-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, HSxDrx5O7u4AhYOnZ+ropbVYz5KF0nxEd8zo3g0XCynt0ebufsutdG/fsePTeW5B yHSUXaXvxXI3wfWHAeyWvQ== 0000950129-97-004815.txt : 19971117 0000950129-97-004815.hdr.sgml : 19971117 ACCESSION NUMBER: 0000950129-97-004815 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19970930 FILED AS OF DATE: 19971114 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: BMC SOFTWARE INC CENTRAL INDEX KEY: 0000835729 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-PREPACKAGED SOFTWARE [7372] IRS NUMBER: 742126120 STATE OF INCORPORATION: DE FISCAL YEAR END: 0331 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-17136 FILM NUMBER: 97721540 BUSINESS ADDRESS: STREET 1: 2101 CITYWEST BLVD CITY: HOUSTON STATE: TX ZIP: 77042-2827 BUSINESS PHONE: 7139188800 MAIL ADDRESS: STREET 1: 2101 CITYWEST BLVD CITY: HOUSTON STATE: TX ZIP: 77042-2827 10-Q 1 BMC SOFTWARE, INC. 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 1997 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _____________________ to ______________________ Commission file number 0-17136 BMC SOFTWARE, INC. (Exact name of registrant as specified in its charter) Delaware 74-2126120 (State or other jurisdiction of (IRS Employer incorporation or organization) identification No.) BMC Software, Inc. 2101 CityWest Boulevard Houston, Texas 77042 (Address of principal executive officer) (Zip Code) Registrant's telephone number including area code: (713)918-8800 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ----- ---- As of November 11, 1997, there were outstanding 101,686,240 shares of Common Stock, par value $.01, of the registrant. 2 BMC SOFTWARE, INC. AND SUBSIDIARIES Quarter Ended September 30, 1997 INDEX
Page ---- PART I. FINANCIAL INFORMATION Item 1. Financial Statements 3 Condensed Consolidated Balance Sheets September 30, 1997 (Unaudited) and March 31, 1997 3 Condensed Consolidated Statements of Earnings Three months and six months ended September 30, 1997 and 1996 (Unaudited) 5 Condensed Consolidated Statements of Cash Flows Six months ended September 30, 1997 and 1996 (Unaudited) 6 Notes to Condensed Consolidated Financial Statements 7 Item 2. Management's Discussion and Analysis of Results of Operations and Financial Condition 7 PART II. OTHER INFORMATION Item 4. Submission of Matters to a Vote of Security Holders 19 Item 6. Exhibits and Reports on Form 8-K 19 SIGNATURES 20
2 3 Part I. FINANCIAL INFORMATION Item 1. Financial Statements BMC SOFTWARE, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (in thousands)
September 30, March 31, ASSETS 1997 1997 ------------- --------- (Unaudited) Current assets: Cash and cash equivalents $ 65,929 $ 79,794 Investment securities 39,434 59,159 Receivables: Trade, net 96,137 87,576 Interest and other 11,597 11,247 -------- -------- Total receivables 107,734 98,823 Prepaid expenses and other 9,288 10,606 -------- -------- Total current assets 222,385 248,382 -------- -------- Property and equipment, net 143,112 116,296 Software development costs, net 48,697 39,486 Purchased software, net 36,307 19,735 Finance receivables 4,521 4,397 Investment securities 433,609 402,742 Deferred charges and other assets 10,178 13,121 -------- -------- $898,809 $844,159 ======== ========
See accompanying notes to condensed consolidated financial statements. 3 4 BMC SOFTWARE, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (in thousands, except share information) (continued)
September 30, March 31, LIABILITIES AND STOCKHOLDERS' EQUITY 1997 1997 --------- --------- (Unaudited) Current liabilities: Trade accounts payable $ 10,241 $ 9,439 Accrued liabilities and other 63,209 50,025 Current portion of deferred revenue 159,173 145,199 --------- --------- Total current liabilities 232,623 204,663 --------- --------- Deferred revenue and other 92,102 93,284 --------- --------- Total liabilities 324,725 297,947 --------- --------- Stockholders' equity: Common stock 1,050 1,050 Additional paid-in capital 91,845 82,391 Retained earnings 599,481 565,122 Foreign currency translation adjustment (778) (820) Unrealized gain (loss) on securities available for sale 2,561 (750) --------- --------- 694,159 646,993 Less treasury stock 116,271 96,901 Less unearned portion of restricted stock compensation 3,804 3,880 --------- --------- Total stockholders' equity 574,084 546,212 --------- --------- $ 898,809 $ 844,159 ========= =========
See accompanying notes to condensed consolidated financial statements. 4 5 BMC SOFTWARE, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS (in thousands, except per share data) (Unaudited)
Three Months Ended Six Months Ended September 30, September 30, --------------------- -------------------- 1997 1996 1997 1996 -------- -------- -------- -------- Revenues: Licenses $110,201 $ 82,025 $217,947 $164,655 Maintenance 52,508 44,475 103,176 87,895 -------- -------- -------- -------- Total revenues 162,709 126,500 321,123 252,550 -------- -------- -------- -------- Operating expenses: Selling and marketing 46,737 35,735 94,138 73,261 Research and development 23,281 19,833 44,050 37,692 Cost of maintenance services and product licenses 18,204 13,122 35,719 27,136 General and administrative 12,635 11,083 23,824 21,678 Acquired research and development costs 5,201 -- 65,473 11,259 -------- -------- -------- -------- Total operating expenses 106,058 79,773 263,204 171,026 -------- -------- -------- -------- Operating income 56,651 46,727 57,919 81,524 Other income 7,148 4,639 13,296 8,933 -------- -------- -------- -------- Earnings before taxes 63,799 51,366 71,215 90,457 Income taxes 18,877 16,180 36,856 28,099 -------- -------- -------- -------- Net earnings $ 44,922 $ 35,186 $ 34,359 $ 62,358 ======== ======== ======== ======== Earnings per share $ .41 $ .33 $ .32 $ .59 ======== ======== ======== ======== Shares used in computing earnings per share 108,332 106,776 108,192 106,456 ======== ======== ======== ========
