-----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, TjvnhJrhU9fTN6QzLeK7ISVud1QKGjEI8oVhzNHq+qycqKXwpOmrBPgKh6qVtKBC MHTs+gLWFUs/BPjqcwkm3g== 0000950005-98-000995.txt : 19981230 0000950005-98-000995.hdr.sgml : 19981230 ACCESSION NUMBER: 0000950005-98-000995 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19980930 FILED AS OF DATE: 19981229 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: 98777340 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 FORM 10-K 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, 1998 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from______________________to______________________ Commission File Number: 0-132-58 BOOLE & BABBAGE, INC. (Exact name of registrant as specified in its charter) Delaware 94-1651571 (State or other jurisdiction of (IRS Employer incorporation or organization) Identification No.) 3131 Zanker Road, San Jose, 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 December 8, 1998, was approximately $773,344,000. 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 December 8, 1998 was 27,694,517. DOCUMENTS INCORPORATED BY REFERENCE 1. Portions of Annual Report to Stockholders for fiscal year ended September 30, 1998 - Items 5, 6, 7, 8 and 14. BOOLE & BABBAGE, INC. FORM 10-K YEAR ENDED SEPTEMBER 30, 1998 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.................................................................. 10 12. Security Ownership of Certain Beneficial Owners and Management.......................... 15 13. Certain Relationships and Related Transactions.......................................... 17 PART IV 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K........................ 18 Signatures................................................................................... 21
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 and performance of their IT infrastructure and the applications it supports 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, middleware 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. 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 600 customer sites 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. 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 a NT, UNIX or web-enabled 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/400, 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 enterprise servers. MainView products provide flexibility and efficiency in data collection across multipleOS/390 systems including Parallel 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 OS/390 operating system as an enterprise server operating system. With the introduction of the System/390 Parallel processors, which essentially reproduce the OS/390 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 manages message-queuing middleware products such as MQSeries and MSMQ. Platform coverage spans S/390, HP-UX, Sun Solaris, DEC VMS, AIX, OS/400, OS/2, and Windows NT. 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 components, such as queue managers, queues and channels, as well as the IT elements in the surrounding network. Command MQ is highly interoperable with enterprise management consoles, including HP OpenView, Tivoli TME 10, and Boole & Babbage COMMAND/POST. 4 SpaceView: End-to-end Storage Management and Automation Boole & Babbage sells products that address the management and automation of mainframe and client/server disk (DASD) storage subsystems. Its SpaceView offering provides enterprise-wide, 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 17.5% 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 1998, 1997 or 1996. 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. 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. 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. 6 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 1998 the Company reinvested 17% 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 $24,058,000, $22,357,000 and $20,872,000 for the years ended September 30, 1998, 1997 and 1996, respectively. Employees As of September 30, 1998 Boole & Babbage employed approximately 930 persons, including sales, marketing and related activities; product development and customer support; and management, administration and finance. Of such employees, approximately 555 are employed in the United States and approximately 375 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 Platinum Technology, Inc., ("Platinum"), filed a Complaint and Motion for Preliminary Injunction on Nov. 13, 1998 in the Circuit Court of the Eighteenth Judicial Circuit Chancery Division, Dupage County, Wheaton, Ill. The complaint alleges that the Company is in breach of a standstill and exclusive negotiation agreement with Platinum, and further, that BMC Software, Inc. tortiously interfered with such alleged agreement when it negotiated and executed the merger agreement announced on Nov. 2, 1998. Platinum seeks entry of an injunction voiding this merger agreement and requiring the Company to negotiate exclusively with it for an uninterrupted 120-day period. The Company is currently evaluating the complaint but believes that the claims by Platinum are without merit, and intends to vigorously defend itself against the allegations in the complaint. The Company continues to believe that the BMC merger agreement is in the best interests of its shareholders. 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, 1998. 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 29 of the 1998 Annual Report to the Stockholders is incorporated herein by reference. ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA The information contained under the caption, "Selected Consolidated Financial Data" in the 1998 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 1998 Annual Report to Stockholders on pages 3 - 11 is incorporated herein by reference. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The information contained under the caption, "Management's Discussion and Analysis of Financial Condition and Results of Operations" in the 1998 Annual Report to Stockholders on pages 3 - 11 is incorporated herein by reference. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Consolidated financial statements for Boole & Babbage, Inc. are contained on pages 12 - 15 of the 1998 Annual Report to Stockholders and are incorporated herein by reference. Supplementary data is contained on page 1 of the 1998 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 FRANKLIN P. JOHNSON, JR. Franklin P. Johnson, Jr., age 70, has served as a director of the Company since 1967 and was elected Chairman of the Board in 1971. He is a general partner of Asset Management Partners, a venture capital partnership, and other related venture capital partnerships. He has been a venture capital investor for more than five years. Mr. Johnson is also a director of Amgen Inc., Applied Microcircuits Corporation and IDEC Pharmaceuticals Corp. PAUL E. NEWTON Paul E. Newton, age 55, has served as a director of the Company since April 1988 and was appointed President and Chief Executive Officer of the Company in October 1991. He served as President and director of Ingres Corporation, a relational database software company ("Ingres"), from January 1987 to October 1990. Mr. Newton served as Chief Operating Officer of Ingres from January 1987 until September 1988 and as Chief Executive Officer of Ingres from September 1988 through October 1990. JOHANNES S. BRUGGELING Johannes S. Bruggeling, age 53, has served as a director of the Company since July 1988. He was appointed Executive Vice President, International Operations of the Company and President, Boole & Babbage Europe, in October 1991. He was a co-founder in 1978 of The European Software Company, now the Company's wholly-owned subsidiary, Boole & Babbage Europe, and was its President from 1982 until April 1989. He also served as President and Chief Executive Officer of the Company from July 1988 through October 1991. TERRY R. MCGOWAN Terry R. McGowan, age 51, has served as a director of the Company since February 1992. Mr. McGowan has been the Chairman of the Board of Action Technologies, Inc., a software company, since June 1997. He was President and Chief Executive Officer from May 1995 until June 1997. Previously, he served as President and Chief Operating Officer of KnowledgeWare, Inc., a computer-aided software company, from August 1985 until September 1991. Mr. McGowan is an advisor to the board of directors of several other software companies. DAVID B. WRIGHT David B. Wright, age 49, served as director of the Company since February 1998. Mr. Wright is President and CEO of Amdahl Corporation, a hardware and software company. He joined Amdahl Corporation in 1987 as a regional Vice President of Sales. After being named Vice President of Commercial U.S. Sales in 1989 and Vice President and General Manager of European Operations in 1992, he was appointed Vice President and General Manager of Worldwide Field Operations in 1993. In January 1996 he became Executive Vice President of the Enterprise Computing Group. From 1976 to 1987, Mr. Wright was employed in various staff and management positions at IBM Corporation. RAYMOND E. CAIRNS Raymond E. Cairns, age 66, has served as a director of the Company since November 1992. In 1992, Mr. Cairns retired from E.I. Dupont De Nemours, a chemical company, where he had been employed since 1962, most recently as Senior Vice President - Information Systems and Member of the Corporate Operating Committee. 9 EXECUTIVE OFFICERS Officers are appointed annually by the Board and serve at the discretion of the Board. Set forth below is information regarding executive officers of the Company who are not directors of the Company:
Name Age Position - -------------------- --- ----------------------------------------------------------- James E. C. Black 50 Senior Vice President, Engineering Richard A. Harrit 47 Senior Vice President, North American Operations Arthur F. Knapp, Jr. 50 Senior Vice President, Chief Financial Officer and Secretary Saverio Merlo 47 Senior Vice President, Marketing
Mr. Black joined the Company in April 1994 as Senior Vice President of Engineering. From 1991 to March 1994, he was a principal at Diablo Management Group, an organization specializing in assisting companies with dynamic market changes. Previously, Mr. Black held technology positions at Ingres Corporation, UCCEL Corporation, a software company, Texas Instruments, an electronics company, and CAP Gemini, a computer consulting company. Mr. Harrit joined the Company in July 1997 as Senior Vice President, North American Operations. Prior to joining the Company, Mr. Harrit was President of AmeriData Computer Rentals, a Division of AmeriData/GE. From June 1990 until October 1994, Mr. Harrit served as President of Genstar Rental Electronics, Inc. Both of these companies were in the business of renting and leasing high technology equipment to industry and government. Mr. Knapp joined the Company in November 1991 as Chief Financial Officer and Senior Vice President. From March 1989 to October 1991, he was employed by Legent Corp., a worldwide developer and distributor of productivity enhancement system software, serving as Vice President and Chief Financial Officer. From 1984 through March 1989, he was employed by Duquesne Systems, Inc. (a predecessor company to Legent Corp.), where he served as Vice President, Controller and Chief Financial Officer. Mr. Knapp is a Certified Public Accountant and a Certified Management Accountant. Mr. Merlo has been employed by the Company for the past 14 years in various operational, technical and marketing capacities. After a four-year tenure as director of the MVS product center, Mr. Merlo served as Vice President of Marketing for Boole & Babbage Europe from 1989 until 1991. During fiscal 1991, Mr. Merlo was appointed Senior Vice President of Marketing. ITEM 11. EXECUTIVE COMPENSATION COMPENSATION OF DIRECTORS Each non-employee director of the Company receives a quarterly retainer fee of $2,000 (plus $5,250 for serving as Chairman of the Board) and a per meeting fee of $400 (except for the Chairman). In the fiscal year ended September 30, 1998, the total compensation paid to non-employee directors was $59,000. The members of the Board of Directors are also eligible for reimbursement for their expenses incurred in connection with attendance at Board meetings in accordance with Company policy. Under the terms of the 1993 Non-Employee Directors' Stock Option Plan, each non-employee director of the Company (except the Chairman) automatically receives an option to purchase 7,500 shares of the Company's Common Stock, as an incentive to encourage maximum efforts for the success of the Company and continued service on the Board. (Prior to an October 30, 1997 amendment to this plan, non-employee directors received options to purchase 10,125 shares annually.) Non-employee directors joining the Board for the first time receive an option to purchase 30,000 shares. In the fiscal year ended September 30, 1998, Messrs., McGowan and Cairns were each granted options to purchase 7,500 shares of Common Stock pursuant to the Company's 1993 Non-Employee Directors' Stock Option Plan at an exercise price of $21.42 per share, which was equal to the fair market value of the Company's Common Stock on the date of the grant. Mr. Wright, elected to the Board on February 18, 1998, was granted options to purchase 30,000 shares of Common Stock pursuant to the Company's 1993 Non-Employee Directors' Stock Option plan at an exercise price of $22.17 per share, which was equal to the fair market value of the Company's Common Stock on the date of the grant. 10 COMPENSATION OF EXECUTIVE OFFICERS SUMMARY OF COMPENSATION The following table shows for the fiscal years ended September 30, 1996, 1997 and 1998, compensation awarded or paid to, or earned by the Company's Chief Executive Officer and its five other executive officers at September 30, 1998 (the "Named Executive Officers"):
SUMMARY COMPENSATION TABLE Annual Compensation Long Term Compensation - --------------------------------------------------------------------------- -------------------------------- Securities All Other Name and Underlying Compen- Principal Salary Bonus Options(1) sation(2) Position Year ($) ($) (#) ($) - ---------------------------------- --------- ------ ----- ----------------- -------------- Mr. Paul E. Newton 1998 347,304 495,266 200,000 2,000 President and Chief Executive Officer 1997 330,768 358,222 -- 1,125 1996 315,000 266,805 180,000 683 Mr. Johannes S. Bruggeling 1998 314,045 261,434 100,000 -- Executive Vice President, 1997(3) 298,259 246,004 -- -- International Operations and 1996 318,613 216,558 112,500 -- President, Boole & Babbage Europe Mr. James E. C. Black 1998 201,720 184,178 90,000 2,000 Senior Vice President 1997 192,120 127,880 -- 1,125 Engineering 1996 182,970 90,721 90,000 427 Mr. Richard A. Harrit 1998 191,625 152,236 65,000 2000 Senior Vice President, North 1997 32,769 36,100 135,000 -- American Operations 1996 -- -- -- -- Mr. Arthur F. Knapp, Jr. 1998 197,668 176,884 100,000 2,000 Senior Vice President and Chief 1997 188,244 122,812 -- 1,125 Financial Officer 1996 179,214 87,085 112,500 683 Mr. Saverio Merlo 1998 192,150 173,322 90,000 2,000 Senior Vice President, 1997 183,015 120,356 -- 1,125 Marketing 1996 174,300 85,378 90,000 683 - ------------------------------ (1) The Company has no stock appreciation rights (SARs). (2) Includes the Company's matching payments under its 401(k) plan. As permitted by rules promulgated by the Commission, no amounts are shown with respect to certain "perquisites," where such amounts do not exceed the lesser of 10% of salary and bonus or $50,000. (3) Mr. Bruggeling's compensation was paid in non-U.S. currency and has been translated to U.S. dollars at the average currency exchange rate for each indicated year.
