UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 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 March 31, 1998
-----------------
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 (IRS 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
----- -----
28,170,793 shares of common stock of the Registrant were outstanding as of April
30, 1998.
<PAGE>
BOOLE & BABBAGE, INC.
<TABLE>
INDEX
<CAPTION>
Part I FINANCIAL INFORMATION Page No.
<S> <C>
Item 1. FINANCIAL STATEMENTS
Consolidated Balance Sheets
March 31, 1998 and September 30, 1997 1
Consolidated Statements of Income
Three and Six Months Ended March 31, 1998 and 1997 2
Consolidated Statements of Cash Flows
Six Months Ended March 31, 1998 and 1997 3
Notes to Consolidated Financial Statements 4-5
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Three and Six Months Ended March 31, 1998 and 1997 6-11
Part II OTHER INFORMATION
Item 4. SUBMISSION OF MATTERS TO A VOTE
OF SECURITY HOLDERS 12
Item 6. EXHIBITS AND REPORTS ON FORM 8-K 13
Signatures 14
</TABLE>
<PAGE>
<TABLE>
Boole & Babbage, Inc.
Consolidated Balance Sheets
(Amounts in thousands except shares)
(March 31, 1998 unaudited)
<CAPTION>
March 31, September 30,
1998 1997
----------- ------------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 41,310 $ 33,923
Short-term investments 53,065 23,050
Accounts receivable, net 22,163 26,412
Installment and other receivables, net 56,726 65,469
Deferred tax asset 5,961 6,154
Prepaid expenses and other current assets 5,142 4,513
--------- ---------
Total current assets 184,367 159,521
Purchased and internally developed software, net 12,178 12,152
Equipment, furniture and leasehold improvements, net 10,044 9,968
Long-term installment and other receivables 42,100 52,290
Long-term deferred tax asset 10,516 10,571
Costs in excess of net assets of purchased businesses, net 621 634
Other assets 16,732 15,008
--------- ---------
Total assets $ 276,558 $ 260,144
========= =========
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 7,786 $ 8,895
Accrued payroll expense 9,450 9,840
Other accrued liabilities 26,966 27,080
Short-term borrowings 386 1,016
Notes payable due within one year 322 319
Capital lease obligations due within one year 832 933
Deferred maintenance revenue 56,283 53,432
--------- ---------
Total current liabilities 102,025 101,515
Notes payable due after one year 17 50
Capital lease obligations due after one year 1,666 1,795
Deferred maintenance revenue due after one year 42,338 38,282
Stockholders' equity:
Preferred stock, 2,000,000 shares authorized, $.001 par value, none issued -- --
Common stock, $.001 par value, authorized--45,000,000 shares; issued--
30,492,473 (29,969,715 at September 30, 1997) 30 30
Additional paid-in capital 95,031 91,960
Retained earnings 50,622 32,800
Unrealized gain on marketable securities 7,579 5,691
Foreign currency translation adjustment (6,935) (3,503)
Less treasury stock, 2,197,930 shares (1,843,182 at
September 30, 1997), at cost (15,815) (8,476)
--------- ---------
Total stockholders' equity 130,512 118,502
--------- ---------
Total liabilities and stockholders' equity $ 276,558 $ 260,144
========= =========
<FN>
See accompanying notes.
</FN>
</TABLE>
1
<PAGE>
<TABLE>
Boole & Babbage, Inc.
Consolidated Statements of Income
(Amounts in thousands, except earnings per share)
(Unaudited)
<CAPTION>
Three Months Ended Six Months Ended
March 31, March 31,
------------------------- -------------------------
1998 1997 1998 1997
<S> <C> <C> <C> <C>
-------- -------- -------- --------
Revenue:
Product licensing $ 30,976 $ 25,057 $ 61,185 $ 52,335
Maintenance fees and other 22,611 21,394 45,335 43,877
-------- -------- -------- --------
Total revenue 53,587 46,451 106,520 96,212
-------- -------- -------- --------
Costs and expenses:
Cost of product licensing 3,295 3,312 7,506 7,290
Cost of maintenance fees and other 5,519 4,200 10,654 10,216
Product development 6,415 5,876 12,871 12,263
Sales and marketing 24,766 22,132 49,157 47,258
General and administrative 4,933 4,348 9,433 9,673
Acquisition and nonrecurring costs -- 11,309 -- 11,309
-------- -------- -------- --------
Total costs and expenses 44,928 51,177 89,621 98,009
-------- -------- -------- --------
Operating income (loss) 8,659 (4,726) 16,899 (1,797)
Interest and other income, net 4,475 2,228 7,858 3,816
-------- -------- -------- --------
Income (loss) before provision for income taxes 13,134 (2,498) 24,757 2,019
Provision (benefit) for income taxes 3,680 (195) 6,935 2,405
-------- -------- -------- --------
Net income (loss) $ 9,454 ($ 2,303) $ 17,822 ($ 386)
======== ======== ======== ========
Basic earnings (loss) per share $ 0.34 ($ 0.08) $ 0.63 ($ 0.01)
======== ======== ======== ========
Diluted earnings (loss) per share $ 0.31 ($ 0.08) $ 0.58 ($ 0.01)
======== ======== ======== ========
Common shares outstanding 28,120 27,615 28,165 27,430
======== ======== ======== ========
Common shares assuming dilution 30,710 27,615 30,740 27,430
======== ======== ======== ========
<FN>
See accompanying notes.
