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 June 30, 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
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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___
28,222,555 shares of common stock of the Registrant were outstanding as of July
31, 1998.
<PAGE>
<TABLE>
BOOLE & BABBAGE, INC.
INDEX
<CAPTION>
Part I FINANCIAL INFORMATION Page No.
<S> <C> <C>
Item 1. FINANCIAL STATEMENTS
Consolidated Balance Sheets
June 30, 1998 and September 30, 1997 1
Consolidated Statements of Income
Three and Nine Months Ended June 30, 1998 and 1997 2
Consolidated Statements of Cash Flows
Nine Months Ended June 30, 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 Nine Months Ended June 30, 1998 and 1997 6-11
Part II OTHER INFORMATION
Item 6. EXHIBITS AND REPORTS ON FORM 8-K 12
Signatures 13
</TABLE>
<PAGE>
<TABLE>
Boole & Babbage, Inc.
Consolidated Balance Sheets
(Amounts in thousands except shares)
(June 30, 1998 unaudited)
<CAPTION>
June 30, September 30,
Assets 1998 1997
----------- -----------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 39,904 $ 33,923
Short-term investments 54,033 23,050
Accounts receivable, net 22,196 26,412
Installment and other receivables, net 59,238 65,469
Deferred tax asset 6,034 6,154
Prepaid expenses and other current assets 6,066 4,513
----------- -----------
Total current assets 187,471 159,521
Purchased and internally developed software, net 12,646 12,152
Equipment, furniture and leasehold improvements, net 10,075 9,968
Long-term installment and other receivables 49,982 52,290
Long-term deferred tax asset 10,539 10,571
Costs in excess of net assets of purchased businesses, net 614 634
Other assets 20,396 15,008
----------- -----------
Total assets $ 291,723 $260,144
=========== ===========
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 8,601 $ 8,895
Accrued payroll expense 10,348 9,840
Other accrued liabilities 24,288 27,080
Short-term borrowings 107 1,016
Notes payable due within one year 67 319
Capital lease obligations due within one year 780 933
Deferred maintenance revenue 59,575 53,432
----------- -----------
Total current liabilities 103,766 101,515
Notes payable due after one year - 50
Capital lease obligations due after one year 1,821 1,795
Deferred maintenance revenue due after one year 44,439 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--
30,646,124 (29,969,715 at September 30, 1997) 30 30
Additional paid-in capital 97,442 91,960
Retained earnings 59,194 32,800
Unrealized gain on marketable securities 11,343 5,691
Foreign currency translation adjustment (5,699) (3,503)
Less treasury stock, 2,397,930, shares (1,843,182 at
September 30, 1997), at cost (20,613) (8,476)
----------- -----------
Total stockholders' equity 141,697 118,502
----------- -----------
Total liabilities and stockholders' equity $291,723 $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 Nine Months Ended
June 30, June 30,
------------------------------- ----------------------------
1998 1997 1998 1997
------------- ----------- ------------ --------
<S> <C> <C> <C> <C>
Revenue:
Product licensing $ 29,922 $ 26,784 $ 91,107 $ 79,119
Maintenance fees and other 23,758 21,972 69,093 65,849
-------- -------- -------- --------
Total revenue 53,680 48,756 160,200 144,968
-------- -------- -------- --------
Costs and expenses:
Cost of product licensing 3,741 3,676 11,247 10,966
Cost of maintenance fees and other 5,788 4,495 16,442 14,711
Product development 6,325 6,310 19,196 18,573
Sales and marketing 24,939 23,277 74,096 70,535
General and administrative 4,545 4,344 13,978 14,017
Acquisition and nonrecurring costs - - - 11,309
-------- -------- -------- --------
Total costs and expenses 45,338 42,102 134,959 140,111
-------- -------- -------- --------
Operating income 8,342 6,654 25,241 4,857
Interest and other income, net 3,570 2,758 11,428 6,574
-------- -------- -------- --------
Income before provision for income taxes 11,912 9,412 36,669 11,431
Provision for income taxes 3,340 2,820 10,275 5,225
-------- -------- -------- --------
Net income $ 8,572 $ 6,592 $ 26,394 $ 6,206
======== ======== ======== ========
Basic earnings per share $ 0.30 $ 0.24 $ 0.94 $ 0.23
======== ======== ======== ========
Diluted earnings per share $ 0.28 $ 0.22 $ 0.86 $ 0.21
======== ======== ======== ========
Common shares outstanding 28,245 27,900 28,200 27,430
======== ======== ======== ========
Common shares assuming dilution 30,825 30,145 30,775 29,910
======== ======== ========= ========
<FN>
See accompanying notes.
</FN>
</TABLE>
2
<PAGE>
<TABLE>
Boole & Babbage, Inc.
