-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, CzCGP1/JXS6TdbK0kHFhRnvZvdzV5balFjbgSJQA/BFdcOWjFefK3gXgu5zsMtGy Ubl0i2/UMbAoqMOJuC/bqQ== 0000950005-97-001017.txt : 19971230 0000950005-97-001017.hdr.sgml : 19971230 ACCESSION NUMBER: 0000950005-97-001017 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 19970930 FILED AS OF DATE: 19971229 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: BOOLE & BABBAGE INC CENTRAL INDEX KEY: 0000734394 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-PREPACKAGED SOFTWARE [7372] IRS NUMBER: 941651571 STATE OF INCORPORATION: DE FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-13258 FILM NUMBER: 97745080 BUSINESS ADDRESS: STREET 1: 3131 ZANKER ROAD CITY: SAN JOSE STATE: CA ZIP: 95134 BUSINESS PHONE: 4085263000 MAIL ADDRESS: STREET 1: 3131 ZANKER ROAD CITY: SAN JOSE STATE: CA ZIP: 95134 10-K 1 ANNUAL REPORT UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 FORM 10-K [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Fiscal year ended September 30, 1997 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, CA 95134-1933 (Address of principal executive offices) Registrant's telephone number, including area code: (408) 526-3000 Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common Stock, $.001 par value (Title of Class) 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 [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] The aggregate market value of voting stock held by nonaffiliates of the registrant, based upon the average bid and asked price of the Common Stock on November 28, 1997, was approximately $503,252,809. Shares of Common Stock held by each officer and director have been excluded because such persons may be deemed to be affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes. The number of shares outstanding of the registrant's Common Stock on November 28, 1997 was 18,866,547. DOCUMENTS INCORPORATED BY REFERENCE 1. Portions of Annual Report to Stockholders for fiscal year ended September 30, 1997 - Items 5, 6, 7, 8 and 14. 2. Portions of Proxy Statement dated January 15, 1998 - Items 10, 11, 12 and 13. BOOLE & BABBAGE, INC. FORM 10-K YEAR ENDED SEPTEMBER 30, 1997 Table of Contents Item Number Page ------ ---- PART I 1. Business....................................................... 1 2. Properties..................................................... 7 3. Legal Proceedings.............................................. 7 4. Submission of Matters to a Vote of Security Holders............ 7 PART II 5. Market for the Registrant's Common Stock and Related Stockholder Matters............................................ 8 6. Selected Consolidated Financial Data........................... 8 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.......................................... 8 7A. Quantitative and Qualitative Disclosures about Market Risk..... 8 8. Financial Statements and Supplementary Data.................... 8 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure........................................... 8 PART III 10. Directors and Executive Officers of the Registrant............. 9 11. Executive Compensation......................................... 9 12. Security Ownership of Certain Beneficial Owners and Management. 9 13. Certain Relationships and Related Transactions................. 9 PART IV 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K 10 Signatures......................................................... 13 PART I ITEM 1. BUSINESS General Boole & Babbage, Inc. ("Boole & Babbage" or the "Company"), founded in 1967, develops and markets enterprise automation software solutions for managing service levels in multivendor, distributed computing environments. The Company's products are used by information systems professionals whose organizations rely on the availability of their computing resources to conduct business. Boole & Babbage is committed to the quality of the products and services it provides to its customers and continually invests in research and development to maintain the quality of its software products. See Note 7 of Notes to Consolidated Financial Statements for certain financial information with respect to the Company's foreign operations. Market Over the last 30 years, systems management has evolved from simply monitoring resource usage in a single mainframe to automated management of client/server applications across the information system enterprise. This includes the monitoring and management of mainframes, servers, networks and applications from disparate vendors and across a myriad of platforms. The explosive growth of computing resources poses new challenges for systems management. Organizations are increasingly dependent on information systems for their 24x7 operations. If systems fail to deliver service to the internal end-user, there can be an immediate impact on external customers and the bottom line. Today's typical computing environment includes mainframes, workstations, applications, middleware, databases and Web technologies dispersed throughout the organization. In this scenario, applications become increasingly complex as they support more business functions and are distributed across the enterprise on downsized platforms. Along with the task of supporting this complex, mission-critical resource, corporate IT departments are under continuous pressure to reduce all the costs associated with information systems and their management--hardware, software, networks and personnel. Despite recent consolidations, a smaller field of software vendors has been slow to deliver significant integration among systems management tools, while the market continues to demand out-of-the-box interoperability of diverse products. In the face of these market dynamics, traditional approaches to systems management--which focuses on managing discrete components such as CPUs, subsystems, devices and networks-- cannot meet the challenge of managing the service levels required by the end-users connected to the corporate IT infrastructure. These users demand that systems management focuses on the same mission-critical applications they rely on. 1 Today, Boole & Babbage is focused on delivering the next generation of service level management tools needed to respond to these challenges with its latest product initiative: Desired State Management. In support of this initiative which is designed to allow organizations to express IT management policies in business terms, Boole & Babbage has introduced a new Windows NT-based, Web-enabled family of clients, called the Explorer, that provide users with increased flexibility and lower complexity in managing the entire enterprise. Additionally, the Company has outlined plans for several other new products, including new servers and agents, and initiatives that support the Desired State Management computing model. Product Strategy: Service Level Management for Distributed Systems Simplifying the management of enterprises and ensuring system availability is the driving force behind Boole & Babbage software solutions. Its products enable leading worldwide organizations with large and complex Information Technology (IT) systems to reduce operational costs and improve service delivery. Through advanced interoperability with leading frameworks and a flexible architecture easily scaled to customer requirements, Boole & Babbage products deliver a comprehensive systems management and automation solution for the entire enterprise, including applications, middleware, databases and Web technologies. The Boole & Babbage set of service level management offerings is an end-to-end open solution -- without any boundaries to the type of IT components that can be reached. If an enterprise has SNMP- and CMIP-managed equipment, or is committed to one of the leading frameworks from IBM/Tivoli, HP or SUN, then Boole & Babbage service level management solutions fit with and complement the customer's specific environment without extensive changes. The Company's products accept any type of alert from non-standard-conforming environments such as legacy, network equipment, environmental systems and/or older midrange systems and allow for implementation through ready-to-use, knowledge bases. Explorer Family for Proactive Service Level Management By focusing on service level management at the application level, the new Explorer product architecture allows businesses to reduce the implementation process; lower the burden and costs involved in maintenance; and effectively close the gap between IT management and business units. Delivering seamless interoperability across all Boole & Babbage product lines from a Web browser or native Microsoft Windows NT-based, graphical user interface, the Explorer family of clients share the same object-oriented technology. Boole & Babbage has also incorporated a highly-graphical 3D and video user interface, secure remote access and complete platform independence, via a full-function Web browser, to all its Explorer offerings. Products include: COMMAND/POST Explorer and MAX/Enterprise Explorer for distributed end-to-end enterprise management. SpaceView Explorer for comprehensive storage management. Command MQ Explorer for end-to-end management of message-oriented middleware. MainView Explorer for management of Parallel Sysplex and traditional mainframe environments (available in Q2 1998). 2 COMMAND/POST: End-to-end Availability Management for Distributed Systems COMMAND/POST is at the core of the Company's service level management strategy and is installed in more than 500 hundred leading organizations worldwide. COMMAND/POST functions as a central point-of-control for managing and automating all computers, networks and applications. It is integrated with all Boole & Babbage product lines, as well as many of the leading help desk problem management products and frameworks. COMMAND/POST uses a combination of agent- and message-based capabilities to extend the reach and scalability to any level of the enterprise. COMMAND/POST finds problems and pinpoints the actual causes of enterprise system failures, triggers rapid corrective actions, interacts with problem management systems and escalates problem resolution to the appropriate level to ensure rapid restoration of service. It targets and solves network problems such as node failures or the rerouting of data over a less-congested path. Customers gain increases in application availability while limiting required manual intervention by systems management professionals. By consolidating enterprise information to a central console, operational staffing requirements are reduced, freeing up resources for more strategic functions while the overall control of the complex information system infrastructure is enhanced. In the last four years, COMMAND/POST has emerged as a valuable tool for centralized, proactive Help Desk management, an area of renewed focus for corporate enterprises. And through partnerships with other market leaders such as HP, IBM/Tivoli and SUN, COMMAND/POST has gained acceptance as the system integrator for various point solutions. These partnerships deliver to COMMAND/POST users the benefits of integrated, complementary products from customers' preferred vendors. COMMAND/POST provides: Immediate improvements in availability and performance through automated recovery and failure prevention across WANs, LANs, mainframes and minicomputers. Low-cost implementation of connectivity through packaged interfaces and tools for message and alert filtering. An open architecture through interfaces to virtually any device. Increased operator productivity through console and alert consolidation, a graphical interface and graphical representations of enterprise configuration. Customization of data presentation on the UNIX workstation. COMMAND/POST Power Modules: Distributed Enterprise Intelligence Power Modules are agent-based solutions for managing a variety of different operating system platforms, middleware and applications. Power Modules exist for multiple versions of UNIX, Windows NT, OS/2, NetWare, IBM MQSeries, Microsoft MSMQ and SAP R/3. Each Power Module is focused on increasing availability by providing surveillance and resolution of conditions that can affect applications, servers or workstations. Integrated management of Power Modules and the alerts they generate is performed from either the enterprise central point of control at a COMMAND/POST console, or from a local domain-level COMMAND/POST console. 