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 December 31, 1995 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ________________ to _________________ Commission file number 0-17136 BMC SOFTWARE, INC. (Exact name of registrant as specified in its charter) Delaware 74-2126120 (State or other jurisdiction of (IRS Employer identification No.) incorporation or organization) BMC Software, Inc. 2101 CityWest Boulevard Houston, Texas 77042 (Address of principal executive officer) (Zip Code) Registrant's telephone number including area code: (713)918-8800 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No____ As of February 1, 1996, there were outstanding 50,136,593 shares of Common Stock, par value $.01, of the registrant.
BMC SOFTWARE, INC. AND SUBSIDIARIES Quarter Ended December 31, 1995 INDEX PAGE ---- PART I. FINANCIAL INFORMATION Item 1. Financial Statements 3 Condensed Consolidated Balance Sheets December 31, 1995 (Unaudited) and March 31, 1995 3 Condensed Consolidated Statements of Earnings Three months and nine months ended December 31, 1995 and 1994 (Unaudited) 5 Condensed Consolidated Statements of Cash Flows Nine months ended December 31, 1995 and 1994 (Unaudited) 6 Notes to Condensed Consolidated Financial Statements 7 Item 2. Management's Discussion and Analysis of Results of Operations and Financial Condition 9 PART II. OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K 17 SIGNATURES 18 2
Part I. FINANCIAL INFORMATION Item 1. Financial Statements BMC SOFTWARE, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (in thousands) <TABLE> <CAPTION> DECEMBER 31, MARCH 31, ASSETS 1995 1995 ------------- --------- (UNAUDITED) <S> <C> <C> Current assets: Cash and cash equivalents $ 26,211 $ 39,494 Securities available for sale 6,950 -- Securities held to maturity 68,771 54,330 Trade accounts receivable, net 94,821 64,741 Other accounts receivable 7,828 5,641 Prepaid expenses and other 4,257 6,432 Deferred income and other taxes 12,209 12,262 -------- -------- Total current assets 221,047 182,900 -------- -------- Property and equipment, net 105,391 101,288 Software development costs, net 21,498 16,499 Purchased software, net 13,793 11,118 Securities available for sale 19,271 -- Securities held to maturity 149,254 180,009 Finance receivables, long-term 5,390 8,047 Deferred charges and other assets 6,638 2,788 -------- -------- $542,282 $502,649 -------- -------- -------- -------- </TABLE> See accompanying notes to condensed consolidated financial statements. 3
BMC SOFTWARE, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (in thousands, except share information) (continued) <TABLE> <CAPTION> DECEMBER 31, MARCH 31, LIABILITIES AND STOCKHOLDERS' EQUITY 1995 1995 ------------- --------- (UNAUDITED) <S> <C> <C> Current liabilities: Trade accounts payable $ 10,124 $ 11,344 Accrued liabilities 28,670 35,564 Taxes payable 21,258 3,427 Current portion of deferred revenue 98,525 97,399 -------- -------- Total current liabilities 158,577 147,734 -------- -------- Deferred revenue and other 35,703 48,761 -------- -------- Total liabilities 194,280 196,495 -------- -------- Stockholders' equity: Preferred stock, $.01 par value, 1,000,000 shares authorized, none issued and outstanding -- -- Common stock, $.01 par value, 180,000,000 shares authorized, 52,520,000 shares issued 525 525 Additional paid-in capital 67,431 67,864 Retained earnings 363,018 296,204 Foreign currency translation adjustment (31) (282) Unrealized gain on securities available for sale 277 -- -------- -------- 431,220 364,311 Less treasury stock (2,633,000 and 2,019,000 shares, respectively) 80,711 54,694 Less unearned portion of restricted stock compensation 2,507 3,463 -------- -------- Total stockholders' equity 348,002 306,154 -------- -------- $542,282 $502,649 -------- -------- -------- -------- </TABLE> See accompanying notes to condensed consolidated financial statements. 4
BMC SOFTWARE, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS (in thousands, except per share data) (Unaudited) <TABLE> <CAPTION> THREE MONTHS ENDED NINE MONTHS ENDED DECEMBER 31, DECEMBER 31, -------------------- -------------------- 1995 1994 1995 1994 -------- -------- -------- -------- <S> <C> <C> <C> <C> Revenues: Licenses $ 78,524 $ 55,555 $182,590 $145,823 Maintenance 40,476 35,145 117,960 102,877 -------- -------- -------- -------- Total revenues 119,000 90,700 300,550 248,700 -------- -------- -------- -------- Operating expenses: Selling and marketing 32,281 23,875 79,100 64,524 Research and development 15,729 13,716 43,036 40,631 Cost of maintenance services and product licenses 11,367 7,977 32,094 23,189 General and administrative 11,176 7,950 27,003 21,651 Acquired research and development costs 23,589 -- 23,589 -- -------- -------- -------- -------- Total operating expenses 94,142 53,518 204,822 149,995 -------- -------- -------- -------- Operating income 24,858 37,182 95,728 98,705 Other income 3,956 2,975 11,541 8,675 -------- -------- -------- -------- Earnings before taxes 28,814 40,157 107,269 107,380 Income taxes 15,749 12,449 40,455 33,288 -------- -------- -------- -------- Net earnings $ 13,065 $27,708 $ 66,814 $ 74,092 -------- -------- -------- -------- -------- -------- -------- -------- Earnings per share $ .25 $ .55 $ 1.28 $ 1.46 -------- -------- -------- -------- -------- -------- -------- -------- Shares used in computing earnings per share 51,965 50,370 52,155 50,784 -------- -------- -------- -------- -------- -------- -------- -------- </TABLE> See accompanying notes to condensed consolidated financial statements. 5