See accompanying notes to condensed consolidated financial statements. 5 6 BMC SOFTWARE, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) (Unaudited)
Six Months Ended September 30, ------------------------- 1997 1996 --------- ---------- Cash flows from operating activities: Net earnings $ 34,359 $ 62,358 Adjustments to reconcile net earnings to net cash provided by operating activities: Acquired research and development costs 65,473 11,259 Depreciation and amortization 24,572 15,796 Net change in receivables, payables and other items 6,626 47,197 --------- --------- Total adjustments 96,671 74,252 --------- --------- Net cash provided by operating activities 131,030 136,610 --------- --------- Cash flows from investing activities: Technology acquisitions, net of cash acquired (66,989) (13,580) Purchased software and related assets (1,718) (4,642) Capital expenditures (36,476) (13,049) Capitalization of software development (18,658) (10,288) Purchases of investment securities (53,454) (125,774) Proceeds from investment securities 45,623 36,393 Increase in long-term finance receivables (124) (29,491) --------- --------- Net cash used in investing activities (131,796) (160,431) --------- --------- Cash flows from financing activities: Income tax reduction relating to stock options 13,170 -- Stock options exercised and other 11,617 7,977 Treasury stock acquired (37,928) (880) --------- --------- Net cash used in financing activities (13,141) 7,097 Effect of exchange rate changes on cash 42 (39) --------- --------- Net change in cash and cash equivalents (13,865) (16,763) Cash and cash equivalents at beginning of period 79,794 62,128 --------- --------- Cash and cash equivalents at end of period $ 65,929 $ 45,365 ========= ========= Supplemental disclosure of cash flow information: Cash paid for Income taxes $ 22,997 $ 52,074
See accompanying notes to condensed consolidated financial statements. 6 7 BMC SOFTWARE, INC. AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements Note 1 - Basis of Presentation The accompanying condensed consolidated financial statements include the accounts of BMC Software, Inc. and its wholly owned subsidiaries (collectively, the "Company"). All significant intercompany balances and transactions have been eliminated in consolidation. The accompanying unaudited interim condensed consolidated financial statements reflect all adjustments (consisting of normal recurring accruals) which, in the opinion of management, are necessary for a fair presentation of the results for the interim periods presented. These financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. These financial statements should be read in conjunction with the Company's annual audited financial statements for the year ended March 31, 1997, as filed with the Securities and Exchange Commission on Form 10-K. Note 2 - Earnings Per Share Earnings per share is based on the weighted average number of common shares and common stock equivalents outstanding for the period. For purposes of this calculation, outstanding stock options and unearned restricted stock shares are considered common stock equivalents using the treasury stock method. Fully diluted earnings per share is the same as, or not materially different from, primary earnings per share and, accordingly, is not presented. Note 3 - Technology Acquisitions During the quarter ended September 30, 1997, the Company completed an acquisition of a technology company for an aggregate purchase price of approximately $6,995,000, including direct acquisition costs. During the quarter ended June 30, 1997, the Company completed two acquisitions which included DataTools, Inc. and another technology company for an aggregate purchase price of approximately $80,700,000, including direct acquisition costs. The Company funded these acquisitions primarily with cash and to a lesser extent through the issuance of stock options in its common stock. The Company accounted for these transactions using the purchase method and for the three months ended September 30, 1997, and for the three months ended June 30, 1997, respectively, recorded a $3,381,000 and $57,267,000 charge, net of a $1,820,000 and $3,005,000 income tax benefit, for acquired research and development costs. As of September 30, 1997, approximately $10,742,000 of additional consideration and transaction costs relating to these acquisitions remained unpaid. Item 2. Management's Discussion and Analysis of Results of Operations and Financial Condition This discussion comprises historical information for the periods covered, followed by certain forward looking information and information about certain risks and uncertainties that could affect the Company's future operating results. This discussion should be read in conjunction with the attached 7 8 BMC SOFTWARE, INC. AND SUBSIDIARIES Management's Discussion and Analysis of Results of Operations and Financial Condition (continued) consolidated financial statements and notes thereto and with the audited financial statements and notes thereto, and the Management's Discussion and Analysis of Results of Operation and Financial Condition, contained in the Company's Annual Report on Form 10-K for fiscal 1997. A. HISTORICAL INFORMATION RESULTS OF OPERATION The following table sets forth, for the periods indicated, the percentages that selected items in the Condensed Consolidated Statements of Earnings bear to total revenues. These comparisons of financial results are not necessarily indicative of future results.