</FN>
</TABLE>
2
<PAGE>
<TABLE>
Boole & Babbage, Inc.
Consolidated Statements of Cash Flows
(Amounts in thousands)
(Unaudited)
<CAPTION>
Six Months Ended
March 31,
-----------------------------
1998 1997
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 17,822 ($ 386)
Adjustments to reconcile net income (loss) to net cash
provided (used) by operating activities:
Depreciation, amortization and write-off of capitalized software 4,584 4,862
Loss on disposal of assets -- 570
Gain on sale of equity securities (2,223) --
Stock issued under compensatory stock plans 92 27
Changes in operating assets and liabilities excluding the effect of acquisitions:
Accounts receivable and installment and other receivables (17,373) (14,807)
Prepaid expenses and other assets (909) (1,268)
Accounts payable and accrued expenses (120) 1,485
Deferred maintenance revenue 10,210 5,755
-------- --------
Net cash provided by (used for) operating activities 12,083 (3,762)
-------- --------
Cash flows from investing activities:
Purchases of equipment, furniture and leasehold improvements (2,445) (1,623)
Payments for capitalized software (2,241) (1,904)
Net purchases of short-term investments (30,015) (846)
Investment in equity securities (2,807) (26)
Proceeds from sale of equity securities 5,030 --
-------- --------
Net cash used for investing activities (32,478) (4,399)
-------- --------
Cash flows from financing activities:
Proceeds from sale of lease contracts receivable 35,732 2,154
Proceeds from issuance of common stock 2,979 3,973
Treasury stock purchases (7,339) (601)
Borrowing (payments) under line of credit, net (631) 116
Payments on notes payable (24) (26)
Payments on capital leases (543) (1,079)
-------- --------
Net cash provided by financing activities 30,174 4,537
-------- --------
Effect of exchange rate changes on cash (2,392) (1,028)
-------- --------
Net increase (decrease) in cash and cash equivalents 7,387 (4,652)
Cash and cash equivalents at beginning of period 33,923 37,260
-------- --------
Cash and cash equivalents at end of period $ 41,310 $ 32,608
======== ========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 688 $ 899
Income taxes, net $ 5,650 $ 3,240
Supplemental disclosures of noncash investing and financing activities:
A capital lease obligation of $313,000 was incurred in 1998 for the purchase of equipment.
<FN>
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, 1997. These
consolidated financial statements should be read in conjunction with those
notes.
The consolidated financial information at March 31, 1998 and for the three-
and six- month periods ended March 31, 1998 and 1997 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. Earnings Per Share
In 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128, "Earnings Per Share", which
replaced the previously reported primary and fully diluted earnings per
share with basic and diluted earnings per share. Unlike primary earnings
per share, basic earnings per share excludes any dilutive effects of
options, warrants, and convertible securities. Diluted earnings per share
is very similar to the previously reported fully diluted earnings per
share. All earnings per share amounts for all periods have been presented
to conform to the Statement 128 requirements.
<TABLE>
<CAPTION>
(Amounts in thousands, except 3 mos. ended Mar. 31, 6 mos. ended Mar. 31,
earnings per share) ---------------------- -----------------------
1998 1997 1998 1997
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Diluted:
Common shares outstanding 28,120 27,615 28,165 27,430
Employee stock option plans 2,590 -- 2,575 --
-------- -------- -------- --------
30,710 27,615 30,740 27,430
======== ======== ======== ========
Net income (loss) $ 9,454 ($ 2,303) $ 17,822 ($ 386)
======== ======== ======== ========
Diluted earnings (loss) per share $ .31 ($ .08) $ .58 ($ .01)
======== ======== ======== ========
</TABLE>
Diluted earnings 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. Net
loss per share is computed using only the weighted average number of common
shares outstanding during the period.
