-----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, UIHFbnSR0WNi1LfbugejAnnS8W3jn6iGsQ8E5buNoLkLknbuaFArCLCUbwYxA8RI yk5aGuWpiUG58q5UKZlbaQ== 0000950005-96-000986.txt : 19961227 0000950005-96-000986.hdr.sgml : 19961227 ACCESSION NUMBER: 0000950005-96-000986 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19960930 FILED AS OF DATE: 19961226 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: BOOLE & BABBAGE INC CENTRAL INDEX KEY: 0000734394 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-PREPACKAGED SOFTWARE [7372] IRS NUMBER: 941651571 STATE OF INCORPORATION: DE FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-13258 FILM NUMBER: 96686253 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, D.C. 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, 1996 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from_________to________ Commission File Number: 0-132-58 BOOLE & BABBAGE, INC. (Exact name of registrant as specified in its charter) Delaware 94-1651571 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 3131 Zanker Road, San Jose, CA 95134-1933 (Address of principal executive offices) Registrant's telephone number, including area code: (408) 526-3000 Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common Stock, $.001 par value (Title of Class) Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] The aggregate market value of voting stock held by nonaffiliates of the registrant, based upon the average bid and asked price of the Common Stock on November 29, 1996, was approximately $289,241,887. Shares of Common Stock held by each officer and director have been excluded because such persons may be deemed to be affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes. The number of shares outstanding of the registrant's Common Stock on November 29, 1996 was 17,003,856. DOCUMENTS INCORPORATED BY REFERENCE 1. Portions of Annual Report to Stockholders for fiscal year ended September 30, 1996 - Items 5, 6, 7, 8 and 14. 2. Portions of Proxy Statement dated January 15, 1997 - Items 10, 11, 12 and 13. BOOLE & BABBAGE, INC. FORM 10-K YEAR ENDED SEPTEMBER 30, 1996 Table of Contents Item Number Page - ------ ---- PART I 1. Business .............................................................. 1 2. Properties ............................................................ 6 3. Legal Proceedings ..................................................... 6 4. Submission of Matters to a Vote of Security Holders ................... 6 PART II 5. Market for the Registrant's Common Stock and Related Stockholder Matters ................................................... 7 6. Selected Consolidated Financial Data .................................. 7 7. Management's Discussion and Analysis of Financial Condition and Results of Operations ................................................. 7 8. Financial Statements and Supplementary Data ........................... 7 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure .................................................. 7 PART III 10. Directors and Executive Officers of the Registrant .................... 8 11. Executive Compensation ................................................ 8 12. Security Ownership of Certain Beneficial Owners and Management ........ 8 13. Certain Relationships and Related Transactions ........................ 8 PART IV 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K ...... 9 Signatures ................................................................ 12 PART I ITEM 1. BUSINESS General Boole & Babbage, Inc. (hereinafter "Boole & Babbage" or the "Company") was founded in 1967. Boole & Babbage is an independent software vendor that develops and markets enterprise automation software solutions for managing distributed computer systems in multivendor, multiplatform computing environments. The Company's products are used by information systems professionals whose organizations rely on the performance of their computing resources to conduct business. Boole & Babbage is committed to the quality of the products and services it provides to its customers and continually invests in research and development to maintain the quality of its software products. See Note 7 of Notes to Consolidated Financial Statements for certain financial information with respect to the Company's foreign operations. Market Over the last 25 years, systems management has evolved from simply monitoring resource usage in a single mainframe to automated management of client/server applications across the information system enterprise. This includes the monitoring and management of mainframes, servers, networks and applications from disparate vendors across a myriad of platforms. The explosive growth of computing resources throughout the enterprise poses new challenges for systems management. Organizations are increasingly dependent on information systems for their moment-to-moment 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. Applications become increasingly complex as they support more business functions and are distributed across the enterprise on downsized platforms. Today's computing environment includes mainframes, minicomputers, workstations and LANs spread throughout the organization Along with the task of supporting this complex, mission-critical resource, corporate MIS departments are under continuous pressure to reduce all the costs associated with information systems and their management -- hardware, software, networks and personnel. The growing diversity of the enterprise computing environment contributes to other features of the current market. While IBM's dominance of the MIS organization is eroding, customers are concerned with protecting their investment in their information systems. This in turn is driving the emergence of often conflicting standards for systems management, such as SNMP DCE and various emerging object-oriented strategies like CORBA, OLE, DSOM, etc. In an effort to reduce training costs and increase efficiencies, there is a customer-driven trend toward consolidating the installed vendor base and standardizing on as few products as possible. Despite recent acquisitions, a smaller field of software vendors has been slow to deliver significant integration among system management tools while the market continues to demand out-of-the-box interoperability of diverse products. 1 In the face of these market dynamics, traditional approaches to systems management -- which focus on managing discrete components such as CPUs, subsystems, devices and networks -- cannot meet the challenge of managing service levels for complex distributed systems. Boole & Babbage is focused on delivering the next generation of automated systems management products needed to respond to these challenges. Product Strategy: Multiplatform Approach with Enterprise Automation Boole & Babbage Enterprise Automation strategy focuses on the business needs of large companies with strategic development of distributed information technologies. Boole & Babbage delivers a comprehensive solution aimed at helping customers gain proactive command and control of their distributed computing environment - from the mainframe to the desktop. Entire enterprises can be managed and automated from a central point-of-control, regardless of the devices, operating systems, network standard and platforms it contains. Boole & Babbage Enterprise Automation is an 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, HP or SUN, then Enterprise Automation fits with and complements the customer standard or framework instead of requiring 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. COMMAND/POST: Enterprise Central Control for Comprehensive Availability