Consolidated Statements of Cash Flows
(Amounts in thousands)
(Unaudited)
<CAPTION>
Nine Months Ended
June 30,
------------------------------
1998 1997
------------ ------------
Cash flows from operating activities:
<S> <C> <C>
Net income $26,394 $6,206
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization of capitalized software 6,760 7,221
Loss on disposal of assets 42 479
Gain on sale of equity securities (3,762) -
Stock issued under compensatory stock plans 125 54
Changes in operating assets and liabilities excluding
the effect of acquisitions:
Accounts receivable and installment and other receivables (31,853) (19,847)
Prepaid expenses and other assets (2,153) (1,967)
Accounts payable and accrued expenses (1,338) 1,188
Deferred maintenance revenue 14,857 7,598
------------ ------------
Net cash provided by operating activities 9,072 932
------------ ------------
Cash flows from investing activities:
Purchases of equipment, furniture and leasehold improvements (3,362) (2,736)
Payments for capitalized software (3,636) (3,664)
Net purchases of short-term investments (30,983) 1,904
Investment in equity securities (2,808) (361)
Proceeds from sale of equity securities 7,025 -
------------ ------------
Net cash used for investing activities (33,764) (4,857)
------------ ------------
Cash flows from financing activities:
Proceeds from sale of lease contracts receivable 40,994 2,154
Proceeds from issuance of common stock 5,355 5,141
Treasury stock purchases (12,136) (601)
Payments under line of credit, net (907) (2,256)
Payments on notes payable (301) (273)
Payments on capital leases (759) (1,672)
------------ ------------
Net cash provided by financing activities 32,246 2,493
------------ ------------
Effect of exchange rate changes on cash (1,573) (2,280)
------------ ------------
Net increase (decrease) in cash and cash equivalents 5,981 (3,712)
Cash and cash equivalents at beginning of period 33,923 37,260
------------ ------------
Cash and cash equivalents at end of period $39,904 $33,548
============ ============
Supplemental disclosures of cash flow information: Cash paid during the period
for:
Interest $1,523 $1,304
Income taxes, net $8,902 $3,457
Supplemental disclosures of noncash investing and financing activities:
Capital lease obligations of $632,000 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 June 30, 1998 and for the three-
and nine- month periods ended June 30, 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.
<TABLE>
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.
<CAPTION>
(Amounts in thousands, except 3 mos. ended June 30, 9 mos. ended June 30,
earnings per share) --------------------- ---------------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Diluted:
Common shares outstanding 28,245 27,900 28,200 27,430
Employee stock option plans 2,580 2,245 2,575 2,480
------ ------ ------ ------
30,825 30,145 30,775 29,910
====== ====== ====== ======
Net income (loss) $8,572 $6,592 $26,394 $ 6,206
====== ====== ======= ======
Diluted earnings (loss) per share $ .28 $ .22 $ .86 $ .21
====== ====== ======= =======
<FN>
Diluted earnings per common share is computed by adding the weighted
average number of common shares outstanding during the period to the number
of dilutive common shares that would be issuable upon the exercise of
outstanding options using the treasury stock method of computation.
</FN>
</TABLE>
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.
The company intends to adopt SFAS No. 133, "Accounting for Derivative
Instruments and for Hedging Activities," in fiscal 2000. The standard
supports the basic premise that all derivatives would be recorded at fair
value in the balance sheet and derivatives meeting certain criteria could
be specifically designated as hedges. Adoption of the standard is not
expected to have a material effect on the Company's financial position or
results of operations.
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 recognition, 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 financial and
administrative 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 table on the following page 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 nine months ended June 30,
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 9 mos. ended
June 30 June 30
--------------------- 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 55.7% 54.9% 11.7% 16.2% 56.9% 54.6% 15.2% 21.8%
Maint.fees and other 44.3% 45.1% 8.1% 12.0% 43.1% 45.4% 4.9% 10.3%
---------- ---------- ---------- --------- ---------- ----------- --------- ----------
Total 100.0% 100.0% 10.1% 14.3% 100.0% 100.0% 10.5% 16.6%
========== ========== ========== ========= ========== =========== ========= ==========
</TABLE>
<TABLE>
Product Licensing:
<CAPTION>
As Without As Without
Reported Currency Reported Currency
-------- -------- -------- --------
Y/Y chg 3Mo Y/Y chg 3Mo Y/Y chg 9Mo Y/Y chg 9Mo
--------------- ---------------- --------------- ----------------
<S> <C> <C> <C> <C>
Product Group:
Client/Server 41.0% 48.2% 56.2% 66.4%
Mainframe (1.7%) 1.4% 2.1% 7.6%
--------------- ---------------- --------------- ----------------
11.7% 16.2% 15.2% 21.8%
=============== ================ =============== ================
Sales Channel:
Domestic (0.6%) (0.6%) 20.0% 20.0%
International 19.1% 26.4% 12.5% 22.9%
--------------- ---------------- --------------- ----------------
11.7% 16.2% 15.2% 21.8%
=============== ================ =============== ================
</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 and 1999. 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.
