UNITED STATES
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 0-132-58
--------
BOOLE & BABBAGE, INC.
------------------------------------------------------
(Exact name of Registrant as specified in its charter)
DELAWARE 94- 1651571
-------- -----------
State or other jurisdiction of (I.R.S. Employer
Incorporation or organization) Identification No.)
3131 ZANKER ROAD, SAN JOSE, CALIFORNIA 95134-1933
-------------------------------------------------
(Address of principal executive offices)
Registrant's Telephone number, including area code: 408-526-3000
------------
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
--- ---
10,878,479 shares of common stock of the Registrant were outstanding as of
January 31, 1996.
<PAGE>
BOOLE & BABBAGE, INC.
INDEX
Part I FINANCIAL INFORMATION Page No.
Item 1. FINANCIAL STATEMENTS
Consolidated Balance Sheets
December 31, 1995 and September 30, 1995 1
Consolidated Statements of Income
Three Months Ended December 31, 1995 and 1994 2
Consolidated Statements of Cash Flows
Three Months Ended December 31, 1995 and 1994 3
Notes to Consolidated Financial Statements 4-5
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Three Months Ended December 31, 1995 and 1994 6-11
Part II OTHER INFORMATION
Item 6. EXHIBITS AND REPORTS ON FORM 8-K 12
Signatures 13
<PAGE>
<TABLE>
BOOLE & BABBAGE, INC.
Consolidated Balance Sheets
(Amounts in thousands except shares)
(December 31, 1995 unaudited)
<CAPTION>
December 31, September 30,
1995 1995
------------ -------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $21,358 $22,340
Short-term investments 13,700 15,800
Accounts receivable, net 23,804 27,293
Installment and other receivables, net 32,858 28,066
Deferred tax asset 5,770 5,810
Prepaid expenses and other current assets 5,642 4,967
---------- ----------
Total current assets 103,132 104,276
Purchased and internally developed software, net 12,138 12,278
Equipment, furniture and leasehold improvements, net 7,358 7,341
Long-term installment and other receivables 38,297 32,223
Long-term deferred tax asset 4,843 4,843
Costs in excess of net assets of purchased businesses, net 680 687
Other assets 2,408 2,260
---------- ----------
Total assets $168,856 $163,908
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $6,915 $6,595
Accrued payroll expense 6,926 7,149
Other accrued liabilities 17,214 18,133
Short-term borrowings 250 400
Notes payable due within one year 256 513
Capital lease obligations due within one year 1,074 1,348
Deferred maintenance revenue 38,647 40,180
---------- ----------
Total current liabilities 71,282 74,318
Notes payable due after one year 663 663
Capital lease obligations due after one year 664 683
Deferred maintenance revenue due after one year 21,496 18,057
Stockholders' equity:
Preferred stock, 2,000,000 shares authorized, $.001
par value, none issued -- --
Common stock, $.001 par value, authorized--15,000,000
shares; issued--11,561,414 (11,476,050 at
September 30, 1995) 11 11
Additional paid-in capital 31,753 30,844
Retained earnings 46,957 42,672
Unrealized gain (loss) on marketable securities (261) 132
Foreign currency translation adjustment 776 1,013
Less treasury stock, 683,325 shares, at cost (4,485) (4,485)
---------- ----------
Total stockholders' equity 74,751 70,187
---------- ----------
Total liabilities and stockholders' equity $168,856 $163,908
========== ==========
<FN>
See accompanying notes.
</FN>
</TABLE>
1
<PAGE>
BOOLE & BABBAGE, INC.
Consolidated Statements of Income
(Amounts in thousands, except net income per share)
(Unaudited)
Three Months Ended
December 31
--------------------------
1995 1994
---------- ----------
Revenue:
New product revenue $21,474 $20,739
Maintenance fees and other 18,645 17,834
---------- ----------
Total revenue 40,119 38,573
---------- ----------
Costs and expenses:
Cost of revenue 7,408 7,036
Product development, net 4,374 4,158
Sales and marketing 19,682 19,031
General and administrative 3,851 4,177
---------- ----------
Total costs and expenses 35,315 34,402
---------- ----------
Operating income 4,804 4,171
Interest and other income, net 1,306 631
---------- ----------
Income before provision for income taxes 6,110 4,802
Provision for income taxes 1,825 1,490
---------- ----------
Net income $4,285 $3,312
========== ==========
Net income per share (a) $ 0.36 $ 0.30
========== ==========
Shares used in per share calculations (a) 11,950 11,200
========== ==========
(a) Per share data and number of shares reflect a 3-for-2 stock split which
became effective on December 6, 1995.