3 MainView: Mainframe and Parallel Sysplex Server Management The Boole & Babbage integrated MainView family of products provides automation and performance management for the IBM S/390 servers, ES/9000 series processors and to the CMOS based highly Parallel Sysplex servers. MainView products provide flexibility and efficiency in data collection across multiple MVS systems including Sysplex environments. On a single screen, application-focused views help ensure that service and availability goals are being met across the entire enterprise. In the mainframe area, IBM has announced several aggressive and strategic initiatives, destined to position the MVS operating system as an enterprise server operating system. With the introduction of the System/390 Parallel processors, which essentially reproduce the MVS operating system on a chip, IBM has given an indication of its plan to accommodate market demand for more efficient parallel processors. Customers benefit from greater efficiency and cost reduction with parallel processors, however, they are also faced with an attendant increase in system complexity. Boole & Babbage was the first software vendor to offer products specifically designed to handle the systems management needs of the Parallel Sysplex environment. The Company's mainframe products operate only with certain IBM operating systems. IBM has often modified or changed its operating systems and introduced new computer systems. The Company believes that IBM's successive operating systems and mainframe architectures have been and will be designed to allow IBM customers to enhance their systems and use new software as well as to modify and use their existing software. The Company must adapt its products to accommodate these IBM changes in order to license its products to new customers and to obtain maintenance contracts from existing customers. Boole & Babbage works closely with IBM to ensure that its products are kept current with their product releases. The companies exchange information and work cooperatively to ensure consistent service to their mutual customers. IBM is also a customer and user of Boole & Babbage products. While it is not anticipated that parallel processors will immediately replace all traditional mainframes, Boole & Babbage is well positioned for the coexistence of both types of processors as they evolve to new roles. In fact, many large firms are investing in Boole & Babbage Sysplex-ready products in order to prepare their systems management infrastructure for a smooth transition to parallel processors. The flexibility of the MainView architecture is beneficial in both a parallel processing environment and in traditional mainframe computing by making it possible to group resource activities in ways that are meaningful to a particular business. Command MQ: End-to-end Middleware Management Command MQ is a fully integrated solution that provides availability management and automation, performance and operations management, and configuration and administration of distributed message-queuing middleware networks. Based on the Boole & Babbage agent and message-based technology, Command MQ's coverage of MQSeries spans MVS, HP-UX, Sun Solaris, DEC VMS, UNIX, AIX, OS/400, OS/2, Microsoft's MSMQ and Windows NT operating environments. From a single console, Command MQ presents a consummate view of the availability and performance of the middleware layer network and how it is affecting the mission-critical applications it supports. Command MQ is capable of monitoring all middleware internal network components, such as queue managers, queues and channels, as well as the physical resources that constitute the external network. Command MQ is highly interoperable with enterprise management consoles, including HP OpenView, Tivoli TME 10, SunSoft Solstice and Boole & Babbage COMMAND/POST. 4 SpaceView: End-to-end Storage Management and Automation Boole & Babbage sells products that address the control and automation of mainframe and client/server disk (DASD) storage subsystems. Its SpaceView offering provides enterprisewide, integrated storage management. Over 3,000 data centers worldwide use the SpaceView family of products to automate storage management across the enterprise. Components of SpaceView dynamically recover from errors caused by space shortages, extend IBM's storage management utilities with more sophisticated file placement and better control of archiving, report on disk utilization by physical volume or by business application, and increase performance of specific types of jobs through extensive buffering. Third-party Products The Company also sells a number of products from independent software vendors; these third-party products complement the Company's strategy by adding applications such as Scheduling, Tape, Output and Printing management, JCL management, Desktop to Mainframe Connectivity etc. The following companies provide products for the European and international market: Diversified Software Systems, Inc., New Dimension Software, Simware, Inc., and Tone Software Corporation. COMMAND/POST, MainView and MAX/Enterprise are registered trademarks of Boole & Babbage, Inc. SpaceView is a trademark of Boole & Babbage, Inc. IBM is a registered trademark of International Business Machines Corporation. MVS, CICS, IMS, DB2, NetView and SystemView are trademarks of International Business Machines Corporation. Customer Support and Product Maintenance The Company offers product maintenance, which includes maintenance and updating of product capabilities to accommodate changes in a customer's hardware and software. An initial period, ranging from six months to one year, of maintenance is included in all of the Company's software licenses. Thereafter, the Company offers optional maintenance renewals at prices that generally range from 15% to 20% annually of the current product price. Customers may also elect to purchase advance maintenance at the time of product licensing for maintenance periods beyond the first year. The Company also provides extensive computer-supported problem solving capabilities over the telephone for its customers as part of their maintenance contracts. The Company believes that support of its customers and products is very important, and it continually attempts to improve its support systems and techniques. The Company's current annual maintenance cancellation rate is approximately 10%. Consulting, Education and Computer Services Consulting and educational services with regard to the application of Boole & Babbage products are provided to customers on a fee basis. The Company's computer services division provides mainframe computing services on a time-sharing basis to corporate affiliates and non-affiliates. 5 Marketing and Customers The Company sells its products domestically through its own distribution division, Boole & Babbage North America. In Europe, the Company's products are sold through its European subsidiary, Boole & Babbage Europe. In areas outside of North America and Europe, the Company has a wholly-owned sales subsidiary, Boole & Babbage Australasia Pty. Ltd, in Australia and a majority-owned sales subsidiary, Joint Systems & Technology, in Japan. In addition to its own sales staff, the Company has agreements with several independent marketing agents who serve international markets in which the Company has not established sales offices. The process of configuring the Company's products to meet the specific hardware and software requirements of the environments in which they will be used is rapid; consequently, shipments are generally made within one week of the time the order is received. In addition, the Company offers its customers the opportunity to use its products on a trial basis such that upon final acceptance by the customer, full installation has already been completed. Accordingly, the Company has no significant backlog of orders at any time. The Company's customers are generally large corporate and government organizations including industrial companies, commercial banks, insurance companies, communications companies, retailers, transportation companies, utilities, health care and educational institutions, and federal, state and local governments. No customer accounted for greater than 10% of the Company's revenue in 1997, 1996 or 1995. The Company's commitment to customer satisfaction and service is reflected in its policies regarding day-to-day operations and product maintenance, as well as in its efforts to establish forums for customer interaction and dialogue. Boole & Babbage has more than 12,500 products installed at more than 6,000 sites worldwide. In each of the last three fiscal years, a large portion of the Company's product revenue was from additional licensing by existing customers of either new products or products for additional sites. Research and Development The computer hardware and software industries are characterized by rapid technological change, which requires a continuing high level of expenditures for the development and maintenance of software products. It is customary for modifications to be made to a software product as experience with its use grows or as changes in manufactures' hardware and software so require. In 1997 the Company reinvested 16% of its Boole product revenues in R&D activities aimed at both enhancing the existing products and adding several new ones. R&D costs net of amounts capitalized were $22,357,000, $20,872,000 and $20,113,000 for the years ended September 30, 1997, 1996 and 1995, respectively. Competition The computer software industry is highly competitive. There are several large software vendors that have substantially greater financial and technical resources than the Company; in the future, these companies may develop and market products similar to those offered by Boole & Babbage. Competitive products are currently offered by a number of independent software companies. The most important consideration for customers of performance capacity management, automated operations, and network management software are product and product line capability, integration, on-going product enhancement, ease of installation and use, reliability and quality of technical support, documentation and training, name recognition, vendor experience and stability, and, to a lesser extent, price. The Company believes that it competes favorably in all of these areas. 6 Product Protection The Company relies on a combination of contract, patent, copyright and trade secret laws, as well as various other measures, to protect its rights with respect to its software products. The Company seeks protection of its proprietary interest in its products and trade secrets and holds registered related documentation. The Company does not believe that any single contract, patent, or copyright or trademark is material to its business as a whole. The Company does not sell or transfer title to its products to customers. The products are licensed on a "right-to-use" basis pursuant to a perpetual license, which is nontransferable and restricts use of the products to the customer's internal purposes on specified computers at specified sites. Employees As of November 30, 1997 Boole & Babbage employed approximately 880 persons, including sales, marketing and related activities; product development and customer support; and management, administration and finance. Of such employees, approximately 544 are employed in the United States and approximately 349 are employed in foreign countries. The Company believes that its employee relations are good. ITEM 2. PROPERTIES Boole & Babbage's principal administrative, marketing, research and development and support groups are located in one facility in San Jose, California. This facility is occupied under a lease that expires on March 31, 2000. The Company believes that this facility is adequate for its current needs and that suitable additional or substitute space will be available as needed to accommodate physical expansion of the Company's operations. In addition, the Company leases several sales and service facilities throughout North America, Europe, Japan and Australia under leases that expire on dates ranging through 2018. ITEM 3. LEGAL PROCEEDINGS Not applicable. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of security holders during the fourth quarter ended September 30, 1997. 7 PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS The information contained under the caption "Market for the Registrant's Common Stock and Related Stockholder Matters" on page 20 of the 1997 Annual Report to Stockholders is incorporated herein by reference. On January 16, 1997, pursuant to an Agreement and Plan of Merger and Reorganization among Boole & Babbage, MAXM Systems Corporation ("MAXM") and Minimum Acquisition Sub, Inc., Boole & Babbage acquired all of the capital stock of MAXM. In connection with and in consideration for the acquisition of MAXM by Boole Babbage, an aggregate of 1,137,115 shares of Boole & Babbage Common Stock were issued to the shareholders of MAXM, subject to an escrow agreement pursuant to which 10% of such shares are being held by an independent third party escrow agent. The issuance of Common Stock by Boole & Babbage was not registered with the Securities and Exchange Commission in reliance upon the exemptions provided by Section 4(2) of the Securities Act of 1933 and Rule 506 thereunder. ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA The information contained under the caption, "Selected Consolidated Financial Data" in the 1997 Annual Report to Stockholders on page 1 is incorporated herein by reference. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The information contained under the caption, "Management's Discussion and Analysis of Financial Condition and Results of Operations" in the 1997 Annual Report to Stockholders on pages 3 - 8 is incorporated herein by reference. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Not applicable. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Consolidated financial statements for Boole & Babbage, Inc. are contained on pages 9 - 12 of the 1997 Annual Report to Stockholders and are incorporated herein by reference. Supplementary data is contained on page 1 of the 1997 Annual Report to Stockholders and is incorporated herein by reference. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES Not applicable. 8 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information required by this Item is incorporated herein by reference to the Company's Proxy Statement dated January 15, 1998 under the captions "Proposal 1" and "Additional Information." ITEM 11. EXECUTIVE COMPENSATION The information required by this Item is incorporated herein by reference to the Company's Proxy Statement dated January 15, 1998 under the captions "Proposal 1," "Executive Compensation," "Stock Option Grants and Exercises" and "Compensation Committee Report." ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required by this Item is incorporated herein by reference to the Company's Proxy Statement dated January 15, 1998 under the caption "Security Ownership of Management and Principal Stockholders." ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required by this Item is incorporated herein by reference to the Company's Proxy Statement dated January 15, 1998 under the caption "Certain Transactions." 9 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) The following documents are filed as a part of this Report: 1. Financial Statements. The following Consolidated Financial Statements of Boole & Babbage, Inc. and Report of Independent Auditors are incorporated by reference to Registrant's 1997 Annual Report to Stockholders: Page in Exhibit 13.1 Consolidated Statements of Income-Years Ended September 30, 1997, 1996 and 1995.......................... 