11 STOCK OPTION GRANTS AND EXERCISES The Company grants options to its executive officers under the 1995 Option Plan. As of September 30, 1998, options to purchase a total of 2,464,139 shares had been granted and were outstanding under the 1995 Option Plan and options to purchase 165,437 shares remained available for grant thereunder. The following tables show for the fiscal year ended September 30, 1998, certain information regarding options granted to, exercised by, and held at year end by the Named Executive Officers.
Option Grants in Last Fiscal Year Potential Realizable Value at Assumed Annual Rates of Stock Price Appreciation Individual Grants for Option Term(3) - ----------------------------------------------------------------- ------------------ % of Total Securities Options Underlying Granted to Exercise Options Employees or Base Expira- Granted in Fiscal Price tion Name (#)(1) Year(2) ($/Share) Date 5% ($) 10% ($) ---- -------- --------- --------- -------- ------ ------- Mr. Newton 200,000 13.82 21.88 09/09/08 2,752,043 6,974,217 Mr. Bruggeling 100,000 6.91 21.88 09/09/08 1,376,021 3,487,108 Mr. Black 90,000 6.22 21.88 09/09/08 1,238,419 3,138,398 Mr. Harrit 65,000 4.49 21.88 09/09/08 894,414 2,266,620 Mr. Knapp 100,000 6.91 21.88 09/09/08 1,376,021 3,487,109 Mr. Merlo 90,000 6.22 21.88 09/09/08 1,238,419 3,138,398 (1) Options vest in cumulative increments over a period of four years. Option grants to executive officers prior to September 10, 1993 generally include a provision whereby upon the sale, acquisition or merger of the Company in a transaction or series of transactions, the vesting of such options shall accelerate such that an additional two months of vesting shall accrue for each month that such executive officer shall have been employed by the Company between October 1, 1991 (or the date of commencement of such executive officer's employment with the Company, if later) and the closing date of any such transaction or series of transactions. Option grants to executive officers on or after September 10, 1993 include a provision whereby upon the termination or resignation of an executive officer within one year following the sale, acquisition or merger of the Company, such officer's options shall immediately vest in full. (2) Based on options to purchase 1,446,850 shares granted to all employees in fiscal year 1998. (3) The potential realizable value is based on the term of the option at its time of grant (10 years). It is calculated by assuming that the stock price on the date of grant appreciates at the indicated annual rate, compounded annually for the entire term of the option and that the option is exercised and sold on the last day of its term for the appreciated stock price. No gain to the optionee is possible unless the stock price increases over the option term which will benefit all stockholders.
12 AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR, AND FISCAL YEAR-END OPTION VALUES
Value of Number of Unexercised Unexercised In-the-Money Options at Options at FY-End (#) FY-End($)(2) Shares Acquired Value Exercisable/ Exercisable/ Name on Exercise (#) Realized(1)($) Unexercisable Unexercisable - ---- --------------- -------------- ------------- ------------- Mr. Newton 165,000 3,283,920 1,201,876/323,750 22,164,209/1,943,500 Mr. Bruggeling -- -- 252,423/162,579 4,014,985/945,383 Mr. Black 37,500 592,070 271,851/140,274 4,603,973/773,362 Mr. Harrit -- -- 33,750/166,250 250,425/840,325 Mr. Knapp 57,500 1,120,400 315,390/162,579 5,442,663/945,383 Mr. Merlo 24,750 491,810 218,600/140,274 3,686,693/773,362 - ------------------------------------------ (1) Value realized is based on the fair market value of the Company's Common Stock on the date of exercise minus the exercise price and does not necessarily indicate that the optionee sold such stock. (2) Fair market value of the Company's Common Stock at September 30, 1998 ($23.25) minus the exercise price of the options.
BOARD COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION(1) The Compensation Committee of the Board of Directors has provided the following report with respect to the compensation of executive officers for fiscal 1998: Compensation for the Company's executive officers is determined by the Compensation Committee of the Company's Board of Directors (the "Committee"), none of whom is an employee of the Company. The Committee establishes base salary levels and target bonuses for the Chief Executive Officer ("CEO") and other executive officers of the Company at or about the beginning of each fiscal year. The Company and its Board believe that the compensation of all employees, including executive officers, must be sufficient to attract and retain highly qualified personnel and must align compensation with the Company's short-term and long-term business strategies and performance goals. However, the current compensation philosophy is to minimize the amount of salary increase in favor of (i) more performance based compensation such as bonuses and (ii) more incentives linked to stockholder value such as stock options. There are three basic elements to executive officer compensation: Salary. To insure that its compensation practices remain competitive, the Company regularly compares its executive compensation to the middle of the range of compensation paid to executives in comparable positions in other software companies in the industry and also in technology companies of similar size located in Silicon Valley. Salary increases are granted generally on an annual basis and are based on both individual performance and the standard percentage of salary increase granted to other employees. Upon recommendation of the Committee, the Board approved the Company's fiscal 1998 salary guidelines applicable to all employees, including executives, pursuant to which salary increases would be targeted at no more than five percent (5%) of current salaries. - ------------------ (1)THE MATERIAL IN THIS REPORT IS NOT "SOLICITING MATERIAL," IS NOT FILED WITH THE COMMISSION AND IS NOT TO BE INCORPORATED IN ANY FILING OF THE COMPANY UNDER THE SECURITIES ACT OF 1934, AS AMENDED, OR THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED, WHETHER MADE BEFORE OR AFTER THE DATE HEREOF AND IRRESPECTIVE OF ANY GENERAL INCORPORATION LANGUAGE IN ANY FILING. 13 Bonuses. The Committee awards bonuses to the Company's executive officers and other key employees pursuant to an employee incentive plan established and approved in the early part of the Company's fiscal year by the Committee. The bonus amounts and persons who will receive bonuses can vary from year to year. The bonus pool is calculated based on a formula tied to the Company's targeted earnings per share. In 1998, the plan included minimal payouts based on attainment of 85% of target EPS with no bonus being paid if results were below the 85% threshold level. As actual results approach targeted levels, the bonus payout increases at an accelerated level. In fiscal year 1998, target amounts for individual executive officers represented between 33% and 80% of base salary. Stock Options. The Company believes that employee equity ownership provides significant additional motivation to executive officers to maximize value for the Company's stockholders. The Committee typically grants stock options each year to executive officers and other key employees. These grants are based on a variety of factors, including total options outstanding and total unvested options outstanding for each officer and key employee, the financial performance of the Company and assessment of personal performance. Whereas the bonus plan recognizes specific annual operational achievements, the Company considers the cumulative stock option grants as a measure of the individual's long-term potential impact on the Company's results. The Committee feels that stock options are the best method of providing incentives for executive officers to maximize the long-term success of the Company. Chief Executive Officer's Compensation. The Committee determined that a 5.0% increase in the Chief Executive Officer's base salary represented an increase in accordance with the Company's policy of increasing salaries by no more than five percent (5%). The Committee also determined that a cash bonus of $495,266 (out of a total executive officer bonus pool of $1,403,276) for fiscal 1998 was appropriate in light of the Company's strong financial performance. Compliance with Section 162(m) of the Internal Revenue Code. Section 162(m) of the Internal Revenue Code (the "Code") limits the Company to a deduction for federal income tax purposes of no more than $1 million of compensation paid to certain Named Executive Officers in a taxable year. Compensation above $1 million may be deducted if it is "performance-based compensation" within the meaning of the Code. The Compensation Committee has determined that stock options granted under the Company's 1995 Option Plan with an exercise price at least equal to the fair market value of the Company's common stock on the date of grant shall be treated as "performance-based compensation." COMPENSATION COMMITTEE Franklin P. Johnson, Jr. Terry R. McGowan David B. Wright 14 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The following table sets forth certain information regarding the ownership of the Company's Common Stock as of October 31, 1998 by: (i) each director and nominee for director; (ii) each of the executive officers named in the Summary Compensation Table; (iii) all executive officers and directors of the Company as a group; and (iv) all those known by the Company to be beneficial owners of more than five percent (5%) of its Common Stock.