2
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<TABLE>
BOOLE & BABBAGE, INC.
Consolidated Statements of Cash Flows
(Amounts in thousands) (Unaudited)
<CAPTION>
Three Months Ended
December 31,
--------------------------
1995 1994
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net income $4,285 $3,312
Adjustments to reconcile net income to net cash
provided (used) by operating activities:
Depreciation, amortization and write-off of capitalized software 2,359 2,498
Stock issued under compensatory stock plans 36 23
Minority interest -- (61)
Changes in operating assets and liabilities excluding the effect
of acquisitions:
Accounts receivable and installment and other receivables (7,965) (4,950)
Prepaid expenses and other assets (610) (669)
Accounts payable and accrued expenses (638) 607
Deferred maintenance revenue 2,269 3,489
--------- --------
Net cash provided by (used for) operating activities (264) 4,249
--------- --------
Cash flows from investing activities:
Purchases of equipment, furniture and leasehold improvements (928) (778)
Payments for capitalized software (1,082) (748)
Net sales of short-term investments 2,100 --
Investment in equity securities (648) --
--------- --------
Net cash used for investing activities (558) (1,526)
--------- --------
Cash flows from financing activities:
Proceeds from issuance of common stock 874 664
Payments on notes payable (253) (230)
Payments on line of credit (150) --
Payments on capital leases (559) (500)
--------- --------
Net cash used for financing activities (88) (66)
--------- --------
Effect of exchange rate changes on cash (72) (112)
--------- --------
Net increase (decrease) in cash and cash equivalents (982) 2,545
Cash and cash equivalents at beginning of year 22,340 34,019
--------- ---------
Cash and cash equivalents at end of year $21,358 $36,564
========= =========
Supplemental disclosures of cash flow information:
Cash paid during the year
for:
Interest $142 $319
Income taxes, net $631 $513
<FN>
Supplemental disclosures of noncash investing and financing activities:
A capital lease obligation of $265,000 was incurred in 1996 for the
purchase of equipment.
See accompanying notes
</FN>
</TABLE>
3
<PAGE>
BOOLE & BABBAGE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Basis of Presentation
The accompanying consolidated financial statements include the accounts of
all subsidiaries after the elimination of all significant inter-company
items and transactions.
A summary of the significant accounting policies of the Company is included
in Note 1 of Notes to Consolidated Financial Statements in the Company's
annual report on Form 10-K for the year ended September 30, 1995. These
consolidated financial statements should be read in conjunction with those
notes.
The consolidated financial information at December 31, 1995 and for the
three-month periods ended December 31, 1995 and 1994 is unaudited. The
statements in this report include all adjustments of a normal recurring
nature. In the opinion of management, these adjustments are necessary for a
fair statement of the interim results for the periods presented. The
interim results are not necessarily indicative of the results for the full
year.
2. Net Income Per Share
Net income per common share is computed by adding to the weighted average
number of common shares outstanding during the period the number of
dilutive common shares that would be issuable upon the exercise of
outstanding options using the treasury stock method of computation. Fully
diluted net income per share is not disclosed because it is not materially
different from primary net income per share.
3 mos. ended Dec. 31,
(Amounts in thousands, except ---------------------
net income per share) 1995 1994
---- ----
Primary: (a)
Common shares outstanding 10,888 10,360
Employee stock option plans 1,062 840
------ ------
11,950 11,200
------ ------
Net income $4,285 $3,312
------ ------
Net income per share $.36 $.30
---- ----
(a) Reflects a 3-for-2 stock split effective December 6, 1995.
4
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BOOLE & BABBAGE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
3. Contingencies
The Company is involved in certain legal actions and claims arising in the
ordinary course of business. Management believes that such litigation and
claims will be resolved without material adverse effect on the Company's
financial position or results of operations.
4. Reclassifications
Beginning in the first quarter of 1996, changes have been made in the
classification of revenue and operating expense in the Consolidated
Statements of Income. 1995 has been reclassified to conform to these
changes.
"New Product Revenue" consists of licensing of core software products (net
of the bundled maintenance) plus consulting and education services.