Management COMMAND/POST functions as a central point-of-control for managing and automating all enterprise computers, networks, and applications. It is integrated with all the Boole & Babbage product lines like Ensign and MainView products as well as many of the leading help desk problem management products and frameworks such as HP OpenView and IBM SystemView. COMMAND/POST uses a combination of agent- and message-based capabilities to extend 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 even escalates problem resolution to the appropriate level to insure rapid restoration of service. It targets and solves network problems such as node failures or the rerouting of data over a less-congested path. Customers gain increases in application availability while limiting required manual intervention by system management professionals. By bringing information about the enterprise 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 three years, COMMAND/POST 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, and SUN, COMMAND/POST has gained wide acceptance as the system integrator for various point solutions. These partnerships insure COMMAND/POST users the benefits of integrated, complementary products from customers' preferred vendors. 2 COMMAND/POST provides: Immediate improvements in availability and performance through automated recovery and failure prevention across WANs, LANs, mainframes and minicomputers. Low-cost implementation of connectivity through packaged interfaces and tools for message and alert filtering. An open architecture through interfaces to virtually any device. Increased operator productivity through console and alert consolidation, a graphical interface and graphical representations of enterprise configuration. Customization of data presentation on the UNIX workstation. Ensign: Intelligent Agent Extension for COMMAND/POST Event Management and Automation Ensign intelligent agents for UNIX, NetWare, and NT can insure the correct functioning of distributed client server applications and apply corrective actions. By distributing knowledge down into the servers, Ensign intelligent agents increase the scalability of the Enterprise Automation solution and insure that only severe non-locally-solvable problems are reported both locally and to the COMMAND/POST central point-of-control. Ensign agents also filter important alarm information to leading frameworks like HP OpenView and IBM SystemView. In addition to availability management, Ensign provides an extensive set of administration applications including User, File, Security and Storage backup and recovery management and via a set of partnerships can be extended to address software distribution and workload management. All Ensign functions can work in concert with COMMAND/Post or standalone in centralized and/or distributed mode to fit the management philosophy of the customer distributed system organization. The Ensign products have architectural advantages over other offerings on the market. Ensign products require no modification to the UNIX kernel ensuring smooth acceptance of UNIX upgrades, interoperability with other application software and easy portability to the different (13) versions of the UNIX operating system. Additionally, Ensign installs and is operational in less than one hour. MainView: Mainframe and Parallel Sysplex Server Management. The Boole & Babbage integrated MainView family of products provides automation and performance management for the IBM S/390 servers, ES/9000 series processors and to the CMOS based highly Parallel Sysplex servers. MainView products provide flexibility and efficiency in data collection across multiple MVS systems including Sysplex environments. On a single screen, application-focused views help insure service and availability goals are being met across the enterprise. In the mainframe area, IBM has announced several aggressive and strategic initiatives, destined to position the MVS operating system as an enterprise server operating system. With the introduction of the System/390 Parallel processors, which essentially reproduce the MVS operating system on a chip, IBM has given an indication of its plan to accommodate market demand for more efficient parallel processors. Customers will benefit from greater efficiency and cost reduction with parallel processors, however, they will also be 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. 3 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 operations 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. This relationship also extends to a joint development partnership which the two companies formalized in January 1991, and by the fact that IBM is also a customer and user of Boole & Babbage products. Under the agreement, Boole & Babbage and IBM are jointly designing and developing systems management products for the CICS transaction processing environment. 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 now in order to prepare their system 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. Storage Management and Automation Boole & Babbage sells products that address the control and automation of mainframe and client/sever disk (DASD) storage subsystems. The ProSMS suite of integrated MVS software products provide advanced automated management capabilities. ProSMS consists of product components that address key storage management areas such as dynamic abend recovery, migration to system managed storage, storage usage, administration and reporting. The company also sells a number of products from independent software vendors; these third-party products complement the Enterprise Automation 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. MainView, COMMAND/POST, BBI, AutoCOMMAND and Ensign are trademarks of Boole & Babbage, Inc. IBM is a registered trademark of International Business Machines Corporation. MVS, CICS, IMS, DB2, NetView and SystemView are trademarks of International Business Machines Corporation. Customer Support and Product Maintenance The Company offers product maintenance, which includes maintenance and updating of product capabilities to accommodate changes in a customer's hardware and software. An initial period, ranging from six months to one year, of maintenance is included in all of the Company's software licenses. Thereafter, the Company offers optional maintenance renewals at prices that generally range from 15% to 20% annually of the current product price. 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%. 4 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. 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 accounts for greater than 10% revenue in 1996, 1995 or 1994. 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 5,000 sites worldwide. In each of the last three fiscal years, a large portion of the Company's product revenue was from additional licensing by existing customers of either new products or products for additional sites. Research and Development The computer hardware and software industries are characterized by rapid technological change, which requires a continuing high level of expenditures for the development and maintenance of software products. It is customary for modifications to be made to a software product as experience with its use grows or as changes in manufactures' hardware and software so require. In 1995 the Company reinvested 16% of its Boole product revenues in R&D activities aimed at both enhancing the existing products and adding several new ones. R&D costs net of amounts capitalized were $17,819,000, $15,650,000 and $13,485,000 for the years ended September 30, 1996, 1995 and 1994, respectively. 