Beneficial Ownership(1) -------------------------------------- Number of Percent of Beneficial Owner Shares Total(%) ---------------- --------- ---------- Willington Management Company, LLP(2) 2,208,126 8.03 75 State Street Boston, MA 02109 Franklin P. Johnson, Jr.(3)(7) 2,076,844 7.54 c/o Asset Management Partners 2275 East Bayshore, Suite 150 Palo Alto, CA 94303 FMR Corp.(4) 2,206,967 8.03 82 Devonshire Street Boston, MA 02106 Private Capital Management, Inc. and related entities(5) 1,682,927 6.12 3003 Tamiami Trail North Naples, FL 33940 Winston Partners, L.P. and related entities(6) 1,637,085 5.95 888 Seventh Avenue New York, NY 10106 Paul Newton(7) 1,348,321 4.69 Johannes Bruggeling(7) 843,465 3.04 Arthur Knapp, Jr.(7) 352,387 1.27 James Black(7) 282,795 1.02 Saverio Merlo(7) 241,762 * Raymond Cairns(7) 57,693 * Richard Harrit 42,769 * Terry McGowan(7) 12,356 * David Wright(7) 1,000 * All executive officers and directors as a group (10 persons)(8) 5,259,392 17.52 * Less than one percent. 15 (1) This table is based upon information supplied by officers, directors and principal stockholders and Schedules 13D and 13G filed with the SEC. Where information regarding stockholders is based on Schedules 13D and 13G, the number of shares owned is as of the date for which information was provided in such schedules, as noted. Unless otherwise indicated in the footnotes to this table and subject to community property laws where applicable and the Voting Agreements entered into between the executive officers and directors, Boole believes that each of the Stockholders named in this table has sole voting and investment power with respect to the shares indicated as beneficially owned. Applicable percentages are based on 27,500,992 shares outstanding on October 31,1998, adjusted as required by rules promulgated by the SEC. (2) Wellington Management Company LLP ("Wellington"), is an investment advisor registered with the SEC under the Investment Advisors Act of 1940, as amended, and in its capacity as investment advisor, may be deemed to have beneficial ownership of these shares, which are owned by numerous investment advisory clients, none of which is known to have such interest with respect to more than five percent of the class. Willington has shared voting power over 634,614 of these shares, and shared dispositive power over all 2,208,126 of these shares. The reported stated number of shares beneficially owned is as of June 30,1998. (3) Includes 177,574 shares held by Mr. Johnson's wife. Mr. Johnson may be deemed to beneficially own these shares but disclaims beneficial ownership of such shares. Also includes 369,562 shares held by Asset Management partners, a limited partnership, of which Mr. Johnson is a general partner. Mr. Johnson disclaims beneficial ownership of two- thirds of such shares. (4) FMR Corp. ("FMR"), in its capacity as a parent holding company, may be deemed to be the beneficial owner of these shares, 1,614,955 of which are beneficially owned by a wholly-owned subsidiary, Fidelity Management & Research Company, a registered investment advisor which acts as an investment advisor to various investment companies ("Funds"), which holds such shares, and 592,012 of which are beneficially owned by a wholly-owned subsidiary, Fidelity Management Trust Company, a bank which serves as investment manager of certain institutional accounts ("Accounts") which holds these shares. FMR, Edward C. Johnson 3d, Chairman of FMR, and the Funds each has sole power to dispose of 1,614,955 shares. Neither FMR nor Mr. Johnson have sole power to vote or direct the voting of the shares owned by the Funds which power resides with the Funds' Board of Trustees who carry out the voting under written guidelines established by the Funds' Board of Trustees. FMR and Mr. Johnson, through its control of Fidelity Management Trust Company, has sole voting disposition power over 592,012 shares owned by the Accounts. Members of Mr. Johnson's family and trusts for their benefit own shares of common stock of FMR representing approximately 49% of the voting stock of FMR. Mr. Johnson owns 12% and Abigail P. Johnson, a director of FMR, owns 24.5% of the aggregate outstanding voting stock of FMR. The reported stated number of shares beneficially owned is as of February 9, 1998. (5) Private Capital Management, Inc. ("PCM"), in its capacity as investment advisor, and Bruce Sherman, PCM's President, may each be deemed beneficial owners of 1,677,927 of these shares, which are held by PCM on behalf of its clients. PCM and Bruce Sherman have shared dispositive power over these 1,677,927 shares. Michael Seaman, who has sole power to vote or direct the vote of, and sole power to dispose of 5,000 shares, is an employee of PCM or affiliates thereof and (i) does not exercise sole or shared dispositive or voting power with respect to the shares held by PCM or SPS, (ii) disclaims beneficial ownership of shares held by Mr. Sherman, PCM and SPS, and (iii) disclaims, along with Mr. Sherman, the existence of a group. (6) The shares are held by Winston Partners, L.P. Chatterjee Fund Management L.P. is the sole general partner of Winston Partners, L.P., and Purnendu Chatterjee is the sole general partner of Chatterjee Fund Management, L.P. (7) Includes shares which certain executive officers and directors of the Company have the right to acquire within 60 days after October 31, 1998 pursuant to outstanding options as follows: James E. C. Black, 282,750 shares; Johannes S. Bruggeling, 265,783 shares; Raymond E. Cairns, 52,631 shares; Richard Harrit, 42,187 shares; Franklin P. Johnson, 50,625 shares; Arthur F. Knapp, Jr., 328,750 shares; Terry R. McGowan, 12,356 shares; Saverio Merlo, 229,499 shares; Paul E. Newton, 1,246,876 shares; and all executive officers and directors as a group, 2,511,457 shares. (8) Includes shares described in notes (3) and (7).
16 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Certain Transactions The Company entered into a loan agreement on October 15, 1997 with James E.C. Black, Senior Vice President, Engineering, under which Mr. Black received a loan of $85,000, to be repaid with interest at a rate of 8.5% per annum. The loan and interest were paid in full on December 2, 1997. The Company has entered into indemnity agreements with certain officers and directors which provide, among other things, that the Company will indemnify such officer or director, under the circumstances and to the extent provided for therein, for expenses, damages, judgments, fines and settlements he may be required to pay in actions or proceedings which he is or may be made a party by reason of his position as a director, officer or other agent of the Company, and otherwise to the full extent permitted under Delaware law and the Company's By-laws. 17 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 1998 Annual Report to Stockholders: Page in Exhibit 13.1 Consolidated Statements of Income-Years Ended September 30, 1998, 1997 and 1996............................... 12 Consolidated Balance Sheets-September 30, 1998, 1997 and 1996........................................................ 13 Consolidated Statements of Cash Flows-Years Ended September 30, 1998, 1997 and 1996............................... 14 Consolidated Statements of Stockholders' Equity- Years Ended September 30, 1998, 1997 and 1996................... 15 Notes to Consolidated Financial Statements...................... 16 Report of Ernst & Young LLP, Independent Auditors............... 30 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, 1998, 1997 and 1996: 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 1998 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, 1998. 18
(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) 10.7 1997 Non-Officer Stock Option Plan, as amended, and related grant forms. (7) 13.1 1998 Annual Report to Stockholders. (8) 21.1 Subsidiaries of Registrant. (8) 23.1 Consent of Ernst & Young LLP, Independent Accountants. (8) 23.2 Consent of PricewaterhouseCoopers LLP, Independent Accountants. (8) 27.1 Financial Data Schedule. (8) 19 (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) Previously filed as an exhibit to the Registration Statement on Form S-8 (Registration No. 333-66373) and incorporated herein by reference. (8) 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. 20 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 28th of December 1998. 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 28th of December 1998. \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.\ \David B. Wright\ - ------------------------------------- ------------------------------- Franklin P. Johnson, Jr. David B. Wright Chairman of the Board of Directors Director 21 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, 1998 $1,995,000 $363,000 -- $(343,000)* $2,015,000 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 * Amount includes $338,000 of account write-offs and $5,000 due to currency changes. ** Amount includes $280,000 of account write-offs, net of $42,000 due to currency changes. *** Amount includes $206,000 of account write-offs, net of $10,000 due to currency changes.
22 EX-13.1 2 EXHIBIT 13.1 Exhibit 13.1 Boole & Babbage, Inc. Selected Consolidated Financial Data
Years ended September 30, ------------------------------------------------------------------- (In thousands, except per share amounts) 1998 1997 1996 1995(a) 1994 - ------------------------------------------------------------------------------------------------------------------------------------ Revenue $218,236 $197,097 $180,151 $169,027 $141,600 Expenses 181,954 185,283 167,322 156,242 137,234 -------------- ------------ ----------- ----------- ----------- Operating Income 36,282 11,814 12,829 12,785 4,366 Interest and other income, net 14,632 9,180 5,643 5,414 1,306 -------------- ------------ ----------- ----------- ----------- Income before income taxes 50,914 20,994 18,472 18,199 5,672 Provision for income taxes 14,260 7,525 7,015 5,076 3,570 -------------- ------------ ----------- ----------- ----------- Net income $36,654 $13,469 $11,457 $13,123 $2,102 ============== ============ =========== =========== =========== Basic earnings per share $1.31 $0.49 $0.43 $0.51 $0.09 Diluted earnings per share $1.20 $0.45 $0.40 $0.47 $0.08 Weighted average common shares outstanding 28,045 27,715 26,565 25,535 24,285 Weighted average common shares outstanding assuming dilution 30,580 30,145 28,815 27,700 25,725 Balance sheet data: Cash, cash equivalents and short-term investments $92,506 $56,973 $62,010 $42,047 $39,794 Total assets $309,926 $260,144 $224,540 $182,827 $145,621 Long-term debt $1,592 $1,845 $3,269 $2,075 $7,830 Deferred maintenance revenue $113,128 $91,714 $80,190 $61,468 $49,172 Stockholders' equity $140,553 $118,502 $95,064 $78,501 $47,482 (a) Includes $1.507 million ($0.06 basic earnings per share and $0.05 diluted per share) of extraordinary gain on forgiveness of debt in fiscal 1995.