4
<PAGE>
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. Recent Accounting Pronouncements
The company intends to adopt SFAS No. 130, "Reporting Comprehensive
Income," and SFAS No. 131 "Disclosures about Segments of an Enterprise and
Related Information," in fiscal 1999. Both standards will require
additional disclosure, but will not have a material effect on the Company's
financial position or results of operations. SFAS No. 130 contains
requirements for the reporting and display of comprehensive income and will
first be reflected in the Company's first quarter of 1999 interim financial
statements. Components of comprehensive income for the Company include
items such as net income and changes in the value of available-for-sale
securities. SFAS No. 131 changes the way companies report segment
information and requires segments to be determined based on how management
measures performance and makes decisions about allocating resources. SFAS
No. 131 will first be reflected in the Company's 1999 Annual Report.
5
<PAGE>
BOOLE & BABBAGE, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS:
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,
1997, 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.
Statement of Position (SOP) 97-2, "Software Revenue Recognition" and (SOP) 98-4
"Deferral of the Effective Date of a Provision of (SOP) 97-2"were issued in
October 1997 and March 1998, respectively, and address software revenue
recognition matters primarily from a conceptual level and does not include
specific implementation guidance. The SOP supersedes SOP 91-1 and is effective
for transactions entered into for fiscal years beginning after December 15, 1997
and will therefore be adopted for the Company's fiscal year 1999, beginning
October 1, 1998. Based on its reading and interpretation of SOP 97-2, the
Company believes it is currently in compliance with the final standard. However,
detailed implementation guidelines for this standard have not yet been issued.
Once issued, such detailed implementation guidance could lead to unanticipated
changes in the Company's current revenue accounting practices, and such changes
could be material to the Company's revenues and earnings.
As detailed on its web site (boole.com), many Boole & Babbage products are
already Year 2000 compliant. Most of the remaining products will be compliant by
the end of fiscal 1998 and the Company will ensure that all products will be
fully Year 2000 compliant before December 31, 1999.
For its internal systems, the Company has implemented conversion projects to
properly process transactions relating to the year 2000 and beyond. The Company
plans to have programming and other changes to critical systems such as Oracle
Accounting Financial Applications completed by early 1999 in order to allow time
for testing. However, there can be no assurance that the systems of other
companies on which the Company's systems rely will be year 2000 capable or that
any failure to ensure year 2000 year capability by another company would not
have an adverse effect on the Company's systems. The Company does not expect the
cost of these projects to have a material effect on the Company's financial
position or results of operations.
REVENUES:
The Company derives its revenues primarily from the licensing of computer
software programs, the sales of software maintenance services, and from
consulting and education services. The following table shows percent of total
revenue and year-to-year percentage changes as reported and without the effect
of currency rate changes for the three and six months ended March 31, 1998 and
1997, respectively.
6
<PAGE>
<TABLE>
BOOLE & BABBAGE, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
<CAPTION>
As Without As Without
% of Revenue Reported Currency % of Revenue Reported Currency
--------------------- ---------- --------- ---------------------- --------- ----------
3 mos. ended 6 mos. ended
Mar. 31 Mar. 31
--------------------- Y/Y Y/Y ---------------------- Y/Y Y/Y
1998 1997 chg. chg. 1998 1997 chg. chg.
-----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Product licensing 57.8% 53.9% 23.6% 30.2% 57.4% 54.4% 16.9% 24.7%
Maint.fees and other 42.2% 46.1% 5.7% 10.7% 42.6% 45.6% 3.3% 9.5%
-----------------------------------------------------------------------------------------
Total 100.0% 100.0% 15.4% 21.2% 100.0% 100.0% 10.7% 17.8%
=========================================================================================
</TABLE>
<TABLE>
Product Licensing:
<CAPTION>
As Without As Without
Reported Currency Reported Currency
-------- -------- -------- --------
Y/Y chg 3Mo Y/Y chg 3Mo Y/Y chg 6Mo Y/Y chg 6Mo
--------------- ---------------- --------------- ----------------
<S> <C> <C> <C> <C>
Product Group:
Client/Server 65.0% 75.5% 68.3% 80.9%
Mainframe 11.7% 17.2% 3.8% 10.4%
--------------- ---------------- --------------- ----------------
23.6% 30.2% 16.9% 24.7%
=============== ================ =============== ================
Sales Channel:
Domestic 54.6% 54.6% 31.4% 31.4%
International 9.1% 18.8% 9.2% 21.1%
--------------- ---------------- --------------- ----------------
23.6% 30.2% 16.9% 24.7%
=============== ================ =============== ================
</TABLE>
The Company licenses its products to customers for use on their computer
systems. 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. 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.