BMC SOFTWARE, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) (Unaudited) <TABLE> <CAPTION> NINE MONTHS ENDED DECEMBER 31, ------------------- 1995 1994 -------- -------- <S> <C> <C> Cash flows from operating activities: Net earnings $ 66,814 $ 74,092 Adjustments to reconcile net earnings to net cash provided by operating activities: Acquired research and development costs 23,589 -- Depreciation and amortization 19,692 9,454 Net change in receivables, payables and other items (26,401) (10,205) -------- -------- Total adjustments 16,880 (751) -------- -------- Net cash provided by operating activities 83,694 73,341 -------- -------- Cash flows from investing activities: Technology acquisitions, net of cash acquired (15,051) -- Purchased software and related assets (2,232) (338) Capital expenditures (14,135) (10,476) Capitalization of software development (12,733) (3,745) Purchases of securities held to maturity (51,814) (50,861) Proceeds from securities held to maturity 42,461 32,065 (Increase) decrease in long-term finance receivables 2,657 (11,081) -------- -------- Net cash used in investing activities (50,847) (44,436) -------- -------- Cash flows from financing activities: Earned portion of restricted stock compensation 1,012 418 Income tax reduction relating to stock options 2,713 1,107 Stock options exercised and other 3,441 -- Treasury stock acquired (53,270) (42,049) -------- -------- Net cash used in financing activities (46,104) (40,524) -------- -------- Effect of exchange rate changes on cash 251 277 Gain on available for sale securities (277) -- -------- -------- Net change in cash and cash equivalents (13,283) (11,342) Cash and cash equivalents at beginning of period 39,494 37,814 -------- -------- Cash and cash equivalents at end of period $ 26,211 $ 26,472 -------- -------- -------- -------- Supplemental disclosure of cash flow information: Cash paid for Income taxes $ 19,934 $ 23,300 Value of treasury stock issued for technology acquired 20,611 -- Future cash payments for technology acquired 5,420 -- </TABLE> See accompanying notes to condensed consolidated financial statements. 6
BMC SOFTWARE, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Note 1 - Basis of Presentation The accompanying condensed consolidated financial statements include the accounts of BMC Software, Inc. and its wholly owned subsidiaries (collectively, 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, 1995, 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 - Securities Management determines the appropriate classification of debt and equity securities at the time of purchase and reevaluates such designation as of each subsequent balance sheet date. The Company has the ability and intent to hold most of its investment securities to maturity and thus has classified these securities as "held to maturity" pursuant to Statement of Financial Accounting Standards (SFAS) No.115. These securities have been recorded at amortized cost in the Company's balance sheets. On December 15, 1995, the Company reclassified $26.2 million of its investment securities to "available for sale". This reclassification was a result of the one-time opportunity to reclassify investment securities allowed under the SFAS No. 115 Special Report issued in November 1995. The reclassification resulted in an unrealized gain of $277,000 reported as an increase to investment securities and stockholders' equity. The Company holds no securities classified as "trading securities". The following table summarizes the Company's total investment securities portfolio as of December 31, 1995: 7
BMC SOFTWARE, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) <TABLE> <CAPTION> GROSS GROSS AMORTIZED UNREALIZED UNREALIZED FAIR COST GAIN LOSS VALUE (a) --------- ---------- ---------- -------- (IN THOUSANDS) <S> <C> <C> <C> <C> Securities with Maturities Within 1 Year: Held to Maturity Securities Municipal Securities 28,652 -- -- 28,652 Auction Preferred Stock 25,950 -- -- 25,950 Corporate Notes, Bonds and Other 14,169 -- -- 14,169 ------- --- --- ------- 68,771 -- -- 68,771 Available for Sale Securities Municipal Securities 6,939 11 -- 6,950 ------- --- --- ------- Total Securities with Maturities Within 1 Year 75,710 11 -- 75,721 Securities with Maturities From 1-5 Years: Held to Maturity Securities Municipal Securities 112,508 -- -- 112,508 Corporate Notes, Bonds and Other 36,746 -- -- 36,746 ------- --- --- ------- 149,254 -- -- 149,254 Available for Sale Securities Municipal