1 Exhibit 13.1 Boole & Babbage, Inc. Quarterly History (Unaudited)
(In thousands, except per share amounts) Q1 97 Q2 97 Q3 97 Q4 97 Q1 98 Q2 98 Q3 98 Q4 98 - --------------------------------------------------------------------------------------------------------------------------------- Revenue: Product licensing $27,278 $25,057 $26,784 $29,790 $30,209 $30,976 $29,922 $33,613 Maintenance fees and other 22,483 21,394 21,972 22,339 22,724 22,611 23,758 24,423 ------------------------------------------------------------------------- Total revenue 49,761 46,451 48,756 52,129 52,933 53,587 53,680 58,036 ------------------------------------------------------------------------- Costs and expenses: Cost of product licensing 3,978 3,312 3,676 4,064 4,211 3,295 3,741 3,122 Cost of maintenance fees and other 6,016 4,200 4,495 5,040 5,135 5,519 5,788 6,486 Product development 6,387 5,876 6,310 6,308 6,455 6,415 6,325 6,421 Sales and marketing 25,126 22,132 23,277 25,282 24,391 24,766 24,939 25,884 General and administrative 5,325 4,348 4,344 4,478 4,501 4,933 4,545 5,082 Acquisition and nonrecurring costs -- 11,309 -- -- -- -- -- -- ------------------------------------------------------------------------- Total costs and expenses 46,832 51,177 42,102 45,172 44,693 44,928 45,338 46,995 ------------------------------------------------------------------------- Operating income (loss) 2,929 (4,726) 6,654 6,957 8,240 8,659 8,342 11,041 Interest and other income, net 1,588 2,228 2,758 2,606 3,383 4,475 3,570 3,204 ------------------------------------------------------------------------- Income (loss) before taxes 4,517 (2,498) 9,412 9,563 11,623 13,134 11,912 14,245 Provision (benefit) for income taxes 2,600 (195) 2,820 2,300 3,255 3,680 3,340 3,985 ------------------------------------------------------------------------- Net income (loss) $1,917 ($2,303) $6,592 $7,263 $8,368 $9,454 $8,572 $10,260 ========================================================================= Basic earnings per share $0.07 ($0.08) $0.24 $0.26 $0.30 $0.34 $0.30 $0.37 Diluted earnings per share $0.06 ($0.08) $0.22 $0.24 $0.27 $0.31 $0.28 $0.34 Weighted average common shares outstanding 27,205 27,615 27,900 28,120 28,105 28,120 28,245 28,025 Weighted average common shares outstanding assuming dilution 29,545 30,180 30,145 30,595 30,675 30,710 30,825 30,430 Stock Price (closing bid) High $16.67 $18.00 $15.83 $21.33 $21.58 $24.88 $25.81 $25.25 Low $11.00 $14.67 $13.50 $14.09 $17.29 $18.67 $21.63 $19.75
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, 1998:
PERCENTAGE OF REVENUE YEAR-TO-YEAR YEARS ENDED SEPTEMBER 30, PERCENTAGE CHANGE --------------------------------------------- ------------------------------ 1998 1997 1996 98 vs. 97 97 vs. 96 - ------------------------------------------------------------------------------------------------------------------------------------ Revenue: Product licensing 57.1% 55.3% 52.9% 14.5% 14.4% Maintenance fees and other 42.9% 44.7% 47.1% 6.0% 3.8% ----------- ----------- ----------- ------------ ----------- Total revenue 100.0% 100.0% 100.0% 10.7% 9.4% Costs and expenses: Cost of product licensing 6.6% 7.6% 8.5% -4.4% -2.1% Cost of maintenance fees and other 10.5% 10.0% 10.8% 16.1% 1.4% Product development 11.8% 12.6% 12.5% 3.0% 11.4% Sales and marketing 45.8% 48.6% 50.9% 4.3% 4.4% General and administrative 8.7% 9.4% 10.1% 3.1% 0.6% Acquisition and nonrecurring costs -- 5.7% -- N/A N/A ----------- ----------- ----------- ------------ ----------- Total costs and expenses 83.4% 93.9% 92.8% -1.8% 10.7% ----------- ----------- ----------- ------------ ----------- Operating income 16.6% 6.1% 7.2% 207.1% -7.9% Interest and other income, net 6.7% 4.7% 3.1% 59.4% 62.7% ----------- ----------- ----------- ------------ ----------- Income before provision for income taxes 23.3% 10.8% 10.3% 142.5% 13.7% Provision for income taxes 6.5% 3.8% 3.9% 89.5% 7.3% ----------- ----------- ----------- ------------ ----------- Net income 16.8% 7.0% 6.4% 172.1% 17.6% =========== =========== =========== ============ ===========
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. Accounting Pronouncements Statement of Position (SOP) 97-2, "Software Revenue Recognition" and (SOP) 98-4 "Deferral of the Effective Date of a Provision of (SOP) 97-2" were issued in October 1997 and March 1998, respectively, and address software revenue recognition. SOP 97-2 and SOP 98-4 supersede SOP 91-1 and are effective for transactions entered into for fiscal years beginning after December 15, 1997 and will therefore be adopted for the Company's fiscal year 1999, beginning October 1, 1998. Based on its reading and interpretation of SOP 97-2 and SOP 98-4, the impact will not be material to the Company's revenues and earnings. In March 1998, the AICPA issued SOP 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use." This standard requires that certain costs related to the development or purchase of internal-use software be capitalized and amortized over the estimated useful life of the software. This SOP also requires that costs related to the preliminary project stage and the post-implementation/operations stage of an internal-use computer software development project be expensed as incurred. SOP 98-1 is effective for financial statements issued for fiscal years beginning after December 31, 1998, which, in the case of the Company is October 1, 1999. SOP 98-1 is not expected to have a material impact on the Company's Consolidated Financial Statements. In June 1997, SFAS No. 130, "Reporting Comprehensive Income" was issued. Under SFAS No. 130, all items that meet the definition of comprehensive income will be separately reported for the period in which they are recognized. The only impact will be that comprehensive income, which will include changes in the balances of items that are reported separately in the Stockholders' Equity section of the Consolidated Balance Sheets, will be either reported in a separate statement or at the bottom of the Consolidated Statements of Earnings. This statement is effective for fiscal years beginning after December 15, 1997, which, in the case of the Company, is October 1, 1998. SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information" was issued in June 1997. SFAS No. 131 requires that a public business enterprise report financial and descriptive information about its reportable operating segments. Generally, financial information is required to be reported on the basis used internally for evaluating segment performance and resource allocation. SFAS No. 131 is effective for fiscal years beginning after December 31, 1997, and disclosure is not required in interim financial statements in the initial year of adoption. Accordingly, the Company will reflect SFAS No. 131 information in its Consolidated Financial Statements for the September 30, 1999, fiscal year. The Company is currently assessing the SFAS No. 131 requirements. Year 2000 The Company is currently taking steps to address Year 2000 issues in the following three areas: (1) internal systems (including information technology such as financial and order entry systems and non-information technology systems such as phones and facilities); (2) products sold by the Company; and (3) the readiness of third parties with whom the Company has business relationships. A Year 2000 readiness plan has been implemented for world-wide operations relating to all of these areas consisting of three phases. Phase One (inventory) consists of identifying all of the systems, products and relationships that may be impacted by Year 2000. Phase Two (assessment) involves determining the current state of Year 2000 readiness for those areas identified in the inventory phase and prioritizing areas that need to be fixed. Phase Three (action) will consist of fixing the areas in order of that priority. The Company currently expects to be in compliance for all of the targeted areas by the end of the 1999 fiscal year (September 1999). 4 For Boole & Babbage products, the Company is in the action phase of our plan. As detailed on its web site (boole.com), most of the Company's most current versions of its products have been designed and tested to be Year 2000 compliant. Some of the Company's customers are running product versions that are not year 2000 compliant. The Company has been encouraging such customers to migrate to current product versions. It is possible that the Company may experience increased expenses in addressing migration issues for such customers. In addition, there can be no assurances that the Company's current products do not contain undetected errors or defects associated with year 2000 date functions that may result in material costs to the Company. Some analysts have stated that a significant amount of litigation will arise out of year 2000 compliance issues, and the Company is aware of a growing number of lawsuits against other software vendors. Because of the unprecedented nature of such litigation, it is uncertain whether or to what extent the Company may be affected by it. Approximately 14% of the Company's total revenue is from the products of one third-party vendor, New Dimension Software. As detailed on their Web site (ndsoft.com), most products are Year 2000 compliant or will be by December 31, 1998. Other third party vendors, comprising less than 3% of total revenue, have provided us written assurances that all their products will be made compliant by the end of 1999. The Company is currently in the assessment and action phase of the plan for both the internal systems and third party relationships. With respect to its internal systems, the Company is taking steps to prepare its systems for the Year 2000 date change. The Company expects to substantially complete these efforts at the end of calendar 1998, with extensive testing to continue through 1999. Although the Company does not believe that it will incur any material costs or experience material disruptions in its business associated with preparing its internal systems for the year 2000, there can be no assurances that the Company will not experience serious unanticipated negative consequences and/or material costs caused by undetected errors or defects in the technology used in its internal systems, which are composed of third party software, third party hardware that contains embedded software and the Company's own software products. The Company uses only large, high credit quality financial institutions, all of which have made representations that they are already Year 2000 compliant. The Company does not make significant purchases from any one vendor and therefore does not believe that any vendor non-compliance related to Year 2000 would materially disrupt operations. While Year 2000 costs incurred to date have not been material, we will incur additional costs as we complete the project phases. Based on preliminary assessments resulting from the early phases of our plan in each of the targeted areas, we are currently unable to determine whether additional costs to achieve Year 2000 readiness will be material. Additional costs incurred may include but are not limited to: the cost of producing and distributing free solutions for products that are not Year 2000 ready; the impact of lost sales due to distribution of free Year 2000 ready solutions for affected products; the administrative costs of completing the Year 2000 project; the cost of correcting our internal systems; and the cost of implementing necessary contingency plans. The above discussion regarding costs, risks and estimated completion dates for the Year 2000 is based on our best estimates given information that is currently available, and is subject to change. As we continue to progress with this initiative, we may discover that actual results will differ materially from these estimates. Euro Currency The European Union's adoption of the Euro single currency raises a variety of issues associated with the Company's European operations. Although the transition will be phased in over several years, the Euro will become Europe's single currency on January 1, 1999. The Company is assessing Euro issues related to its product pricing, contracts, treasury operations and accounting systems. Although the evaluation of these items is still in process, the Company believes that the hardware and software systems it uses internally will accommodate this transition and any required policy or operating changes will not have a material adverse effect on future results. 5 Revenue The Company derives its revenues primarily from the licensing of computer software programs, the sales of software maintenance services and from consulting and education services. The following table shows year-to-year percentage changes as reported and without the effect of currency rate changes.
Without Currency Growth Rates: As Reported Effect --------------------------- ------------------------ Product Licensing 98 vs. 97 97 vs. 96 98 vs. 97 97 vs. 96 Product Group: Distributed 54.7% 4.9% 59.8% 13.2% Mainframe 0.8% 18.0% 5.2% 26.4% ----- ----- ----- ----- 14.5% 14.4% 19.1% 22.7% ===== ===== ===== ===== Sales Channel: Domestic 27.6% 23.5% 27.6% 23.5% International 7.1% 9.8% 14.4% 22.3% ----- ----- ----- ----- 14.5% 14.4% 19.1% 22.7% ===== ===== ===== ===== Maintenance fees and other 6.0% 3.8% 10.1% 10.6% ===== ===== ===== ===== Total revenue 10.7% 9.4% 15.1% 17.0% ===== ===== ===== =====
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. 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 Distributed group of products will show higher growth rates for fiscal 1999. However, the Company competes with certain companies who have much greater financial and operational resources along with larger customer bases. This could allow those companies to bundle competing products with more established non-competing products in order to gain a marketing advantage. In addition, the Company is dependent on the success of its new Explorer family of Windows NT and Web-based products relating to its new Desired-State Management initiative. This initiative represents a significant expansion of the SpaceView, COMMAND/POST and Command MQ product lines. There is also a potential diversion of customers' business attention and project funding 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 1999 or later. Thus, despite a somewhat flat mainframe market, the Company's product licensing growth has benefited by data centers adopting this new technology. This has also helped to increase the number of competitive replacements that in 1998 accounted for approximately 9% of total revenue compared with approximately 5% in 1997. These occur primarily through multi-year licensing agreements that comprised approximately 38% of the total revenue in 1998 and 36% in 1997. Thus, future growth rates could be materially and adversely affected if these parallel processors do not gain significant market acceptance among the mid- 6 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. Markets Domestic: Domestic licensing comprised 40.2%, 36.1% and 33.5% of total product licensing for 1998, 1997, and 1996, respectively. Domestic product licensing grew 27.6% and 23.5% in 1998 and 1997, respectively. For growth to continue in the domestic market, the company is dependent on continued productivity increases as well as the ability to generate larger size transactions, primarily through multi-year contracts and competitive replacements. International: In 1998, the Company's licensing from its international operations, comprised of foreign subsidiaries and marketing agents, increased 7.1% as a result of solid growth in Europe and South America despite unfavorable currency exchange rates. In the Asia-Pacific area, except for its subsidiaries in Japan and Australia, the Company took a conservative position and only booked new revenues on a cash basis from the distributors in the other markets of this region to avoid potential impact from the current economic turmoil and uncertainties regarding payment on product orders. In 1997, the increase was 9.8% as a result of solid growth in all channels despite 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 education services, computer services, hardware sales and royalties from IBM for the jointly developed CICS product. In July 1996, the Company entered into a long-term licensing agreement requiring IBM to make royalty payments, based upon their sales of the product, of up to approximately $10 million for the period from the fourth quarter of 1996 through the second quarter of fiscal 1999. The Company has recognized $8.4 million in revenue of which $7.4 million has been paid through September 30, 1998. Since there are no minimum generated amounts, actual royalties due to the Company may be below the annual maximum amounts. The Company records royalty revenue based upon reporting from IBM. 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, higher consulting revenue and increased royalties from IBM under the July 1996 agreement. In 1998, consulting and education revenue was 7.8% of maintenance fees and other compared to 5.2% in 1997. 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 1999 will increase due to the higher license revenue growth in 1998, 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. 7 Costs and expenses The following table shows year-to-year percentage changes of costs and expenses, excluding acquisition and non-recurring costs, as reported and without the effect of currency rate changes.