5 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 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. Employees As of November 30, 1996 Boole & Babbage employed approximately 780 persons, including sales, marketing and related activities; product development and customer support; management, administration and finance. Of such employees, approximately 473 are employed in the United States and approximately 307 are employed in foreign countries. The Company believes that its employee relations are good. Subsequent Event During December 1996, Boole & Babbage agreed to acquire, subject to certain conditions, all of the outstanding capital stock of MAXM Systems Corporation ("MAXM") in exchange for approximately 1.2 million shares of Boole & Babbage common stock. Boole & Babbage anticipates that there will be a significant charge in connection with this acquisition when the transaction is completed in the quarter ending March 31, 1997. ITEM 2. PROPERTIES Boole & Babbage's principal administrative, marketing, research and development and support groups are located in one facility in San Jose, California. This facility is occupied under a lease that expires on March 31, 2000. The Company believes that this facility is adequate for its current needs and that suitable additional or substitute space will be available as needed to accommodate physical expansion of the Company's operations. In addition, the Company leases several sales and service facilities throughout North America, Europe, Japan and Australia under leases that expire on dates ranging through 2018. ITEM 3. LEGAL PROCEEDINGS Not applicable. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of security holders during the fourth quarter ended September 30, 1996. 6 PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS The information contained under the caption "Market for the Registrant's Common Stock and Related Stockholder Matters" on page 20 of the 1996 Annual Report to Stockholders is incorporated herein by reference. ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA The information contained under the caption, "Selected Consolidated Financial Data" in the 1996 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 1996 Annual Report to Stockholders on pages 3 - 8 is incorporated herein by reference. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Consolidated financial statements for Boole & Babbage, Inc. are contained on pages 9 - 12 of the 1996 Annual Report to Stockholders and are incorporated herein by reference. Supplementary data is contained on page 1 of the 1996 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. 7 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information required by this Item is incorporated herein by reference to the Company's Proxy Statement dated January 15, 1997 under the captions "Proposal 1" and "Additional Information." ITEM 11. EXECUTIVE COMPENSATION The information required by this Item is incorporated herein by reference to the Company's Proxy Statement dated January 15, 1997 under the captions "Proposal 1," "Executive Compensation," "Stock Option Grants and Exercises" and "Compensation Committee Report." ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required by this Item is incorporated herein by reference to the Company's Proxy Statement dated January 15, 1997 under the caption "Security Ownership of Management and Principal Stockholders." ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required by this Item is incorporated herein by reference to the Company's Proxy Statement dated January 15, 1997 under the caption "Certain Transactions." 8 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 1996 Annual Report to Stockholders: Page in Exhibit 13.1 ------------ Consolidated Statements of Income-Years Ended September 30, 1996, 1995 and 1994............................ 9 Consolidated Balance Sheets-September 30, 1996, 1995 and 1994.....................................................10 Consolidated Statements of Stockholders' Equity- Years Ended September 30, 1996, 1995 and 1994................11 Consolidated Statements of Cash Flows-Years Ended September 30, 1996, 1995 and 1994............................12 Notes to Consolidated Financial Statements...................13 Report of Ernst & Young LLP, Independent Auditors............20 2. Financial Statement Schedule. The following financial statement schedule of Boole & Babbage, Inc. is filed as part of this Report and should be read in conjunction with the Consolidated Financial Statements of Boole & Babbage, Inc.: Schedule for the fiscal years ended September 30, 1996, 1995 and 1994: Schedule Page -------- ---- II- Valuation and Qualifying Accounts........................13 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 1996 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, 1996. 9 (c) Exhibit Number Description ------ ------------ 3.1 Restated Certificate of Incorporation of Registrant. (1) 3.2 Bylaws of Registrant. (2) 4.1 Reference is made to Exhibits 3.1 and 3.2. 10.1 1986 Incentive Stock Option Plan, as amended, and related grant forms. (3) 10.2 1986 Supplemental Stock Option Plan, as amended, and related grant forms. (3) 10.3 Employee Stock Purchase Plan. (4) 10.4 Form of Indemnity Agreement between Registrant and its officers and directors. (1) 10.5 1993 Nonemployee Directors' Stock Option Plan, as amended, and related grant forms. (5) 10.6 1995 Stock Option Plan, as amended, and related grant forms. (6) 11.1 Computation of net income per share. (7) 13.1 1996 Annual Report to Stockholders. (7) 21.1 Subsidiaries of Registrant. (7) 23.1 Consent of Ernst & Young LLP, Independent Auditors. (7) 27.1 Financial Data Schedule. (7) 10 (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. 33-55588) and incorporated herein by reference. (5) Previously filed as an exhibit to the Registration Statement on Form S-8 (Registration No. 33-79782) and incorporated herein by reference. (6) Previously filed as an exhibit to the Registration Statement on Form S-8 (Registration No. 333-02723) and incorporated herein by reference. (7) Filed as an exhibit to this Annual Report on Form 10-K. Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the registrant pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as express in the Securities Act of 1933 and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue. 11 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 26th day of December 1996. 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 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 26th day of December 1996. \Johannes S. Bruggeling\ \Terry R. McGowan\ - -------------------------------------- ------------------------------------ Johannes S. Bruggeling Terry R. McGowan Executive Vice President and Director Director \Raymond E. Cairns\ \Paul E. Newton\ - -------------------------------------- ------------------------------------ Raymond E. Cairns Paul E. Newton Director President and Director \Franklin P. Johnson, Jr.\ \Carl H. Reynolds\ - -------------------------------------- ------------------------------------ Franklin P. Johnson, Jr. Carl H. Reynolds Chairman of the Board of Directors Director 12 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, 1996 $1,734,000 $370,000 -- $(216,000)* $1,888,000 Year ended September 30, 1995 $1,781,000 $129,000 -- $(176,000)** $1,734,000 Year ended September 30, 1994 $1,832,000 $296,000 -- $(347,000)*** $1,781,000 * Amount includes $206,000 of account write-offs net of $10,000 due to currency changes. ** Amount includes $162,000 of account write-offs net of $14,000 due to currency changes. *** Amount includes $378,000 of account write-offs, net of $31,000 due to currency changes.