7
<PAGE>
BOOLE & BABBAGE, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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 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 13% of licensing
revenue and occur primarily through multi-year licensing agreements which
comprised approximately 58% 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 33.5% and 37.7% of total product licensing for the
three months and 37.3% and 35.8% for the nine months ended June 30, 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 and South America despite unfavorable currency exchange rates. In the
Asia-Pacific area, except for its subsidiaries in Japan and Australia, the
Company continued its conservative position and only booked new revenues on a
cash basis from the distributors in the other markets of this region to avoid
potential impact from the current economic turmoil and uncertainties regarding
payment on product orders. 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.
8
<PAGE>
BOOLE & BABBAGE, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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 $7.8
million of revenue of which $6.8 million has been paid through June 30, 1998.
Since there are no minimum generated amounts, actual royalties due to the
Company may be significantly below the maximum amount. The increase in
maintenance fees and other is mainly the result of more consulting and
educational service revenue and higher maintenance revenue due to increased
product licensing in the previous year combined with relatively high renewal
rates. 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 nine
months ended June 30, 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 June 30, 1998 than the nine-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 9 mos. ended
June 30 June 30
------------------ 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 7.0% 7.5% 1.8% 6.9% 7.0% 7.6% 2.6% 9.8%
Cost of maintenance
fees and other 10.8% 9.2% 28.8% 33.2% 10.3% 10.1% 11.8% 18.0%
Product development 11.8% 12.9% 0.2% 0.6% 12.0% 12.8% 3.4% 4.5%
Sales and marketing 46.5% 47.7% 7.1% 11.1% 46.3% 48.7% 5.0% 10.8%
General and
administrative 8.5% 8.9% 4.6% 7.4% 8.7% 9.7% (0.3%) 4.0%
---------- ---------- ---------- --------- ---------- ---------- ---------- ----------
Total 84.6% 86.2% 7.7% 11.2% 84.3% 88.9% 4.8% 9.9%
---------- ---------- ---------- --------- ---------- ---------- ---------- ----------
</TABLE>
9
<PAGE>
BOOLE & BABBAGE, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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.
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 nine 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 nine 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) for the nine months in 1998 and in 1997 while
the amount of R&D capitalized was 16% and 15% of gross R&D costs in 1998 and
1997, respectively. 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 nine 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 nine months in
1998 primarily due to increased personnel costs.
10
<PAGE>
BOOLE & BABBAGE, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Interest and other income, net:
Interest and other income consists principally of net interest income and gains
and losses from sales of investments and currency hedging. Increases of 29% and
74% for the three and nine months of fiscal 1998 over 1997 are due to higher
interest income on more lease contracts and gains on sales of equity
investments. In the third quarter, this was partially offset by currency losses
in Europe in the current year versus net gains in the prior year.
Income Taxes:
Income taxes have been provided based upon the estimated effective tax rate of
28% for 1998. 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 $1,800,000 for the nine months
ended June 30, 1997.
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 $16.6
million.
LIQUIDITY AND CAPITAL RESOURCES:
At June 30, 1998, the Company's cash, cash equivalents and short-term
investments were $93,937,000. The Company continues to use installment payment
plans to gain a competitive advantage during the sales process and had gross
outstanding installment receivables of $113,368,000 at June 30, 1998. The
Company periodically sells portions of installments receivables subject to
limited recourse provisions. During the first nine months of 1998, the Company
sold $40,994,000 of installment receivables.
The Company continues to finance its growth through funds generated from
operations. For the nine months ended June 30, 1998 net cash provided by
operating activities was $9,072,000. Net cash used in investing activities in
1998 was $33,764,000, 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 $32,246,000, 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 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.
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.
August 10, 1998 \Paul E. Newton\
- --------------- --------------------------
Paul E. Newton
President and Director
(Principal Executive Officer)
August 10, 1998 \Arthur F. Knapp, Jr.\
- ---------------
--------------------------
Arthur F. Knapp, Jr.
Senior Vice President
Chief Financial Officer
(Principal Financial Officer)
August 10, 1998 \Carla J. Dorow\
- --------------- --------------------------
Carla J. Dorow
Controller
(Principal Accounting Officer)
13
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<ARTICLE> 5
<CIK> 0000734394
<NAME> PACIFIC FINANCIAL PRINTING
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-START> OCT-01-1997
<PERIOD-END> JUN-30-1998
<CASH> 39,904
<SECURITIES> 54,033
<RECEIVABLES> 24,097
<ALLOWANCES> 1,901
<INVENTORY> 0
<CURRENT-ASSETS> 187,471
<PP&E> 45,614
<DEPRECIATION> 35,539
<TOTAL-ASSETS> 291,723
<CURRENT-LIABILITIES> 103,766
<BONDS> 0
0
0
<COMMON> 30
<OTHER-SE> 141,667
<TOTAL-LIABILITY-AND-EQUITY> 291,723
<SALES> 160,200
<TOTAL-REVENUES> 160,200
<CGS> 0
<TOTAL-COSTS> 27,689
<OTHER-EXPENSES> 107,270
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,512
<INCOME-PRETAX> 36,669
<INCOME-TAX> 10,275
<INCOME-CONTINUING> 26,394
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 26,394
<EPS-PRIMARY> .94
<EPS-DILUTED> .86
</TABLE>
