.
ITEM 2. PROPERTIES
BMC's headquarters and principal sales and product development operations
are located in Houston, Texas, where BMC owns and occupies two office buildings
totaling approximately 730,000 square feet. BMC also maintains a large
development organization in Austin, Texas, where it leases a 175,000 square foot
product development facility. The recently acquired Boole & Babbage operations
are located in one 110,000 square foot leased facility in San Jose, California,
the BGS Systems operations occupy a leased 80,000 square foot facility in
Waltham, Massachusetts and the DataTools operations occupy a leased 40,000
square foot facility in Sunnyvale, California. BMC occupies a 50,000 square foot
leased sales and support facility in Frankfurt, Germany, and smaller sales
offices in other major cities around the world. BMC leases its principal
mainframe computers, an IBM 9672-RC5, an IBM 9672-RY5, an IBM 9672-R66, and an
IBM 9672-R46, and its telecommunications equipment. See Notes (1) and (9) of
Notes to Consolidated Financial Statements.
ITEM 3. LEGAL PROCEEDINGS
On March 9, 1999, a class action complaint was filed in the United States
District Court for the Southern District of Texas, Houston Division styled
Rickey Hartman v. BMC Software, Inc., Max P. Watson, William M. Austin, M.
Brinkley Morse and Kevin Klausmeyer, No. B-99-0715, against the Company and four
senior executives of the Company alleging violations of Sections 10(b) and 20(a)
of the Exchange Act in connection with the Company's financial statement
presentation following its acquisition of BGS in March 1998 in a
pooling-of-interests transaction. Four similar actions were filed in the
Southern District of Texas. All of the actions were subsequently consolidated in
a single action. The lawsuits were filed following the Company's announcement
that it was restating its historical financial results to include BGS's
financial results in the Company's financial statements as a condition to the
Securities and Exchange Commission declaring effective the Company's
registration statement on Form S-4 relating to its acquisition of Boole. The
complaint alleges that the Company and the individual defendants artificially
inflated the Company's stock price by failing to include the historical results
of BGS in the Company's historical financial statements thereby reporting
inflated revenue and income growth rates during the first three quarters of the
Company's 1999 fiscal year. The plaintiffs seek an unspecified amount of
compensatory damages, interest and costs, including legal fees. The Company
denies the allegations of wrongdoing in connection with the matters set forth in
the complaint and intends to vigorously defend the action. An unfavorable
judgment or settlement, however, could have a material adverse effect on the
financial results of the Company.
The Company filed a trade secret lawsuit styled BMC Software, Inc. vs.
Peregrine Systems, Inc. et al., Cause No. 91-10161, in the 200th Judicial
District Court of Travis County, Texas, in August 1995. The lawsuit sought an
injunction prohibiting a group of former employees and their employer from
misappropriating and misusing certain of the Company's trade secrets. The
Company has settled the litigation as to certain individuals and claims and is
continuing to pursue its trade secret and other claims against the remaining and
additional defendants. These defendants are asserting counterclaims against the
Company for violations of the Texas Free Enterprise and Antitrust Act of 1983,
abuse of process, slander of title, tortious interference with
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contract and tortious interference with advantageous and prospective business
relationships. These counterclaims seek compensatory, treble and exemplary
damages, costs and attorneys' fees and certain injunctive relief. Management
believes the ultimate resolution of this matter will not be material to the
Company's financial condition.
The Company is subject to various other legal proceedings and claims,
either asserted or unasserted, which arise in the ordinary course of business.
Management does not believe that the outcome of any of these legal matters will
have a material adverse effect on the Company's results of operations or
consolidated financial position.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not Applicable.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Since August 12, 1988, the Company's Common Stock has been traded in the
NASDAQ National Market System under the symbol "BMCS." At June 17, 1999, the
Company had 1,615 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 1998
First Quarter............................................. $29.31 $19.81
Second Quarter............................................ 34.75 26.56
Third Quarter............................................. 35.63 27.38
Fourth Quarter............................................ 42.13 29.25
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
The only dividends declared or paid by BMC since 1988 relate to BGS. BGS
paid dividends of $5.8 million and $7.6 million in fiscal 1997 and 1998,
respectively. No dividends were paid in fiscal 1999. The Company does not intend
to pay any cash dividends in the foreseeable future. The Company currently
intends to retain any future earnings otherwise available for cash dividends on
the Common Stock for use in its operations, for expansion and for stock
repurchases. See "Management's Discussion and Analysis of Results of Operations
and Financial Condition -- Liquidity and Capital Resources."
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, 1999, are
derived from the Consolidated Financial Statements of BMC Software, Inc. and its
subsidiaries. BMC's historical financial data has been restated to include the
historical financial results of Boole and BGS for each of the periods presented.
As the Company, Boole and BGS had different fiscal year-ends, necessary
adjustments have been made to conform fiscal year-ends for certain periods. See
"Notes to Consolidated Financial Statements -- (1)(c) Basis of Presentation" for
further discussion of consolidated
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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, except to the
extent indicated that Ernst & Young LLP's report on Boole's consolidated
financial statements relied on the report of PricewaterhouseCoopers LLP. The
selected consolidated financial data should be read in conjunction with the
Consolidated Financial Statements as of March 31, 1998 and 1999, and for each of
the three years in the period ended March 31, 1999, the accompanying notes and
the reports of independent public accountants thereon, which are included
elsewhere in this Form 10-K.