13 EX-11.1 2 SCHEDULE OF COMPUTATION OF NET INCOME PER SHARE BOOLE & BABBAGE, INC. Exhibit 11.1 SCHEDULE OF COMPUTATION OF NET INCOME PER SHARE (in thousands, except per share data) Years ended September 30, --------------------------- 1996 1995 1994 ---- ---- ---- PRIMARY Weighted average number of common shares outstanding during the year 16,571 15,883 15,052 Incremental common shares attributable to exercise of outstanding options (assuming proceeds would be used to purchase treasury stock) 1,499 1,442 1,148 ------- ------- ------- Total shares(a) 18,070 17,325 16,200 ======= ======= ======= Net income $18,040 $13,948 $ 7,946 ======= ======= ======= Net income per share(a) $ 1.00 $ 0.81 $ 0.49 ======= ======= ======= FULLY DILUTED Weighted average number of common shares outstanding during the year 16,571 15,883 15,052 Incremental common shares attributable to exercise of outstanding options (assuming proceeds would be used to purchase treasury stock) 1,554 1,542 1,343 ------- ------- ------- Total shares(a) 18,125 17,425 16.395 ======= ======= ======= Net income $18,040 $13,948 $ 7,946 ======= ======= ======= Net income per share(a) $ 1.00 $ 0.80 $ 0.48 ======= ======= ======= (a) Per share data and number of shares reflect a 3-for-2 split to be effective on December 10, 1996. 14 EX-13.1 3 1996 ANNUAL REPORT TO STOCKHOLDERS Exhibit 13.1 Boole & Babbage, Inc. Selected Consolidated Financial Data
Years ended September 30, ------------------------------------------------------------------------- (In thousands, except per share amounts) 1996 1995 1994 1993 1992 - ------------------------------------------------------------------------------------------------------------------------------------ Revenue $ 167,178 $ 154,367 $ 131,796 $ 118,245 $ 110,539 Expenses (a) 148,064 138,323 119,032 108,622 102,228 --------- --------- --------- --------- --------- Income (loss) excluding special charges (a) 19,114 16,044 12,764 9,623 8,311 Interest and other income (expense), net 5,941 3,904 2,003 1,548 (584) --------- --------- --------- --------- --------- Income (loss) before income taxes 25,055 19,948 14,767 11,171 7,727 Provision (benefit) for income taxes 7,015 6,000 4,575 3,519 2,434 --------- --------- --------- --------- --------- Net income (loss) $ 18,040 $ 13,948 $ 10,192 $ 7,652 $ 5,293 ========= ========= ========= ========= ========= Net income (loss) per share (b) $ 1.00 $ 0.81 $ 0.63 $ 0.47 $ 0.35 ========= ========= ========= ========= ========= Shares used in per share calculations (b) 18,070 17,325 16,200 16,315 15,075 ========= ========= ========= ========= ========= Balance sheet data: Cash, cash equivalents and short-term investments $ 60,055 $ 38,140 $ 34,019 $ 23,726 $ 16,113 Total assets $ 207,064 $ 163,908 $ 131,626 $ 100,905 $ 88,363 Long-term debt $ 2,489 $ 1,346 $ 3,080 $ 5,165 $ 5,196 Deferred maintenance revenue $ 74,685 $ 58,237 $ 46,905 $ 32,371 $ 32,182 Stockholders' equity $ 93,025 $ 70,187 $ 48,164 $ 34,467 $ 29,025 (a) Excludes $3.3 million ($0.14 per share) of purchased R&D expense in FY94. (b) Per share data and number of shares reflect a 3-for-2 stock split which became effective on December 10, 1996.
Page 1 Exhibit 13.1 Boole & Babbage, Inc. Quarterly History (Unaudited)
(In thousands, except per share amounts) Q1 95 Q2 95 Q3 95 Q4 95 Q1 96 Q2 96 Q3 96 Q4 96 - ------------------------------------------------------------------------------------------------------------------------ Revenue: Product licensing $20,739 $18,787 $18,924 $22,404 $21,474 $21,668 $22,312 $25,198 Maintenance fees and other 17,834 18,466 18,444 18,769 18,645 18,997 18,605 20,280 ------------------------------------------------------------------------------- Total revenue 38,573 37,253 37,368 41,173 40,119 40,665 40,917 45,478 ------------------------------------------------------------------------------- Costs and expenses: Cost of product licensing 3,456 3,300 3,298 3,854 3,973 4,301 5,090 4,127 Cost of maintenance fees and other 3,580 4,010 3,812 4,177 3,435 3,703 3,476 3,557 Product development 4,158 3,842 3,748 4,846 4,374 4,540 4,650 5,709 Sales and marketing 19,031 18,255 20,145 19,908 19,682 19,814 19,570 22,292 General and administrative 4,177 3,792 3,006 3,928 3,851 3,851 3,987 4,082 ------------------------------------------------------------------------------- Total costs and expenses 34,402 33,199 34,009 36,713 35,315 36,209 36,773 39,767 ------------------------------------------------------------------------------- Operating income (loss) 4,171 4,054 3,359 4,460 4,804 4,456 4,144 5,711 Interest and other income, net 631 1,116 1,037 1,120 1,306 1,408 1,519 1,707 ------------------------------------------------------------------------------- Income before taxes 4,802 5,170 4,396 5,580 6,110 5,864 5,663 7,418 Provision for income taxes 1,490 1,600 1,230 1,680 1,825 1,530 1,585 2,075 ------------------------------------------------------------------------------- Net income $3,312 $3,570 $3,166 $3,900 $4,285 $4,334 $4,078 $5,343 =============================================================================== Net income per share (a) $0.20 $0.21 $0.18 $0.22 $0.24 $0.24 $0.22 $0.29 =============================================================================== Shares used in per share calculations (a) 16,800 17,325 17,475 17,625 17,925 17,965 18,180 18,220 =============================================================================== Stock Price (closing bid) (a) High $11.67 $13.45 $13.89 $13.89 $17.11 $17.25 $17.59 $17.17 Low $8.85 $11.45 $12.11 $12.78 $12.89 $13.33 $15.50 $14.17 (a) Per share data, number of shares and stock price reflect a 3-for-2 stock split which became effective on December 10, 1996.