Without Currency Growth Rates: As Reported Effect --------------------------- ------------------------ 98 vs. 97 97 vs. 96 98 vs. 97 97 vs. 96 Cost of product licensing (4.4%) (2.1%) 0.6% 6.9% Cost of maintenance fees and other 16.1% 1.4% 20.7% 7.9% Product development 3.0% 11.4% 3.8% 13.0% Sales and marketing 4.3% 4.4% 8.6% 11.2% General and administrative 3.1% 0.6% 6.4% 5.1% ---- ---- ---- ----- Total costs and expenses 4.6% 4.0% 8.4% 10.0% ==== ==== ==== =====
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 relate primarily to higher royalty costs due to increased third party sales. 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. Cost of Maintenance Fees and Other Cost of maintenance fees and other consists primarily of cost of product maintenance support, royalties paid to independent software authors, amortization of purchased and internally developed software, the cost to provide educational and consulting services and costs related to certain computer services. In 1998, the increase is primarily due to higher costs to provide consulting and education and to a lesser extent, higher royalty costs and increased support costs. 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 service revenue increase although this was partially offset by lower maintenance support costs. In general, fluctuations in the relationship of cost of maintenance fees and other to revenue are caused primarily by changes in maintenance revenue mix, educational and consulting revenue, maintenance support, royalty agreements, and amortization of capitalized software. Product Development The increase in product development in 1998 is primarily attributable to higher research and development ("R&D") personnel costs due to increased headcount offset by decreased expenses relating to supporting the IBM jointly developed CICS product. In 1997, the increase in product development is primarily due to increased headcount and consulting costs. 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. R&D expenditures were 17% of revenue (excluding third party) for 1998 and 16% in 1997 while the amount of R&D capitalized was 17% and 15% of these gross R&D expenditures in 1998 and 1997, respectively. Product development expenses may fluctuate annually depending in part upon the number and status of internal software development projects. Sales and Marketing The increase in sales and marketing in 1998 is primarily a result of higher commissions on increased product licensing, increased headcount, and more product marketing costs. In 1997, the increase in sales 8 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. General and Administrative In 1998, the increase in general and administrative costs was due to higher legal costs, MIS consulting costs and performance-based accruals. The increase in costs in 1997 is primarily attributable to higher personnel and consulting costs, European facility costs and performance-based accruals. 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 acquisition 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 Income, Net Interest and other income consists principally of interest income or expense and gain or loss from sales of investments, currency or disposal of assets. In 1998, the 59.4% increase consisted primarily of higher interest income on more lease contracts and gains on sales of equity investments. This was partially offset by lower currency gains in Europe in the current year. 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. As further described in Note 1, the Company has a hedging program to attempt to reduce its exposure to currency fluctuations. Income Taxes The effective tax rates were 28.0%, 35.8%, and 38.0% for 1998, 1997 and 1996, respectively. Without the impact of non-deductible acquisition costs and pre-acquisition operating losses of MAXM, the effective tax rates were 28.5% and 28.0% for 1997 and 1996, respectively. It is anticipated that the Company's effective tax rate in 1999 will approximate the 1998 rate. The Company's effective tax rates 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, 1998, the Company had carryforwards of MAXM's pre-acquisition federal net operating losses of approximately $45.7 million that will expire between 2003 and 2012. The losses were incurred by MAXM prior to acquisition and are subject to limitation. Management believes future taxable income will be sufficient to realize the deferred tax benefit of the net deferred tax asset. Quantitative and Qualitative Disclosure about Market Risk Interest Rate Risk: The Company's exposure to market risk for changes in interest rates relate primarily to the Company's short-term investment portfolio and long-term debt obligations. The Company does not use derivative financial instruments in its investment portfolio. The Company places its investments with high credit quality issuers and, by policy, limits the amount of credit exposure to any one issuer. The Company is averse to principal loss and ensures the safety and preservation of its invested funds by limiting default risk, market risk, and reinvestment risk. The Company mitigates default risk by investing in only the highest credit quality securities and by constantly positioning its portfolio to respond appropriately to a significant reduction in a credit rating of any investment issuer or guarantor. The portfolio includes only marketable securities with active secondary or resale markets to ensure portfolio liquidity. All short-term investments mature in fiscal 1999. Cash equivalents of $16.1 million have an average fixed interest rate of 4.0% or 6.5% average taxable equivalent fixed interest rate. Short-term investments of $46.2 million have an average fixed interest rate of 3.9% or 5.8% average taxable equivalent fixed interest rate. The Company has no cash flow exposure due to rate changes for its $2.4 million capital lease obligations. The average fixed interest rate on all capital leases is 7.6% and matures as described in Note 5. In addition, the Company has a note payable of $50,000 note payable due in fiscal 1999. 9 Foreign Exchange Risk: 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 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. 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. It is the Company's policy to hedge approximately 75% to 100% of the net asset position. The following table provides information about the Company's foreign exchange forward contracts at September 30, 1998. Notional Average Amount Contract (mil $) Rate ------------- ------------ Pound sterling $15.8 1.6895 Deutsche marks 15.8 1.6640 French francs 7.2 5.5765 Italian lira 6.3 1649.30 Spanish peseta 2.8 141.80 Belgium francs 2.2 34.60 Swiss francs 2.6 1.387 Swedish krona 1.9 7.853 Dutch guilders 1.0 1.891 Austrian schilling 1.7 11.798 Japanese yen 2.6 135.10 Australian dollars 1.1 0.5939 ----- $61.0 ===== Beginning the first quarter of fiscal 1998, the Company implemented a program of purchasing foreign currency option contracts as an economic hedge for a portion of the net revenue of the Company's foreign subsidiaries. The premium cost of the options is expensed in the period in which they are purchased. Realized option gains are recorded as income in the period in which the options are exercised. Fair values are based upon quoted prices in an active market. The following table provides information about the Company's foreign currency option contracts, all of which expire in fiscal 1999, at September 30, 1998. Notional Average Amount Contract Fair Value (mil $) Rate (thou $) ------------- ------------ ------------ Pound sterling $2.7 1.6579 $30.7 Deutsche marks 9.6 1.7238 87.2 Japanese yen 2.5 132.05 131.3 ----- ------ $14.8 $249.2 ===== ====== Subsequent Event On November 2, 1998 the Company and BMC Software, ("BMC"), entered into an Agreement and Plan of Reorganization. The merger contemplated therein will be accomplished by the issuance of 0.675 shares of BMC stock for each share of the Company's common stock. This transaction is expected to close in the second quarter in fiscal 1999 and to be accounted for using the pooling of interests method. The merger is subject to a number of customary closing conditions, including antitrust approval and approval by the stockholders of the Company. See Note 8 of Notes to Consolidated Financial Statements. See also the Company's Current report on Form 8-K dated November 10, 1998 and BMC's Form S-4 dated November 13, 1998 for a description of the merger. 10 Litigation Platinum Technology, Inc., ("Platinum"), filed a Complaint and Motion for Preliminary Injunction on Nov. 13, 1998 in the Circuit Court of the Eighteenth Judicial Circuit Chancery Division, Dupage County, Wheaton, Ill. The complaint alleges that the Company is in breach of a standstill and exclusive negotiation agreement with Platinum, and further, that BMC Software, Inc. tortiously interfered with such alleged agreement when it negotiated and executed the merger agreement announced on Nov. 2, 1998. Platinum seeks entry of an injunction voiding this merger agreement and requiring the Company to negotiate exclusively with it for an uninterrupted 120-day period. The Company is currently evaluating the complaint but believes that the claims by Platinum are without merit, and intends to vigorously defend itself against the allegations in the complaint. The Company continues to believe that the BMC merger agreement is in the best interests of its shareholders. Liquidity and Capital Resources At September 30, 1998, the Company's cash, cash equivalents and short-term investments were $92,506,000. The Company continues to use installment payment plans to gain a competitive advantage during the sales process and had outstanding installment receivables of $128,460,000 at September 30, 1998. The Company periodically sells portions of installments receivables subject to limited recourse provisions. During 1998, the Company sold $43,986,000. The Company continues to finance its growth through funds generated from operations. For the year ended September 30, 1998 net cash provided by operating activities was $18,775,000. Net cash used in investing activities in 1998 was $28,251,000, primarily for purchases of short-term investments, internally developed and purchased capitalized software and acquisition of computers. Cash provided by investing activities was due to proceeds from sales of equity securities. Net cash provided by financing activities in 1998 was $20,831,000, 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. In July 1997, a share repurchase plan was adopted which authorized the Company to acquire 750,000 (post-split) 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. In August 1998, an additional 1,000,000 shares were approved for repurchase. Total shares repurchased under this plan were 1,223,000 and 127,500 during fiscal 1998 and 1997, respectively, with aggregate purchase prices of $26,919,000 and $2,072,000. The Board of Directors rescinded the plan October 30, 1998 in accordance with pooling of interest accounting in connection with BMC's acquisition of the Company. The Company evaluates business acquisition opportunities that complement its strategic plans and believes existing cash balances and funds generated from operations will be sufficient to meet its liquidity requirements for the foreseeable future. 11 Exhibit 13.1 Boole & Babbage, Inc. Consolidated Statements of Income
Years Ended September 30, ------------------------------------------------- (In thousands, except per share amounts) 1998 1997 1996 - ------------------------------------------------------------------------------------------------------------------------------ Revenue: Product licensing $124,720 $108,909 $95,219 Maintenance fees and other 93,516 88,188 84,932 ------------ ------------- ------------ Total revenue 218,236 197,097 180,151 ------------ ------------- ------------ Costs and expenses: Cost of product licensing 14,369 15,030 15,355 Cost of maintenance fees and other 22,928 19,751 19,483 Product development 25,617 24,881 22,326 Sales and marketing 99,980 95,817 91,766 General and administrative 19,060 18,495 18,392 Acquisition and nonrecurring costs -- 11,309 -- ------------ ------------- ------------ Total costs and expenses 181,954 185,283 167,322 ------------ ------------- ------------ Operating income 36,282 11,814 12,829 Interest and other income, net 14,632 9,180 5,643 ------------ ------------- ------------ Income before provision for income taxes 50,914 20,994 18,472 Provision for income taxes 14,260 7,525 7,015 ------------ ------------- ------------ Net income $36,654 $13,469 $11,457 ============ ============= ============ Basic earnings per share $1.31 $0.49 $0.43 Diluted earnings per share $1.20 $0.45 $0.40 Weighted average common shares outstanding 28,045 27,715 26,565 Weighted average common shares outstanding assuming dilution 30,580 30,145 28,815 See accompanying notes