YEARS ENDED MARCH 31,
--------------------------------------------------------
1995 1996 1997 1998 1999
-------- -------- -------- -------- ----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
STATEMENT OF EARNINGS DATA:
Total revenues.................................... $521,981 $638,933 $791,939 $985,250 $1,303,876
Operating income.................................. 123,576 171,802 242,834 253,545 415,230
Net earnings...................................... $ 87,024 $126,676 $184,442 $188,459 $ 362,636
======== ======== ======== ======== ==========
Basic earnings per share.......................... $ 0.39 $ 0.56 $ 0.81 $ 0.82 $ 1.55
======== ======== ======== ======== ==========
Shares used in computing basic earnings per
share........................................... 225,969 225,449 226,542 229,837 234,255
======== ======== ======== ======== ==========
Diluted earnings per share........................ $ 0.38 $ 0.54 $ 0.76 $ 0.77 $ 1.46
======== ======== ======== ======== ==========
Shares used in computing diluted earnings per
share........................................... 228,835 235,446 241,462 244,533 248,647
======== ======== ======== ======== ==========
AS OF MARCH 31,
----------------------------------------------------------
1995 1996 1997 1998 1999
-------- -------- ---------- ---------- ----------
(IN THOUSANDS)
BALANCE SHEET DATA:
Cash and cash equivalents......................... $ 88,373 $ 99,603 $ 127,050 $ 106,016 $ 347,914
Working capital................................... 63,118 83,121 114,528 96,350 222,574
Total assets...................................... 679,363 826,426 1,104,754 1,498,068 2,282,693
Stockholders' equity.............................. 370,294 477,170 659,518 877,659 1,334,365
Dividends declared................................ 6,809 7,009 5,786 7,555 --
Dividends declared per share...................... $ 0.03 $ 0.03 $ 0.03 $ 0.03 $ --
- ---------------
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 the Company's future operating results
to differ materially from the results indicated by any forward looking
statements made by the Company 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 audited financial
statements and notes thereto.
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HISTORICAL INFORMATION
ACQUISITIONS
In March 1998, the Company acquired BGS in a stock for stock merger. The
Company issued 7.2 million shares of common stock in the transaction. The
transaction was accounted for using the pooling of interests method, and the
Company has restated its prior period financial results to include those of BGS
for the periods presented.
In March 1999, the Company acquired Boole in a stock for stock merger. The
Company issued 19.1 million shares of common stock in the transaction. The
transaction was accounted for using the pooling of interests method, and the
Company has restated its prior period financial results to include those of
Boole for the periods presented.
In April 1999, the Company acquired New Dimension in a cash tender offer.
This transaction was accounted for using the purchase accounting method. Because
the transaction closed after the end of the Company's 1999 fiscal year and the
transaction was accounted for as a purchase transaction, New Dimension's
financial results are not included in the Company's financial results through
March 31, 1999. For a discussion of the New Dimension acquisition and its
financial affects on the Company, see the Company's Current Report on Form 8-K
dated March 18, 1999.
RESULTS OF OPERATIONS
The following table sets forth, for the fiscal years indicated, the
percentages that selected items in the Consolidated Statements of Earnings bear
to total revenues.
PERCENTAGE OF
TOTAL REVENUE
YEARS ENDED MARCH 31,
---------------------
1997 1998 1999
----- ----- -----
Revenues
Licenses.................................................. 63.7% 66.8% 69.6%
Maintenance............................................... 36.3 33.2 30.4
----- ----- -----
Total revenues.................................... 100.0 100.0 100.0
Selling and marketing expenses.............................. 33.0 32.2 32.0
Research and development expenses........................... 12.9 12.7 12.9
Cost of maintenance services and product licenses........... 13.4 13.0 11.7
General and administrative expenses......................... 8.6 7.9 7.3
Acquired research and development........................... 1.4 6.6 1.3
Merger related costs........................................ 0.0 1.9 3.0
----- ----- -----
Operating income.................................. 30.7 25.7 31.8
Interest and other income................................... 3.4 4.0 4.8
----- ----- -----
Earnings before income taxes...................... 34.1 29.7 36.6
Income taxes................................................ 10.8 10.6 8.7
----- ----- -----
Net earnings before cumulative effect............. 23.3 19.1 27.9
Cumulative effect of a change in accounting principle....... -- -- 0.1
----- ----- -----
Net earnings...................................... 23.3% 19.1% 27.8%
===== ===== =====
EARNINGS
Total revenues in fiscal 1999 were $1.3 billion, a 32% increase over fiscal
1998 total revenues of $985.3 million. The increase was the result of a 39%
increase in North American product license revenues, a 35% increase in
international product license revenues and a 21% increase in worldwide
maintenance revenues. Over the three year period ending March 31, 1999, the
Company's operating expenses (excluding acquired research and development and
merger related costs) have decreased slightly from approximately 68% of total
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revenues in fiscal 1997 to approximately 64% of total revenues in fiscal 1999.
Net earnings were $362.6 million in fiscal 1999, a 92% increase over net
earnings of $188.5 million in fiscal 1998. The significant increase was due to
increased revenues and interest income, a lower effective tax rate and the
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 earnings from
fiscal 1998 to fiscal 1999 was also affected by the restatement of BMC's
financial results to include Boole's financial results. Boole's fiscal year end
was September 30 and BMC's fiscal year end is March 31. As discussed in footnote
(1)(c) of the Notes to Consolidated Financial Statements, the consolidated
financial statements for fiscal 1999 include the results of operations of Boole
for the twelve month period ended March 31, 1999. The Company's consolidated
financial statements for fiscal 1998 include the audited Boole financial results
for Boole's fiscal year ended September 30, 1997. Based upon the unaudited Boole
financial results for the twelve month period ending March 31, 1998, the growth
in total revenues would have been approximately 31% and the growth in net
earnings would have been approximately 76%. The primary reason for the
difference in the net earnings growth rates is the loss Boole incurred in its
quarter ended March 31, 1997 associated with its acquisition of MAXM Systems
Corporation during the same quarter. This loss is included in the Boole
financial results for its fiscal year ended September 30, 1997, but would be
excluded from its unaudited financial results for the twelve month period ended
March 31, 1998. 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 $.81, $.82 and $1.55 in fiscal 1997, 1998 and
1999, respectively. Diluted earnings per share was $.76, $.77 and $1.46. The
increase in earnings per share from fiscal 1998 to fiscal 1999 came from the
factors discussed under "-- Earnings" above. Earnings per share growth was less
than growth in net earnings because of increases in the number of weighted
shares outstanding caused by the Company's employee incentive stock option
programs as explained in Notes to Consolidated Financial Statements -- (7) Stock
Incentive Plans.