9 Consolidated Balance Sheets-September 30, 1997, 1996 and 1995................................................... 10 Consolidated Statements of Stockholders' Equity- Years Ended September 30, 1997, 1996 and 1995.............. 11 Consolidated Statements of Cash Flows-Years Ended September 30, 1997, 1996 and 1995.......................... 12 Notes to Consolidated Financial Statements................. 13 Report of Ernst & Young LLP, Independent Auditors.......... 20 2. Financial Statement Schedule. The following financial statement schedule of Boole & Babbage, Inc. is filed as part of this Report and should be read in conjunction with the Consolidated Financial Statements of Boole & Babbage, Inc.: Schedule for the fiscal years ended September 30, 1997, 1996 and 1995: Schedule Page -------- ---- II- Valuation and Qualifying Accounts..................... 14 All other schedules are omitted since the required information is not present or is not present in amounts sufficient to require submission of the schedules, or because the information required is included in the Consolidated Financial Statements and notes thereto included in the 1997 Annual Report to Stockholders, filed as Exhibit 13.1. 3. Exhibits. The exhibits listed in Item 14(c) are filed as part of this Annual Report. (b) The Company did not file any reports on Form 8-K during the quarter ended September 30, 1997. 10 (c) Exhibit Number Description ------ ----------- 3.1 Restated Certificate of Incorporation of Registrant. (1) 3.2 Bylaws of Registrant. (2) 4.1 Reference is made to Exhibits 3.1 and 3.2. 10.1 1986 Incentive Stock Option Plan, as amended, and related grant forms. (3) 10.2 1986 Supplemental Stock Option Plan, as amended, and related grant forms. (3) 10.3 Employee Stock Purchase Plan. (4) 10.4 Form of Indemnity Agreement between Registrant and its officers and directors. (1) 10.5 1993 Nonemployee Directors' Stock Option Plan, as amended, and related grant forms. (5) 10.6 1995 Stock Option Plan, as amended, and related grant forms. (6) 11.1 Computation of net income per share. (7) 13.1 1997 Annual Report to Stockholders. (7) 21.1 Subsidiaries of Registrant. (7) 23.1 Consent of Ernst & Young LLP, Independent Accountants. (7) 23.2 Report of Coopers & Lybrand LLP, Independent Accountants. (7) 23.3 Consent of Coopers & Lybrand LLP, Independent Accountants. (7) 27.1 Financial Data Schedule. (7) 11 (1) Previously filed as an exhibit to the definitive Proxy Statement for January 20, 1987 Annual Meeting of Stockholders and incorporated herein by reference. (2) Previously filed as an exhibit to the Annual Report on Form 10-K for the year ended September 30, 1989, and incorporated herein by reference. (3) Previously filed as an exhibit to the Registration Statement on Form S-8 (Registration No. 33-65145) and incorporated herein by reference. (4) Previously filed as an exhibit to the Registration Statement on Form S-8 (Registration No. 333-32341) and incorporated herein by reference. (5) Previously filed as an exhibit to the Registration Statement on Form S-8 (Registration No. 33-79782) and incorporated herein by reference. (6) Previously filed as an exhibit to the Registration Statement on Form S-8 (Registration No. 333-02723) and incorporated herein by reference. (7) Filed as an exhibit to this Annual Report on Form 10-K. Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the registrant pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as express in the Securities Act of 1933 and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue. 12 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) 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 on the 22nd day of December 1997. BOOLE & BABBAGE, INC. By: \Arthur F. Knapp, Jr.\ ------------------------- Arthur F. Knapp, Jr. Chief Financial Officer (Principal Financial and Accounting Officer) POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears on the following page constitutes and appoints Paul E. Newton and Arthur F. Knapp, Jr. his attorneys-in-fact for him in any and all capacities, to sign any amendments to this Report on Form 10-K, and to file the same, with exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, hereby ratifying and confirming all that the said attorney-in-fact, or his substitute or substitutes, may do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the Registrant and in the capacities indicated on the 22nd day of December 1997. \Johannes S. Bruggeling\ \Terry R. McGowan\ - ------------------------ ------------------ Johannes S. Bruggeling Terry R. McGowan Executive Vice President and Director Director \Raymond E. Cairns\ \Paul E. Newton\ - ------------------- ---------------- Raymond E. Cairns Paul E. Newton Director President and Director \Franklin P. Johnson, Jr.\ \Carl H. Reynolds\ - -------------------------- ------------------ Franklin P. Johnson, Jr. Carl H. Reynolds Chairman of the Board of Directors Director 13 SCHEDULE II BOOLE & BABBAGE, INC. VALUATION AND QUALIFYING ACCOUNTS Allowance for Doubtful Accounts
Additions ---------------------- Charged Charged Balance at to Costs to Other Balance Beginning and Accounts Deductions at End of Period Expenses Describe Describe of Period --------- -------- -------- -------- --------- Year ended September 30, 1997 $2,277,000 $ 40,000 -- $(322,000)* $1,995,000 Year ended September 30, 1996 $2,103,000 $ 390,000 -- $(216,000)** $2,277,000 Year ended September 30, 1995 $2,150,000 $ 129,000 -- $(176,000)*** $2,103,000 * Amount includes $280,000 of account write-offs and $42,000 due to currency changes. ** Amount includes $206,000 of account write-offs, net of $10,000 due to currency changes. *** Amount includes $162,000 of account write-offs, net of $14,000 due to currency changes.
14 EX-11.1 2 COMPUTATION OF NET INCOME PER SHARE BOOLE & BABBAGE, INC. Exhibit 11.1 SCHEDULE OF COMPUTATION OF NET INCOME PER SHARE (in thousands, except per share data) Years ended September 30, ------------------------- 1997 1996 1995 ---- ---- ---- PRIMARY Weighted average number of common shares outstanding during the year 18,474 17,711 17,023 Incremental common shares attributable to exercise of outstanding options (assuming proceeds would be used to purchase treasury stock) 1,621 1,499 1,442 ------- ------- ------- Total shares 20,095 19,210 18,465 ======= ======= ======= Net income $13,469 $11,457 $13,123 ======= ======= ======= Net income per share $ 0.67 $ 0.60 $ 0.71 ======= ======= ======= FULLY DILUTED Weighted average number of common shares outstanding during the year 18,474 17,711 17,023 Incremental common shares attributable to exercise of outstanding options (assuming proceeds would be used to purchase treasury stock) 1,856 1,554 1,542 ------- ------- ------- Total shares 20,330 19,265 18.565 ======= ======= ======= Net income $13,469 $11,457 $13,123 ======= ======= ======= Net income per share $ 0.66 $ 0.59 $ 0.71 ======= ======= ======= EX-13.1 3 1997 ANNUAL REPORT OF STOCKHOLDERS Exhibit 13.1 Boole & Babbage, Inc. Selected Consolidated Financial Data
Years ended September 30, (c) ---------------------------------------------------- (In thousands, except per share amounts) 1997 1996 1995 1994 1993 - ------------------------------------------------------------------------------------------------------------- Revenue $197,097 $180,151 $169,027 $141,600 $121,015 Expenses (a) 173,974 167,322 156,242 133,983 116,834 -------- -------- -------- -------- -------- Income excluding special charges (a) 23,123 12,829 12,785 7,617 4,181 Interest and other income, net 9,180 5,643 3,907 1,306 1,209 -------- -------- -------- -------- -------- Income before income taxes 32,303 18,472 16,692 8,923 5,390 Provision for income taxes 10,365 7,015 5,076 4,575 3,519 -------- -------- -------- -------- -------- Net income (b) $ 21,938 $ 11,457 $ 11,616 $ 4,348 $ 1,871 ======== ======== ======== ======== ======== Net income per share $ 1.09 $ 0.60 $ 0.63 $ 0.25 $ 0.11 ======== ======== ======== ======== ======== Shares used in per share calculations 20,095 19,210 18,465 17,150 16,980 ======== ======== ======== ======== ======== Balance sheet data: Cash, cash equivalents and short-term investments $ 56,973 $ 62,010 $ 42,047 $ 39,794 $ 24,224 Total assets $260,144 $224,540 $182,827 $145,621 $106,450 Long-term debt $ 1,845 $ 3,269 $ 2,075 $ 7,830 $ 9,684 Deferred maintenance revenue $ 91,714 $ 80,190 $ 61,468 $ 49,172 $ 33,893 Stockholders' equity $118,502 $ 95,064 $ 78,501 $ 47,482 $ 29,481 (a) Excludes $11.3 million ($0.42 per share) of acquisition expense in FY97and $4.1 million ($0.18 per share) of purchased R&D expense in FY94. (b) Excludes $1.5 million ($0.08 per share) of extraordinary gain on forgiveness of debt in FY95 and $.2 million ($0.01 per share) of gain on disposal of division in FY93. (c) All periods have been restated to reflect the pooling of interest accounting in connection with the MAXM acquisition in Q297
1 Exhibit 13.1 Boole & Babbage, Inc. Quarterly History (Unaudited)
(In thousands, except per share amounts) Q1 96 Q2 96 Q3 96 Q4 96 Q1 97 Q2 97 Q3 97 Q4 97 - ------------------------------------------------------------------------------------------------------------------------------ Revenue: Product licensing $ 22,448 $ 23,659 $ 24,169 $ 24,943 $ 27,278 $ 25,057 $ 26,784 $ 29,790 Maintenance fees and other 20,416 20,179 21,426 22,911 22,483 21,394 21,972 22,339 -------------------------------------------------------------------------------------- Total revenue 42,864 43,838 45,595 47,854 49,761 46,451 48,756 52,129 -------------------------------------------------------------------------------------- Costs and expenses: Cost of product licensing 3,787 4,048 3,863 3,657 3,978 3,312 3,676 4,064 Cost of maintenance fees and other 4,200 4,147 5,968 5,168 6,016 4,200 4,495 5,040 Product development 5,303 5,058 5,482 6,483 6,387 5,876 6,310 6,308 Sales and marketing 22,106 22,783 22,403 24,474 25,126 22,132 23,277 25,282 General and administrative 4,688 4,424 4,615 4,665 5,325 4,348 4,344 4,478 Acquisition and nonrecurring costs -- -- -- -- -- 11,309 -- -- -------------------------------------------------------------------------------------- Total costs and expenses 40,084 40,460 42,331 44,447 46,832 51,177 42,102 45,172 -------------------------------------------------------------------------------------- Operating income (loss) 2,780 3,378 3,264 3,407 2,929 (4,726) 6,654 6,957 Interest and other income, net 1,256 1,332 1,411 1,644 1,588 2,228 2,758 2,606 -------------------------------------------------------------------------------------- Income (loss) before taxes 4,036 4,710 4,675 5,051 4,517 (2,498) 9,412 9,563 Provision (benefit) for income taxes 1,825 1,530 1,585 2,075 2,600 (195) 2,820 2,300 -------------------------------------------------------------------------------------- Net income (loss) $ 2,211 $ 3,180 $ 3,090 $ 2,976 $ 1,917 ($ 2,303) $ 6,592 $ 7,263 ====================================================================================== Net income (loss) per share $ 0.12 $ 0.17 $ 0.16 $ 0.15 $ 0.10 ($ 0.11) $ 0.33 $ 0.36 ====================================================================================== Shares used in per share calculations 19,065 19,105 19,320 19,360 19,700 20,120 20,095 20,395 ====================================================================================== Stock Price (closing bid) High $ 17.11 $ 17.25 $ 17.59 $ 17.17 $ 25.00 $ 27.00 $ 23.75 $ 32.00 Low $ 12.89 $ 13.33 $ 15.50 $ 14.17 $ 16.50 $ 22.00 $ 20.25 $ 21.13
2 Exhibit 13.1 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION & RESULTS OF OPERATIONS The table below sets forth the results of operations of the Company for the three fiscal years ended September 30, 1997:
PERCENTAGE OF REVENUE YEAR-TO-YEAR YEARS ENDED SEPTEMBER 30, PERCENTAGE CHANGE ------------------------------ --------------------- 1997 1996 1995 97 vs. 96 96 vs. 95 - ----------------------------------------------------------------------------------------------------- Revenue: Product licensing 55.3% 52.9% 53.0% 14.4% 6.3% Maintenance fees and other 44.7% 47.1% 47.0% 3.8% 6.9% Total revenue 100.0% 100.0% 100.0% 9.4% 6.6% ----- ----- ----- ----- ----- Costs and expenses: Cost of product licensing 7.6% 8.5% 7.7% -2.1% 18.4% Cost of maintenance fees and other 10.0% 10.8% 10.8% 1.4% 6.3% Product development 12.6% 12.5% 12.5% 11.4% 6.0% Sales and marketing 48.6% 50.9% 51.3% 4.4% 5.8% General and administrative 9.4% 10.1% 10.1% 0.6% 7.3% Acquisition and nonrecurring costs 5.7% -- -- N/A N/A ----- ----- ----- ----- ----- Total costs and expenses 93.9% 92.8% 92.4% 10.7% 7.1% ----- ----- ----- ----- ----- Operating income 6.1% 7.2% 7.6% -7.9% 0.3% Interest and other income, net 4.7% 3.1% 2.3% 62.7% 44.4% ----- ----- ----- ----- ----- Income before provision for income taxes 10.8% 10.3% 9.9% 13.7% 10.7% Provision for income taxes 3.8% 3.9% 3.0% 7.3% 38.2% ----- ----- ----- ----- ----- Net income before extraordinary item 7.0% 6.4% 6.9% 17.6% -1.4% Extraordinary gain on forgiveness of debt -- -- 0.9% N/A N/A ----- ----- ----- ----- ----- Net income 7.0% 6.4% 7.8% 17.6% -12.7% ===== ===== ===== ===== =====
3 Forward-Looking Information 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, 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. Acquisition On January 16, 1997, the Company acquired all of the outstanding capital stock of MAXM Systems Corporation ("MAXM"), a privately held company, in exchange for up to 1,137,115 shares of Boole & Babbage common stock. The transaction was accounted for using the pooling of interests method and the Company's consolidated financial statements for all prior periods have been restated to include the results of MAXM. Revenue The Company derives its revenues primarily from the licensing of computer software programs, the sales of software maintenance services and from consulting and educational services. The following table shows year-to-year percentage changes as reported; without the effect of currency rate changes; and without the revenues of MAXM for all periods.