Securities 19,005 266 -- 19,271 ------- --- --- ------- Total Securities with Maturities From 1-5 Years 168,259 266 -- 168,525 ------- --- --- ------- Total Investment Securities 243,969 277 -- 244,246 ------- --- --- ------- ------- --- --- ------- </TABLE> (a)For securities classified as "held to maturity", the reported fair value represents the value to be realized upon maturity. As of December 31, 1995, the fair market value of these securities exceeded amortized cost by approximately $2.9 million. Note 4 - Stock Split On July 19, 1995, the Company declared a two-for-one stock split of its common stock. The stock split was effected in the form of a stock dividend. Stockholders of record at the close of business on August 4, 1995, received two shares of common stock for each share held. The payment date for the distribution of shares was August 14, 1995. All stock related data in the financial statements reflects the stock split for all periods presented. 8
BMC SOFTWARE, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION 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 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 to Stockholders for fiscal 1995. 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. The year to year comparisons of financial results are not necessarily indicative of future results. <TABLE> <CAPTION> PERCENTAGE OF TOTAL REVENUES --------------------------------------- THREE MONTHS ENDED NINE MONTHS ENDED DECEMBER 31, DECEMBER 31, ------------------ ----------------- 1995 1994 1995 1994 ----- ----- ----- ----- <S> <C> <C> <C> <C> Revenues: License 66.0% 61.3% 60.8% 58.6% Maintenance 34.0 38.7 39.2 41.4 ----- ----- ----- ----- Total revenues 100.0 100.0 100.0 100.0 Operating expenses: Selling and marketing 27.1 26.3 26.3 25.9 Research and development 13.2 15.1 14.3 16.4 Cost of maintenance services and product licenses 9.6 8.8 10.7 9.3 General and administrative 9.4 8.8 9.0 8.7 Acquired research and development costs 19.8 -- 7.8 -- ----- ----- ----- ----- Operating income 20.9 41.0 31.9 39.7 Other income 3.3 3.3 3.8 3.5 Earnings before taxes 24.2 44.3 35.7 43.2 Income taxes 13.2 13.7 13.5 13.4 ----- ----- ----- ----- Net earnings 11.0% 30.6% 22.2% 29.8% ----- ----- ----- ----- ----- ----- ----- ----- </TABLE> 9
BMC SOFTWARE, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION (CONTINUED) REVENUES <TABLE> <CAPTION> THREE MONTHS ENDED NINE MONTHS ENDED DECEMBER 31, DECEMBER 31, -------------------------- ---------------------------- (IN THOUSANDS) (IN THOUSANDS) 1995 1994 CHANGE 1995 1994 CHANGE ------- ------- ------ -------- --------- ------ <S> <C> <C> <C> <C> <C> <C> North American license revenues $ 41,954 $32,176 30.4% $107,726 $ 92,671 16.2% International license revenues 36,570 23,379 56.4% 74,864 53,152 40.8% -------- ------- -------- -------- Total license revenues 78,524 55,555 41.3% 182,590 145,823 25.2% Maintenance revenues 40,476 35,145 15.2% 117,960 102,877 14.7% -------- ------- -------- -------- Total revenues $119,000 $90,700 31.2% $300,550 $248,700 20.8% -------- ------- -------- -------- -------- ------- -------- -------- </TABLE> License Revenues The license revenues line item consists of two categories of revenues: product license fees and central processing unit ("CPU") upgrade fees. Product license fees are (a) fees paid when a customer licenses its first copy or additional copies of a product and (b) license restructuring fees, which are fees a customer may pay, generally as part of an enterprise license transaction, to acquire additional permanent discounts that will be used in calculating future charges for already licensed products, including maintenance fees, CPU upgrade fees and product license fees for additional copies. CPU upgrade fees are fees charged when a customer acquires the right to install and run an already licensed product on additional processing capacity, whether measured traditionally by CPU tier or, under enterprise license terms, by millions of instructions per second ("MIPS"). The product upgrade fee category includes upgrade fees for both currently installed additional processing capacity and for future anticipated additional processing capacity. Total CPU upgrade fees for the quarter and nine months ended December 31, 1995, as a percentage of total revenues, were in the mid-twenty percent range. North American license revenues comprised 53.4% and 59.0% of total license revenues in the quarter and nine months ended December 31, 1995, respectively. North American license revenue growth in the third quarter was derived principally from higher license sales of the Company's open systems products and upgrade fees for future additional processing capacity. Increased open systems license fees and upgrade fees for current processing capacity accounted for North American license revenue growth for the nine month period. International license revenues contributed 46.6% of total license revenues in the third quarter and 41.0% of total license revenues in the first nine months of fiscal 1996. For the quarter and nine months ended December 31, 1995, international license revenue growth was driven by increased license sales of the Company's mainframe products, by upgrade fees for future additional processing capacity and, to a lesser extent, by increased sales of the Company's open systems products. International license revenues received a benefit of approximately 4.7% from the weakening of the dollar from the third quarter of fiscal 1995. 10