REVENUES
PERCENTAGE CHANGE
-------------------------
YEARS ENDED MARCH 31, 1998 1999
-------------------------------- COMPARED TO COMPARED TO
1997 1998 1999 1997 1998
-------- -------- ---------- ----------- -----------
(IN THOUSANDS)
Perpetual licenses
North America..................... $285,379 $399,967 $ 557,127 40.2% 39.3%
International..................... 218,855 258,280 349,731 18.0% 35.4%
-------- -------- ----------
Total perpetual
licenses................ 504,234 658,247 906,858 30.5% 37.8%
-------- -------- ----------
Maintenance....................... 287,705 327,003 397,018 13.7% 21.4%
-------- -------- ----------
Total revenues............ $791,939 $985,250 $1,303,876 24.4% 32.3%
======== ======== ==========
The Company generates revenues from product license fees for its computer
software products and product maintenance fees for the associated maintenance,
enhancement and support of these products. The Company generally recognizes
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. Such deferred
revenue is recognized as license revenue when all related criteria have been
met. Maintenance and support fees are recognized ratably over the course of the
maintenance and support term as defined in the software license agreement. For
further discussion of the Company's revenue recognition policies, refer to the
discussion below and to Note 1(h) of Notes to Consolidated Financial Statements.
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Total revenue growth in fiscal 1998 and 1999 resulted from continued demand
for the Company's mainframe products for the IBM OS/390 operating system and IMS
and DB2 DBMSs, its expansion of its distributed systems product lines and sales
channels and, to a lesser extent, higher growth rates of product maintenance
fees. In fiscal 1998 and 1999, license fees from customers' licensing BMC's
mainframe products for current and future additional processing capacity
generated over one-half of overall growth in total revenues. Increases in
distributed systems license revenues and in overall maintenance fees were the
other primary contributors to growth in these periods. The growth in product
license and maintenance fees in fiscal 1998 and 1999 was derived principally
from products developed prior to fiscal 1998. Distributed systems product
revenue growth was driven primarily by customers' increased adoption of
distributed IT systems, by growing acceptance of the Company's PATROL
application and data management product suite and expansion of the distributed
systems sales channels. Product revenue growth was only nominally impacted by
price increases and inflation in fiscal 1998 and fiscal 1999.
The Company's customer base is diversified, with no single customer
representing greater than 10% of its total revenues in fiscal 1997, 1998 and
1999. This customer base is nonetheless concentrated in the top 1,000 IT
purchasers worldwide and, by industry, in the telecommunications, financial
services and other transaction-intensive sectors. The Company believes 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, 1999, the Company marketed over 350 software products designed
to improve the availability, performance and recoverability of enterprise
applications, databases and other IT systems components operating in host
mainframe and distributed computing environments. The Company's mainframe
products accounted for approximately 79%, 73% and 70% of total revenues for
fiscal years 1997, 1998 and 1999, respectively. Total revenues from mainframe
products grew 14% from fiscal 1997 to fiscal 1998 and 28% from fiscal 1998 to
fiscal 1999. The revenues from these products are driven largely by the growth
in customers' processing capacity, as discussed below.
The Company's mainframe revenues are concentrated in its high performance
utilities and administrative tools for IMS and DB2. The Company's tools and
utilities for IMS databases collectively contributed 23%, 19% and 20% of total
revenues for fiscal years 1997, 1998 and 1999, respectively. The Company's tools
and utilities for DB2 databases collectively contributed 22%, 24% and 24% of
total revenues for the same periods. Combined revenues for these product lines
grew 19% from fiscal 1997 to 1998 and 36% from fiscal 1998 to 1999. The balance
of the Company's mainframe products represented 34%, 30% and 26% of total
revenues for fiscal years 1997, 1998 and 1999, respectively, representing growth
of 7% from fiscal 1997 to fiscal 1998 and 16% from fiscal 1998 to fiscal 1999.
The decline in relative revenue contribution by the mainframe product lines
reflects the increased contribution by the Company's distributed systems
products in these periods.
Total revenues from distributed systems products grew 63% from fiscal 1997
to 1998 and 45% from fiscal 1998 to 1999. Distributed systems product revenue
growth was derived primarily from increased market acceptance of the PATROL
application and data management product suite, the Company's significant and
growing investment in its distributed systems direct and indirect sales channels
and higher distributed systems maintenance fees. In fiscal 1998 and 1999, PATROL
was the most significant contributor to growth in total and license revenues for
distributed systems products. For fiscal 1999, the Company's principal
distributed systems management product lines were the PATROL application and
data management suite, the BEST/1 performance management products, the PATROL DB
database administration products, the SQL-Backtrack application and database
recovery products and the Boole COMMAND/POST, Spaceview and Command MQ products.
Upon closing the New Dimension acquisition in April 1999, the Company added the
New Dimension Control M job scheduling products, Control D output management
products and Control SA security administration products for distributed systems
environments.
The PATROL application and data management products accounted for 8%, 13%
and 13% of total revenues for fiscal years 1997, 1998 and 1999, respectively,
reflecting a 95% increase from fiscal 1997 to fiscal 1998 and a 33% increase
from fiscal 1998 to fiscal 1999. The remaining distributed systems products
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accounted for 13%, 14% and 17% of total revenues in fiscal years 1997, 1998 and
1999, respectively, reflecting a 42% increase from fiscal 1997 to 1998 and a 56%
increase from fiscal 1998 to 1999. The revenues from the Company's distributed
systems product offerings depend upon the continued market acceptance of the
Company's existing products and the Company's ability to successfully develop
and deliver additional products for the distributed systems environment. The
Company has experienced rapid growth in its distributed systems product lines
since their introduction in late fiscal 1994. The distributed systems market is
highly competitive and dynamic and there can be no assurance that this growth
will continue.