Growth Rates: As Reported Without Currency Effect Without MAXM Results -------------------------- ------------------------ ------------------------ Product Licensing 97 vs. 96 96 vs. 95 97 vs. 96 96 vs. 95 97 vs. 96 96 vs. 95 Product Group: Client/Server 4.9% 16.0% 13.2% 17.5% 43.6% 73.4% Mainframe 18.0% 3.0% 26.4% 4.9% 26.4% 4.9% ---- ---- ---- ---- ---- ---- 14.4% 6.3% 22.7% 8.1% 30.2% 14.9% ==== ==== ==== ==== ==== ==== Sales Channel: Domestic 23.5% (5.9%) 23.5% (5.9%) 35.2% 17.9% International 9.8% 13.7% 22.3% 16.6% 27.8% 13.6% ---- ---- ---- ---- ---- ---- 14.4% 6.3% 22.7% 8.1% 30.2% 14.9% ==== ==== ==== ==== ==== ==== Maintenance fees and other 3.8% 6.9% 10.6% 8.6% 15.0% 5.5% ==== ==== ==== ==== ==== ==== Total revenue 9.4% 6.6% 17.0% 8.3% 23.1% 10.3% ==== ==== ==== ==== ==== ====
Product Licensing 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. And, since operating expenses are relatively fixed, failure to achieve projected revenues could materially 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 of products will show higher growth rates for fiscal 1998. However, the Company competes with certain companies who have much greater financial and operational resources 4 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 toward 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 from IBM. In the mainframe market, industry analysts have projected that systems management spending will only grow at approximately 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 flattish 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 1997 accounted for approximately 16% of licensing revenue compared with approximately 11% in 1996. These occur primarily through multi-year licensing agreements which comprised approximately 50% of the licensing revenue in 1997 and 1996. Thus, future growth rates could be materially and adversely affected if these 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. A price increase on selected products was implemented in January 1997, but did not have a significant effect on recognized revenue in 1997. Price changes during 1996 and 1995 were not significant. Markets Domestic: Domestic licensing comprised 36.1%, 33.5% and 37.8% of total product licensing for 1997, 1996, and 1995, respectively. Domestic product licensing grew 23.5% overall in 1997 versus the decrease of 5.9% in 1996 which had resulted primarily from decreased productivity in the telesales group. 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: In 1997, the Company's licensing from its international operations, comprised of foreign subsidiaries and marketing agents, increased 9.8% as a result of solid growth in all channels despite unfavorable currency exchange rates. In 1996, the Company's licensing from its international operations increased 13.7% as a result of strong growth in Europe which was somewhat offset by unfavorable currency exchange rates. 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 agreement 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 the jointly developed CICS product. In July 1996, 5 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 approximately $10 million for the period from the fourth quarter of 1996 through the second quarter of fiscal 1999. The Company has recognized $5.4 million in revenue of which $4.3 million has been paid through September 30, 1997. Since there are no minimum generated amounts, actual royalties due to the Company may be significantly below the annual maximum amounts. The increases in maintenance fees and other are mainly the result of increased product licensing in the previous years combined with relatively high renewal rates and increased royalties from IBM under the July 1996 agreement. In both years, the maintenance revenue growth rates are lower than the licensing growth rates 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 revenue in 1998 will increase due to the higher license revenue growth in 1997, although it will continue to be negatively impacted by reduced revenue associated with site consolidations, non-CPU specific pricing and discounted multiple-year maintenance packages. 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 The following table shows year-to-year percentage changes of costs and expenses, excluding acquisition and non-recurring costs, as reported; without the effect of currency rate changes; and without the costs and expenses relating to MAXM for all periods.
Growth Rates: As Reported Without Currency Effect Without MAXM Results --------------------------- ------------------------ ------------------------ 97 vs. 96 96 vs. 95 97 vs. 96 96 vs. 95 97 vs. 96 96 vs. 95 Cost of product licensing (2.1%) 18.4% 6.9% 20.1% 11.8% 20.4% Cost of maintenance fees and other 1.4%% 6.3% 7.9% 9.2% 21.7% 4.9% Product development 11.4% 6.0% 13.0% 6.3% 17.8% 16.5% Sales and marketing 4.4% 5.8% 11.2% 7.4% 19.7% 6.5% General and administrative 0.6% 7.3% 5.1% 8.6% 14.4% 7.3% ---- ---- ---- ---- ---- ---- Total costs and expenses 4.0% 7.1% 10.0% 8.7% 18.3% 8.9% ==== ==== ==== ==== ==== ====
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. In both years, the increases were primarily due to higher third-party royalties from increased third-party licensing in Europe and Japan. In the third quarter of 1996 there was a charge of approximately $1 million on the remaining royalty commitments on a third-party product. In general, fluctuations in the relationship of cost of product licensing to revenue are caused primarily by changes in licensing revenue mix, royalty agreements, and amortization of capitalized software. 6 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 1997, the increase was due primarily to higher third-party royalties in Europe as a result of the expiration of a reduced rate from a third-party vendor which was in effect from the second quarter of fiscal 1995 to the fourth quarter of fiscal 1996. Cost of educational and consulting services was up in proportion to the services revenue increase although this was partially offset by lower maintenance support costs. In 1996, the increase was primarily due to higher cost of educational and consulting services partially offset by lower maintenance support costs and software amortization. Software amortization was down due to write-offs in 1995 of certain software products and the full amortization of products purchased in July 1991. Maintenance support costs are down as a result of more efficient processes which allowed the redeployment of personnel to research and development ("R&D"). In general, fluctuations in the relationship of cost of maintenance fees and other to revenue are caused primarily by changes in maintenance revenue mix, educational and consulting revenue, maintenance support, royalty agreements, and amortization of capitalized software. Product Development In 1997, the increase in product development is primarily due to increased headcount and consulting costs. The increase in 1996 is due to higher personnel costs as headcount replacements were filled and certain maintenance support employees were transferred to R&D. The Company capitalizes development costs in accordance with Statement of Financial Accounting Standards 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 In 1997, the increase in sales and marketing was primarily a result of higher sales commissions on increased product licensing. In addition, 1997 had higher product marketing costs and international sales costs. The increase in 1996 is primarily a result of higher commissions on increased sales. Higher sales personnel costs internationally were partially offset by lower product marketing costs. General and Administrative The increase in costs in 1997 is primarily attributable to higher personnel and consulting costs, European facility costs and performance-based accruals. The increase in 1996 was primarily a result of a prior year lease termination credit combined with higher 1996 facilities costs for relocating certain European and Japanese offices. Acquisition and Non-recurring Costs During the second quarter of 1997, the Company had approximately $11.3 million of non-recurring costs comprised of $1 million of purchased R&D costs and $10.3 million of acquisition costs related to the purchase of MAXM. These acquisition costs consisted primarily of $4.0 million of termination costs related to reseller agreements, $2.8 million of employee costs, $1.6 million of costs related to closing redundant facilities and $1.9 million of legal, accounting, broker fees and other. Interest and Other Interest and other income consists principally of interest income or expense and gain or loss from sales of investments, currency or disposal of assets. An increase of 62.7% over 1996 was primarily the result of higher interest income on more lease contracts receivable, lower interest expense as the MAXM line of credit was paid off in 1997 and less currency losses. The 44.4% increase in 1996 was primarily the result of more interest income as gross lease contracts receivable was higher and there was approximately $300,000 of gain on sale of investment securities versus a $300,000 loss in 1995. These increases were somewhat mitigated by higher currency losses. As further described in Note 1, the Company has a hedging program 7 to attempt to reduce its exposure to currency fluctuations. Income Taxes The effective tax rates were 35.8%, 38.0%, and 30.4% for 1997, 1996 and 1995, respectively. Without the impact of non-deductible acquisition costs and pre-acquisition operating losses of MAXM, the effective tax rates were 28.5%, 28.0% and 30.0%, respectively. It is anticipated that the Company's effective tax rate in 1998 will approximate these non-acquisition related rates. The Company's effective tax rates before the valuation allowance for MAXM operating losses and non-deductible acquisition costs differ from the federal statutory rate primarily due 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. At September 30, 1997, the Company had carryforwards of MAXM's pre-acquisition federal net operating losses of approximately $43.8 million that will expire between 2003 and 2012. Recent Accounting Pronouncements SFAS No. 128, "Earnings per share," was issued in February 1997 and is required for periods ending after December 15, 1997. It requires dual presentation of earnings per share ("EPS"); basic EPS and diluted EPS (see Note 1 of Notes to Consolidated Financial Statements). SOP 97-2, "Software Revenue Recognition," was issued in November 1997 and is required for periods ending after December 15, 1997. It provides guidance on applying GAAP in recognizing revenue on software transactions and the impact on the results of operations is not expected to be material. Liquidity and Capital Resources At September 30, 1997, the Company's cash, cash equivalents and short-term investments were $56,973,000. The Company continues to use installment payment plans to gain a competitive advantage during the sales process and had outstanding installment receivables of $124,792,000 at September 30, 1997. The Company periodically sells portions of installments receivables subject to limited recourse provisions. During 1997, the Company sold $8,140,000. The Company continues to finance its growth through funds generated from operations. For the year ended September 30, 1997 net cash provided by operating activities before acquisition and non-recurring costs was $9,726,000. Acquisition and non-recurring expenses of $9,744,000 were paid in 1997. Net cash used in investing activities in 1997 was $7,690,000, primarily for internally developed and purchased capitalized software, acquisition of computers and related equipment and the purchase of equity securities. Cash provided by investing activities was due to net sales of short-term investments. Net cash provided by financing activities in 1997 was $7,628,000, primarily from the sale of lease contracts receivable, the exercise of employee stock options and stock purchases through the Employee Stock Purchase Plan. Cash used for financing activities relates to the Company's stock repurchase program and to debt payment. On July 30, 1997, a share repurchase plan was adopted which authorized the Company to acquire 500,000 shares of its common stock. The Company's previous stock repurchase plan was rescinded in accordance with pooling of interest accounting in connection with the MAXM acquisition. During fiscal 1997, the Company repurchased 85,000 shares of its common stock, 55,000 of which were purchased under the new plan, for an aggregate purchase price of $2,072,000. 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. 8 Exhibit 13.1 Boole & Babbage, Inc. Consolidated Statements of Income