Percentage of Total Revenues ------------------------------------------ Three Months Ended Six Months Ended September 30, September 30, ------------------- ----------------- 1997 1996 1997 1996 ------------------- ----------------- Revenues: License 67.7% 64.8% 67.9% 65.2% Maintenance 32.3 35.2 32.1 34.8 ----- ----- ----- ----- Total revenues 100.0 100.0 100.0 100.0 Operating expenses: Selling and marketing 28.7 28.2 29.3 29.0 Research and development 14.3 15.7 13.7 14.9 Cost of maintenance services and product licenses 11.2 10.4 11.1 10.7 General and administrative 7.8 8.8 7.4 8.6 Acquired research and development costs 3.2 -- 20.4 4.5 ----- ----- ----- ----- Operating income 34.8 36.9 18.1 32.3 Other income 4.4 3.7 4.1 3.5 ----- ----- ----- ----- Earnings before taxes 39.2 40.6 22.2 35.8 Income taxes 11.6 12.8 11.5 11.1% ----- ----- ----- ----- Net earnings 27.6% 27.8% 10.7% 24.7% ===== ===== ===== =====
8 9 BMC SOFTWARE, INC. AND SUBSIDIARIES Management's Discussion and Analysis of Results of Operations and Financial Condition (continued) REVENUES
Three Months Ended Six Months Ended September 30, September 30, --------------------- --------------------- (in thousands) (in thousands) 1997 1996 Change 1997 1996 Change -------- -------- ------ -------- -------- ------ North American license revenues $ 73,200 $ 55,488 32% $148,399 $111,216 33% International license revenues 37,001 26,537 39% 69,548 53,439 30% -------- -------- -------- -------- Total license revenues 110,201 82,025 34% 217,947 164,655 32% Maintenance revenues 52,508 44,475 18% 103,176 87,895 17% -------- -------- -------- -------- Total revenues $162,709 $126,500 29% $321,123 $252,550 27% ======== ======== ======== ========
LICENSE REVENUES The Company's license revenues consist of product license fees, capacity-based license upgrade fees and restructuring fees. Product license fees are generated by (a) the initial licenses of a product on either a per copy or MIPS capacity licensing basis and (b) the licensing of additional copies of a product previously licensed under the Company's per copy, tier-based licensing programs. Capacity-based license upgrade fees are charged when a customer acquires the right to run an already licensed product on additional processing capacity, which may be measured traditionally by central processing unit ("CPU") tier or by the aggregate processing capacity measured in millions of instructions per second ("MIPS") on which the Company's products are installed. These license upgrade fees include fees associated with currently installed additional processing capacity and fees associated with anticipated future additional processing capacity. Restructuring fees are charges used to increase the discounts used to calculate future maintenance and upgrade charges for a customer's installed products. The Company's North American operations generated 66% and 68% of total license revenues in the quarters ended September 30, 1997 and 1996, respectively, and 68% of total license revenues in the six-month periods ending on such dates. Year-over-year growth in North American license revenues in the second quarter of fiscal 1998 over the second quarter of fiscal 1997 was principally from increased capacity-based upgrade fees for current capacity, and to a lesser extent, restructuring fees and future capacity upgrade fees. For the six months ended September 30, 1997, the 33% increase in North American license revenues over the prior year is primarily attributable to increased capacity-based upgrade fees for both current and future capacity. Capacity-based upgrade fees for current capacity represented the single largest component of North American license revenues for the quarter and six months ended September 30, 1997. International license revenues represented 34% and 32% of total license revenues in the quarters ended September 30, 1997 and 1996, respectively, and 32% of total license revenues in the six-month periods ending on such dates. International license revenue growth from both the three and six month periods ended September 30, 1996 to the three and six month periods ended September 30, 1997 was derived principally from new license sales of the Company's client-server products, and to a lesser extent, capacity-based upgrade fees for current capacity. 9 10 BMC SOFTWARE, INC. AND SUBSIDIARIES Management's Discussion and Analysis of Results of Operations and Financial Condition (continued) Capacity-based upgrade fees include fees for both current and anticipated future additional processing capacity. These fees accounted for 34% and 30% of total revenues in the quarters ended September 30, 1997 and 1996, respectively, and 34% and 26% of total revenues for the respective six-month periods. The growth and sustainability of the Company's mainframe-based license revenues are dependent upon these capacity-based upgrade fees, particularly within its largest customer accounts. Most of the Company's largest customers have entered into enterprise license agreements allowing them to install the Company's products on an unspecified number of CPUs, subject to a maximum limit on the aggregate power of the CPUs as measured in MIPS. Substantially all of these transactions include upgrade charges associated with anticipated future additional processing capacity beyond the customer's current usage level and/or a restructuring fee, and some include license fees for additional products. In the quarters ended September 30, 1997 and 1996, the enterprise license fees for future additional processing capacity and license restructurings comprised approximately 24% and 26% of total revenues, respectively, and comprised 25% and 24% of total revenues in the respective six-month periods. The fees associated with future additional mainframe processing capacity typically represent from one-half to substantially all of the license fees included in the enterprise license transaction. Over the