12 Exhibit 13.1 Boole & Babbage, Inc. Consolidated Balance Sheets
September 30, --------------------------------------------- (Dollars in thousands) 1998 1997 1996 - ---------------------------------------------------------------------------------------------------------------------------- Assets Current assets: Cash and cash equivalents $46,354 $33,923 $37,260 Short-term investments 46,152 23,050 24,750 Accounts receivable, net 23,213 26,412 27,955 Installment and other receivables, net 64,600 65,469 46,221 Deferred tax asset 8,359 6,154 5,649 Prepaid expenses and other current assets 7,136 4,513 4,383 ----------- ----------- ----------- Total current assets 195,814 159,521 146,218 Purchased and internally developed software, net 12,898 12,152 11,614 Equipment, furniture and leasehold improvements, net 11,225 9,968 12,763 Long-term installment and other receivables 59,089 52,290 39,141 Long-term deferred tax asset 14,390 10,571 9,472 Costs in excess of net assets of purchased businesses, net 607 634 660 Other assets 15,903 15,008 4,672 ----------- ----------- ----------- Total assets $309,926 $260,144 $224,540 =========== =========== =========== Liabilities and Stockholders' Equity Current liabilities: Accounts payable $10,136 $8,895 $7,605 Accrued payroll expense 11,625 9,840 7,890 Other accrued liabilities 32,051 27,080 25,090 Short-term borrowings -- 1,016 3,150 Notes payable due within one year 50 319 469 Capital lease obligations due within one year 791 933 1,813 Deferred maintenance revenue 57,532 53,432 51,241 ----------- ----------- ----------- Total current liabilities 112,185 101,515 97,258 Notes payable due after one year -- 50 444 Capital lease obligations due after one year 1,592 1,795 2,825 Deferred maintenance revenue due after one year 55,596 38,282 28,949 Stockholders' equity: Preferred stock, 2,000,000 shares authorized, $.001 par value, none issued -- -- -- Common stock, $.001 par value, authorized--45,000,000 shares; issued-- 30,733,364 (29,969,715 and 28,667,061 in 1997 and 1996, respectively) 31 30 29 Additional paid-in capital 102,264 91,960 81,034 Retained earnings 69,454 32,800 19,331 Unrealized gain on marketable securities 6,424 5,691 370 Foreign currency translation adjustment (2,226) (3,503) 704 Less treasury stock, 3,065,930 shares (1,843,180 and 1,715,680 shares in 1997 and 1996, respectively), at cost (35,394) (8,476) (6,404) ----------- ----------- ----------- Total stockholders' equity 140,553 118,502 95,064 ----------- ----------- ----------- Total liabilities and stockholders' equity $309,926 $260,144 $224,540 =========== =========== =========== See accompanying notes
13 Exhibit 13.1 Boole & Babbage, Inc. Consolidated Statements of Cash Flows
Years ended September 30, --------------------------------------- (Dollars in thousands) 1998 1997 1996 - ---------------------------------------------------------------------------------------------------------------- Cash flows from operating activities: Net income $36,654 $13,469 $11,457 Adjustments to reconcile net income to net cash provided by (used for) operating activities: Depreciation, amortization and write-off of capitalized software 9,134 9,672 10,415 Loss on disposal of assets 42 413 279 Gain on sale of equity securities (4,788) -- (291) Deferred income taxes (5,896) (4,772) (1,634) Stock issued under compensatory stock plans 150 96 272 Changes in operating assets and liabilities excluding the effect of acquisitions: Accounts receivable and installment and other receivables (45,431) (45,472) (35,976) Prepaid expenses and other assets (3,000) (1,926) 2,296 Accounts payable and accrued expenses 11,103 12,930 5,599 Deferred maintenance revenue 20,807 15,572 19,267 --------- ---------- ---------- Net cash provided by (used for) operating activities 18,775 (18) 11,684 --------- ---------- ---------- Cash flows from investing activities: Purchases of equipment, furniture and leasehold improvements (5,615) (3,752) (5,495) Payments for capitalized software (4,874) (5,277) (3,941) Net sales (purchases) of short-term investments (23,102) 1,700 (8,950) Investment in equity securities (2,807) (361) (2,085) Proceeds from sale of equity securities 8,147 -- 717 --------- ---------- ---------- Net cash used for investing activities (28,251) (7,690) (19,754) --------- ---------- ---------- Cash flows from financing activities: Sale of lease contracts receivables 43,986 8,140 15,849 Proceeds from issuance of common stock 6,074 5,988 4,375 Purchase of treasury stock (26,918) (2,072) (1,919) Borrowings (payments) under line of credit (1,016) (2,134) 2,750 Payments on notes payable (318) (282) (626) Borrowings on sales leaseback transactions -- -- 1,184 Payments on capital leases (977) (2,012) (2,108) --------- ---------- ---------- Net cash provided by financing activities 20,831 7,628 19,505 --------- ---------- ---------- Effect of exchange rate changes on cash 1,076 (3,257) (422) --------- ---------- ---------- Net increase (decrease) in cash and cash equivalents 12,431 (3,337) 11,013 Cash and cash equivalents at beginning of year 33,923 37,260 26,247 --------- ---------- ---------- Cash and cash equivalents at end of year $46,354 $33,923 $37,260 ========= ========== ========== Supplemental disclosures of cash flow information: Cash paid during the year for: Interest $2,382 $1,638 $916 Income taxes $10,906 $7,935 $4,783 Supplemental disclosures of non-cash investing and financing activities: Capital lease obligations of $632,000 were incurred in 1998 for the purchase of equipment. Capital lease obligations of $2,505,000 were incurred in 1996 for the purchase of equipment. See accompanying notes
14 Exhibit 13.1 Boole & Babbage, Inc. Consolidated Statements of Stockholders' Equity
Unrealized Foreign Total Common Stock Additional Gain on Currency Stock- -------------- Paid-in Retained Marketable Translation Treasury holders' (Dollars in thousands) Shares Amount Capital Earnings Securities Adjustment Stock Equity - --------------------------------------------------------------------------------------------------------------------------- -------- Balance, September 30, 1995 27,514,872 $28 $73,901 $7,874 $132 $1,051 ($4,485) $78,501 Other equity transactions of acquired companies 13,397 -- 341 -- -- -- -- 341 Exercise of employee stock options and related tax benefit 931,022 1 5,362 -- -- -- -- 5,363 Sale of common stock under the employee stock purchase plan and related tax benefit 197,342 -- 1,323 -- -- -- -- 1,323 Issuance of common stock under the employee incentive stock plan 10,428 -- 107 -- -- -- -- 107 Unrealized loss on marketable securities, net of taxes -- -- -- -- 238 -- -- 238 Purchase of treasury stock -- -- -- -- -- -- (1,919) (1,919) Foreign currency translation adjustment -- -- -- -- -- (347) -- (347) Net income -- -- -- 11,457 -- -- -- 11,457 ---------------- -------- ------- ------ ------- -------- -------- Balance, September 30, 1996 28,667,061 29 81,034 19,331 370 704 (6,404) 95,064 Other equity transactions of acquired companies (2,667) -- (34) -- -- -- -- (34) Exercise of employee stock options and related tax benefit 1,098,618 1 9,062 -- -- -- -- 9,063 Sale of common stock under the employee stock purchase plan and related tax benefit 198,393 -- 1,768 -- -- -- -- 1,768 Issuance of common stock under the employee incentive stock plan 8,310 -- 130 -- -- -- -- 130 Unrealized gain on marketable securities, net of taxes -- -- -- -- 5,321 -- -- 5,321 Purchase of treasury stock -- -- -- -- -- -- (2,072) (2,072) Foreign currency translation adjustment -- -- -- -- -- (4,207) -- (4,207) Net income -- -- -- 13,469 -- -- -- 13,469 ---------------- -------- ------- ------ ------- -------- -------- Balance, September 30, 1997 29,969,715 30 91,960 32,800 5,691 (3,503) (8,476) 118,502 Exercise of employee stock options and related tax benefit 769,667 1 8,153 -- -- -- -- 8,154 Sale of common stock under the employee stock purchase plan and related tax benefit 157,321 -- 2,001 -- -- -- -- 2,001 Issuance of common stock under the employee incentive stock plan 7,245 -- 150 -- -- -- -- 150 Unrealized gain on marketable securities, net of taxes -- -- -- -- 733 -- -- 733 Purchase of treasury stock -- -- -- -- -- -- (26,918) (26,918) Foreign currency translation adjustment -- -- -- -- -- 1,277 -- 1,277 Return of shares from escrow related to 1997 acquisition (170,584) Net income -- -- -- 36,654 -- -- -- 36,654 ---------------- -------- ------- ------ ------- -------- -------- Balance, September 30, 1998 30,733,364 $31 $102,264 $69,454 $6,424 ($2,226) ($35,394) $140,553 ================ ======== ======= ====== ======= ======== ======== See accompanying notes
15 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. 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, 1998, cash equivalents consisted of $15,665,000 of time deposits with original maturities of 90 days or less and $477,000 of money market mutual funds. The Company places its cash equivalents and short-term investments with high credit quality financial institutions and, by policy, limits the amount of credit exposure with any one financial institution. 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, 1998, 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) 1998 1997 1996 - ----------------------------------------------------------- ------------ ------------ ------------ Municipal bonds and notes $35,656 $9,600 $16,000 Auction preferred stock 7,050 13,450 6,750 Taxable commercial paper 2,737 - 2,000 Corporate notes 709 - - ------------ ------------ ------------ $46,152 $23,050 $24,750 ============ ============ ============
Receivables Accounts receivable and installment receivables are net of allowances for doubtful accounts of $2,015,000, $1,995,000, and $2,277,000, at September 30, 1998, 1997 and 1996, 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. 16 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. 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) 1998 1997 1996 - -------------------------------------------------------------------------------------------------- Equipment $33,962 $34,200 $37,938 Furniture 12,211 10,381 9,288 Leasehold improvements 1,598 1,259 1,982 ------------ ------------ ------------ 47,771 45,840 49,208 Accumulated depreciation 36,546 35,872 36,445 ------------ ------------ ------------ $11,225 $9,968 $12,763 ============ ============ ============
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) 1998 1997 1996 - -------------------------------------------------------------------------------------------------- Costs in excess of net assets of purchased businesses $1,056 $1,056 $1,056 Accumulated amortization 449 422 396 ------------ ------------ ------------ $607 $634 $660 ============ ============ ============
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) 1998 1997 1996 - -------------------------------------------------------------------------------------------------- Cost of marketable securities $ 2,660 $ 3,212 $2,850 Unrealized gain 10,509 9,546 625 ------------ ------------ ------------ $13,169 $12,758 $3,475 ============ ============ ============
17 The unrealized gain is recorded net of tax in a separate stockholders' equity account as follows:
-------------------------------------- September 30, -------------------------------------- (Dollars in thousands) 1998 1997 1996 - -------------------------------------------------------------------------------------------------- Unrealized gain $10,509 $9,546 $ 625 Deferred income tax (4,085) (3,855) (255) ------------ ------------ ------------ $6,424 $ 5,691 $ 370 ============ ============ ============
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". 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 $4,173,000, $4,581,000 and $4,814,000 for 1998, 1997 and 1996, 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) 1998 1997 1996 - -------------------------------------------------------------------------------------------------- Total costs $28,806 $26,379 $24,483 Less amounts capitalized 4,748 4,022 3,611 ------------ ------------ ------------ $24,058 $22,357 $20,872 ============ ============ ============