Page 2 Exhibit 13.1 MANANGEMENT'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, 1996:
PERCENTAGE OF REVENUE YEAR-TO-YEAR YEARS ENDED SEPTEMBER 30, PERCENTAGE CHANGE -------------------------------------------- -------------------------------- 1996 1995 1994 96 vs. 95 95 vs. 94 - --------------------------------------------------------------------------------------------------------------------------------- Revenue: Product licensing 54.2% 52.4% 49.3% 12.1% 24.4% Maintenance fees and other 45.8% 47.6% 50.7% 4.1% 10.0% ------ ------ ------ ------ ------ Total revenue 100.0% 100.0% 100.0% 8.3% 17.1% Costs and expenses: Cost of product licensing 10.5% 9.0% 7.4% 25.8% 42.7% Cost of maintenance fees and other 8.5% 10.1% 12.5% -9.0% -5.4% Product development 11.5% 10.8% 11.2% 16.1% 12.4% Sales and marketing 48.7% 50.1% 48.2% 5.2% 21.7% General and administrative 9.4% 9.6% 11.0% 5.8% 2.9% Purchased R&D expense -- -- 2.5% N/A N/A ------ ------ ------ ------ ------ Total costs and expenses 88.6% 89.6% 92.8% 7.0% 13.1% ------ ------ ------ ------ ------ Operating income 11.4% 10.4% 7.2% 19.1% 68.7% Interest and other income, net 3.6% 2.5% 1.5% 52.2% 94.9% ------ ------ ------ ------ ------ Income before provision for income taxes 15.0% 12.9% 8.7% 25.6% 73.2% Provision for income taxes 4.2% 3.9% 2.7% 16.9% 68.1% ====== ====== ====== ====== ====== Net income 10.8% 9.0% 6.0% 29.3% 75.5% ====== ====== ====== ====== ======
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. Revenue The Company derives its revenues primarily from the licensing of computer software programs, consulting and education services, and the sales of software maintenance services. Total revenue increased over the prior year by 8.3% in 1996 compared to an increase of 17.1% in 1995. Without the impact of currency exchange rates, total revenue increased 10.2% and 9.6% in 1996 and 1995, respectively. Product Licensing The Company licenses its products to customers for use on their computer systems. The Company also performs consulting and educational services related to those products, although revenue from these services was not significant. Product licensing accounted for 54.2% or $90,652,000 of total revenue in 1996, compared to 52.4% or $80,854,000 in 1995 and 49.3% or $64,985,000 in 1994. Revenue from product licensing increased by 12.1% in 1996 compared to 1995 and by 24.4% for 1995 over 1994. As is common in the industry, more than 50% of the Company's license revenue is derived from transactions that close in the last month of a quarter, which can make quarterly revenues difficult to forecast. And, since operating expenses are relatively fixed, failure to achieve projected revenues could materially affect the Company's operating results. This, in turn, could result in an immediate and adverse effect on the market price of the Company's stock. Products The product area with the highest growth rate was the client/server group which grew by 66.0% in 1996 and 83.0% in 1995 and comprised 22.8% of the total product licensing in 1996 compared to 15.4% in 1995 and 10.5% in 1994. The Company anticipates that this group will continue to show high growth rates for fiscal 1997. However, the Company competes with certain companies who have greater resources along with products already in the marketplace. In addition, the Company is dependent on the client/server market developing at a rapid rate despite reports by industry analysts that implementation of client/server networks may be more expensive and time consuming than users had anticipated, which could potentially slow the growth of the market. Specifically, these circumstances resulted in below-plan sales on the Stage3 LAN backup product which caused the Company to take a charge of approximately $1 million in the third quarter of 1996 for the remaining royalty commitment. Due to these factors, there can be no assurances that new products will achieve significant market acceptance or competitive success and thus contribute to revenue growth. Mainframe products grew 2.3% and 17.6% in 1996 and 1995, respectively, and comprised 77.2%, 84.6%, and 89.5% of total product licensing in 1996, 1995 and 1994, respectively. The mainframe group includes plex products which enable customers to handle large groups of computer processors, particularly the new parallel processing machines by IBM. The Company's new revenue growth could be materially and adversely affected if these new parallel processors do not gain significant market acceptance and customer spending shifts away from traditional mainframes to technology platforms where the Company does not have significant product acceptance. Price changes during 1996, 1995 and 1994 were not significant. 4 Product licensing growth: ------------------ 1996 1995 ------------------ Domestic 16.6% 10.4% International 10.1% 31.9% ------------------ 12.1% 24.4% ------------------ Product licensing mix: ----------------------------- 1996 1995 1994 ----------------------------- Domestic 32.1% 30.8% 34.8% International 67.9% 69.2% 65.2% ----------------------------- 100.0% 100.0% 100.0% ----------------------------- Markets Domestic: Domestic product licensing grew 16.6% overall in 1996, as revenue from the field sales force grew 31.8%, but was partially offset by decreased revenues for the telesales group. The telesales group decreases were due primarily to ineffective sales execution. In 1995, domestic product licensing grew 10.4% overall, as the telesales group produced strong growth, but was partially offset by a flat year for the field sales force. For growth to continue in the domestic market, the company is dependent on increased productivity from the telesales group, continued increases from the field sales force, and the ability to generate larger size transactions. International: In 1996, the Company's revenues from its international operations, comprised of foreign subsidiaries and marketing agents, increased 10.1% as a result of solid growth in Europe despite unfavorable currency exchange rates. In 1995, the Company's revenues from its international operations increased 31.9% as a result of strong growth in South America and favorable currency exchange rates. Without the impact of currency exchange rates, international growth was 13.1% and 19.6% for 1996 and 1995, respectively. As further described in Note 1, the Company has a hedging program to attempt to reduce its exposure to currency fluctuations. Since the majority of product licensing is derived from international markets, the Company's operations and financial results could be significantly and adversely affected by such international factors as changes in currency exchange rates and specific countries' 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 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 with IBM which replaces the former agreement. The new agreement requires royalty payments to the Company, based upon sales of the product by IBM, of up to approximately $10 million for the period from the fourth quarter of 1996 through the second quarter of fiscal 1999. Since there are no minimum generated amounts, actual royalties due to the Company may be significantly below the annual maximum amounts. For 1996, 1995 and 1994, maintenance fees and other accounted for 45.8%, 47.6% and 50.7%, respectively, of total revenues. Year-to-year increases in maintenance fees and other for 1996 and 1995 were 4.1% and 10.0%, respectively. Without