past three fiscal years, the Company has experienced a marked increase in demand from its largest customers for current and anticipated mainframe processing capacity, and the Company expects that it will continue to be dependent upon these license revenue components. With the rapid advancement of client/server technology and customers' needs for more functional and open applications to replace legacy systems, however, there can be no assurance that the demand for mainframe processing capacity will continue at current levels. Should this trend slow dramatically or reverse, it would adversely impact the Company's mainframe-based license revenues and operating results. See "Forward Looking Information and Certain Risks and Uncertainties that Could Affect Future Operating Results." MAINTENANCE REVENUES Maintenance and support revenues represent the ratable recognition of customers' prepaid fees entitling them to product enhancements, technical support services and ongoing compatibility with third-party operating systems, database management systems and applications. Maintenance and support charges are generally 15% to 20% of the list price of the product at the time of renewal, less any applicable discounts. Maintenance revenues also include the ratable recognition of the bundled fees for first-year maintenance services covered by the related perpetual license agreement. The Company continues to invest heavily in product maintenance and support and believes that maintaining its reputation for superior product support is a key component of its value pricing model. Maintenance revenues have increased over the last three fiscal years as a result of the continuing growth in the base of installed products and the processing capacity on which they run. Maintenance fees increase in proportion to the processing capacity on which the products are installed; consequently, the Company receives higher absolute maintenance fees as customers install its products on additional processing capacity. Due to increased discounting at higher levels of "future MIPS" licensing, however, the maintenance fees per MIPS are often reduced in enterprise license agreements. Historically, the Company has enjoyed high maintenance renewal rates for its mainframe-based products. Should customers migrate from their mainframe applications or find alternatives to the 10 11 BMC SOFTWARE, INC. AND SUBSIDIARIES Management's Discussion and Analysis of Results of Operations and Financial Condition (continued) Company's products, however, increased cancellations could occur. This would adversely impact the sustainability and growth of the Company's maintenance revenues. To date, the Company has been successful in extending its traditional maintenance and support pricing model to the client/server market. At this time, there is insufficient historical data to determine whether customers will continue to accept this pricing model and renew their maintenance and support contracts at the levels experienced in the mainframe market. PRODUCT LINE REVENUES The Company's products for the IBM-compatible mainframe environment accounted for 77% and 82% of total revenues in the quarters ended September 30, 1997 and 1996, and 80% and 85% of total revenues, respectively, in the six-month periods. The database utilities and administrative tools for IBM's IMS DB and DB2 database management systems comprise the largest portion of the Company's mainframe-based and total revenues. These product lines accounted for 61% of total revenues and 58% of license revenues in the quarter ended September 30, 1997, and 63% and 62% of total and license revenues in the respective six-month periods. Total revenues and license revenues from these product lines grew 17% and 18%, respectively, in the second quarter of fiscal 1998, and grew 21% and 26% in the six-month period of fiscal 1998 compared to the comparable prior year periods. The Company's other products for the mainframe environment contributed 16% of total revenues and 14% of license revenues in the second quarter of fiscal 1998, and contributed 17% and 14% of total and license revenues, respectively, in the six-month period of fiscal 1998. Total revenues for the Company's other mainframe products in the fiscal 1998 second quarter grew by 49% and license revenues grew by 106% year- over-year. The Company's client/server product lines primarily comprise the PATROL application and database management solutions, the PATROL DB database administration products and the Company's high-performance database backup and recovery solutions. These product lines contributed 23% of total revenues and 28% of license revenues in the quarter ended September 30, 1997, and 20% and 24% of total and license revenues, respectively, in the six-month period. Total revenues for these product lines grew 62% and license revenues grew 53% in the second quarter of fiscal 1998, compared to the comparable, prior year quarter. 11 12 BMC SOFTWARE, INC. AND SUBSIDIARIES Management's Discussion and Analysis of Results of Operations and Financial Condition (continued) OPERATING EXPENSES
Three Months Ended Six Months Ended September 30, September 30, --------------------- --------------------- (in thousands) (in thousands) 1997 1996 Change 1997 1996 Change -------- -------- ------ -------- -------- ------ Selling and marketing $ 46,737 $ 35,735 31% $ 94,138 $ 73,261 28% Research and development 23,281 19,833 17% 44,050 37,692 17% Cost of maintenance services and product licenses 18,204 13,122 39% 35,719 27,136 32% General and administrative 12,635 11,083 14% 23,824 21,678 10% Acquired research and development 5,201 -- N/A 65,473 11,259 482% -------- -------- -------- -------- Total operating expenses $106,058 $ 79,773 $263,204 $171,026 ======== ======== ======== ========