Products:
The Company anticipates that the Client/Server group will continue to show high
growth rates for fiscal 1998. However, the Company competes with certain
companies who have greater financial and operational resources along with larger
customer bases. This could allow those companies to bundle competing products
with more established non-competing products in order to gain a marketing
advantage. In addition, the Company is dependent on the success of its new
Explorer family of Windows NT and Web-based products relating to its new
Desired-State Management initiative. This initiative represents a significant
expansion of the SpaceView, COMMAND/POST and Command MQ product lines. There is
also a potential diversion of customers' business attention and project funding
to Year 2000 projects. Due to these factors, there can be no assurances that new
or even existing products will achieve significant market acceptance or
competitive success and thus contribute to revenue growth.
Mainframe products include Plex products, which enable customers to handle large
groups of computer processors, particularly the parallel processing machines by
IBM. In the mainframe market, industry analysts have projected that systems
management spending will only grow at 5% per year through the year 2000. They
also project that while the majority of large data centers have adopted a
sysplex
7
<PAGE>
BOOLE & BABBAGE, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
strategy, mid-size data centers will not broadly adopt these parallel processors
until 1998 or later. Thus, despite a somewhat flat mainframe market, the
Company's product licensing growth has benefited by data centers adopting this
new technology. This has also helped to increase the number of competitive
replacements which in fiscal 1998 accounted for approximately 14% of licensing
revenue and occur primarily through multi-year licensing agreements which
comprised approximately 59% of licensing revenue. Thus, future growth rates
could be materially and adversely impacted if the parallel processors do not
gain significant market acceptance among the mid-size data centers, if the rate
of successful competitive replacements slows, or if customer spending shifts
away from traditional mainframes to technology platforms where the Company does
not have significant product acceptance.
Sales Channels
Domestic:
Domestic licensing comprised 39.9% and 31.9% of total product licensing for the
three months and 39.1% and 34.8% for the six months ended March 31, 1998 and
1997, respectively. For growth to continue in the domestic market, the company
is dependent on continued productivity increases as well as the ability to
generate larger size transactions, primarily through multi-year contracts and
competitive replacements.
International:
The Company's licensing from its international operations, comprised of foreign
subsidiaries and marketing agents, increased as a result of solid growth in
Europe, Japan and South America despite unfavorable currency exchange rates. In
the Asia-Pacific area, the Company continued its conservative position and only
booked new revenues on a cash basis other than from its subsidiaries in Japan
and Australia to avoid potential impact from the current economic turmoil and
uncertainties regarding payment on product orders from the distributors in the
other markets of this region. In addition to the risks described above, since
the majority of product licensing is derived from international markets, the
Company's overall operations and financial results could be significantly and
adversely affected by such international factors as changes in currency exchange
rates and specific regional or country political and economic circumstances.
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 maintenance services for an initial period
ranging from six months to one year 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 consulting and educational services, computer services, hardware sales and
royalties from IBM for a jointly developed CICS product. In July 1996, the
Company entered into a long-term licensing agreement requiring IBM to make
royalty payments, based upon their sales of the product, of up to a maximum of
approximately $10 million for the period from the fourth quarter of 1996 through
the second quarter of fiscal 1999. The Company has recognized $7.5 million of
revenue of which $6.5 million has been paid through March 31, 1998. Since there
are no minimum generated amounts, actual royalties due to the Company may be
significantly below the maximum amount. This increase in
8
<PAGE>
BOOLE & BABBAGE, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
maintenance fees and other is mainly the result of increased product licensing
in the previous year combined with relatively high renewal rates and increased
royalties from IBM under the July 1996 agreement. The maintenance revenue growth
rate is lower than the licensing growth rate primarily as a result of fewer
customer sites due to the consolidation of customer data centers; reduced
revenue associated with customers' conversion to non-CPU specific pricing
systems such as MIPS-based pricing; and higher discount levels offered by the
Company on multiple-year maintenance packages.