LICENSE REVENUES
The Company's license revenues include product license fees and
capacity-based license upgrade fees. Product license fees are generated from the
initial licensing of a product and subsequent licenses purchased under the
Company's per copy, central processing unit ("CPU") tier-based licensing
program. Product license fees also include fees associated with the initial
licensing of a product on an aggregate processing capacity measured on a
millions of instructions per second ("MIPS") basis. Capacity-based license
upgrade fees have, to date, been generated almost exclusively by the Company's
mainframe products. These fees are charged when a customer acquires the right to
run an already licensed product on additional processing capacity, as measured
by CPU tier or by MIPS. Customers may purchase this right for current processing
capacity or anticipated future processing capacity. In both fiscal 1998 and
fiscal 1999, capacity-based license upgrade fees for both current and future
capacity generated the Company's mainframe license revenue growth.
The Company's North American operations generated 57%, 61% and 61% of total
license revenues in fiscal 1997, 1998 and 1999, respectively. North American
license revenues increased by 40% from fiscal 1997 to fiscal 1998 and by 39%
from fiscal 1998 to fiscal 1999. Capacity-based license upgrade fees were the
largest contributor of growth from fiscal 1998 to fiscal 1999, followed by
increased licensing of the Company's distributed systems products.
International license revenues represented 43%, 39% and 39% of total
license revenues in fiscal 1997, 1998 and 1999, respectively. International
license revenues increased by 18% from fiscal 1997 to fiscal 1998 and by 35%
from fiscal 1998 to fiscal 1999. Capacity-based license upgrade fees were the
largest contributor of growth from fiscal 1998 to fiscal 1999, followed by
increased licensing of the Company's distributed systems products. International
license revenues were slightly reduced by the strengthening of the dollar
against local currencies from fiscal 1997 to fiscal 1998 and were slightly
increased from fiscal 1998 to fiscal 1999 after giving effect to the Company's
foreign currency hedging program.
The sustainability and growth of the Company's mainframe-based license
revenues are dependent upon capacity-based upgrade fees, particularly within its
largest customer accounts. Most of the Company's largest customers have entered
into enterprise license agreements allowing them to install the Company's
products on an unspecified number of CPUs, subject to a maximum limit on the
aggregate power of the CPUs as measured in MIPS. As companies increase their
MIPS within their mainframe environment, they may elect to increase or decrease
the number of underlying CPUs. Regardless of which approach is utilized,
additional fees are owed if the MIPS limit is exceeded. Substantially all of the
Company's enterprise license agreements include upgrade charges associated with
additional processing capacity beyond the customers' current usage level, and
some include license fees for additional products. The fees associated with
future additional mainframe processing capacity typically comprise from one-half
to substantially all of the license fees included in enterprise license
transactions. The Company has experienced continued demand from its largest
customers for the right to run its products on increased current and anticipated
mainframe processing capacity as enterprises invest heavily in their core OS/390
mainframe IT systems, at lower unit cost levels for both hardware and software.
This trend has led to larger single transactions with higher per MIPS discounts.
The Company expects that it will continue to be dependent upon these
capacity-related license revenue components. With the rapid advancement of
distributed systems technology and customers' needs for more functional and open
applications, there can be no assurance that the demand for mainframe processing
capacity or the higher operating efficiencies afforded by the Company's products
will continue at current levels. Should demand for the Company's mainframe
products slow dramatically or reverse, it would adversely impact the Company's
mainframe license revenues and its operating results.
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MAINTENANCE AND SUPPORT REVENUES
Maintenance and support revenues represent the ratable recognition of fees
to enroll licensed products in the Company's software maintenance, enhancement
and support program. Enrollment entitles customers to product enhancements,
technical support services and ongoing compatibility with third-party operating
systems, database management systems and applications. These fees are generally
incurred annually and equal 15% to 20% of the list price of the product at the
time of renewal, less any applicable discounts. Maintenance revenues also
include the ratable recognition of the bundled fees for any first-year
maintenance services covered by the related perpetual license agreement. In
addition, maintenance revenues include revenue recognized from professional
services performed during the respective period. The Company continues to invest
heavily in product maintenance and support and believes that maintaining its
reputation for superior product support is a key component of its value pricing
model.
Maintenance revenues have increased over the last three fiscal years as a
result of the continuing growth in the base of installed products and the
processing capacity on which they run. Maintenance fees increase in proportion
to the aggregate processing capacity on which the products are installed;
consequently, the Company receives higher absolute maintenance fees as customers
install its products on additional processing capacity. Due to 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, the Company has enjoyed high maintenance
renewal rates for its mainframe-based products. Should customers migrate from
their mainframe applications or find alternatives to the Company's products,
increased cancellations could adversely impact the sustainability and growth of
the Company's maintenance revenues. To date, the Company has been successful in
extending its traditional maintenance and support pricing model to the
distributed systems market.
EXPENSES
PERCENTAGE CHANGE
-------------------------
FISCAL YEARS ENDED MARCH 31, 1998 1999
------------------------------ COMPARED TO COMPARED TO
1997 1998 1999 1997 1998
-------- -------- -------- ----------- -----------
(IN THOUSANDS)
Selling and marketing................ $261,287 $317,278 $417,740 21% 32 %
Research and development............. 102,536 124,757 168,194 22% 35 %
Cost of maintenance services and
product licenses................... 105,744 127,701 151,985 21% 19 %
General and administrative........... 68,279 77,450 95,118 13% 23 %
Acquired research and development.... 11,259 65,473 17,304 482% (74)%
Merger related costs................. -- 19,046 38,305 N/A 101 %
-------- -------- --------
Total operating expenses... $549,105 $731,705 $888,646
======== ======== ========
SELLING AND MARKETING
The Company's selling and marketing expenses include personnel and related
costs, sales commissions and costs associated with advertising, industry trade
shows and sales seminars. Personnel costs were the largest single contributor to
the expense growth in fiscal 1998 and fiscal 1999. Selling and marketing
year-end headcount increased by 52% from fiscal 1997 to fiscal 1998, and by 31%
from fiscal 1998 to fiscal 1999. The headcount increase during fiscal 1999 was
primarily attributable to significant increases in the Company's services
business, open systems sales representatives and technical sales support
consultants. Sales commissions increased in fiscal 1998 and in fiscal 1999, as a
result of the 31% and 38% increases, respectively, in license revenues. Ongoing
commission plan adjustments maintained sales commission expense consistent with
license revenue growth in both fiscal years. Marketing costs have continued to
increase to meet the requirements of marketing a greater number of increasingly
complex distributed systems products and of supporting a growing indirect
distribution channel. In addition, the Company has continued to invest in
increasing its market presence and customer awareness. Other contributors to the
increase were significantly
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higher levels of travel and trade show activity, consulting expenses and the
opening of additional field sales offices.