"Maintenance Fees and Other" consists of revenue from maintenance, hardware
sales, computer services and royalties from IBM related to the jointly
developed CICS product now being sold by IBM. "Cost of Revenue" now
includes the cost of maintenance support. "Product Development, Net"
consists of development costs less costs capitalized under FAS 86.
5
<PAGE>
BOOLE & BABBAGE, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS: THREE MONTHS ENDED DECEMBER 31, 1995
When used in this discussion, the words "anticipate," "estimate," "project" and
similar expressions are intended to identify forward-looking statements. Such
statements are subject to certain risks and uncertainties, including those
discussed below and in the Company's Form 10-K for the year ended September 30,
1995, that could cause actual results to differ materially from those projected.
Readers are cautioned not to place undue reliance on these forward looking
statements, which speak only as of the date hereof. The Company undertakes no
obligation to publicly release the result of any revisions to these
forward-looking statements which may be made to reflect events or circumstances
after the date hereof or to reflect the occurrence of unanticipated events.
REVENUES:
The Company derives its revenues primarily from the licensing of computer
software programs, consulting and education services, and the sales of software
maintenance services. Total revenue for the three months ended December 31, 1995
increased over the same period in the prior year by 4.0%.
% of Revenue
---------------------- Year-to-Year
1996 1995 % Change
------------------------------------------------
New product revenue 53.5% 53.8% 3.5%
Maintenance fees and other 46.5% 46.2% 4.5%
------------------------------------------------
Total 100.0% 100.0% 4.0%
================================================
NEW PRODUCT REVENUE:
The Company licenses its products to customers for use on their computer systems
and performs consulting and educational services related to those products. New
product revenue accounted for 53.5% or $21,474,000 of total revenue in 1996,
compared to 53.8% or $20,739,000 in 1995 and increased by 3.5% in 1996 compared
to 1995. As is common in the industry, more than 50% of the Company's license
revenue is derived from transactions that close in the last month of a quarter,
which can make quarterly revenues difficult to forecast. And, since operating
expenses are relatively fixed, failure to achieve projected revenues could
materially and adversely affect the Company's operating results. This, in turn,
could result in an immediate and adverse effect on the market price of the
Company's stock.
6
<PAGE>
BOOLE & BABBAGE, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Products:
The product area with the highest growth rate in 1996 is the client/server group
which grew by 51.7% comprising 18.8% of the total new product revenue. The
Company anticipates that this group will continue to show high growth rates for
the remainder of fiscal 1996 as new products such as Ensign and Stage3 begin to
produce greater revenue. However, these two new products have taken longer to
rollout than originally planned and the Company competes with certain firms who
have greater resources along with products already in the marketplace. In
addition, the Company is dependent on the client/server market developing at a
rapid rate despite recent reports by industry analysts that implementation of
client/server networks may be more expensive and time-consuming than users had
anticipated, which could potentially slow the growth of the market. Due to these
factors, there can be no assurances that these new products will achieve
significant market acceptance or competitive success and thus contribute to
revenue growth. Mainframe products decreased 3.5% over the first quarter in 1995
which, in turn, had increased a strong 38.1% due to several large sales.
Mainframe products include Plex products, which enable customers to handle large
groups of computer processors, particularly the new parallel processing machines
by IBM. The Company's new product growth rates could be materially and adversely
impacted if the new parallel processors do not gain significant market
acceptance and customer spending shifts away from traditional mainframes to
technology platforms where the Company does not have significant product
acceptance.
Markets:
% of new product revenue
------------------------ Year-to-Year
1996 1995 % Change
---------------------------------------------------
Domestic 31.4% 34.2% (4.9%)
International 68.6% 65.8% 7.9%
---------------------------------------------------
100.0% 100.0% 3.5%
===================================================
Domestic:
Field sales grew 12.9%, but was offset by a decrease in telesales of 50.7%,
resulting in a decrease for total domestic new product revenue of 4.9%. The
telesales group decrease was primarily attributable to a change in sales year
from a calendar year to a fiscal year to conform with the rest of the Company's
sales force which had the effect of shifting momentum away from the traditional
final quarter. For growth to return in this geographic market, the Company is
dependent on increased productivity from the telesales group and continued
increases from the field sales force.