the impact of currency exchange rates, the increases were 5.7% and 3.5% for 1996 and 1995, respectively. These increases are mainly the result of increased product licensing in the previous years combined with high renewal rates and, in 1996, increased royalties from IBM under the new agreement. In both years, the maintenance revenue growth rates are lower than the licensing growth rates primarily as a result of fewer customer sites due to the consolidation of customer data centers; reduced revenue associated with customers' conversion to non-CPU specific pricing systems such as MIPS-based pricing; and higher discount levels offered by the Company on multiple-year maintenance packages. The Company anticipates that maintenance revenue in 1997 will increase due to the higher license revenue growth in 1996, although it will 5 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. Cost of Product Licensing: Cost of product licensing consists primarily of royalties paid to independent software authors, amortization of purchased and internally developed software and the cost of outside consultants to provide educational services. Cost of product licensing increased 25.8% and 42.7% in 1996 and 1995, respectively, and represented 10.5%, 9.0% and 7.4% of revenues for 1996, 1995 and 1994, respectively. Without the impact of currency exchange rates, the increases were 28.7% and 31.4% for 1996 and 1995, respectively. In 1996, the increase was primarily due to higher third-party royalties and service costs as increased third-party licensing in Europe and Japan resulted in higher royalties while higher service revenue worldwide produced a corresponding increase in consulting and educational costs. In addition, in the third quarter of 1996 there was a charge of approximately $1 million on the remaining royalty commitments on the Stage3 product. In 1995, the increase is a result of higher third-party royalties and software amortization. Third-party royalties increased both as a result of higher third-party revenue in Europe and Japan as well as the addition of third-party client/server products to which the Company has exclusive distribution rights. Software amortization increased from the combination of 1994's Sysnet a.s. acquisition (see Note 3) and the large number of product releases at the end of 1994. 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 of hardware associated with sales of client/server products and costs related to operating the computer services division. Cost of maintenance fees and other decreased by 9.0% and 5.4% in 1996 and 1995, respectively, and represented 8.5%, 10.1% and 12.5% of revenues for 1996, 1995 and 1994, respectively. Without the impact of currency exchange rates, the decreases were 7.7% and 9.1% for 1996 and 1995, respectively. In 1996, the decrease was primarily due to lower maintenance support costs and software amortization. Software amortization is down due to write-offs in 1995 of certain software products and the full amortization of products purchased in July 1991. Maintenance support costs are down as a result of more efficient processes implemented which allowed the redeployment of personnel to research and development ("R&D"). In 1995, the decrease is a result of lower third-party royalties and maintenance support costs partially offset by higher software amortization. Software amortization increased due to the write-off of certain software products at the end of 1995. A new contract with a third-party vendor in Europe has significantly reduced the royalties on maintenance from the second quarter of 1995 through the fourth quarter of 1996. Since this reduction was in effect for both 1996 and 1995, there was no material impact on the comparability between these years. In 1997, the effective royalty rate to this vendor will increase as a result of the expiration of the reduced rate. In general, fluctuations in the relationship of cost of maintenance fees and other to revenue are caused primarily by changes in maintenance revenue mix, maintenance support, royalty agreements, and amortization of capitalized software. Product Development: Product development costs increased by 16.1% and 12.4% in 1996 and 1995, respectively, and represented 11.5%, 10.8% and 11.2% of revenues for 1996, 1995 and 1994, respectively. Without the impact of currency exchange rates, the increases were 16.5% and 10.7% for 1996 and 1995, respectively. The increase in 1996 is due to higher personnel costs as headcount replacements were filled and maintenance support employees transferred to R&D. In 1995, a decrease in domestic R&D due to delayed headcount replacements was offset by higher computer costs and a full year of R&D costs in 6 Oslo as a result of the Sysnet acquisition in April 1994. The Company capitalizes certain development costs in accordance with Statement of Financial Accounting Standards No. 86 ("FAS 86"). To the extent the Company capitalizes its product development costs, the effect is to defer such costs to future periods and match them to the revenue generated by the products. Product development and support expenses may fluctuate annually depending in part upon the number and status of internal software development projects. Sales and Marketing Sales and marketing expenses increased by 5.2% and 21.7% in 1996 and 1995, respectively, and represented 48.7% of revenues in 1996 compared to 50.1% and 48.2% in 1995 and 1994, respectively. Without the impact of currency exchange rates, the increases were 7.0% and 15.7% for 1996 and 1995, respectively. The increase in 1996 is primarily a result of higher commissions on increased sales. Higher sales personnel costs internationally were partially offset by lower product marketing costs. In 1995, sales commissions increased proportionately with product licensing. The remainder of the increase is a result of increased headcount in all sales channels including a full year of expenses of the Japanese subsidiary, which was started June 1994. General and Administrative General and administrative expenses increased 5.8% in 1996 and 2.9% in 1995 and represented 9.4%, 9.6% and 11.0% of revenues for 1996, 1995 and 1994, respectively. Without the impact of currency exchange rate changes, general and administrative expenses increased 7.3% in 1996 and decreased 0.8% in 1995. In the third quarter of 1995, the Company negotiated a lease termination which resulted in the recovery of approximately $350,000 of previously accrued lease payments on an idle facility. The increase in 1996 was primarily a result of this prior year non-recurring credit as well as higher facilities costs for European and Japanese office relocations. In 1995, the decrease in net facility expense was offset by increases in personnel both domestically and in Europe. Purchased R&D Expense In April 1994, the Company acquired the net assets of Sysnet a.s., an Oslo, Norway-based provider of system administration software for UNIX systems and other distributed client/server systems, for $4.1 million in cash plus potential additional consideration based upon future results (see Note 3). The transaction was accounted for using the purchase method and a valuation was performed of all assets acquired. As a result, $3,251,000, or approximately 78% of the purchase price was written off as a one-time charge related to purchased research and development. Interest and Other Income, Net Interest and other income consists principally