RESEARCH AND DEVELOPMENT
Research and development expenses mainly comprise personnel costs related
to software developers and development support personnel, including software
programmers, testing and quality assurance personnel and writers of technical
documentation such as product manuals and installation guides. These expenses
also include computer hardware/software costs and telecommunications expenses
necessary to maintain the Company's data processing and development centers.
Increases in the Company's research and development expenses for fiscal 1998 and
1999 were the result of increased compensation costs associated with both
software developers and development support personnel, as well as associated
benefits. Additionally, outside consulting, recruiting, and facilities costs
increased. The Company increased its headcount in the research and development
organization by 58% from fiscal 1997 to fiscal 1998 and by 24% from fiscal 1998
to fiscal 1999. The substantial increase in headcount in fiscal 1998 resulted
primarily from the addition of research and development personnel as a result of
the merger with BGS in March 1998. 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. The Company capitalizes its
software development costs when the projects under development reach
technological feasibility as defined by SFAS No. 86. During fiscal 1997, 1998
and 1999, the Company capitalized approximately $25.8 million, $45.6 million and
$68.8 million, respectively, of software development 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 the Company's products and royalty fees.
The increase in cost of maintenance services and product licenses during fiscal
1998 is mainly due to an increase in maintenance, enhancement and support
activities. The Company acquired DataTools in May 1997 and thereby reduced its
royalty expense significantly from fiscal 1997 to fiscal 1998. Maintenance costs
are increasing as a percentage of maintenance fees as the Company's revenue mix
shifts to distributed systems. The Company amortized $11.9 million, $23.7
million and $32.8 million in fiscal 1997, 1998 and 1999, respectively, of
capitalized software development costs pursuant to SFAS No. 86. In these
periods, the Company expensed $3.7 million, $12.0 million and $15.9 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 required for the
Company to realize the carrying value of the assets. The Company expects its
cost of maintenance services and product licenses will continue to increase as
the Company capitalizes a higher level of software development costs and as the
Company builds its distributed systems product support organization. Maintenance
and support of distributed systems products is much less cost effective because
of the complexity and variability of the environments in which the products
operate. The distributed systems products operate in a high number of operating
environments, including operating systems, DBMSs and ERP applications, and
require greater ongoing platform support development activity relative to the
Company's OS/390 mainframe products.
GENERAL AND ADMINISTRATIVE
General and administrative expenses are comprised primarily of compensation
and personnel costs within executive management, finance and accounting,
customer order processing, product distribution, facilities management and human
resources. Other expenses included in general and administrative expenses are
fees paid for legal and accounting services, consulting projects, insurance and
costs of managing the Company's foreign currency exposure. Growth in general and
administrative expenses from fiscal 1997 to fiscal 1998 was primarily
attributable to increased personnel and related infrastructure to support the
Company's growth. Fiscal year end headcount within the general and
administrative organizations grew by 34% from fiscal 1997 to fiscal 1998 and 11%
from fiscal 1998 to fiscal 1999.
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ACQUIRED RESEARCH AND DEVELOPMENT
Over the past three years, the Company has devoted significant resources to
developing its distributed systems software solutions. Distributed systems are
highly fragmented and characterized by multiple hardware, software and network
components. The applications and underlying infrastructure components are
provided by many different vendors.
In executing its product strategies, the Company employs both internal
research and development and the acquisition of emerging technologies and, in
the case of Boole and BGS, established software companies. The Company believes
that time-to-market is critical to its success in the rapidly evolving
distributed systems software market, where it must compete with well-established
companies such as IBM, and where its products must integrate with the
predominate DBMS's, operating systems, network protocols and applications within
the enterprise computing environment. Accordingly, the Company 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 its existing product architecture. The developers of the acquired
technologies are typically 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 the Company's overall development plans. Over the last
several years, some of the acquired technologies were successfully completed and
integrated, while others were not.
The two primary areas wherein the Company has focused its distributed
systems technology acquisition strategy are as follows: a) Application Recovery
and b) Distributed Systems Performance and Availability. An overview of the
primary, research and development efforts associated with acquired technologies
that were incomplete, completed or abandoned in fiscal 1999 follows.
a) APPLICATION RECOVERY
During the past year the Company focused on developing technology that
would enable customers to back-up and recover all of their databases and file
systems throughout the enterprise from a single point of control in a user
friendly mode. The Company was also focused on building back-up and recovery
("BU&R") scheduling and archiving functionality, and, more recently, on
designing ERP application back-up and recovery technology. Pursuant to this
strategy, the Company acquired DataTools in May 1997, for an aggregate purchase
price of $73 million. DataTools owns certain DBMS-specific back-up products that
were sold as stand-alone products. Its flagship product is called SQL Backtrack
("SQL-BT"). DataTools was in the process of developing numerous products and
enhanced versions of products, including next generation versions of SQL-BT for
the Informix platform ("SQI") and the Oracle platform ("SBO"), as well as first
generation products for the Microsoft SQL ("SBM") and Sybase IDR ("SBS/I")
platforms.
The Company allocated approximately $18.6 million of the purchase price to
developed technology, workforce and goodwill. The Company allocated
approximately $54.4 million to in process research and development ("IPR&D").