The Company anticipates that maintenance revenues in fiscal 1998 will increase
due to the higher license revenue growth in 1997, although it will be negatively
impacted by reduced revenue associated with site consolidations, non-CPU
specific pricing and multiple-year maintenance package discounts. The Company
must continue to generate new product licensing revenues and also continue to
provide high quality maintenance support and upgrades to ensure future
maintenance revenue increases.
COSTS AND EXPENSES :
<TABLE>
The following table shows percent of total revenue and year-to-year percentage
changes of costs and expenses (excluding acquisition and non recurring costs) as
reported and without the effect of currency rate changes for the three and six
months ended March 31, 1998 and 1997, respectively. The Company acquired MAXM
Systems Corporation ("MAXM") on January 16, 1997. The transaction was accounted
for using the pooling of interest method and the Company's consolidated
financial statements for all prior periods have been restated to include the
results of MAXM. In general, operating costs increased more in the three months
ending March 31, 1998 than the six month period as redundant costs related to
MAXM were eliminated in the second quarter of 1997.
<CAPTION>
As Without As Without
% of Revenue Reported Currency % of Revenue Reported Currency
------------ -------- -------- ------------ -------- --------
3 mos. ended 6 mos. ended
Mar. 31 Mar. 31
--------------------- Y/Y Y/Y --------------------- Y/Y Y/Y
1998 1997 chg. chg. 1998 1997 chg. Chg.
------------------------------------------ -------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Cost of product
licensing 6.1% 7.1% (0.5%) 6.5% 7.0% 7.6% 3.0% 11.3%
Cost of maintenance
fees and other 10.3% 9.0% 31.4% 38.6% 10.0% 10.6% 4.3% 11.3%
Product development 12.0% 12.6% 9.2% 10.5% 12.1% 12.7% 5.0% 6.5%
Sales and marketing 46.2% 47.6% 11.9% 17.9% 46.1% 49.1% 4.0% 10.6%
General and
administrative 9.2% 9.4% 13.5% 17.3% 8.9% 10.1% (2.5%) 2.5%
------------------------------------------ -------------------------------------------
Total 83.8% 85.7% 12.7% 18.0% 84.1% 90.1% 3.4% 9.3%
------------------------------------------ -------------------------------------------
</TABLE>
Cost of product licensing:
Cost of product licensing consists primarily of royalties paid to independent
software authors and amortization of purchased and internally developed
software. The increase in 1998 relates primarily to higher royalty costs due to
increased third party sales. In general, fluctuations in the relationship of
cost of product licensing to licensing revenue are caused primarily by changes
in licensing revenue mix, royalty agreements and amortization of capitalized
software.
9
<PAGE>
BOOLE & BABBAGE, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Cost of maintenance fees and other:
Cost of maintenance fees and other consists primarily of cost of product
maintenance support, royalties paid to independent software authors,
amortization of purchased and internally developed software, the cost to provide
educational and consulting services and costs related to certain computer
services. In 1998, the increase for the three and six months is primarily due to
higher costs to provide consulting and education and higher royalty costs.
In general, fluctuations in the relationship of cost of maintenance fees and
other to revenue are caused primarily by changes in maintenance revenue mix,
maintenance support, royalty agreements, and amortization of capitalized
software
Product development:
The increase in product development in 1998 for the three and six months is
primarily attributable to higher research and development ("R&D") personnel
costs due to increased headcount offset by decreased expenses relating to
supporting the IBM jointly developed CICS product. R&D expenditures were 16% of
revenue (excluding third party) in 1998 and in 1997 while the amount of R&D
capitalized was 15% of gross R&D costs in both years. The Company capitalizes
certain development costs in accordance with Statement of Financial Accounting
Standard No. 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 expenses may fluctuate
annually depending in part upon the number and status of internal software
development projects.
Sales and marketing:
The increase in sales and marketing in 1998 for the three and six months is
primarily a result of higher commissions on increased product licensing,
increased headcount, and more product marketing costs.
General and administrative:
General and administrative expenses increased for the three and six months in
1998 primarily due to increased personnel costs.
Interest and other income, net:
Interest and other income consists principally of net interest income and gains
or losses from sales of investments, and currency hedging. Increases of 101% and
106% for the three and six months of fiscal 1998 over 1997 are approximately
one-third due to higher interest income on more lease contracts receivable and
two-thirds due to currency gains in Europe in the current year (versus a loss in
the prior year) and gains on sales of equity investments.