of interest income, interest expense, gain or loss on sales of investments, currency gain or loss, and gain or loss on disposal of assets. An increase of 52.2% over 1995 was primarily the result of more interest income as gross lease contracts receivable was 39.0% higher than one year ago. In addition, there was approximately a $300,000 gain on sale of investment securities compared to an approximate $300,000 loss in 1995 and interest expense decreased as capital leases and notes payable were paid down. These increases were somewhat mitigated by higher currency losses. In 1995, the 94.9% increase over 1994 was primarily attributable to interest income as gross lease contracts receivable increased 60.4% over 1994. Additionally, net interest income increased in 1995 as a result of approximately $300,000 of interest received from the IRS in settlement of an audit, more investment income as a result of higher cash and short-term investment balances, and less interest expense as capital leases and notes payable are paid down. The Company has a hedging program to attempt to minimize its exposure to fluctuations in foreign currencies in the Company's statement of operations. Income Taxes The effective tax rate was 28.0%, 30.0%, and 31.0% for 1996, 1995 and 1994, respectively. The Company's effective tax rate differs from the federal statutory rate due primarily to permanently invested earnings of foreign subsidiaries being taxed at rates lower than the federal statutory rate. 7 Liquidity and Capital Resources The significant sources of cash during 1996 include cash provided by operating activities of $14,368,000; proceeds from the sale of lease contracts receivable of $15,849,000; the exercise of employee stock options of $2,885,000; stock purchases through the Employee Stock Purchase Plan of $1,281,000; proceeds from the sale of marketable equity securities of $717,000; and net proceeds from a line of credit of $590,000. The significant uses of cash during 1996 include $8,950,000 for the net purchases of short-term investments; $3,941,000 for internally developed and purchased capitalized software; $3,475,000 for purchases of furniture, equipment and leasehold improvements; $2,085,000 for investment in equity securities; $1,919,000 for treasury stock purchases; $1,456,000 for payments on capital leases; and $510,000 for payments on notes payable. In 1996, the Company incurred capital lease obligations of $2,505,000 for the purchase of equipment for the corporate data center. Management believes cash flows from operations and existing cash resources will be adequate to meet its working capital requirements for the foreseeable future. 8 Exhibit 13.1 Boole & Babbage, Inc. Consolidated Statements of Income Years ended September 30, --------------------------- (In thousands, except per share amounts) 1996 1995 1994 - -------------------------------------------------------------------------------- Revenue: Product licensing $ 90,652 $ 80,854 $ 64,985 Maintenance fees and other 76,526 73,513 66,811 -------- -------- -------- Total revenue 167,178 154,367 131,796 -------- -------- -------- Costs and expenses: Cost of product licensing 17,492 13,908 9,745 Cost of maintenance fee and other 14,170 15,579 16,473 Product development 19,273 16,594 14,768 Sales and marketing 81,358 77,339 63,565 General and administrative 15,771 14,903 14,481 Purchased R&D expense -- -- 3,251 -------- -------- -------- Total costs and expenses 148,064 138,323 122,283 -------- -------- -------- Operating income 19,114 16,044 9,513 Interest and other income, net 5,941 3,904 2,003 -------- -------- -------- Income before provision for income taxes 25,055 19,948 11,516 Provision for income taxes 7,015 6,000 3,570 -------- -------- -------- Net income $ 18,040 $ 13,948 $ 7,946 ======== ======== ======== Net income per share (a) $ 1.00 $ 0.81 $ 0.49 ======== ======== ======== Shares used in per share calculations (a) 18,070 17,325 16,200 ======== ======== ======== (a) Per share data and number of shares reflect a 3-for-2 stock split which became effective on December 10, 1996. Page 9 Exhibit 13.1 Boole & Babbage, Inc. Consolidated Balance Sheets
September 30, -------------------------------------------- (Dollars in thousands) 1996 1995 1994 - ------------------------------------------------------------------------------------------------------------------------------------ Assets Current assets: Cash and cash equivalents $ 35,305 $ 22,340 $ 34,019 Short-term investments 24,750 15,800 -- Accounts receivable, net 23,281 27,293 23,180 Installment and other receivables, net 44,105 28,066 18,251 Deferred tax asset 5,649 5,810 4,959 Prepaid expenses and other current assets 3,183 4,967 3,199 --------- --------- --------- Total current assets 136,273 104,276 83,608 Purchased and internally developed software, net 11,614 12,278 14,276 Equipment, furniture and leasehold improvements, net 8,695 7,341 8,506 Long-term installment and other receivables 39,141 32,223 20,011 Long-term deferred tax asset 6,537 4,843 2,284 Costs in excess of net assets of purchased businesses, net 660 687 713 Other assets 4,144 2,260 2,228 --------- --------- --------- Total assets $ 207,064 $ 163,908 $ 131,626 ========= ========= ========= Liabilities and Stockholders' Equity Current liabilities: Accounts payable $ 6,642 $ 6,595 $ 6,762 Accrued payroll expense 7,890 7,149 6,603 Other accrued liabilities 20,089 18,133 16,835 Short-term borrowings 990 400 -- Notes payable due within one year 293 513 1,171 Capital lease obligations due within one year 961 1,348 2,045 Deferred maintenance revenue 47,225 40,180 34,174 --------- --------- --------- Total current liabilities 84,090 74,318 67,590 Notes payable due after one year 369 663 1,177 Capital lease obligations due after one year 2,120 683 1,903 Deferred maintenance revenue due after one year 27,460 18,057 12,731 Minority interest -- -- 61 Stockholders' equity: Preferred stock, 2,000,000 shares authorized, $.001 par value, none issued -- -- -- Common stock, $.001 par value, authorized--30,000,000 shares; issued-- 17,973,270 (17,214,075 and 16,578,850 in 1995 and 1994, respectively) 18 17 17 Additional paid-in capital 37,630 30,838 23,834 Retained earnings 60,712 42,672 28,724 Unrealized gain on marketable securities 370 132 170 Foreign currency translation adjustment 699 1,013 (96) Less treasury stock, 1,143,788 shares (1,024,988 shares in 1995 and 1994, respectively), at cost (6,404) (4,485) (4,485) --------- --------- --------- Total stockholders' equity 93,025 70,187 48,164 --------- --------- --------- Total liabilities and stockholders' equity $ 207,064 $ 163,908 $ 131,626 ========= ========= =========
Page 10 Exhibit 13.1 Boole & Babbage, Inc. Consolidated Statements of Stockholders' Equity