BMC SOFTWARE, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION (CONTINUED) The Company continues to rely upon enterprise license fees as significant components of license revenue growth, license revenues and total revenues. An enterprise license converts a customer's traditional, CPU tier-based licenses to a MIPS-based license that allows the customer to run an unlimited number of copies of a product on its CPUs without regard to size, subject to a maximum limit on the aggregate power of the CPUs as measured in MIPS. In a typical enterprise license transaction, the customer pays the restructuring fee described above to secure a more favorable discount, pays significant upgrade fees for future additional processing capacity in anticipation of MIPS growth over the term of the agreement and may license additional software products. For the three and nine months ended December 31, 1995, the revenue contribution from restructuring fees and upgrade fees for future additional processing capacity has remained in the high teens, which is consistent with the results from the fiscal year ended March 31, 1995. The Company's operating results are dependent upon the continued demand for enterprise license transactions, which will depend upon customers' increasing reliance on their IBM mainframe database management systems and a resulting increase in the mainframe MIPS on which they run their installed base of the Company's products. The database management product lines, comprising the company's tools and utilities for IBM's IMS and DB2 mainframe database management systems, contributed approximately 66.7% of total revenues and 65.3% of license revenues in the third quarter. Total revenues and license revenues from these product lines increased 21.8% and 25.5%, respectively, compared to the third quarter last year. For the nine month period, the database management product lines contributed 69.8% of total revenues and license revenues, representing total revenue growth of 16.2% and license revenue growth of 15.8% over the comparable, prior year nine month period. The Company continues to invest substantial resources in the development and marketing of its open systems products, which currently consist of three product lines: the PATROL application and database management products, the MetaSUITE data administration and management products and the backup and recovery utilities from DataTools, Inc., for whom the Company acts as an exclusive distributor. The Company's combined open systems license revenues grew approximately 300% for the quarter and nine month period ended December 31, 1995, as compared to the prior year periods. The increase in open systems license sales contributed approximately one half of the net license revenue growth for these periods. These product lines accounted for 18.0% of license revenues and 12.7% of total revenues for the third quarter. For the nine months ended December 31, 1995, the open systems products accounted for 14.5% and 9.5% of license and total revenues, respectively. Maintenance Revenues Maintenance revenues represent maintenance fees charged to perpetual license customers entitling them to product enhancements, technical support services and ongoing compatibility with third-party operating systems. A warranty period of one year is included in the initial license of the Company's mainframe products; accordingly, the Company classifies a portion of the initial license fee as maintenance. All maintenance revenues are recognized ratably over the term of the maintenance agreement. The increase in maintenance revenues is attributable to a growing installed base of the 11
BMC SOFTWARE, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION (CONTINUED) Company's products resulting from additional license sales as well as CPU upgrades, which generate higher maintenance fees. The growth rate in maintenance revenues has slowed from that achieved in prior years primarily as a result of the higher discounts granted to customers as a result of license restructurings and enterprise license agreements. EXPENSES <TABLE> <CAPTION> THREE MONTHS ENDED NINE MONTHS ENDED DECEMBER 31, DECEMBER 31, ------------------ ------------------ (IN THOUSANDS) (IN THOUSANDS) 1995 1994 CHANGE 1995 1994 CHANGE ------- ------- ------ -------- -------- ------ <S> <C> <C> <C> <C> <C> <C> Selling and marketing expenses $32,281 $23,875 35.2% $ 79,100 $ 64,524 22.6% Research and development expenses 15,729 13,716 14.7% 43,036 40,631 5.9% Cost of maintenance services and product licenses 11,367 7,977 42.5% 32,094 23,189 38.4% General