10
<PAGE>
BOOLE & BABBAGE, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Income Taxes:
Income taxes have been provided based upon the estimated effective tax rate for
the year of 28%. In 1997, the effective tax rate was 30% exclusive of the tax
effect of non-deductible acquisition costs and pre-acquisition operating losses
of MAXM for which no tax benefit was recognized. These acquisition costs and
operating losses of Maxm increased tax expense by $555,000 and $1,800,000 for
the three and six months ended March 31, 1997, respectively.
The 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 and tax credits for increased research and
development. Management believes future taxable income will be sufficient to
realize the tax benefit of the net deferred tax asset of approximately $16.5
million.
LIQUIDITY AND CAPITAL RESOURCES:
At March 31, 1998, the Company's cash, cash equivalents and short-term
investments were $94,375,000. The Company continues to use installment payment
plans to gain a competitive advantage during the sales process and had
outstanding installment receivables of $102,510,000 at March 31, 1998. The
Company periodically sells portions of installments receivables subject to
limited recourse provisions. During the first six months of 1998, the Company
sold $35,732,000 of installment receivables.
The Company continues to finance its growth through funds generated from
operations. For the six months ended March 31, 1998 net cash provided by
operating activities was $12,083,000. Net cash used in investing activities in
1998 was $32,478,000, primarily for internally developed and purchased
capitalized software, acquisition of computers and related equipment, the
purchase of equity securities, and the net purchases of short-term investments
offset by cash provided from to the sale of equity securities. Net cash provided
by financing activities in 1998 was $30,174,000, primarily from the sale of
lease contracts receivable, the exercise of employee stock options and stock
purchases through the Employee Stock Purchase Plan offset by cash used for the
Company's stock repurchase program and debt payment.
The Company continues to evaluate business acquisition opportunities that
complement its strategic plans and believes existing cash balances and funds
generated from operations will be sufficient to meet its liquidity requirements
for the foreseeable future.
11
<PAGE>
BOOLE & BABBAGE, INC.
PART II. OTHER INFORMATION
ITEM 4. Submission of Matters to a Vote of Security Holders
The Annual Meeting of Stockholders of Boole & Babbage, Inc. was held February
18, 1998, for the purpose of electing two people to the Company's Board of
Directors to serve a three-year term expiring on the date of the Company's 2001
annual meeting of stockholders, and to ratify the selection of Ernst & Young LLP
as the Company' independent auditors for the next fiscal year. Proxies were
solicited pursuant to Section 14(a) of the Securities Exchange Act of 1934 and
there was no solicitation in opposition to management's solicitations.
Terry R. McGowan. was elected to the board of directors for a three-year term
with 16,091,368 votes "FOR" and 84,272 votes "WITHHELD".
David B. Wright was elected to the board of directors for a three-year term with
16,092,147 votes "FOR" and 83,493 votes "WITHHELD".
The selection of Ernst & Young LLP as the Company's independent auditors for the
fiscal year ending September 30, 1998 was ratified by the following vote:
Broker
"FOR" "AGAINST" "ABSTAIN" Nonvotes
----- --------- --------- --------
16,152,043 12,699 10,898 NONE
12
<PAGE>
BOOLE & BABBAGE, INC.
PART II. OTHER INFORMATION
ITEM 6. Exhibits and Reports on Form 8-K
(a) Exhibits
The following exhibit is filed herewith.
Exhibit
Number Description of Document
------ -----------------------
27 Financial Data Schedule
(b) Reports on Form 8-K - None.
13
<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.
April 11, 1998 \Paul E. Newton\
- -------------- --------------------------
Paul E. Newton
President and Director
(Principal Executive Officer)
April 11, 1998 \Arthur F. Knapp, Jr.\
- -------------- --------------------------
Arthur F. Knapp, Jr.
Senior Vice President
Chief Financial Officer
(Principal Financial Officer)
April 11, 1998 \Carla J. Dorow\
- -------------- --------------------------
Carla J. Dorow
Controller
(Principal Accounting Officer)
14
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<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-START> OCT-01-1997
<PERIOD-END> MAR-31-1998
<CASH> 41,310
<SECURITIES> 53,065
<RECEIVABLES> 122,885
<ALLOWANCES> 1,896
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<CURRENT-ASSETS> 184,367
<PP&E> 44,438
<DEPRECIATION> 34,494
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<BONDS> 0
0
0
<COMMON> 30
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<TOTAL-LIABILITY-AND-EQUITY> 276,558
<SALES> 106,250
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<INCOME-TAX> 6,935
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