SELLING AND MARKETING EXPENSES Selling and marketing expenses increased year-over-year by 31% or $11,002,000 for the quarter ended September 30, 1997, and by 28% or $20,877,000 for the six month period ended September 30, 1997. The single largest contributor to this expense growth for both the three month and six month periods ending September 30, 1997 was personnel costs. Personnel costs increased as the result of a 59% increase in headcount from September 30, 1996 to September 30, 1997, which was primarily attributable to significant increases in the Company's open systems sales representatives, including the 37 sales representatives acquired with DataTools, Inc. in the June 1997 quarter. Other contributors to the increase were expenses associated with trade shows, travel and charges for overdue receivables. As a percentage of total revenues, selling and marketing expenses remained relatively constant at 28% to 29% for the three and six month periods ended September 30, 1997 and 1996, respectively. RESEARCH AND DEVELOPMENT EXPENSES Research and development expenses increased primarily due to the hiring of additional personnel who were hired to develop new product offerings and, to a lesser extent, support existing products. Research and development headcount from September 30, 1996 to September 30, 1997 increased by 32%. These increases have been partially offset by increases in software capitalization in both the quarter and six months ended September 30, 1997. For the second quarter of fiscal 1998, the Company capitalized $9,380,000 in software development costs as compared to $4,378,000 in the year-ago quarter. The Company capitalized $18,658,000 and $10,288,000 in software development costs during the six months ended September 30, 1997 and 1996, respectively. The Company capitalizes its software development costs when the projects under development reach technological feasibility as defined by Statement of Financial Accounting Standards No. 86. The capitalization amounts will fluctuate from period to period in part based upon the status and number of software projects which are in process. 12 13 BMC SOFTWARE, INC. AND SUBSIDIARIES Management's Discussion and Analysis of Results of Operations and Financial Condition (continued) Research and development expenses (which are reported net of the above-mentioned capitalized software development costs) as a percentage of total revenues have decreased slightly from 16% in the second quarter of fiscal 1997 to 14% in the second quarter of fiscal 1998, and decreased slightly from 15% in the six month period in fiscal 1997, to 14% in the six month period in fiscal 1998. Over the last three fiscal years, the Company has supplemented its internal product development efforts with acquisitions of several companies and technologies, including the base technologies for the PATROL product lines. The Company's acquisition strategy in general has been to acquire emerging technologies, rather than established companies. See "-Acquired Research and Development Costs" below. COST OF MAINTENANCE SERVICES AND PRODUCT LICENSES Cost of maintenance services and product licenses expenses 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. This expense line item has increased in the second quarter of fiscal 1998 primarily as a result of increases in maintenance, enhancement and support activities and amortization of internally developed software. Amortization for the Company's capitalized software totaled $4,401,000 and $1,112,000, including accelerated charges discussed below, in the second quarter of fiscal 1998 and 1997, respectively. The Company's amortization of internally developed software costs totaled $8,894,000 and $4,304,000 during the six months ended September 30, 1997, and 1996, respectively. The Company accelerated the amortization of some of its older products by approximately $2,734,000 during the second quarter of fiscal 1998, versus $0 in the second quarter of fiscal 1997, and by approximately $5,639,000 and $2,009,000 in the respective six-month periods. These software products were not expected to generate future revenues sufficient to justify the carrying value of the assets. As a percentage of total revenues, cost of maintenance services and product licenses increased slightly from 10% in the second quarter of fiscal 1997 to 11% in the second quarter of fiscal 1998 while these expenses remained constant at 11% in the six-month periods of fiscal 1998 and 1997. GENERAL AND ADMINISTRATIVE EXPENSES The Company's general and administrative expenses increased by $1,552,000 or 14% in the second quarter of fiscal 1998 as compared to the second quarter of fiscal 1997 and increased by $2,146,000 or 10% compared to the prior years six-month period. The increase is primarily related to personnel costs associated with a 10% increase in associated headcount from September 30, 1996 to September 30, 1997. Increasing infrastructure costs have also contributed to the expense growth. As a percentage of total revenues, general and administrative expenses decreased slightly from 9% in the second quarter of fiscal 1997 to 8% in the second quarter of fiscal 1998 and decreased from 9% in the six-month period in fiscal 1997 to 7% in the six-month period in fiscal 1998. 