and administrative expenses 11,176 7,950 40.6% 27,003 21,651 24.7% Acquired research and development 23,589 -- -- % 23,589 -- -- % ------- ------- -------- -------- Total operating expenses $94,142 $53,518 $204,822 $149,995 ------- ------- -------- -------- ------- ------- -------- -------- </TABLE> Selling and Marketing Expenses Selling and marketing expenses of the Company increased over 35% in the third quarter of fiscal 1996. Primary contributors to this growth were increases in selling and marketing personnel and increased marketing activities. These increases primarily relate to expenses associated with the Company's efforts to expand its presence in the open systems market. Sales commissions also increased as a direct result of the 41% increase in license revenue in the third quarter. The Company also incurred certain costs relative to international sales personnel changes. All of these factors contributed to the expense growth for the first nine months of fiscal 1996 over fiscal 1995 levels. Sales commissions, however, did not contribute as significantly to the expense growth in the nine months of fiscal 1996 compared to the comparable period in fiscal 1995. As a percentage of total revenues, selling and marketing expenses have only increased slightly over fiscal 1995 levels for both the third quarter and first nine months. Research and Development Expenses The Company significantly increased its spending on its research and development organization in the third quarter and for the first nine months of fiscal 1996 over the comparable periods in fiscal 1995. The primary focus within the research and development organization has been the hiring of permanent and contract developers to create product offerings in the open systems market. These expense increases have largely been offset by the increase in capitalized software. 12
BMC SOFTWARE, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION (CONTINUED) The Company has recorded increased capitalization of $2,137,000 in the third quarter of fiscal 1996 and $9,081,000 in the first nine months of fiscal 1996 over the comparable periods in fiscal 1995. The capitalization increases relate primarily to costs associated with new open systems products. As a percentage of total revenues, net research and development expenses have decreased to 13.2% in the third quarter of fiscal 1996 from 15.1% in the third quarter of fiscal 1995; and decreased to 14.3% in the first nine months of fiscal 1996 from 16.4% in the first nine months of fiscal 1995. Excluding the impact of software capitalization, research and development expenses continue to approximate 17% to 18% of total revenues in the third quarter of fiscal 1996. For the third quarter of fiscal 1996, the Company capitalized $4,237,000 in software development costs. In the third quarter of fiscal 1995, the Company capitalized $2,100,000. Over the last two 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 and MetaSUITE product lines. The Company's acquisition strategy in general has been to acquire emerging technologies, rather than established companies, and to significantly enhance and add to the acquired technology. In the quarter ended December 31, 1995, the Company acquired two open systems software companies, Peer Networks, Incorporated and HawkNet, Inc., and certain mainframe database technologies. See "-Acquired Research and Development Cost" below. Cost of Maintenance Services and Product Licenses Cost of maintenance services and product licenses expenses consist of amortization of purchased and internally developed software, costs associated with technical support operations and royalty fees. These costs have increased in the third quarter and in the first nine months of fiscal 1996 primarily as a result of increased product licenses costs due to increased amortization of purchased and internally developed software. Also, increases in royalty fees have contributed to the increase in cost of product licenses. As a percentage of total revenues, these expenses increased from 8.8% in the third quarter of fiscal 1995 to 9.6% in the third quarter of fiscal 1996. For the third quarter of fiscal 1996, the Company's amortization of internally developed software costs totaled $1,553,000 versus $822,000 in the third quarter of fiscal 1995. General and Administrative Expenses The Company's general and administrative expenses increased significantly in the third quarter of fiscal 1996 as compared to the third quarter of fiscal 1995. The increase is primarily attributable to variable compensation plans for the Company's executives and the country managers of the Company's international offices, which are based on increases in operating income. In addition to the factors above, certain severance payments to former country managers were incurred during the third quarter of fiscal 1996 that were not incurred in fiscal 1995. General and administrative expenses for the first six months of fiscal 1996 increased 15.5%. The increases incurred during the third quarter of fiscal 1996 caused general and administrative expenses for the first nine months of fiscal 1996 to increase approximately 25% from the comparable period in fiscal 1995. As a percentage of total revenues, general and administrative expenses remain in the 9% range in the third quarter of fiscal 1996. 13