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 nor the IBM reimbursements which totaled $1,375,000 in 1996. 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 In 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 128, "Earnings Per Share," which replaced the previously reported primary and fully diluted earnings per share with basic and diluted earnings per share. Unlike primary earnings per share, basic earnings per share excludes any diluted effects of options, warrants, and convertible securities. Diluted earnings per common share is computed by adding the weighted average number of common shares outstanding during 18 the period to the number of dilutive common shares that would be issuable upon the exercise of outstanding options using the treasury stock method of computation. Diluted earnings per share is very similar to the previously reported fully diluted earnings per share. All earnings per share amounts for all periods have been presented to conform to the Statement 128 requirements. All shares and per share amounts have been restated to retroactively reflect the 3 - for - 2 stock split described in note 6. The calculation of basic earnings per share and diluted earnings per share is as follows:
Years Ended September 30, 1998 1997 1996 TOTAL BASIC SHARES Weighted average number of common shares outstanding during the year 28,045 27,715 26,565 Net income $36,654 $13,469 $11,457 ======= ======= ======= Net income per share $ 1.31 $ 0.49 $ 0.43 ======= ======= ======= DILUTED SHARES Weighted average number of common shares outstanding during the year 28,045 27,715 26,565 Incremental common shares attributable to exercise of outstanding options (assuming proceeds would be used to purchase treasury stock) 2,535 2,430 2,250 ------- ------- ------- Total diluted shares 30,580 30,145 28,815 ======= ======= ======= Net income $36,654 $13,469 $11,457 ======= ======= ======= Net income per share $ 1.20 $ 0.45 $ 0.40 ======= ======= =======
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 criteria the Company uses for designating an instrument as a hedge include the instrument's effectiveness in the risk reduction and one-to-one matching of derivative instruments to underlying transactions. The foreign exchange 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 1998, 1997 and 1996 were approximately ($452,000), $992,000, and ($958,000), respectively. These amounts are included in the consolidated statements of income under the caption "interest and other income, net." The Company had approximately $61.0 million, $50.4 million and $34.5 million of open forward exchange contracts at September 30, 1998, 1997 and 1996, respectively. Beginning the first quarter of fiscal 1998, the Company implemented a program of purchasing foreign currency option contracts as an economic hedge for a portion of the anticipated net revenue of the Company's foreign subsidiaries. The premium cost of the options is expensed in the period in which they are purchased; the cost of foreign exchange options expensed during fiscal 1998 was approximately $679,000. Realized option gains are recorded as income in the period in which the options are exercised; option gains recorded in fiscal 1998 were $106,000. The Company had $14.8 million of open foreign currency option contracts as of September 30, 1998 which will expire during fiscal 1999. Fair value on 19 foreign currency option contracts as of September 30, 1998 approximated $249,000. Fair values are based upon quoted prices in an active market. Gains and losses on any instruments not meeting the above criteria would be recognized in income in the current period. If an underlying hedged transaction is terminated earlier than initially anticipated the offsetting gain or loss on the related derivative instrument would be recognized in income in the same period. Recent Accounting Pronouncements Statement of Position (SOP) 97-2, "Software Revenue Recognition" and (SOP) 98-4 "Deferral of the Effective Date of a Provision of (SOP) 97-2"were issued in October 1997 and March 1998, respectively, and address software revenue recognition. SOP 97-2 and SOP 98-4 supersede SOP 91-1 and are effective for transactions entered into for fiscal years beginning after December 15, 1997 and will therefore be adopted for the Company's fiscal year 1999, beginning October 1, 1998. Based on its reading and interpretation of SOP 97-2 and SOP 98-4, the impact will not be material to the Company's revenues and earnings. In March 1998, the AICPA issued SOP 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use." This standard requires that certain costs related to the development or purchase of internal-use software be capitalized and amortized over the estimated useful life of the software. This SOP also requires that costs related to the preliminary project stage and the post-implementation/operations stage of an internal-use computer software development project be expensed as incurred. SOP 98-1 is effective for financial statements issued for fiscal years beginning after December 31, 1998, which, in the case of the Company is October 1, 1999. SOP 98-1 is not expected to have a material impact on the Company's Consolidated Financial Statements. In June 1997, SFAS No. 130, "Reporting Comprehensive Income" was issued. Under SFAS No. 130, all items that meet the definition of comprehensive income will be separately reported for the period in which they are recognized. The only impact will be that comprehensive income, which will include changes in the balances of items that are reported separately in the Stockholders' Equity section of the Consolidated Balance Sheets, will be either reported in a separate statement or at the bottom of the Consolidated Statements of Earnings. This statement is effective for fiscal years beginning after December 15, 1997, which, in the case of the Company, is October 1, 1998. SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information" was issued in June 1997. SFAS No. 131 requires that a public business enterprise report financial and descriptive information about its reportable operating segments. Generally, financial information is required to be reported on the basis used internally for evaluating segment performance and resource allocation. SFAS No. 131 is effective for fiscal years beginning after December 31, 1997, and disclosure is not required in interim financial statements in the initial year of adoption. Accordingly, the Company will reflect SFAS No. 131 information in its Consolidated Financial Statements for the September 30, 1999, fiscal year. The Company is currently assessing the SFAS No. 131 requirements. 2. Acquisitions On January 16, 1997, the Company acquired all of the outstanding capital stock of MAXM Systems Corporation, a privately held company, in exchange for 1,535,082 shares of Boole & Babbage common stock. 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. 20 ---------------------------- Years Ended September 30 ------------- -------------- (Dollars in thousands) 1997 1996 - ------------------------------------------------------------------------------- Revenues: Boole & Babbage $195,032 $165,077 MAXM (Pre-Acquisition) 2,065 15,074 ------------- -------------- Consolidated $197,097 $180,151 ============= ============== Net income (loss): Boole & Babbage $ 27,908 $ 18,040 Acquisition costs (10,309) - MAXM (4,130) (6,583) ------------- -------------- Consolidated $ 13,469 $ 11,457 ============= ============== 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) 1998 1997 1996 - ----------------------------------------------------------------------------------------- Minimum lease payments receivable $128,460 $124,792 $89,054 Less unearned interest 11,634 13,105 8,853 ------------ ------------ ------------ Net investment in sales type leases 116,826 111,687 80,201 Amount due within one year 57,737 59,397 41,060 ------------ ------------ ------------ Amount due after one year $59,089 $52,290 $39,141 ============ ============ ============
Minimum lease payments receivable during each of the succeeding fiscal years are as follows: - ------------------------------------------------------------------------ Year (Dollars in thousands) - ------------------------------------------------------------------------ 1999 $63,684 2000 36,786 2001 20,240 2002 6,701 2003 1,049 ------------ $128,460 ============ 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 1998, 1997 and 1996 had present values of $43,986,000, $8,140,000 and $15,849,000, respectively. The uncollected present value of receivables that have been sold was approximately $48,951,000, $18,478,000 and $17,842,000 at September 30, 1998, 1997 and 1996, respectively. 21 4. Income Taxes Pretax income consists of the following:
-------------------------------------- Years Ended September 30, -------------------------------------- (Dollars in thousands) 1998 1997 1996 - -------------------------------------------------------------------------------------------------- Domestic $34,038 $ 7,236 $ 7,599 Foreign 16,876 13,758 10,873 ------------ ------------ ------------ $50,914 $20,994 $18,472 ============ ============ ============ The provision for taxes on income consists of the following: -------------------------------------- Years Ended September 30, -------------------------------------- (Dollars in thousands) 1998 1997 1996 - ----------------------------------------------------------- ------------ ------------ ------------ Federal Current $13,429 $ 7,637 $ 4,756 Deferred (4,238) (3,921) (1,141) ------------ ------------ ------------ 9,191 3,716 3,615 State Current 3,117 1,515 1,013 Deferred (1,037) (1,107) (322) ------------ ------------ ------------ 2,080 408 691 Foreign Current 3,610 3,145 2,880 Deferred (621) 256 (171) ------------ ------------ ------------ 2,989 3,401 2,709 ------------ ------------ ------------ $14,260 $ 7,525 $ 7,015 ============ ============ ============
No provision for residual federal taxes has been made on approximately $60 million 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, -------------------------------------- 1998 1997 1996 -------------------------------------- Computed expected tax provision 35.0% 35.0% 35.0% State income tax, net of federal benefit 2.7% 1.3% 0.9% Permanently invested earnings of foreign subsidiaries, net of foreign income taxes (4.9%) (10.6%) (8.0%) Goodwill amortization and other permanent items (0.7%) 2.7% 0.6% Research & development credit (2.4%) (3.1%) (0.9%) FSC benefit (0.5%) (0.4%) (0.1%) Net change in valuation allowance (0.6%) 10.4% 11.4% Other (0.6%) 0.5% (0.9%) ------------ ------------ ------------ 28.0% 35.8% 38.0% ============ ============ ============
22 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 components of the Company's deferred tax assets are as follows:
-------------------------------------- September 30, -------------------------------------- (Dollars in thousands) 1998 1997 1996 - -------------------------------------------------------------------------------------------------- Deferred Tax Assets: Net operating loss carryforwards $18,021 $18,235 $16,578 Foreign tax credit carryforwards 9 36 29 Research credit carryforwards -- -- 52 Deferred maintenance revenue 22,762 16,078 11,307 Accrued expenses 3,710 2,784 2,134 Bad debt allowance 604 612 563 Other 611 644 594 ------------ ------------ ------------ Total gross deferred tax asset 45,717 38,389 31,257 Less valuation allowance 15,113 14,603 12,470 ------------ ------------ ------------ Total deferred tax asset 30,604 23,786 18,787 ------------ ------------ ------------ Deferred Tax Liabilities: Unrealized gain on marketable securities (4,080) (3,850) (255) Software capitalization, net (3,775) (3,211) (3,065) Other -- -- (346) ------------ ------------ ------------ Total deferred tax liability (7,855) (7,061) (3,666) ------------ ------------ ------------ Net deferred tax asset $22,749 $16,725 $15,121 ============ ============ ============