13 14 BMC SOFTWARE, INC. AND SUBSIDIARIES Management's Discussion and Analysis of Results of Operations and Financial Condition (continued) ACQUIRED RESEARCH AND DEVELOPMENT COSTS The Company completed the acquisitions of stock and assets (including in-process research and development) of certain technology companies for an aggregate purchase price of $80,700,000 during the first quarter of fiscal 1998, and for an aggregate purchase price of $6,995,000 during the second quarter of fiscal 1998, including direct acquisition costs. The Company accounted for these transactions using the purchase method of accounting. During the respective quarters, the Company recorded a $60,272,000 charge ($57,267,000 net of income tax benefits) and a $5,201,000 charge ($3,381,000 net of income tax benefits) for acquired research and development costs. OTHER INCOME For the second quarter of fiscal 1998, other income was $7,148,000, reflecting an increase of 54% over $4,639,000 of other income in the same quarter of fiscal 1997. Other income increased by 49% to $13,296,000 in the six-month period in fiscal 1998, from $8,933,000 in the six-month period in fiscal 1997. Other income consists primarily of interest earned on tax-exempt municipal securities, euro bonds, corporate bonds, mortgage securities and money market funds. INCOME TAXES For the second quarter of fiscal 1998, income tax expense was $18,877,000, compared to $16,180,000 for the same quarter in fiscal 1997. Income tax expense was $36,856,000 and $28,099,000 for the six-month periods in fiscal 1998 and 1997, respectively. The Company's income tax expense represents the federal statutory rate of 35%, plus certain state taxes, reduced by the benefit from the Company's Foreign Sales Corporation, the effect of tax exempt interest earned from cash investments, the effect of tax deductions on certain technology acquisitions and foreign income taxes. Excluding the impact of technology acquisitions, the Company's effective income tax rate for the six months ended September 30, 1997 has decreased to 30% from 31% during the same period in fiscal 1997. LIQUIDITY AND CAPITAL RESOURCES The Company has financed its growth through funds generated from operations. As of September 30, 1997, the Company had cash, cash equivalents and investment securities of $538,972,000. The Company effectively repurchased 641,510 of its shares during the second quarter of fiscal 1998. As of September 30, 1997, the Company has authorization from its Board of Directors, to acquire up to 4,297,300 shares of its common stock pursuant to the Company's stock repurchase program. The Company believes that existing cash balances and funds generated from operations will be sufficient to meet its liquidity requirements for the foreseeable future. 14 15 BMC SOFTWARE, INC. AND SUBSIDIARIES Management's Discussion and Analysis of Results of Operations and Financial Condition (continued) B. FORWARD LOOKING INFORMATION AND CERTAIN RISKS AND UNCERTAINTIES THAT COULD AFFECT FUTURE OPERATING RESULTS. The Company's future operating results may vary substantially from period to period. The results of the Company's operating results for the quarter ended September 30, 1997 are not necessarily indicative of results for following periods, including the fiscal year ended March 31, 1998. Expectations of, and forecasts and projections by the Company and others are by their nature forward looking statements. Numerous important factors, risks and uncertainties affect the Company's operating results and could cause the Company's actual results to differ materially from the results implied by such forward looking statements made by, or on behalf of, the Company. These important factors, risks and uncertainties include, but are not limited to, those described in the following paragraphs and the Company's Annual Report on Form 10-K for the fiscal year ended March 31, 1997. The Company's stock price has been and is highly volatile. Future revenues, earnings and stock prices may be subject to wide swings, particularly on a quarterly basis, in response to variations in operating and financial results, anticipated revenue and/or earnings growth rates, competitive pressures and other factors. The stock price of software companies in general, and the Company in particular, is based on expectations of sustained future revenue and earnings growth. Any failure to meet anticipated revenue and earnings levels in a period or any negative change in the Company's perceived long-term growth prospects would likely have a significant adverse effect on the Company's stock price. The growth rates of the Company's license revenues, total revenues, net earnings and earnings per share have accelerated over the last 24 months. The Company may not achieve, in future periods, these relatively higher rates of growth. The timing and amount of the Company's license revenues are subject to a number of factors that make estimation of operating results prior to the end of a quarter extremely uncertain. The Company generally operates with little or no sales backlog and, as a result, license revenues in any quarter are dependent upon contracts entered into or orders booked and shipped in that quarter. Most of the Company's sales are closed at the end of each quarter, and there has been and continues to be a trend toward larger enterprise license transactions, which can have sales cycles of up to a year or more and require approval by a customer's upper management. These transactions are typically difficult to manage and predict. Failure to close an expected individually significant transaction could cause the Company's revenues and earnings in a period to fall short of expectations. Other factors that may cause significant fluctuations in the Company's quarterly revenues include competition, industry or technological trends, customer budgetary decisions, mainframe processing capacity growth, general economic conditions or uncertainties, mainframe industry pricing and other trends, announcements of new hardware or software products and the timing of price increases. The Company generally does not know whether revenues and earnings will meet expected results until the final days or day of a quarter. The Company's operating expenses are to a large extent fixed in the short term so that the Company has very limited ability to adjust its planned expenses if revenues fail to meet expectations; therefore, if near-term demand for the Company's products weakens in a given quarter, there could be 15 16 BMC SOFTWARE, INC. AND SUBSIDIARIES Management's Discussion and Analysis of Results of Operations and Financial Condition (continued) an immediate, material adverse effect on net revenues and operating