BMC SOFTWARE, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION (CONTINUED) Acquired Research and Development Costs During the third quarter of fiscal 1996, the Company completed the acquisitions of stock and assets (including in-process research and development) of certain technology companies for an aggregate purchase price of $27.8 million, including direct acquisition costs. The Company accounted for these transactions using the purchase method and recorded a $23,589,000 charge ($22,831,000 net of income tax benefits), for acquired research and development costs during the quarter. OTHER INCOME For the third quarter of fiscal 1996, other income was $3,956,000, reflecting an increase of 33.0% over $2,975,000 of other income in the same quarter of fiscal 1995. Other income consists primarily of interest earned on tax-exempt municipal securities, auction preferred stock, Eurodollar deposits, corporate debt securities, financed receivables and money market funds. The increase is primarily the result of the increase in cash available for investment. INCOME TAXES For the third quarter of fiscal 1996, income tax expense was $15,749,000, compared to $12,449,000 for the same quarter in fiscal 1995. Income tax expense for the first nine months of fiscal 1996 was $40,455,000 compared to $33,288,000 for the same period in fiscal 1995. 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 temporary 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 nine months ended December 31, 1995 and 1994 approximated 31.5% and 31.0%, respectively. LIQUIDITY AND CAPITAL RESOURCES The Company has financed its growth through funds generated from operations. As of December 31, 1995, the Company had cash, cash equivalents and investment securities of $270,457,000. During the quarter ended December 31, 1995, the Company repurchased 1,313,000 shares of its common stock for approximately $47,408,000 in open market transactions. As a result, the Company depleted its shares authorized, by the Board of Directors, for repurchase. 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
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. Numerous factors affect the Company's operating results, including general economic conditions, market acceptance and demand for its products, its ability to develop new products, rapidly changing technologies and increasing competitive pressures. These and other important factors, including the risks and uncertainties discussed below, could cause the Company's actual results for the fourth quarter of fiscal 1996 and for fiscal 1997 and beyond to differ materially from those expressed in any forward-looking statements made by, or on behalf of, the Company. The Company derives approximately 90% of its revenues from software products for IBM and IBM-compatible mainframe computers. CPU upgrade fees and enterprise license transactions are a substantial and integral component of the Company's mainframe business, and the percentage of license revenues contributed by enterprise license transactions has increased over the last three fiscal years. See "Results of Operations-Revenues-License Revenues" above. The Company believes that demand for enterprise licenses has been driven by an increase in customers' long term investments in their mainframe systems and processing capacity as hardware costs have declined dramatically and the efficacy of the mainframe platform was reaffirmed for large enterprises. The Company's future operating results are dependent upon customers' continued requirements for, and investment in, their mainframe systems software and customers' continually increasing need to use the Company's existing software products on substantially greater mainframe processing capacity. There can be no assurance that these trends of MIPS growth and of customers using the Company's current mainframe products on more powerful computers will continue. Future operating results are also dependent on sustained improvement of the Company's international operating results, which have been inconsistent over the last three fiscal years. Operating income as a percentage of revenues ("Operating Margins") remained relatively unchanged in the reported periods from fiscal 1995 to fiscal 1996. Since the Company's costs, however, are to a large extent fixed in the short term and are planned primarily based on sales forecasts, failure to achieve planned revenue growth in a period would likely have a material adverse affect on Operating Margins and net earnings. The Company has increased its research and development and marketing spending significantly in fiscal 1996 and intends to continue such increased investment, which will place additional pressure on its Operating Margins if revenue