I believe this is normal for the earlier model e39s.
I know my '97 540 will blow hot air if I turn the dial to the red even if the A/C is on (I leave the A/C compressor on all the time because the bump in idle speeds keeps me from getting this stupid flickering oil pressure light, but that's an entirely different problem).
Anyway, I don't think you actually have a problem here. If you want hotter air, adjust the dial between the vents to the red, not the actual climate control temperature. I usually keep the climate control at 70° F and that keeps the cabin at just how I want it.