results, which would likely result in a precipitous drop in its stock price. In the quarter ended September 30, 1997, the Company announced several executive management and organizational changes, including the elimination of the position of chief operating officer and the consolidation of worldwide sales and marketing into a single, integrated unit. In addition, the Company replaced its senior vice president in charge of research and development. The Company may make other management and organizational changes in the future. Organizational and management changes are intended to enhance competitiveness, productivity and execution; however, there can be no assurance that they will produce the desired results. The Company's operating margins (exclusive of charges for acquired research and development costs) have ranged from 37% to 45% in recent quarters, which is at the high-end of the range for peer companies. The Company does not expect future margin expansion. Further, since research and development, sales, support and distribution costs for client/server software products are generally higher than for mainframe products, operating margins will experience more pressure as the mix of the Company's business continues its shift to client/server revenues. The Company is continuing to develop indirect channel relationships to increase its coverage and presence in a cost effective manner. There can be no assurance, however, that this strategy will be successful. If the Company's direct sales force remains the primary channel for its client/server products, its selling and marketing expenses could increase and operating margins could be reduced. The Company has historically realized greater revenues and net earnings in the latter half of its fiscal year; the quarter ending December 31 coincides with the end of customers' annual budgetary periods and the quarter ending March 31 coincides with the end of the Company's annual sales plans and fiscal year. For the same reasons, the Company has typically reported lower or flat revenues in the first two quarters of a fiscal year than in the last two quarters of the previous year, resulting in lower operating margins in the first two quarters. The Company historically has generated greater revenues in the third and fourth quarters while maintaining lower rates of expense growth and expanded operating margins. Past financial performance is not a reliable indicator of future performance, and there can be no assurance that this pattern will be maintained. Future operating results are also dependent on sustained performance improvement by the Company's international offices. In this regard, the economy in Europe has been somewhat depressed in the past year, with relatively high unemployment. The Company's operations and financial results could be significantly adversely affected by issues such as changes in foreign currency exchange rates, sluggish regional economic conditions and difficulties in staffing and managing international operations. Many systems and applications software vendors are experiencing difficulties internationally, particularly in Europe. The European office whose results have been and are expected to be the most significant to the Company's overall results is the German office, which accounted for over 33% of total international revenues in each of the prior three fiscal years. 16 17 BMC SOFTWARE, INC. AND SUBSIDIARIES Management's Discussion and Analysis of Results of Operations and Financial Condition (continued) The Company derived approximately 77% of its revenues in the second quarter of fiscal 1998 from software products for IBM and IBM-compatible mainframe computers. IBM continues to focus on reducing the overall software costs associated with the OS/390 mainframe platform. Further, IBM continues, directly and through third parties, to enhance its utilities for IMS and DB2 to provide lower cost alternatives to those provided by the Company and other independent software vendors. IBM has significantly increased its level of activity in the IMS and DB2 high speed utility markets over the last twelve months. The Company has traditionally maintained sufficient performance and functional advantages over IBM's base utilities to justify its pricing differential although there can be no assurance that it will continue to maintain such advantages. Fees from enterprise license transactions remain fundamental components of the Company's revenues. In the second quarter of fiscal 1998, enterprise license fees for future additional processing capacity and license restructurings comprised approximately 24% of total revenues. These revenues are dependent upon the Company's customers' continuing to perceive an increasing need to use the Company's existing software products on substantially greater mainframe processing capacity in future periods. The Company believes that the demand for enterprise licenses has been driven by customers' re-commitment over the last 24 to 36 months to the OS/390 mainframe platform for large scale, transaction intensive information systems. Whether this trend will continue is difficult to predict. If the Company's customers' processing capacity growth were to slow and/or if such customers were to perceive alternatives to relying upon the Company's current mainframe products, the Company's revenues would be adversely impacted. Capacity-based upgrade fees associated with both current and future processing capacity contributed 34% of total revenues in the second quarter of fiscal 1998. The charging of upgrade fees based on CPU tier classifications is standard among mainframe systems software vendors, including IBM. The pricing of mainframe systems software, including the charging of tier-based upgrade fees or other capacity-based fees, is under constant pressure from customers. Although the Company has adopted MIPS-based pricing for enterprise licenses, it has not changed the fact that