7
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BOOLE & BABBAGE, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
International:
In 1996 the Company's new product revenues from its international operations,
comprised of foreign subsidiaries and marketing agents, increased 7.9% due
primarily to strong growth in Europe. Without the effect of favorable currency
rate changes, international new product revenue grew 1.1% in 1996. Since the
majority of new revenue is derived from international markets, the Company's
operations and financial results could be significantly and adversely affected
by international factors such as changes in currency exchange rates and specific
countries' political and economic circumstances. The Company has implemented an
economic hedging program to attempt to reduce its exposure to currency
fluctuations for a portion of its anticipated intercompany royalty transactions
for the next two quarters. As a result of this strategy, the Company has
recognized less benefit from continued weakness in the U.S. dollar than if no
hedging programs were undertaken.
MAINTENANCE FEES AND OTHER:
Maintenance revenue is generated from services the Company provides including
technical support, product enhancements, system updates and user documentation.
Maintenance revenue also includes the first year of maintenance services which
is included in the initial charge when the Company licenses its software
products under a long-term agreement. Thereafter on each anniversary date of the
license, the customer may elect to renew its maintenance contract with the
Company. Customers may also elect to purchase advance maintenance at the time of
product licensing for maintenance periods beyond the first year. Included in
maintenance fees and other is revenue from computer services, hardware sales and
royalties from IBM for the jointly developed CICS product.
Maintenance fees and other grew 4.5% in 1996 accounting for 46.5% and 46.2% of
total revenues in 1996 and 1995, respectively. Without the effect of currency
rate changes, maintenance fees and other grew 0.6%. This increase is mainly the
result of increased product licensing in the previous year combined with high
renewal rates but reduced by higher discounts granted on multiple-year
maintenance packages purchased by customers.
The Company anticipates that maintenance revenues in fiscal 1996 will continue
to increase due to the higher license revenue growth in 1995, although it will
be negatively impacted by reduced revenue associated with site consolidations,
non-CPU specific pricing and multiple-year maintenance package discounts. In
addition, to produce maintenance revenue increases, the Company must continue to
generate new product licensing revenues and continue to provide high quality
maintenance support and upgrades.
8
<PAGE>
BOOLE & BABBAGE, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
COSTS AND EXPENSES:
% of Revenue
----------------- Year-to-Year
1996 1995 % Change
--------------------------------------
Cost of revenue 18.4% 18.3% 5.3%
Product development, net 10.9% 10.8% 5.2%
Sales and marketing 49.1% 49.3% 3.4%
General and administrative 9.6% 10.8% (7.8%)
--------------------------------------
Total 88.0% 89.2% 2.7%
======================================
COST OF REVENUE:
Cost of revenue consists primarily of the cost of product maintenance support,
royalties paid to independent software authors, amortization of purchased and
internally developed software, the cost of hardware associated with certain
sales of client/server products and costs related to operating the computer
services division. Cost of revenue increased by 5.3% in 1996 and represented
18.4% and 18.3% of revenues for 1996 and 1995, respectively. Without the effect
of currency rate changes, the increase was 1.4%. The increase in 1996 is
primarily attributable to increased royalties on higher third-party revenue in
Europe and Japan which was partially offset by lower maintenance royalties
payable to one of the third-party vendors in Europe. This decrease resulted from
a new contract with that vendor effective Q295 which significantly reduced the
royalty rate on maintenance billings through fiscal 1996. In general, the
relationship of cost of revenue to revenue will fluctuate due primarily to
changes in revenue mix, maintenance support, royalty agreements and amortization
of capitalized software.
PRODUCT DEVELOPMENT, NET:
Net product development costs increased by 5.2% in 1996 and represented 10.9%
and 10.8% of revenues for 1996 and 1995, respectively. Without the effect of
currency rate changes, the increase was 4.3%. The increase in 1996 is primarily
attributable to higher R&D personnel costs due to increased headcount. R&D
expenditures were approximately 16% of revenue (excluding third party) in both
years with the amount of R&D capitalized in both years at approximately 15% of
gross R&D costs. The Company capitalizes certain development costs in accordance
with Statement of Financial Accounting Standard No. 86 ("FAS 86"). To the extent
the Company capitalizes its product development costs, the effect is to defer
such costs to future periods and match them to the revenue generated by the
products. Product development and support expenses may fluctuate annually
depending in part upon the number and status of internal software development
projects.