The most significant four specific development projects, which comprised $40.6
million (74%) of the IPR&D, pertained to the above mentioned projects. The
primary remaining efforts associated with the IPR&D included code completion in
several key areas, such as logical extraction and piecemeal back-up and
recovery, large database support and performance-related functionality. As of
the acquisition date, the expected costs to complete the IPR&D were, on a
calendar year basis, approximately $2.9 million in 1997, $4.7 million in 1998,
$2.1 million in 1999, and $0.7 million in 2000. The Company has made significant
progress with the IPR&D and continues to advance its efforts to attain
technological feasibility throughout all of the underlying IPR&D projects. With
respect to the estimated completion costs, the Company is below the above
mentioned, forecasted amounts as a result of decisions to terminate certain of
the IPR&D projects (such as the SBS/I project noted below) and more efficient
development efforts than anticipated. The following summarizes the four primary
projects pertaining to the DataTools IPR&D.
- The Company completed and released the SBM product in April 1998.
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- 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.
- BMC abandoned the SBS/I project based on concerns over market demand and
the allocation of Sybase resources to the core Sybase product.
- The Company 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 July 1997, the Company acquired certain software code from Software
Partners/32, Inc. ("Software Partners") for a total purchase price of $6.9
million. The Company allocated $1.7 million of the purchase price to completed
technology and $5.2 million to 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. The Company initially planned on completing this code
and integrating it into its Patrol recovery manager product. These efforts were
unsuccessful, and the Company is now attempting to complete the code and
integrate it into a planned distributed systems application recovery management
product scheduled to be released in the latter part of fiscal 2000. The expected
costs to complete the R&D (and to integrate the R&D into the application
recovery product) are approximately $0.2 million in fiscal 2000.
The Company believes that while the various products released in the
back-up and recovery space are beneficial to its customers and generate
incremental revenue for the Company, the value of these acquisitions to the
Company will only be realized upon the successful completion of an
enterprise-wide, integrated back-up and recovery management product. This
product should provide back-up and recovery functions on all major applications,
databases and file systems. Patrol Recovery Manager, which manages SBO and SBS,
was released in December 1998. In fiscal 2001, the Company plans on releasing
its first comprehensive, distributed systems "application recovery" product,
which is intended to incorporate essentially all of the Company's distributed
systems back-up and recovery technology. To date, the Company has not generated
a material amount of net cash flow from these back-up and recovery technologies.
The Company anticipates that it will continue to invest significantly in this
area over the next few years. If these efforts prove unsuccessful, there would
be a detrimental impact on the Company's financial results.
b) DISTRIBUTED SYSTEMS PERFORMANCE AND AVAILABILITY
In an effort to strengthen PATROL's monitoring and management capabilities
in the middleware arena, the Company acquired certain in-process technology in
May 1996 from Network Catalyst Software LLC ("Network Catalyst") with the
intention of improving PATROL's ability to measure and report on the performance
of its customers' applications. The acquired code was incomplete as it had no
display capability, was not scalable, supported only a few platforms and did not
work with certain communication protocols. The Company completed the code, and,
released its new version of PATROL's knowledge module for networked applications
in September 1998.
During fiscal 1999, the Company completed two asset acquisition
transactions. The Company was in the process of designing a middleware
management product to assist customers with optimizing middleware performance
and with handling enterprise environmental changes in the latter part of fiscal
1998. In this regard, in April 1998, the Company acquired a license from Nastel
Technologies, Inc. ("Nastel") for certain infrastructure source code for use in
its MQ management product that was under development, but had not yet reached
technological feasibility. Accordingly, the Company allocated the entire $6.0
million purchase price to IPR&D. BMC completed the acquired IPR&D by creating an
effective installation routine, developing an automated MQ configuration
routine, fortifying the underlying Nastel database and modifying the code to
work in environments with complementary management products. Upon completion of
the
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IPR&D, the Company completed the initial related product after developing
efficient data collection, user interface and business logic code.
In June 1998, the Company entered into a strategic agreement with Envive
Corporation ("Envive") primarily to strengthen BMC's ERP business management
solutions to provide better diagnostic and correlation ability, service level
management and end-to-end monitoring capability. The Company also secured the
rights to distribute certain products in the SAP management market. The
Company's committed costs associated with the transaction approximated $17.7
million. The Company allocated $6.4 million of the transaction costs to software
assets, prepaid royalties and interest. The remaining $11.3 million was
allocated to acquired IPR&D that had not reached technological feasibility as of
the date of the transaction. The Company believes the acquired IPR&D was
approximately 45% complete towards development of end-to-end and service level
management functionality across the major ERP platforms, but there is no
assurance that it will be successful in developing such marketable technology.
The Company incurred a moderate level of development costs during fiscal 1999
towards completing the IPR&D. The Company is in the process of evaluating the
alternative levels of commitment and effort required to develop the
above-mentioned functionality in the non-SAP environments. The range of future
expenditures associated with these alternatives is $0.5 million to $3.5 million.
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
trends in technology and the nature and expected timing of new product
introductions by the Company and its competitors. Operating expenses were
estimated based on historical results and anticipated profit margins. Due to
purchasing power increases and general economies of scale, estimated operating
expenses as a percentage of revenues were, in some cases, estimated to decrease
after the acquisitions.
The rates utilized to discount the net cash flows to their present value
were based on cost of capital calculations. Due to the nature of the forecast
and risks associated with the projected growth, profitability and the
developmental nature of the projects, discount rates of 16% to 20% were used to
value the acquired IPR&D. These discount rates were commensurate with the
respective stage of development and the uncertainties in the economic estimates
described above. If the acquired IPR&D projects are not successfully completed,
the Company's business, operating results and financial condition may be
materially adversely affected in future periods. In addition, the value of other
intangible assets acquired may become impaired.
MERGER RELATED COSTS
In conjunction with the Company's merger with Boole in March 1999, the
Company's management approved a formal plan of restructuring (the "Plan") which
included steps to be taken to integrate the operations of the two companies,
consolidate duplicate facilities and streamline operations to achieve reductions
in overhead expenses in future periods. In connection with the Plan, at March
31, 1999 the Company had accrued approximately $38 million in merger related
charges comprised principally of the following components: employee related
expenses including severance and other benefits, costs to eliminate duplicative
facilities, transaction costs and impairment of assets to be disposed of as a
result of consolidations.