Years Ended September 30, ------------------------------ (In thousands, except per share amounts) 1997 1996 1995 - -------------------------------------------------------------------------------------- Revenue: Product licensing $108,909 $ 95,219 $ 89,542 Maintenance fees and other 88,188 84,932 79,485 -------- -------- -------- Total revenue 197,097 180,151 169,027 -------- -------- -------- Costs and expenses: Cost of product licensing 15,030 15,355 12,964 Cost of maintenance fees and other 19,751 19,483 18,329 Product development 24,881 22,326 21,056 Sales and marketing 95,817 91,766 86,753 General and administrative 18,495 18,392 17,140 Acquisition and nonrecurring costs 11,309 -- -- -------- -------- -------- Total costs and expenses 185,283 167,322 156,242 -------- -------- -------- Operating income 11,814 12,829 12,785 Interest and other income, net 9,180 5,643 3,907 -------- -------- -------- Income before provision for income taxes 20,994 18,472 16,692 Provision for income taxes 7,525 7,015 5,076 -------- -------- -------- Net income before extraordinary item 13,469 11,457 11,616 Extraordinary gain on forgiveness of debt of acquired companies, net of $924,000 tax provision -- -- 1,507 -------- -------- -------- Net income $ 13,469 $ 11,457 $ 13,123 ======== ======== ======== Net income per share $ 0.67 $ 0.60 $ 0.71 ======== ======== ======== Shares used in per share calculations 20,095 19,210 18,465 ======== ======== ========
9 Exhibit 13.1 Boole & Babbage, Inc. Consolidated Balance Sheets
September 30, ----------------------------------- (Dollars in thousands) 1997 1996 1995 - --------------------------------------------------------------------------------------------------------------------- Assets Current assets: Cash and cash equivalents $ 33,923 $ 37,260 $ 26,247 Short-term investments 23,050 24,750 15,800 Accounts receivable, net 26,412 27,955 33,565 Installment and other receivables, net 65,469 46,221 28,066 Deferred tax asset 6,154 5,649 5,810 Prepaid expenses and other current assets 4,513 4,383 6,832 --------- --------- --------- Total current assets 159,521 146,218 116,320 Purchased and internally developed software, net 12,152 11,614 12,278 Equipment, furniture and leasehold improvements, net 9,968 12,763 10,914 Long-term installment and other receivables 52,290 39,141 32,223 Long-term deferred tax asset 10,571 9,472 7,778 Costs in excess of net assets of purchased businesses, net 634 660 687 Other assets 15,008 4,672 2,627 --------- --------- --------- Total assets $ 260,144 $ 224,540 $ 182,827 ========= ========= ========= Liabilities and Stockholders' Equity Current liabilities: Accounts payable $ 8,895 $ 7,605 $ 8,261 Accrued payroll expense 9,840 7,890 7,149 Other accrued liabilities 27,080 25,090 22,449 Short-term borrowings 1,016 3,150 400 Notes payable due within one year 319 469 680 Capital lease obligations due within one year 933 1,813 1,844 Deferred maintenance revenue 53,432 51,241 43,411 --------- --------- --------- Total current liabilities 101,515 97,258 84,194 Notes payable due after one year 50 444 863 Capital lease obligations due after one year 1,795 2,825 1,212 Deferred maintenance revenue due after one year 38,282 28,949 18,057 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-- 19,979,810 (19,111,374 and 18,343,248 in 1996 and 1995, respectively) 20 19 18 Additional paid-in capital 91,970 81,044 73,911 Retained earnings 32,800 19,331 7,874 Unrealized gain on marketable securities 5,691 370 132 Foreign currency translation adjustment (3,503) 704 1,051 Less treasury stock, 1,228,788 shares (1,143,788 and 1,024,988 shares in 1996 and 1995, respectively), at cost (8,476) (6,404) (4,485) --------- --------- --------- Total stockholders' equity 118,502 95,064 78,501 --------- --------- --------- Total liabilities and stockholders' equity $ 260,144 $ 224,540 $ 182,827 ========= ========= =========
10 Exhibit 13.1 Boole & Babbage, Inc. Consolidated Statements of Cash Flows
September 30, ----------------------------------- (Dollars in thousands) 1997 1996 1995 - --------------------------------------------------------------------------------------------------------------------- Cash flows from operating activities: Net income $ 13,469 $ 11,457 $ 13,123 Adjustments to reconcile net income to net cash provided by (used for) operating activities: Depreciation, amortization and write-off of capitalized software 9,672 10,415 10,766 Loss on disposal of assets 413 279 103 Gain on sale of equity securities -- (291) -- Extraordinary gain on forgiveness of debt, net of tax -- -- (1,507) Deferred income taxes (4,772) (1,634) (1,884) Stock issued under compensatory stock plans 96 272 138 Minority interest -- -- (62) Changes in operating assets and liabilities excluding the effect of acquisitions: Accounts receivable and installment and other receivables (45,472) (35,976) (26,325) Prepaid expenses and other assets (1,926) 2,296 (2,152) Accounts payable and accrued expenses 12,930 5,599 4,164 Deferred maintenance revenue 15,572 19,267 11,607 -------- -------- -------- Net cash provided by (used for) operating activities (18) 11,684 7,971 -------- -------- -------- Cash flows from investing activities: Purchases of equipment, furniture and leasehold improvements (3,752) (5,495) (5,584) Payments for capitalized software (5,277) (3,941) (3,048) Net sales (purchases) of short-term investments 1,700 (8,950) (15,510) Investment in equity securities (361) (2,085) (346) Proceeds from sale of equity securities -- 717 -- -------- -------- -------- Net cash used for investing activities (7,690) (19,754) (24,488) -------- -------- -------- Cash flows from financing activities: Sale of lease contracts receivables 8,140 15,849 -- Proceeds from issuance of common stock 5,988 4,375 6,865 Purchase of treasury stock (2,072) (1,919) -- Borrowings (payments) under line of credit (2,134) 2,750 400 Payments on notes payable (282) (626) (3,583) Borrowings on sales leaseback transactions -- 1,184 855 Payments on capital leases (2,012) (2,108) (2,333) -------- -------- -------- Net cash provided by financing activities 7,628 19,505 2,204 -------- -------- -------- Effect of exchange rate changes on cash (3,257) (422) 766 -------- -------- -------- Net increase (decrease) in cash and cash equivalents (3,337) 11,013 (13,547) Cash and cash equivalents at beginning of year 37,260 26,247 39,794 -------- -------- -------- Cash and cash equivalents at end of year $ 33,923 $ 37,260 $ 26,247 ======== ======== ======== Supplemental disclosures of cash flow information: Cash paid during the year for: Interest $ 1,638 $ 916 $ 1,299 Income taxes $ 7,935 $ 4,783 $ 3,355 Supplemental disclosures of non-cash investing and financing activities: Capital lease obligations of $2,505,000 were incurred in 1996 for the purchase of equipment. A capital lease obligation of $103,000 was incurred in 1995 for the purchase of equipment.
11 Exhibit 13.1 Boole & Babbage, Inc. Consolidated Statements of Stockholders' Equity
Common Stock Additional Unrealized Gain ------------------------ Paid-in Retained on Marketable (Dollars in thousands) Shares Amount Capital Earnings Securities - -------------------------------------------------------------------------------------------------------------------------------- Balance, September 30, 1994 17,527,349 $ 18 $ 60,015 ($ 5,249) $170 Other equity transactions of acquired companies 177,122 -- 6,892 -- -- Exercise of employee stock options and related tax benefit 486,137 -- 5,892 -- -- Sale of common stock under the employee stock purchase plan and related tax benefit 141,380 -- 974 -- -- Issuance of common stock under the employee incentive stock plan 11,260 -- 138 -- -- Unrealized loss on marketable securities, net of taxes -- -- -- -- (38) Foreign currency translation adjustment -- -- -- -- -- Net income -- -- -- 13,123 -- ---------- ----------- ----------- ----------- ------ Balance, September 30, 1995 18,343,248 18 73,911 7,874 132 Other equity transactions of acquired companies 8,931 -- 341 -- -- Exercise of employee stock options and related tax benefit 620,682 1 5,362 -- -- Sale of common stock under the employee stock purchase plan and related tax benefit 131,561 -- 1,323 -- -- Issuance of common stock under the employee incentive stock plan 6,952 -- 107 -- -- Unrealized gain on marketable securities, net of taxes -- -- -- -- 238 Purchase of treasury stock -- -- -- -- -- Foreign currency translation adjustment -- -- -- -- -- Net income -- -- -- 11,457 -- ---------- ----------- ----------- ----------- ------ Balance, September 30, 1996 19,111,374 19 81,044 19,331 370 Other equity transactions of acquired companies (1,778) -- (34) -- -- Exercise of employee stock options and related tax benefit 732,412 1 9,062 -- -- Sale of common stock under the employee stock purchase plan and related tax benefit 132,262 -- 1,768 -- -- Issuance of common stock under the employee incentive stock plan 5,540 -- 130 -- -- Unrealized gain on marketable securities, net of taxes -- -- -- -- 5,321 Purchase of treasury stock -- -- -- -- -- Foreign currency translation adjustment -- -- -- -- -- Net income -- -- -- 13,469 -- ---------- ----------- ----------- ----------- ------ Balance, September 30, 1997 19,979,810 $ 20 $ 91,970 $ 32,800 $5,691 ========== =========== =========== =========== ======
Boole & Babbage, Inc. Consolidated Statements of Stockholders' Equity
Foreign Total Currency Stock- Translation Treasury holders' (Dollars in thousands) Adjustment Stock Equity - ----------------------------------------------------------------------------------------------- Balance, September 30, 1994 ($ 52) ($ 4,485) $ 50,417 Other equity transactions of acquired companies -- -- 6,892 Exercise of employee stock options and related tax benefit -- -- 5,892 Sale of common stock under the employee stock purchase plan and related tax benefit -- -- 974 Issuance of common stock under the employee incentive stock plan -- -- 138 Unrealized loss on marketable securities, net of taxes -- -- (38) Foreign currency translation adjustment 1,103 -- 1,103 Net income -- -- 13,123 ----------- ----------- ----------- Balance, September 30, 1995 1,051 (4,485) 78,501 Other equity transactions of acquired companies -- -- 341 Exercise of employee stock options and related tax benefit -- -- 5,363 Sale of common stock under the employee stock purchase plan and related tax benefit -- -- 1,323 Issuance of common stock under the employee incentive stock plan -- -- 107 Unrealized gain on marketable securities, net of taxes -- -- 238 Purchase of treasury stock -- (1,919) (1,919) Foreign currency translation adjustment (347) -- (347) Net income -- -- 11,457 ----------- ----------- ----------- Balance, September 30, 1996 704 (6,404) 95,064 Other equity transactions of acquired companies -- -- (34) Exercise of employee stock options and related tax benefit -- -- 9,063 Sale of common stock under the employee stock purchase plan and related tax benefit -- -- 1,768 Issuance of common stock under the employee incentive stock plan -- -- 130 Unrealized gain on marketable securities, net of taxes -- -- 5,321 Purchase of treasury stock -- (2,072) (2,072) Foreign currency translation adjustment (4,207) -- (4,207) Net income -- -- 13,469 ----------- ----------- ----------- Balance, September 30, 1997 ($ 3,503) ($ 8,476) $ 118,502 =========== =========== ===========