The net valuation allowance increased $510,000 from 1997 to 1998 and $2,133,000 from 1996 to 1997 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, 1998 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, 1998, the Company had federal net operating loss carryforwards of approximately $45.7 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, 1998 are as follows: - ------------------------------------------------------------------------ Year (Dollars in thousands) - ------------------------------------------------------------------------ 1999 $8,225 2000 5,304 2001 2,387 2002 1,292 2003 928 Thereafter 2,333 ------------ $20,469 ============ Total rent expense under operating leases was $7,897,000, $8,692,000 and $8,793,000, for 1998, 1997 and 1996, respectively. 23 Capital Leases The Company leases certain computer equipment under long-term capital leases. Capitalized costs of $13,354,176, $12,721,000 and $16,484,000, are included in equipment, furniture and leasehold improvements at September 30, 1998, 1997 and 1996, respectively. Accumulated depreciation amounted to $11,255,603, $10,288,000 and $12,378,000, at September 30, 1998, 1997 and 1996, 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, 1998: - ------------------------------------------------------------------------ Year (Dollars in thousands) - ------------------------------------------------------------------------ 1999 $933 2000 750 2001 773 2002 153 2003 73 ----------- Total minimum lease payments 2,682 Less amount representing interest 299 ------------ Present value of future minimum lease payments 2,383 Amount due within one year 791 ------------ Amount due after one year 1,592 ============ Total interest expense related to capital lease obligations and notes payable was $223,000, $482,000 and $419,000 in 1998, 1997 and 1996, respectively. Notes Payable The Company has an equipment note at 8.25%, which had a balance of $50,000 at September 30, 1998. The note is due in fiscal year 1999. 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, 1998, there was no balance on this line of credit. As of September 30, 1997 and 1996, there were outstanding balances of $1,016,000 and $990,000, 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 was paid in full and the line of credit cancelled. 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. See Note 8, Subsequent Event, for a description of legal action entered into after September 30, 1998. 24 6. Common Stock Stock Split On February 18, 1998, the Company's Board of Directors authorized a 3-for-2 split of common stock payable on March 25, 1998, to shareholders of record as of March 6, 1998. The stock split is effected in the form of a stock dividend. The stated par value of each share remained $.001. A total of $10,000 was reclassified from the Company's additional paid-in-capital account to the Company's common stock account. All shares, per share amounts and stock option data have been restated to retroactively reflect the stock split. Stock option plans The 1997 Non-Officer Stock Option Plan (the 1997 plan), as amended, authorizes the grant of up to 1,500,000 shares of the Company's common stock to key employees and consultants of the Company who are not officers or members of the Board of Directors. The exercise price is 100% of the fair market value of the stock on the date such options are granted. The 1995 Stock Option Plan (the 1995 plan), as amended, authorizes the grant of up to 1,687,500 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 253,125 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 11,947,500 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 3,958,137, 3,583,160 and 3,554,699 at September 30, 1998, 1997 and 1996, respectively. Employee Stock Purchase Plan The Company adopted an Employee Stock Purchase Plan and, as amended, has reserved an aggregate total of 3,750,000 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 156,121, 198,393 and 197,342 during 1998, 1997 and 1996, respectively. At September 30, 1998 there were 714,814 shares available for future purchases of which 69,196 were committed to be issued in October 1998. 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 7,245, 8,310 and 10,428 during 1998, 1997 and 1996, respectively. The Board has reserved 225,000 shares for issuance under the plan. At September 30, 1998, there were 24,531 shares available for future awards. 25 The following table summarizes activity of the stock option plans for the three years ended September 30, 1998:
Option Activity ------------------------------ Weighted Options Average Available for Exercise Future Grant Number Price ---------------- ----------------- ------------ Balance, September 30, 1995 1,171,448 6,178,070 $ 4.55 Authorized increase 1,687,500 -- Options granted (1,395,732) 1,395,732 10.71 Options exercised -- (931,023) 3.10 Options canceled 138,204 (138,204) 6.22 ---------------- ----------------- ------------ Balance, September 30, 1996 1,601,420 6,504,575 6.07 Options granted (888,750) 888,750 14.86 Options exercised -- (1,098,618) 3.92 Options canceled 275,445 (275,445) 9.39 ---------------- ----------------- ------------ Balance, September 30, 1997 988,115 6,019,262 7.58 Authorized increase 1,500,000 -- Options granted (1,491,850) 1,491,850 22.02 Options exercised -- (769,676) 5.30 Options canceled 159,579 (159,579) 14.50 - -------------------------------------------------------------------------------------------------- Balance, September 30, 1998 1,155,844 6,581,857 $10.96 - --------------------------------------------------------------------------------------------------
The following tables summarize the information about options outstanding at September 30, 1998:
Outstanding options ---------------------------------------------------- Weighted Number of Average Weighted Shares (in Contractual Average Range of Exercise Prices thousand) Life (in years) Exercise Price - -------------------------------------------------------------------------------------------------- $1.83 - $7.33 3,055 4.89 $4.95 $8.45 - $19.75 2,247 8.01 12.63 $21.45 - $25.19 1,280 9.79 22.36 - -------------------------------------------------------------------------------------------------- 6,582 6.91 $10.96 - --------------------------------------------------------------------------------------------------
Exercisable options ---------------------------------- Number of Weighted Shares (in Average Range of Exercise Prices thousands) Exercise Price - -------------------------------------------------------------------------------- $1.83 - $7.33 2,973 $4.89 $8.45 - $19.75 985 11.46 $21.45 - $25.19 -- -- - ------------------------------------------------------------------------------- Total 3,958 $6.52 - ------------------------------------------------------------------------------- These options will expire if not exercised at specific dates ranging from October 1998 to September 2007. Prices for options exercised during the three-year period ended September 30, 1998 ranged from $1.53 to $22.44. 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 26 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 1998, 1997 and 1996 reported below has been estimated at the date of grant using a Black-Scholes option pricing model with the following weighted average assumptions:
Employee Stock Options -------------------------------------- 1998 1997 1996 - -------------------------------------------------------------------------------------------------- Expected life (in years) 6.0 5.5 5.5 Risk-free interest rate 5.0% 6.2% 6.3% Volatility .42 .43 .42 - -------------------------------------------------------------------------------------------------- Employee Stock Purchase Plan -------------------------------------- 1998 1997 1996 - -------------------------------------------------------------------------------------------------- Expected life (in years) .5 .5 .5 Risk-free interest rate 5.5% 5.7% 5.5% Volatility .48 .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 1998, 1997 and 1996 was $10.71, $7.22 and $5.13 per share, respectively. The weighted average estimated fair value of shares granted under the Employee Stock Purchase Plan during 1998, 1997 and 1996 was $6.74, $4.00 and 3.00, 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): 1998 1997 1996 - -------------------------------------------------------------------------------- Pro forma net income $32,974 $11,344 $10,689 ======= ======= ======= Pro forma basic earnings per share $ 1.18 $ 0.41 $ 0.40 ======= ======= ======= Pro forma diluted earnings per share $ 1.10 $ 0.38 $ 0.37 ======= ======= ======= 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. 27 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) 1998 1997 1996 - -------------------------------------------------------------------------------------------------- Revenues: United States and Canada $91,942 $78,574 $69,242 Europe 98,562 91,322 87,138 Other 27,732 27,201 23,771 ------------ ------------ ------------ Consolidated $218,236 $197,097 $180,151 ------------ ------------ ------------ Operating income: United States and Canada $23,485 $2,252 $1,658 Europe 10,596 7,837 10,084 Other 2,201 1,725 1,087 ------------ ------------ ------------ Consolidated $36,282 $11,814 $12,829 ------------ ------------ ------------ Identifiable assets: United States and Canada $169,111 $144,137 $126,791 Europe 141,508 115,966 98,917 Other 13,195 12,596 11,773 Eliminations (13,888) (12,555) (12,941) ------------ ------------ ------------ Consolidated $309,926 $260,144 $224,540 ------------ ------------ ------------
Included in operating income but excluded from revenues are royalties charged to international operations by domestic operations that aggregated $22,717,000, $21,464,000 and $21,192,000 in 1998, 1997 and 1996, respectively. 8. Subsequent Event On November 2, 1998 the Company and BMC Software, ("BMC"), entered into an Agreement and Plan of Reorganization. The merger contemplated therein will be accomplished by the issuance of 0.675 shares of BMC stock for each share of the Company's common stock. This transaction is expected to close in the second quarter in fiscal 1999 and to be accounted for using the pooling of interests method. The merger is subject to a number of customary closing conditions, including antitrust approval and approval by the stockholders of the Company. Platinum Technology, Inc., ("Platinum"), filed a Complaint and Motion for Preliminary Injunction on Nov. 13, 1998. The complaint alleges that the Company is in breach of a standstill and exclusive negotiation agreement with Platinum, and further, that BMC Software, Inc. tortiously interfered with such alleged agreement when it negotiated and executed the merger agreement announced on Nov. 2, 1998. Platinum seeks entry of an injunction voiding this merger agreement and requiring the Company to negotiate exclusively with it for an uninterrupted 120-day period. The Company is currently evaluating the complaint but believes that the claims by Platinum are without merit, and intends to vigorously defend itself against the allegations in the complaint. The Company continues to believe that the BMC merger agreement is in the best interests of its shareholders. 28 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, 1998 was 626. 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, 1996 and 1998. 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. 29 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, 1998, 1997 and 1996, 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. 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, 1998, 1997 and 1996, 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 21, 1998 30 EX-21.1 3 EXHIBIT 21.1 Exhibit 21.1 Subsidiaries of Registrant MAXM Systems Corporation Boole & Babbage Europe (Ireland) Boole & Babbage Australasia Pty Ltd. (Australia) Boole & Babbage a.s. (Norway) Joint Systems & Technology, Inc. (Japan) Boole & Babbage Europe (Portugal) MAXM Systems Limited (UK) MAXM Systems Corporation of Canada 23 EX-23.1 4 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 21, 1998, included in the 1998 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, 333-02723 and 333-66373) 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, the 1995 Stock Option Plan and the 1997 Non-Officer Stock Option Plan of Boole & Babbage, Inc. of our report dated October 21, 1998, 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 28, 1998 24 EX-23.2 5 CONSENT OF PRICEWATERHOUSECOOPERS LLP Exhibit 23.2 CONSENT OF PRICEWATERHOUSECOOPERS 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 audit of the consolidated financial statements of MAXM Systems Corporation as September 30, 1996, and for the year then ended, as included in the Form 8-K/A of Boole & Babbage, Inc. (File No. 000-13258). \PricewaterhouseCoopers LLP \ McLean, Virginia December 28, 1998 25 EX-27 6 FINANCIAL DATA SCHEDULE
5 1,000 YEAR SEP-30-1998 OCT-01-1997 SEP-30-1998 46,354 46,152 148,917 2,015 0 195,814 47,771 36,546 309,926 112,185 0 0 0 31 140,522 309,926 218,236 218,236 0 37,297 144,657 0 2,382 50,914 14,260 36,654 0 0 0 36,654 1.31 1.20
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