9
<PAGE>
BOOLE & BABBAGE, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
SALES AND MARKETING:
Sales and marketing expenses increased by 3.4% and represented 49.1% of revenues
in 1996 compared to 49.3% in 1995. Without the effect of currency rate changes,
there would be no change from the prior year as an increase in commission
expense in Europe was offset by lower marketing costs worldwide.
GENERAL AND ADMINISTRATIVE:
General and administrative expenses decreased 7.8% in 1996 and represented 9.6%
and 10.8% of revenues for 1996 and 1995. Without the effect of currency rate
changes, general and administrative expenses would have decreased 10.6%. The
decrease is primarily attributable to lower personnel costs and legal expense.
INTEREST AND OTHER INCOME, NET:
Interest and other income consists principally of interest income, interest
expense, currency gain or loss and gain or loss on disposal of assets. The
increase in 1996 over 1995 is mainly due to interest income as installment
receivables increased approximately 61% over the first quarter of 1995. In
addition, 1995 included a write-off of an investment of approximately $300,000.
INCOME TAXES:
The effective tax rate was 30.0% for 1996 and 1995. The Company's effective tax
rate differs from the federal statuary rate due primarily to permanently
invested earnings of foreign subsidiaries being taxed at rates lower than the
federal statutory rate. Management believes future taxable income will be
sufficient to realize the tax benefit of the net deferred tax asset of
$10,613,000.
The Company is currently under audit for federal tax purposes for fiscal year
1993. Management believes that the audit will be resolved without material
adverse effect on the Company's financial position.
10
<PAGE>
BOOLE & BABBAGE, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES:
The significant sources of cash during 1996 include proceeds from the sale of
short-term investments of $2,100,000; the exercise of employee stock options of
$381,000 and stock purchases through the Employee Stock Purchase Plan of
$493,000. The significant uses of cash during 1996 include $264,000 used by
operating activities; $928,000 for purchases of furniture, equipment and
leasehold improvements; $757,000 for internally developed capitalized software;
$648,000 for investment in long-term equity securities; $559,000 for payments on
capital leases; $253,000 for payments on notes payable; $325,000 for purchased
capitalized software and $150,000 for net payments under a line of credit.
Included in short-term investments is a $1,400,000 certificate of deposit
pledged as collateral for the lease financing of certain computer equipment.
Management believes cash flows from operations and existing cash resources will
be adequate to meet its working capital requirements for the foreseeable future.
11
<PAGE>
BOOLE & BABBAGE, INC.
PART II. OTHER INFORMATION
ITEM 6. Exhibits and Reports on Form 8-K
(a) Exhibits
EX-27 Financial Data Schedule
(b) Reports on Form 8-K - None
12
<PAGE>
BOOLE & BABBAGE, INC. 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.
BOOLE & BABBAGE, INC.
\Paul E. Newton\
February 12, 1996
- ----------------- ------------------------------
Paul E. Newton
President and Director
(Principal Executive Officer)
\Arthur F. Knapp, Jr.\
February 12, 1996
- ----------------- -----------------------------
Arthur F. Knapp, Jr.
Senior Vice President
Chief Financial Officer
(Principal Financial Officer)
\Carla J. Dorow\
February 12, 1996
- ----------------- ------------------------------
Carla J. Dorow
Controller
(Principal Accounting Officer)
13
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-30-1996
<PERIOD-START> OCT-01-1995
<PERIOD-END> DEC-31-1995
<CASH> 21,358
<SECURITIES> 13,700
<RECEIVABLES> 97,016
<ALLOWANCES> 2,057
<INVENTORY> 0
<CURRENT-ASSETS> 103,132
<PP&E> 35,451
<DEPRECIATION> 28,093
<TOTAL-ASSETS> 168,856
<CURRENT-LIABILITIES> 71,282
<BONDS> 0
<COMMON> 11
0
0
<OTHER-SE> 74,740
<TOTAL-LIABILITY-AND-EQUITY> 168,856
<SALES> 40,119
<TOTAL-REVENUES> 40,119
<CGS> 0
<TOTAL-COSTS> 7,408
<OTHER-EXPENSES> 27,557
<LOSS-PROVISION> 350
<INTEREST-EXPENSE> 150
<INCOME-PRETAX> 6,110
<INCOME-TAX> 1,825
<INCOME-CONTINUING> 4,285
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,285
<EPS-PRIMARY> 0.36
<EPS-DILUTED> 0.36
</TABLE>