customers pay more to use its products on more powerful CPU's. The Company believes its current pricing policies properly reflect the value provided by its products. IBM provides alternatives to tier-based pricing with respect to its large mainframe CPUs and continues to reduce the costs of its mainframe systems software to increase the overall cost competitiveness of its mainframe hardware and software products. These actions continue to increase pricing pressures within the mainframe systems software markets. The Company's growth prospects are dependent upon many factors, including the success of its existing client/server products and those anticipated to be introduced in the future. The client-server systems and application management markets in which the Company operates are far more crowded and competitive than its traditional mainframe systems management markets. The Company has experienced long development cycles and product delays in the past, particularly with some of its client/server products, and expects to have delays in the future. Delays in new mainframe or client/server product introductions or less-than-anticipated market acceptance of these new products 17 18 BMC SOFTWARE, INC. AND SUBSIDIARIES Management's Discussion and Analysis of Results of Operations and Financial Condition (continued) are possible and would have an adverse affect on the Company's revenues and earnings. New products or new versions of existing products may, despite testing, contain undetected errors or bugs that will delay the introduction or adversely affect commercial acceptance of such products. The enterprise systems management market that the Company's client/server products address is characterized by rapid change and intense competition that continues to increase as vendors within the broader markets converge. Certain of the Company's competitors and potential competitors have significantly greater financial, technical, sales and marketing resources than the Company and greater experience in client/server development and sales. A key factor in determining the success of the Company's products, particularly its client/server offerings, will be their ability to interoperate and perform well with existing and future leading database management systems and other systems software products supported by the Company's products. While the Company believes its products that address this market, including those under development, will compete effectively, this market will be relatively unpredictable over the next few years and there can be no assurance that anticipated results will be achieved. Microsoft Corporation has significantly increased its focus on developing operating systems, systems management products and databases that will provide "business-critical" class functionality. Specifically, Microsoft is aggressively promoting its BackOffice(TM) family of software products, including its Window NT Server operating system and its SQL Server relational database management system, as lower cost alternatives to the UNIX operating systems coupled with relational database management systems from Oracle Corporation, Sybase, Inc., Informix Corporation and other vendors. Microsoft could significantly lower software price points in some of the Company's markets, which could place additional pricing pressure on the Company. The Company has invested and intends to continue to invest in the development of systems management products for Windows NT and BackOffice(TM) environments, but there are numerous uncertainties associated with the Company's ability to successfully execute this strategy. Litigation seeking to enforce patents, copyrights and trade secrets is increasing in the software industry. There can be no assurance that third parties will not assert that their patent or other proprietary rights are violated by products offered by the Company. Any such claims, with or without merit, can be time consuming and expensive to defend and could have an adverse effect on the Company's business, results of operations, financial position and cash flows. 18 19 BMC SOFTWARE, INC. AND SUBSIDIARIES PART II - OTHER INFORMATION Item 4. Submission of Matters to a Vote of Security Holders The Company's Annual Stockholders Meeting was held on August 25, 1997. At the meeting, the stockholders elected all of the management's seven nominees to serve as directors for the following year. Also at the meeting, the stockholders voted on a proposal to amend and restate the BMC Software, Inc. 1994 Employee Incentive Plan. The proposal to amend and restate the BMC Software, Inc. 1994 Employee Incentive Plan received 57,002,170 affirmative and 30,574,434 negative votes. Item 6. Exhibits and Reports on Form 8-K (a) Exhibits. 27 Financial Data Schedule (b) Reports on Form 8-K. None 19 20 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. BMC SOFTWARE, INC. Date: November 14, 1997 By: /s/ Max P. Watson Jr. ---------------------------------------- Max P. Watson Jr. Chairman of the Board, President and Chief Executive Officer Date: November 14, 1997 By: /s/ William M. Austin ---------------------------------------- William M. Austin Sr. Vice President and Chief Financial Officer Date: November 14, 1997 By: /s/ Kevin M. Klausmeyer ---------------------------------------- Kevin M. Klausmeyer Chief Accounting Officer 20 21 INDEX TO EXHIBITS
EXHIBIT NUMBER DESCRIPTION - ------- ----------- 27 Financial Data Schedule
EX-27 2 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE COMPANY'S UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE SIX MONTHS ENDED SEPTEMBER 30, 1997, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 6-MOS MAR-31-1998 APR-01-1997 SEP-30-1997 65,929 473,043 109,213 8,555 0 222,385 201,943 58,831 898,809 232,623 0 0 0 1,050 573,034 898,809 217,947 321,123 35,719 263,204 0 0 0 71,215 36,856 34,359 0 0 0 34,359 .32 .32
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