12 1. Summary of Significant Accounting Policies Business Boole & Babbage, Inc. ("the Company") is a worldwide leader in availability and service level management for distributed systems. Its Enterprise Automation product lines provide a flexible and scalable set of solutions for the entire IT enterprise including systems, applications, middleware, databases and Web technologies. Basis of Presentation The accompanying financial statements include the wholly-owned subsidiaries of Boole & Babbage, and Joint Systems & Technology (JST), a majority-owned Japanese subsidiary of Boole & Babbage. All significant intercompany accounts and transactions have been eliminated. As more fully described in Note 2, on January 16, 1997 the Company acquired MAXM Systems Corporation ("MAXM"). The transaction was accounted for using the pooling of interests method and the Company's consolidated financial statements for all prior periods have been restated to include the results of MAXM. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. Cash, Cash Equivalents and Short-Term Investments The Company considers all highly liquid investments that mature within ninety days of purchase to be cash equivalents. At September 30, 1997, cash equivalents consisted of $6,449,000 of time deposits with original maturities of 30 days or less. All of the Company's cash equivalents and short-term investments are classified as available-for-sale and are reported at fair value with unrealized gains and losses included in equity. Fair values are based upon quoted prices in an active market or if that information is not available, on quoted market prices of instruments of similar characteristics. At September 30, 1997, cost approximated fair value for all cash equivalents and short-term investments. All of the Company's short-term available-for-sale securities have a contractual maturity of one year or less. Realized gains and losses and declines in value judged to be other than temporary are included in interest income. To date, there have been no significant gains or losses realized on the Company's cash equivalents or short-term investments. The cost of securities sold is based upon the specific identification method. Short-term investments consist of the following: (Dollars in thousands) 1997 1996 1995 - ------------------------ --------- -------- --------- Municipal bonds and $ 9,600 $16,000 $ 7,500 notes Auction preferred stock 13,450 6,750 4,000 Taxable commercial - 2,000 1,500 paper Certificates of deposit - - 2,800 --------- -------- --------- $23,050 $24,750 $15,800 ========= ======== ========= Receivables Accounts receivable and installment receivables are net of allowances for doubtful accounts of $1,995,000, $2,277,000, and $2,103,000, at September 30, 1997, 1996, and 1995, respectively. The Company markets computer software systems to customers in diversified industries. Ongoing credit evaluations of its customers' financial condition are made and generally no collateral is required. Revenue Recognition Revenue from product licensing is recognized after delivery and customer acceptance without contingencies. Each license contract entitles the customer to maintenance and enhancements for a period ranging from six months to one year. The portion of the contract fee associated with providing maintenance is deferred and recognized ratably over the period as maintenance fees. The Company uses the same percentage to compute maintenance included in the product licensing amount as it uses to price subsequent year maintenance. Revenue and related royalty and agent commission costs from maintenance contracts are deferred and recognized ratably over the renewal periods. In connection with long-term leases of software, the net present value of the lease payments related to the product license is recognized as revenue upon the commencement of the lease. Related interest income and maintenance revenue are recognized ratably over the lease term. Revenue from sales through marketing agents in certain overseas markets is recorded at the gross sales price to the customer, and the commissions withheld by these agents are included in sales and marketing expense. 13 Equipment, Furniture and Leasehold Improvements Equipment, furniture and leasehold improvements are stated at cost. Depreciation and amortization are provided principally on a straight-line basis over useful lives ranging from 3 to 10 years. Assets under capital leases are amortized over the shorter of the asset life or the remaining lease term. Equipment, furniture and leasehold improvements consist of the following: ------------------------------- September 30, ------------------------------- (Dollars in thousands) 1997 1996 1995 - ----------------------- ---------- --------- ---------- Equipment $ 34,200 $ 37,938 $ 31,892 Furniture 10,381 9,288 8,571 Leasehold improvements 1,259 1,982 1,796 ---------- --------- ---------- 45,840 49,208 42,259 Accumulated depreciation 35,872 36,445 31,345 ---------- --------- ---------- $ 9,968 $ 12,763 $ 10,914 ========== ========= ========== Costs in Excess of Net Assets of Purchased Businesses The excess of the purchase price over the net assets of Boole & Babbage Europe, a wholly-owned subsidiary, is being amortized on a straight-line basis over 40 years. Costs in excess of net assets of purchased businesses are summarized below: -------------------------- September 30, -------------------------- (Dollars in thousands) 1997 1996 1995 - ---------------------------- -------- -------- -------- Costs in excess of net assets of purchased businesses $ 1,056 $ 1,056 $ 1,056 Accumulated amortization 422 396 369 -------- -------- -------- $ 634 $ 660 $ 687 ======== ======== ======== Marketable Securities Included in noncurrent other assets are marketable equity securities which are classified as available for sale and stated at fair value. Fair values are based upon quoted prices in an active market. -------------------------- September 30, -------------------------- (Dollars in thousands) 1997 1996 1995 - ---------------------------- -------- -------- -------- Cost of marketable securities $ 3,212 $ 2,850 $1,193 Unrealized gain 9,546 625 230 -------- -------- -------- $12,758 $ 3,475 $1,423 ======== ======== ======== The unrealized gain is recorded net of tax in a separate stockholders' equity account as follows: -------------------------- September 30, -------------------------- (Dollars in thousands) 1997 1996 1995 - ---------------------------- -------- -------- -------- Unrealized gain $ 9,546 $ 625 $ 230 Deferred income tax (3,855) (255) (98) -------- -------- -------- $ 5,691 $ 370 $ 132 ======== ======== ======== Purchased and Internally Developed Software Capitalized software consists of purchases of completed software products from outside vendors and internal costs associated with the development of software. Such costs are capitalized and amortized in accordance with guidelines set forth in Financial Accounting Standard No. 86, "Accounting for Costs of Computer Software to be Sold, Leased, or Otherwise Marketed" (FAS 86). All software costs are amortized to cost of revenue on the basis of each product's projected revenues or on a straight-line basis over the remaining estimated economic life of the products, whichever is greater. The estimated economic lives range from five to seven years. Amortization of capitalized software was $4,581,000, $4,814,000, and $5,315,000 for 1997, 1996, and 1995, respectively. Cost of Product Licensing Cost of product licensing consists of royalties paid to software authors and amortization of capitalized software. Cost of Maintenance Fees and Other Cost of maintenance fees and other consists of the cost of maintenance support, royalties paid to software authors, amortization of capitalized software, the cost to provide educational and consulting services, and the costs of certain computer services. Product Development Product development costs include expenditures for research and development, net of amounts capitalized. Research and development expenditures included in product development costs are as follows: --------------------------- Years Ended September 30, --------------------------- (Dollars in thousands) 1997 1996 1995 - ------------------------- -------- -------- --------- Total costs $26,379 $24,483 $23,163 Less amounts capitalized 4,022 3,611 3,050 -------- -------- --------- $22,357 $20,872 $20,113 ======== ======== ========= These costs do not include either the expenditures relating to the joint development project with IBM to develop systems management products in support of new CICS releases not the IBM reimbursements which totaled $1,375,000, and $2,080,000 in 1996, and 1995, respectively. In 1997, the company acquired the rights to a client/server software product for $1,000,000 which was expensed as purchased research and development. This expense in included under the caption "acquisition and nonrecurring costs" on the consolidated statements of income. Accounting for Income Taxes Income taxes are computed in accordance with Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes." Net Income Per Share Net income per share is computed using the weighted average number of common shares outstanding and shares issuable assuming the exercise of outstanding options using the treasury stock method. Fully diluted earnings per share is not disclosed because it is not materially different from primary earnings per share. 14 Foreign Currency The assets and liabilities of foreign subsidiaries are translated into U.S. dollars at current exchange rates. Revenue and expense accounts of these operations are translated at average exchange rates prevailing during the year. Translation gains and losses are included as an adjustment to stockholders' equity. The Company has a hedging strategy to attempt to minimize the short-term impact of foreign currency fluctuations on its net asset position in foreign currencies. The foreign currency forward contracts have a term of ninety days or less and settle immediately after the end of the fiscal year. The contracts are marked-to-market and the fair value upon settlement approximates the carrying value. The gains and losses on these contracts are netted with gains and losses on the revaluation of the net asset position and are included in income in the period in which the exchange rates change. Aggregate transaction gains and (losses) included in determining net income in 1997, 1996, and 1995 were approximately $992,000, ($958,000), and ($497,000), respectively. These amounts are included in the consolidated statements of income under the caption "interest and other income, net." The Company had approximately $50.4 million, $34.5 million and $26.3 million of open forward exchange contracts at September 30, 1997, 1996 and 1995, respectively. Recent Accounting Pronouncements In February 1997, the Financial Accounting Standards Board issued Statement No. 128, "Earning per Share," which is required to be adopted on December 31, 1997. At that time, the Company will be required to change the method currently used to compute earnings per share and to restate all prior periods. Under the new requirements for calculating primary earnings per share, the dilutive effect of stock plans will be excluded. The impact is expected to result in an increase in primary earnings for the years ended September 30, 1997 and 1996 of approximately $.06 and $.05 per share, respectively. The impact of Statement 128 in the calculation of fully diluted earnings per share is not expected to be material. SOP 97-2, "Software Revenue Recognition," was issued in November 1997. Implementation of SOP 97-2 is required for periods ending after December 15, 1997 and provides guidance on applying GAAP in recognizing revenue on software transactions. The impact of SOP 97-2 on the results of operations is not expected to be material. Statement of Financial Accounting Standards No. 130, ("SFAS 130"), "Reporting Comprehensive Income" was issued in June 1997. Implementation of SFAS 130 is required for periods ending after December 15, 1997 and establishes standards for reporting and display of comprehensive income and its components in a full set of general-purpose financial statements. Statement of Financial Accounting Standards No. 131, ("SFAS 131"), "Disclosures about Segments of an Enterprise and Related Information" was issued in June 1997. Implementation of SFAS 131 is required for periods ending after December 15, 1997 and establishes standards for the way that public business enterprises report information about operating segments in annual financial statements and requires that those enterprises report selected information about operating segments in interim financial reports issued to shareholders. Reclassifications Beginning in the first quarter of 1997, changes have been made in the classification of revenue and operating expense in the Consolidated Statements of Income. 1996 and 1995 have been reclassified to conform to these changes. "Product licensing" consists of licensing of software products (net of the bundled maintenance). "Maintenance fees and other" consists of revenue from maintenance, educational and consulting services, hardware sales, computer services and royalties from IBM related to the jointly developed CICS product now being sold by IBM. "Cost of product licensing" includes royalties paid to independent software authors and the amortization of purchased and internally developed software. "Cost of maintenance fees and other" includes the cost of maintenance support as well as royalties paid to independent software authors, amortization of purchased and internally developed software, the cost to provide educational and consulting services to customers and costs related to operating the computer services division. 