expectations are not met, particularly by its new client/server products. Sales, support and distribution costs for client/server software products are generally higher, as a percentage of sales, than for mainframe products, because of lower unit prices, more widely dispersed customers and prospects and intense competition. The Company intends to supplement its direct sales force by distributing its client/server products through large hardware and software vendors. This strategy is designed to increase the Company's geographic presence and to provide the increased levels of sales and support contact with customers and prospects necessary to succeed in the open systems markets on a cost-effective basis relative to a purely direct sales and distribution channel. There can be no assurance that this strategy will be effective, however. If the Company's direct sales force is the primary channel for its client/server products, its cost of sales will likely increase and Operating Margins could be reduced. 15
BMC SOFTWARE, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION (CONTINUED) The Company's stock price has been highly volatile over the last several years. Future revenues, earnings and stock prices may be subject to wide swings, particularly on a quarterly basis. The stock price of software companies in general, and the Company in particular, is primarily based on expectations of future revenue and earnings growth. Any failure of revenues or earnings to meet expected levels in a period would likely have a significant adverse effect on the Company's stock price. A high percentage of the Company's sales is closed at the end of each quarter, and there has been a trend toward larger single sales transactions, which can have extended sales cycles and are less predictable. The Company generally does not know whether revenues and earnings will meet expected results until the end of a quarter. The Company's ability to sustain growth depends in part on the timely development or acquisition of successful new and updated products. The Company is investing heavily in the development of new products for the rapidly growing open systems market and has relied upon acquisitions of open systems technologies to accelerate and augment its open systems product initiatives. The Company is also continuing to develop and to acquire new mainframe products and technologies. Over 70% of the Company's revenues are derived from its IMS and DB2 database utility products, which are mature product lines. The Company has invested in the development of new mainframe products that have been recently released or are scheduled for release in fiscal 1997. Software development is, however, a complex and creative process that can be difficult to accurately schedule and predict, and the Company has experienced long development cycles and product delays in the past 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 would have an adverse effect on the Company's revenues and earnings. Further, the Company's strategic plans and business models contemplate significant revenue growth from its client/server product families. This market is highly dynamic and is characterized by rapid change and intense competition. 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. CPU upgrade fees contributed 19%, 27% and 25% of total revenues in fiscal years 1993, 1994 and 1995. 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, is under continued pressure from customers. Although the Company has adopted MIPS-based pricing for enterprise licenses, it has not significantly changed the fact that customers pay more to use its products on more powerful CPU's. The Company believes its current pricing policies most properly reflect the value provided by its products. IBM provides alternatives to tier-based pricing with respect to its large mainframe CPUs. This action has increased pricing pressures within the mainframe systems software markets. The advent of IBM's "Sysplex" pricing of its mainframe systems software when installed in a complex of coupled mainframe CPUs may additionally increase these pricing pressures. If changes in mainframe systems software pricing or increased competition were to result in significant price decreases that were not offset by sales volume increases, the Company's business and financial results would be adversely affected. 16
BMC SOFTWARE, INC. AND SUBSIDIARIES PART II - OTHER INFORMATION Item 6. EXHIBITS AND REPORTS ON FORM 8-K (a) EXHIBITS. None (b) REPORTS ON FORM 8-K. Report dated October 6, 1995 reporting the Company's preliminary financial results for the three months ended September 30, 1995. 17
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: February 14, 1996 By: /s/ MAX P. WATSON JR. ----------------------- ----------------------------------- Max P. Watson Jr. Chairman of the Board, President and Chief Executive Officer Date: February 14, 1996 By: /s/ KEVIN M. KLAUSMEYER ----------------------- ----------------------------------- Kevin M. Klausmeyer Chief Accounting Officer 18