This accrual represents management's best estimate of identifiable and
quantifiable charges that the Company will incur as a result of the actions
taken under the Plan. The accrued charges at March 31, 1999 included estimates
of involuntary termination benefits for 50 domestic employees and 30
international employees, located primarily in Europe, including the executive
management of Boole and various redundant administrative and support personnel.
As part of the integration, the Company will incur incremental costs to exit
certain office lease arrangements as well as to make payments for idle
facilities. In conjunction with these office consolidations, the Company will
dispose of certain identified assets, including office furniture and fixtures
and computer hardware, which have been written down to market value.
Additionally, the Company and Boole incurred direct transaction costs to effect
the merger which include fees for investment banking,
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legal, accounting and other professional fees, as well as approximately $5
million for settlement of a suit brought against Boole for allegedly breaching a
standstill and exclusive negotiating agreement with Platinum. The Company
expects to substantially complete the Plan within fiscal 2000.
The Company expects to incur other significant costs in future periods that
were either not quantifiable or as to which the Company had not committed to a
course of action as of March 31, 1999, and therefore, have not been included in
the accrual. These costs could have a material adverse impact on future
operating results.
In addition to costs which are included in the restructuring accrual, the
Company will incur various incremental expenses in the near-term as a direct
result of integration efforts, but for which, classification as restructuring
charges is not allowed under current accounting standards. These items, such as
relocation and retraining of employees and development or marketing efforts for
enhanced or integrated products, could be significant to future operating
results.
INTEREST AND OTHER INCOME
Interest and other income consists primarily of interest earned on cash and
cash equivalents, marketable securities and to a lesser degree, financed
receivables. Interest and other income increased by 47% from fiscal 1997 to 1998
and 59% from fiscal 1998 to 1999. This increase is primarily due to higher
interest income earned on larger invested cash and investment balances.
INCOME TAXES
The Company recorded income tax expense of $85 million, $105 million and
$114 million in fiscal 1997, 1998 and 1999, respectively. The Company's
effective tax rates were 32%, 36% and 24% for fiscal years ended 1997, 1998 and
1999, respectively. During fiscal 1999, the Company recorded a non-recurring
benefit to its provision for income taxes to reflect a settlement with the
Internal Revenue Service. For further discussion, see Note (6) of Notes to
Consolidated Financial Statements. An analysis of the differences between the
statutory and effective income tax rates is provided in Note (6) of Notes to
Consolidated Financial Statements.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In June 1997, SFAS No. 130, "Reporting Comprehensive Income," was issued.
Under SFAS No. 130, all items that meet the definition of comprehensive income
will be reported separately for the period in which they are recognized. The
only impact is that comprehensive income, which includes changes in the balances
of items that are reported separately in the Stockholders' Equity section of the
Consolidated Balance Sheets, has been reported at the bottom of the Consolidated
Statements of Earnings and Comprehensive Income. This statement became effective
for fiscal years beginning after December 15, 1997, which, in the case of the
Company, was fiscal 1999.
SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information," was issued in June 1997. SFAS No. 131 requires that a public
business enterprise report financial and descriptive information about its
reportable operating segments. Generally, financial information is required to
be reported on the basis used internally for evaluating segment performance and
resource allocation. SFAS No. 131 became effective for the Company during its
March 31, 1999 fiscal year. The Company operates in a single segment,
distributing enterprise software products.
The AICPA issued SOP 97-2, "Software Revenue Recognition," in October 1997,
which replaces the previous revenue recognition rules provided by SOP 91-1. SOP
97-2 is effective for transactions entered into in fiscal years beginning after
December 15, 1997, which, in the case of the Company, was fiscal 1999. More
recently, the AICPA issued SOP 98-9 "Modification of SOP 97-2, Software Revenue
Recognition, With Respect to Certain Transactions," in December 1998, which
provided additional guidance on SOP 97-2. SOP 98-9 is effective for transactions
entered into in fiscal years beginning after March 15, 1999, which, in the case
of the Company, is the fiscal year beginning April 1, 1999 and ending March 31,
2000. The adoption of SOP 97-2 did not have a material impact on the Company's
Consolidated Financial Statements. The
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Company similarly believes that the adoption of SOP 98-9 will not materially
impact the Company's revenue recognition practices.
In March 1998, the AICPA issued SOP 98-1, "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use." This standard
requires that certain costs related to the development or purchase of
internal-use software be capitalized and amortized over the estimated useful
life of the software. This SOP also requires that costs related to the
preliminary project stage and the post-implementation/operations stage of an
internal-use computer software development project be expensed as incurred. SOP
98-1 is effective for financial statements issued for fiscal years beginning
after December 31, 1998, which, in the case of the Company is the fiscal year
beginning April 1, 1999 and ending March 31, 2000. SOP 98-1 is not expected to
have a material impact on the Company's Consolidated Financial Statements.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 redefines "derivative
instruments" and requires that an entity recognize all derivatives as either
assets or liabilities on the balance sheet and to measure those instruments at
fair value, with changes in the instruments' fair value to be recognized in
earnings. SFAS No. 133 also establishes new criteria for transactions to qualify
for hedge accounting. The Company elected to adopt the provisions of SFAS No.
133 in the fourth quarter of fiscal 1999, resulting in a cumulative expense
adjustment of $1.5 million, net of tax.
QUARTERLY RESULTS
The following table sets forth certain unaudited quarterly financial data
for the fiscal years ended March 31, 1998 and 1999. This information has been
prepared on the same basis as the Consolidated Financial Statements and all
necessary adjustments have been included in the amounts stated below to present
fairly the selected quarterly information when read in conjunction with its
Consolidated Financial Statements and Notes thereto. Results for the quarters
ended June 30, September 30, and December 31, 1997 and March 31, 1998 include
the historical quarterly financial results of BMC for the periods then ended, of
Boole for the quarters ended December 31, 1996, March 31, June 30, and September
30, 1997, respectively, and of BGS for the quarters ended April 30, July 31, and
October 31, 1997 and January 31, 1998, respectively. Results for the quarters
ended June 30, September 30, and December 31, 1998 and March 31, 1999 include
the historical quarterly financial results of BMC and of Boole for the periods
then ended. Excluded from the Company's quarterly results are the historical
quarterly financial results of Boole for the quarters ended December 31, 1997
and March 31, 1998, which included total revenues of $53 million and $54
million, respectively, and net earnings of $8 million and $9 million,
respectively. The Company completed its merger with BGS in March 1998.