2. Acquisitions On January 16, 1997, the Company acquired all of the outstanding capital stock of MAXM Systems Corporation ("MAXM"), a privately held company, in exchange for 1,137,115 shares of Boole & Babbage common stock, 10% of which are held in escrow with an independent third-party escrow agent. The Company incurred a charge in the quarter ending March 31,1997 (which is included in the income statement line "acquisition and nonrecurring costs") in connection with activities to complete this acquisition and eliminate redundant facilities and personnel. The acquisition costs consisted primarily of $4.0 million of termination costs related to reseller agreements, $2.8 million of employee costs, $1.6 million of costs related to closing redundant facilities and $1.9 million of legal, accounting, broker fees and other. The transaction was accounted for using the pooling of interests method and the Company's consolidated financial statements for all prior periods have been restated to include the results of MAXM. The table below sets forth the composition of combined revenues and net income (loss) for the periods indicated. Information for the year ended September 30, 1997 with respect to MAXM reflects the period October 1, 1996 through January 16, 1997, the date MAXM was acquired. The net loss of MAXM in 1995 includes $1,507,000 of extraordinary gain, net of taxes, from forgiveness of debt. 15 --------------------------------- Years Ended September 30, --------------------------------- (Dollars in thousands) 1997 1996 1995 - ----------------------------------------------------- Revenues: Boole & Babbage $195,032 $165,077 $152,244 MAXM (Pre- acquisition) 2,065 15,074 16,783 ----------- ---------- ---------- Consolidated $197,097 $180,151 $169,027 ----------- ---------- ---------- Net income (loss): Boole & Babbage $ 27,908 $ 18,040 $ 13,948 Acquisition costs (10,309) - - MAXM (4,130) (6,583) (825) ----------- ---------- ---------- Consolidated $ 13,469 $ 11,457 $ 13,123 =========== ========== =========== 3. Installment and Other Receivables Installment and other receivables consists of lease contracts receivables, sales tax and value-added tax on trade receivables, and other receivables. The Company's leasing operations consist of the leasing of various computer software products under term or perpetual licensing agreements with payment periods from one to five years. Following are the components of the lease contracts receivable: ----------------------------- September 30, ----------------------------- (Dollars in thousands) 1997 1996 1995 - ------------------------- --------- --------- --------- Minimum lease payments receivable $124,792 $89,054 $62,553 Less unearned interest 13,105 8,853 6,399 --------- --------- --------- Net investment in sales type leases 111,687 80,201 56,154 Amount due within one year 59,397 41,060 23,931 --------- --------- --------- Amount due after one year $ 52,290 $39,141 $32,223 --------- --------- --------- Minimum lease payments receivable during each of the succeeding fiscal years are as follows: - ------------------ --------------------------------- Year (Dollars in thousands) - ------------------ --------------------------------- 1998 $ 66,094 1999 31,214 2000 19,704 2001 6,941 2002 839 ---------- $124,792 ========== The Company periodically sells portions of its lease contracts receivable to finance companies subject to limited recourse provisions. The total lease contracts receivables sold during 1997 and 1996 had present values of $8,140,000 and $15,849,000, respectively. No lease contract receivables were sold during 1995. The uncollected present value of receivables that have been sold was approximately $18,478,000, $17,842,000, and $4,050,000 at September 30, 1997, 1996 and 1995, respectively. 4. Income Taxes Pretax income consists of the following: ----------------------------- Years Ended September 30, ----------------------------- (Dollars in thousands) 1997 1996 1995 - ------------------------ --------- --------- --------- Domestic $ 7,236 $ 7,599 $ 7,661 Foreign 13,758 10,873 9,031 --------- --------- --------- $20,994 $18,472 $16,692 ========= ========= ========= The provision for taxes on income consists of the following: ------------------------------- Years Ended September 30, ------------------------------- (Dollars in thousands) 1997 1996 1995 - ----------------------- --------- --------- --------- Federal Current $7,637 $4,756 $1,884 Deferred (3,921) (1,141) (1,119) ---------- --------- ---------- 3,716 3,615 765 State Current 1,515 1,013 1,075 Deferred (1,107) (322) (614) ---------- --------- ---------- 408 691 461 Foreign Current 3,145 2,880 4,001 Deferred 256 (171) (151) ---------- --------- --------- 3,401 2,709 3,850 ---------- --------- ---------- $7,525 $7,015 $5,076 ========== ========= ========== No provision for residual federal taxes has been made on approximately $46,000,000 of accumulated undistributed earnings of the Company's foreign subsidiaries, since it is the Company's intention to permanently invest such earnings in its foreign operations. Determination of the amount of unrecognized deferred tax liabilities is not practicable. The provision for taxes on income differs from the amount computed by applying the statutory tax rate of 35% to income before taxes as follows: -------------------------- Years Ended September 30, -------------------------- 1997 1996 1995 --------- ------- -------- Computed expected tax provision 35.0% 35.0% 35.0% State income tax, net of federal benefit 1.3% 0.9% 1.0% Permanently invested earnings of foreign subsidiaries, net of foreign income taxes (10.6%) (8.0%) (9.4%) Goodwill amortization and other permanent items 2.7% 0.6% 0.5% Research & development (3.1%) (0.9%) (2.7%) credit Net change in valuation allowance 10.4% 11.4% 6.4% Other 0.1% (1.0%) (0.4%) --------- ------- -------- 35.8% 38.0% 30.4% ========= ======= ======== Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant 16 components of the Company's deferred tax assets are as follows: ---------------------------------- September 30, ---------------------------------- (Dollars in thousands) 1997 1996 1995 - ---------------------------- -------- -------- -------- Deferred Tax Assets: Net operating loss carryforwards $ 18,235 $ 16,578 $ 14,036 Foreign tax credit carryforwards 36 29 17 Research credit carryforwards -- 52 898 AMT credit carryforwards -- -- 650 Deferred maintenance revenue 16,078 11,307 9,564 Accrued expenses 2,784 2,134 1,694 Bad debt allowance 612 563 520 Other 644 594 506 -------- -------- -------- Total gross deferred tax asset 38,389 31,257 27,885 Less valuation allowance 14,603 12,470 11,256 -------- -------- -------- Total deferred tax asset 23,786 18,787 16,629 -------- -------- -------- Deferred Tax Liabilities: Unrealized gain on marketable securities (3,850) (255) (98) Software capitalization, net (3,211) (3,065) (2,943) Other -- (346) -- -------- -------- -------- Total deferred tax liability (7,061) (3,666) (3,041) -------- -------- -------- Net deferred tax asset $ 16,725 $ 15,121 $ 13,588 -------- -------- -------- The net valuation allowance increased $2,133,000 from 1996 to 1997 and $1,214,000 from 1995 to 1996 primarily as a result of establishing allowances on pre-acquisition net operating losses of MAXM and net operating losses incurred in certain foreign tax jurisdictions. None of the allowance at September 30, 1997 is attributable to stock option deductions; consequently, any reversal of the valuation allowance will be reflected in a lower tax rate. Management believes future taxable income will be sufficient to realize the deferred tax benefit of the net deferred tax asset. At September 30, 1997, the Company had federal net operating loss carryforwards of approximately $43.8 million that will expire between 2003 and 2012. The losses were incurred by MAXM prior to acquisition and are subject to limitation. 5. Leases, Notes Payable and Contingencies Operating Leases The Company leases its facilities and certain equipment under operating leases expiring at various dates through 2018. Minimum lease commitments for facilities and equipment at September 30, 1997 are as follows: - ------------------------- -------------------- Year (Dollars in thousands) - ------------------------- -------------------- 1998 $ 8,125 1999 6,815 2000 3,789 2001 1,113 2002 449 Thereafter 2,156 ---------- $22,447 ========== Total rent expense under operating leases was $8,692,000, $8,793,000 and $8,670,000, for 1997, 1996, and 1995, respectively. Capital Leases The Company leases certain computer equipment under long-term capital leases. Capitalized costs of $12,721,000, $16,484,000, and $12,898,000, are included in equipment, furniture and leasehold improvements at September 30, 1997, 1996 and 1995, respectively. Accumulated depreciation amounted to $10,288,000, $12,378,000, and $10,478,000, at September 30, 1997, 1996 and 1995, respectively. The following is a schedule of future minimum lease payments under long-term capital leases together with the present value of the net minimum lease payments as of September 30, 1997: - ---------------------------------- -------------------- Year (Dollars in thousands) - ---------------------------------- -------------------- 1998 $ 1,114 1999 780 2000 596 2001 615 ---------- Total minimum lease payments 3,105 Less amount representing interest 377 ---------- Present value of future minimum lease payments 2,728 Amount due within one year 933 ---------- Amount due after one year $ 1,795 ========== Notes Payable The Company incurred a note payable as a result of an acquisition in 1994. The non-interest bearing obligation, net of discount based on an imputed interest rate of 8.25%, had a balance of $256,000 at September 30, 1997. The Company has an equipment note at 8.25% which had a balance of $113,000 at September 30, 1997. The notes payable are due as follows: - ----------------------- ------------------------ Year (Dollars in thousands) - ----------------------- ------------------------ 1998 $319 1999 50 ---------- Total notes payable 369 Amount due within one year 319 ---------- Amount due after one year $ 50 ========== Total interest expense related to capital lease obligations and notes payable was $482,000, $419,000, and $623,000 in 1997, 1996 and 1995, respectively. Line of Credit During 1995, the Company entered into arrangements for the Japanese subsidiary for two lines of credit totaling $1,800,000. As of September 30, 1997, 1996 and 1995, there were outstanding balances of $1,016,000, $990,000 and $400,000, respectively. Interest rates on these lines of credit range from 1.63% to 1.75% per annum. During 1995, MAXM Systems Corporation entered into a line of credit arrangement for $2,500,000. As of September 30, 1997 the balance has been paid in full. 17 At September 30, 1996, there was an outstanding balance of $2,160,000. The interest rate on the line of credit was prime rate plus 1.5%. Litigation 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 effect on the Company's financial position or results of operations. 6. Common Stock Stock option plans The 1995 Stock Option Plan (the 1995 plan), as amended, authorizes the grant of up to 1,125,000 shares of the Company's common stock to key employees and consultants of the Company. The exercise price is 100% of the fair market value of the stock on the date such options are granted. The 1993 Nonemployee Directors' Stock Option Plan (the 1993 plan), as amended, authorizes the grant of up to 168,750 shares of the Company's common stock to nonemployee directors of the Company. The exercise price is 100% of the fair market value of the stock on the date such options are granted. The 1986 Supplemental Stock Option Plan (the 1986 plan), as amended, which authorized the grant up to 7,965,000 shares of the Company's common stock under terms substantially the same as the 1995 Plan, expired November 1996. Options outstanding under all plans are currently exercisable to the extent that the optionees have vested under the terms of their grant. Options generally vest at a rate of twenty-five percent per year and expire 10 years after the date of grant. The number of options exercisable under all plans was 2,388,773, 2,369,799, and 2,086,124 at September 30, 1997, 1996 and 1995, respectively. Employee Stock Purchase Plan The Company adopted an Employee Stock Purchase Plan and, as amended, has reserved an aggregate total of 2,500,000 shares. Purchase rights under the plan are granted at 85% of the lesser of the market value on the offering date or the exercise date. Shares purchased under the plan were 132,262, 131,561 and 141,380 during 1997, 1996, and 1995, respectively. At September 30, 1997 there were 580,623 shares available for future purchases of which 59,911 were committed to be issued in October 1997. Stock Incentive Plan In September 1987, the Company adopted a Stock Incentive Plan and, as amended, entitles employees who have reached certain anniversary dates with the Company to receive the Company's common stock for each year of service. Shares issued under the plan were 5,540, 6,952, and 11,260 during 1997, 1996, and 1995, respectively. The Board has reserved 134,438 shares for issuance under the plan. At September 30, 1997, there were 5,622 shares available for future awards. The following table summarizes activity of the stock option plans for the three years ended September 30, 1997:
Option Activity --------------------------------- Weighted Average Options Available Exercise for Future Grant Number Price ----------------- --------------- ----------------- Balance, September 30, 1994 523,022 3,512,793 $ 4.92 Authorized increase 1,350,000 -- Options granted (1,207,125) 1,207,125 11.18 Options exercised -- (486,137) 3.92 Options canceled 115,068 (115,068) 6.75 ----------------- --------------- ----------------- Balance, September 30, 1995 780,965 4,118,713 6.83 Authorized increase 1,125,000 -- Options granted (930,488) 930,488 16.06 Options exercised -- (620,682) 4.65 Options canceled 92,136 (92,136) 9.33 ----------------- --------------- ----------------- Balance, September 30, 1996 1,067,613 4,336,383 9.10 Options granted (592,500) 592,500 22.29 Options exercised -- (732,412) 5.88 Options canceled 183,630 (183,630) 14.09 - ----------------------------------- ----------------- --------------- ----------------- Balance, September 30, 1997 658,743 4,012,841 $11.37 - ----------------------------------- ----------------- --------------- -----------------
18 20 The following tables summarize the information about options outstanding at September 30, 1997: Outstanding options ---------------------------------- Weighted Weighted Number of Average Average Range of Shares Contractual Exercise Exercise (in Life (in Price Prices thousands) years) - ---------------- ----------- ----------- ---------- $2.74-$8.00 1,497 4.95 $ 5.01 $8.26-$16.00 1,703 7.71 12.55 $16.25-$33.66 813 9.26 20.65 - ---------------- ----------- ----------- ---------- Total 4,013 6.99 $11.37 ================ =========== =========== ========== Exercisable options -------------------------- Number of Weighted Shares Average (in Exercise Range of Exercise Prices thousands) Price - ------------------------ ------------- ------------ $2.74-$8.00 1,420 $ 4.89 $8.26-$16.00 894 11.68 $16.25-$33.66 75 16.95 - ------------------------ ------------- ------------ Total 2,389 $ 7.81 ======================== ============= ============ These options will expire if not exercised at specific dates ranging from October 1997 to September 2007. Prices for options exercised during the three-year period ended September 30, 1997 ranged from $2.30 to $16.83. Pro forma information The Company has elected to follow APB Opinion No. 25, "Accounting for Stock Issued to Employees," in accounting for its employee stock options because, as discussed below, the alternative fair value accounting provided for under SFAS No. 123, "Accounting for Stock-Based Compensation," requires the use of option valuation models that were not developed for use in valuing employee stock options. Under APB No. 25, because the exercise price of the Company's employee stock options equals the market price of the underlying stock on the date of grant, no compensation expense is recognized in the Company's financial statements. Pro forma information regarding net income and earnings per share is required by SFAS No. 123. This information is required to be determined as if the Company had accounted for its employee stock options (including shares issued under the Employee Stock Purchase Plan, collectively called "options") granted subsequent to September 30, 1995 under the fair value method of that statement. The fair value of options granted in fiscal years 1996 and 1997 reported below has been estimated at the date of grant using a Black-Scholes option pricing model with the following weighted average assumptions: Employee Employee Stock Stock Purchase Options Plan ------------ ------------- 1997 1996 1997 1996 - ------------------------ ------ ----- ------ ------ Expected life (in years) 5.5 5.5 .5 .5 Risk-free interest rate 6.2% 6.3% 5.7% 5.5% Volatility .43 .42 .50 .40 - ------------------------ ------ ----- ------ ------ The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options that have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions, including the expected stock price volatility. Because the Company's options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in the opinion of management, the existing models do not necessarily provide a reliable single measure of the fair value of its options. The weighted average estimated fair value of employee stock options granted during 1997 and 1996 was $10.83 and $7.70 per share, respectively. The weighted average estimated fair value of shares granted under the Employee Stock Purchase Plan during 1997 and 1996 was $6.00 and $4.51, respectively. For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over the options' vesting period. The Company's pro forma information follows (in thousands except for earnings per share information): 1997 1996 - --------------------------- --------- ---------- Pro forma net income $11,344 $10,689 Pro forma earnings per $ 0.57 $ 0.56 share - --------------------------- --------- ---------- The effects on pro forma disclosures of applying SFAS No. 123 are not likely to be representative of the effects on pro forma disclosures of future years. Because SFAS No. 123 is applicable only to options granted subsequent to September 30, 1995, the pro forma effect will not be fully reflected until 2000. 19 7. Foreign Operations The company operates predominantly in one industry segment. The following table summarizes selected financial information of the Company's operations by geographic location: ----------------------------------- Years Ended September 30, ----------------------------------- (Dollars in thousands) 1997 1996 1995 - -------------------- ----------- ----------- ----------- Revenues: United States and Canada $ 78,574 $ 69,242 $ 70,076 Europe 91,322 87,138 75,390 Other 27,201 23,771 23,561 ----------- ----------- ----------- Consolidated $ 197,097 $180,151 $169,027 ----------- ----------- ----------- Operating income: United States and Canada $ 2,252 $ 1,658 $ 1,983 Europe 7,837 10,084 7,718 Other 1,725 1,087 3,084 ----------- ----------- ----------- Consolidated $ 11,814 $ 12,829 $ 12,785 ----------- ----------- ----------- Identifiable assets: United States and Canada $ 144,137 $126,791 $106,762 Europe 115,966 98,917 80,248 Other 12,596 11,773 8,392 Eliminations (12,555) (12,941) (12,575) ----------- ----------- ----------- Consolidated $ 260,144 $224,540 $182,827 ----------- ----------- ----------- Included in operating income but excluded from revenues are royalties charged to international operations by domestic operations which aggregated $21,464,000, $21,192,000 and $17,550,000 in 1997, 1996, and 1995, respectively. Market for the Registrant's Common Stock and Related Stockholder Matters The Company's common stock has been traded in the over-the-counter market under the NASDAQ symbol "BOOL" since the Company's initial public offering on February 3, 1984. The number of stockholders of record of the Company's common stock as of October 31, 1997 was 591. The Company has not paid any cash dividends since 1978 on its common stock, with the exception of payment of partial shares as a result of the stock splits in 1994, 1995 and 1996. The Company anticipates that for the foreseeable future, it will continue to retain its earnings for use in its business. The table on page 2 reflects the range of high and low closing bid quotations for each period indicated as reported by NASDAQ. These quotations represent prices between dealers without adjustment for retail markups, markdowns or commissions, and may not represent actual transactions. The Board of Directors and Stockholders Boole & Babbage, Inc. We have audited the accompanying consolidated balance sheets of Boole & Babbage, Inc. as of September 30, 1997, 1996 and 1995, and the related consolidated statements of income, stockholders' equity, and cash flows for the years then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We did not audit the financial statements of MAXM Systems Corporation, which statements reflect total assets and a net loss constituting $14.5 million and $6.6 million, respectively, of the related 1996 consolidated financial statements totals, and which statements reflect total assets and a net loss constituting $15.9 million and $0.8 million, respectively, of the related 1995 consolidated financial statements totals. Those statements were audited by other auditors whose report has been furnished to us, and our opinion, insofar as it relates to data included for MAXM Systems Corporation, is based solely on the report of the other auditors. We conducted our audits in accordance with generally accepted auditing standards. These standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, based on our audits and the report of the other auditors, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Boole & Babbage, Inc. at September 30, 1997, 1996 and 1995, and the consolidated results of its operations and its cash flows for the years then ended in conformity with generally accepted accounting principles. Ernst & Young LLP San Jose, California October 24, 1997 20 EX-21.1 4 SUBSIDIARIES OF REGISTRANT Exhibit 21.1 Subsidiaries of Registrant Boole & Babbage, Europe Boole & Babbage, Australasia Pty Ltd. Boole & Babbage a.s. Joint Systems & Technology, Inc. MAXM Systems Limited MAXM Systems Corporation of Canada MAXM Systems Corporation of Germany 16 EX-23.1 5 CONSENT OF ERNST & YOUNG LLP Exhibit 23.1 CONSENT OF ERNST & YOUNG LLP, INDEPENDENT ACCOUNTANTS We consent to the incorporation by reference in this Annual Report (Form 10-K) of Boole & Babbage, Inc. of our report dated October 24, 1997, included in the 1997 Annual Report to Stockholders of Boole & Babbage, Inc. Our audits also included the financial statement schedule of Boole & Babbage, Inc. listed in Item 14(a). This schedule is the responsibility of the Company's management. Our responsibility is to express an opinion based on our audits. In our opinion, the financial statement schedule referred to above, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein. We also consent to the incorporation by reference in the Registration Statements (Form S-8 Nos. 33-13837, 33-39248, 33-65145, 333-32341, 33-79782 and 333-02723) pertaining to the 1986 Incentive Stock Option Plan, the 1986 Supplemental Stock Option Plan, the Employee Stock Purchase Plan, the 1993 Nonemployee Directors' Stock Option Plan and the 1995 Stock Option Plan of Boole & Babbage, Inc. of our report dated October 24, 1997, with respect to the consolidated financial statements incorporated herein by reference, and our report included in the preceding paragraph with respect to the financial statement schedule included in this Annual Report (Form 10-K) of Boole & Babbage, Inc. \Ernst & Young LLP\ San Jose, California December 22, 1997 17 EX-23.2 6 CONSENT OF COOPERS & LYBRAND LLP Exhibit 23.2 CONSENT OF COOPERS & LYBRAND LLP, INDEPENDENT ACCOUNTANTS We consent to the inclusion in the Annual Report of Boole & Babbage, Inc. on Form 10-K of our report dated April 10, 1997, on our audits of the consolidated financial statements of MAXM Systems Corporation as September 30, 1996 and 1995, and for the years ended September 30, 1996 and 1995, as included in the Form 8-K/A of Boole & Babbage, Inc. (File No. 000-13258). \Coopers & Lybrand LLP\ McLean, Virginia December 22, 1997 EX-23.3 7 REPORT OF COOPERS & LYBRAND LLP Exhibit 23.3 REPORT OF COOPERS & LYBRAND LLP, INDEPENDENT ACCOUNTANTS To the Board of Directors of MAXM Systems Corporation We have audited the accompanying consolidated balance sheets of MAXM Systems Corporation (the Company) as of September 30, 1996 and 1995, and the related consolidated statements of operations, stockholders' deficit, and cash flows for the years then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. As discussed in Note 1, the Company has been acquired by Boole & Babbage, Inc. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of MAXM Systems Corporation as of September 30, 1996 and 1995, and the consolidated results of their operations and their cash flows for the years then ended in conformity with generally accepted accounting principles. \Coopers & Lybrand LLP\ Washington, DC April 10, 1997 19 EX-27 8 FINANCIAL DATA SCHEDULE
5 1,000 12-MOS SEP-30-1997 OCT-01-1996 SEP-30-1997 33,923 23,050 146,166 1,995 0 159,521 45,840 35,872 260,144 101,515 0 0 0 20 118,482 260,144 197,097 197,097 0 34,781 150,502 0 1,638 20,994 7,525 13,469 0 0 0 13,469 0.67 0.67
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