The Company's quarterly results are subject to seasonality and can be
volatile and difficult to predict accurately prior to a quarter's end as
discussed under "Certain Risks and Uncertainties that Could Affect
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Future Operating Results." Historical quarterly financial results and trends may
not be indicative of future results.
FISCAL QUARTER ENDED
---------------------------------------------------------------------------------------
JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31,
1997 1997 1997 1998 1998 1998 1998 1999
-------- --------- -------- -------- -------- --------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Total revenues........................ $219,789 $221,829 $260,783 $282,849 $279,284 $293,934 $344,127 $386,531
Selling and marketing expenses........ 75,463 71,980 80,725 89,110 89,801 95,568 105,559 126,812
Research and development expense...... 28,262 30,527 34,868 31,100 40,154 40,246 40,240 47,554
Cost of maintenance services and
product licenses.................... 30,970 29,396 29,963 37,372 32,434 35,495 38,339 45,717
General and administrative expenses... 17,427 18,023 20,940 21,060 20,747 20,471 27,327 26,573
Acquired research and development
costs............................... 60,272 5,201 -- -- 17,304 -- -- --
Merger related costs.................. -- 11,309 -- 7,737 -- -- -- 38,305
-------- -------- -------- -------- -------- -------- -------- --------
Operating income...................... 7,395 55,393 94,287 96,470 78,844 102,154 132,662 101,570
-------- -------- -------- -------- -------- -------- -------- --------
Net earnings.......................... $ (6,432) $ 44,956 $ 74,194 $ 75,741 $ 67,217 $ 84,975 $109,997 $100,447
======== ======== ======== ======== ======== ======== ======== ========
Basic EPS............................. $ (0.03) $ 0.20 $ 0.32 $ 0.33 $ 0.29 $ 0.36 $ 0.47 $ 0.43
======== ======== ======== ======== ======== ======== ======== ========
Shares used in computing basic EPS.... 228,052 228,680 229,606 232,218 233,197 233,983 234,831 235,009
======== ======== ======== ======== ======== ======== ======== ========
Diluted EPS........................... $ (0.03) $ 0.18 $ 0.31 $ 0.31 $ 0.27 $ 0.34 $ .44 $ 0.40
======== ======== ======== ======== ======== ======== ======== ========
Shares used in computing diluted
EPS................................. 243,926 244,860 241,988 246,544 248,221 248,965 248,830 248,744
======== ======== ======== ======== ======== ======== ======== ========
In April 1998, the Company announced that its 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.
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 1999, the Company's cash, cash equivalents and marketable
securities were $1.2 billion, which represents a 53% increase over the March 31,
1998 balance. An important contributor to the increase is the Company's software
financing program, whereby interests in its trade receivables are transferred to
third party financial institutions in exchange for cash. The Company's working
capital as of March 31, 1999, was $223 million. The Company continues to invest
cash in securities with maturities beyond one year. While yielding greater
returns, this reduces reported working capital. The Company's securities are
investment grade and highly liquid. Stockholders' equity as of March 31, 1999,
was $1.3 billion.
The Company continues to finance its growth through funds generated from
operations. For the year ended March 31, 1999, net cash provided by operating
activities was $615 million, which included an increase in deferred revenue of
approximately $254 million. Net cash used in investing activities in fiscal 1999
was $479 million, primarily related to the purchase of investment securities,
acquisition of computers and related equipment, construction of a new building
and increases in financial receivables. Net cash provided by financing
activities in fiscal 1999 was $111 million, which derived primarily from the
income tax benefit associated with the exercise of employee stock options. Cash
flow amounts presented above include adjustments necessary to conform the cash
flows of Boole with those of BMC.
During fiscal 1999, the Company did not repurchase any shares of its common
stock. The Company's board of directors terminated the share buy-back program in
March 1998 prior to consummation of the BGS merger consistent with the pooling
of interests accounting provisions. Prior to cancellation of the share buy-back
program, the Company was authorized to acquire 7,530,000 shares of its common
stock under its stock repurchase program. The Company continues to evaluate
business acquisition opportunities that complement the Company's strategic
plans.
The Company had no debt as of March 31, 1999, other than normal trade
payables, accrued liabilities and deferred tax liabilities. As part of the
Company's acquisition of New Dimension in the first quarter of fiscal year 2000,
the Company entered into a $500 million credit facility with a consortium of
U.S. banks. The facility consists of (a) a 364-day revolving credit facility for
general corporate purposes with renewal options
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by the lenders and with a one-year option granted to the Company to convert the
revolving loans into a one year term loan, and (b) a competitive bid facility
that allows the Company to request bids from the lenders for loans on a
negotiated basis up to the existing availability under the credit facility.
Interest rates on the loans under the credit facility are based upon a margin
above LIBOR within current market parameters and certain financial ratios of the
Company. As of June 1, 1999, the Company had $490 million in outstanding
borrowings under the credit facility at an average annual interest rate of
5.57%. The credit facility includes, among others, covenants regarding
maintenance by the Company of at least $300 million in cash and marketable
securities and certain financial ratios.
The Company believes that its existing cash balances and funds generated
from operations will be sufficient to meet its liquidity requirements for the
foreseeable future.
CERTAIN RISKS AND UNCERTAINTIES THAT COULD AFFECT FUTURE OPERATING RESULTS
This Annual Report and Management's Discussion and Analysis of Results of
Operations and Financial Condition contain certain forward looking statements
within the meaning of Sections 27A of the Securities Act