Unrealized Common Stock Additional Gain on ---------------------- Paid-in Retained Marketable (Dollars in thousands) Shares Amount Capital Earnings Securities - ------------------------------------------------------------------------------------------------------------------------------------ Balance, September 30, 1993 15,419,448 $ 15 $18,996 $20,778 $-- Exercise of employee stock options and related tax benefit 983,772 2 3,876 -- -- Sale of common stock under the employee stock purchase plan and related tax benefit 158,256 -- 829 -- -- Issuance of common stock under the employee incentive stock plan 17,374 -- 133 -- -- Unrealized gain on marketable securities, net of taxes -- -- -- -- 170 Purchase of treasury stock -- -- -- -- -- Foreign currency translation adjustment -- -- -- -- -- Net income -- -- -- 7,946 -- ---------- ----- ------- ------- ----- Balance, September 30, 1994 16,578,850 17 23,834 28,724 170 Exercise of employee stock options and related tax benefit 482,585 -- 5,892 -- -- Sale of common stock under the employee stock purchase plan and related tax benefit 141,380 -- 974 -- -- Issuance of common stock under the employee incentive stock plan 11,260 -- 138 -- -- Unrealized loss on marketable securities, net of taxes -- -- -- -- (38) Foreign currency translation adjustment -- -- -- -- -- Net income -- -- -- 13,948 -- ---------- ----- ------- ------- ----- Balance, September 30, 1995 17,214,075 17 30,838 42,672 132 Exercise of employee stock options and related tax benefit 620,682 1 5,362 -- -- Sale of common stock under the employee stock purchase plan and related tax benefit 131,561 -- 1,323 -- -- Issuance of common stock under the employee incentive stock plan 6,952 -- 107 -- -- Unrealized gain on marketable securities, net of taxes -- -- -- -- 238 Purchase of treasury stock -- -- -- -- -- Foreign currency translation adjustment -- -- -- -- -- Net income -- -- -- 18,040 -- ---------- ----- ------- ------- ----- Balance, September 30, 1996 17,973,270 $ 18 $37,630 $60,712 $ 370 ========== ===== ======= ======= ===== Foreign Total Currency Stock- Translation Treasury holders' Adjustment Stock Equity ------------------------------------------ Balance, September 30, 1993 ($1,542) ($ 3,780) $34,467 Exercise of employee stock options and related tax benefit -- -- 3,878 Sale of common stock under the employee stock purchase plan and related tax benefit -- -- 829 Issuance of common stock under the employee incentive stock plan -- -- 133 Unrealized gain on marketable securities, net of taxes -- -- 170 Purchase of treasury stock -- (705) (705) Foreign currency translation adjustment 1,446 -- 1,446 Net income -- -- 7,946 ------- -------- ------- Balance, September 30, 1994 (96) (4,485) 48,164 Exercise of employee stock options and related tax benefit -- -- 5,892 Sale of common stock under the employee stock purchase plan and related tax benefit -- -- 974 Issuance of common stock under the employee incentive stock plan -- -- 138 Unrealized loss on marketable securities, net of taxes -- -- (38) Foreign currency translation adjustment 1,109 -- 1,109 Net income -- -- 13,948 ------- -------- ------- Balance, September 30, 1995 1,013 (4,485) 70,187 Exercise of employee stock options and related tax benefit -- -- 5,363 Sale of common stock under the employee stock purchase plan and related tax benefit -- -- 1,323 Issuance of common stock under the employee incentive stock plan -- -- 107 Unrealized gain on marketable securities, net of taxes -- -- 238 Purchase of treasury stock -- (1,919) (1,919) Foreign currency translation adjustment (314) -- (314) Net income -- -- 18,040 ------- -------- ------- Balance, September 30, 1996 $ 699 ($ 6,404) $93,025 ======= ======== =======
Page 11 Exhibit 13.1 Boole & Babbage, Inc. Consolidated Statements of Cash Flows
Years ended September 30, ----------------------------------------------- (Dollars in thousands) 1996 1995 1994 - ------------------------------------------------------------------------------------------------------------------------------------ Cash flows from operating activities: Net income $ 18,040 $ 13,948 $ 7,946 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation, amortization and write-off of capitalized software 8,890 9,667 11,922 Loss on disposal of assets 279 103 -- Gain on sale of equity securities (291) -- -- Write-off of investment in equity securities -- -- 150 Deferred income taxes (1,634) (960) (1,117) Stock issued under compensatory stock plans 107 138 133 Minority interest -- (62) (199) Changes in operating assets and liabilities excluding the effect of acquisitions: Accounts receivable and installment and other receivables (35,468) (25,041) (20,272) Prepaid expenses and other assets 1,835 (1,439) (1,040) Accounts payable and accrued expenses 5,617 3,042 2,955 Deferred maintenance revenue 16,993 10,643 12,941 -------- -------- -------- Net cash provided by operating activities 14,368 10,039 13,419 -------- -------- -------- Cash flows from investing activities: Purchases of equipment, furniture and leasehold improvements (3,475) (3,326) (2,848) Payments for capitalized software (3,941) (3,048) (6,542) Net purchases of short-term investments (8,950) (15,800) -- Investment in equity securities (2,085) (346) (997) Proceeds from sale of equity securities 717 -- -- -------- -------- -------- Net cash used for investing activities (17,734) (22,520) (10,387) -------- -------- -------- Cash flows from financing activities: Sale of lease contracts receivables 15,849 -- 6,376 Proceeds from issuance of common stock 4,166 2,835 3,703 Proceeds from minority interest investors -- -- 252 Purchase of treasury stock (1,919) -- (705) Borrowings under line of credit 590 400 -- Payments on notes payable (510) (1,186) (1,450) Payments on capital leases (1,456) (2,019) (2,063) -------- -------- -------- Net cash provided by financing activities 16,720 30 6,113 -------- -------- -------- Effect of exchange rate changes on cash (389) 772 1,148 -------- -------- -------- Net increase (decrease) in cash and cash equivalents 12,965 (11,679) 10,293 Cash and cash equivalents at beginning of year 22,340 34,019 23,726 -------- -------- -------- Cash and cash equivalents at end of year $ 35,305 $ 22,340 $ 34,019 ======== ======== ======== Supplemental disclosures of cash flow information: Cash paid during the year for: Interest $ 508 $ 1,081 $ 1,510 Income taxes $ 4,783 $ 3,355 $ 1,814 Supplemental disclosures of noncash investing and financing activities: Capital lease obligations of $2,505,000 was incurred in 1996 for the purchase of equipment. A capital lease obligation of $103,000 was incurred in 1995 for the purchase of equipment. Notes payable of $901,000 were incurred in 1994 when the Company purchased the net assets of Sysnet a.s. A note payable of $283,000 was incurred in 1994 for the purchase of various equipment. See accompanying notes
12 1. Summary of Significant Accounting Policies Business Boole & Babbage, Inc. ("the Company") provides enterprise automation software that helps users worldwide to organize and manage complex computer systems. Basis of Presentation The accompanying financial statements include the accounts of Boole & Babbage Europe (BBE), Boole & Babbage Australasia (BBA), and Boole & Babbage a.s., Norway (BBN), 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, 1996, cash equivalents consisted of $5,541,000 of time deposits with original maturities of 30 days or less. All of the Company's cash equivalents and short-term investments are classified as available-for-sale and are reported at fair value with unrealized gains and losses included in equity. Fair values are based upon quoted prices in an active market or if that information is not available, on quoted market prices of instruments of similar characteristics. At September 30, 1996, 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 as of September 30, 1996 consisted of the following: (Dollars in thousands) - --------------------------------------------------- Municipal bonds and notes $16,000 Auction preferred stock 6,750 Taxable commercial paper 2,000 ------- $24,750 ======= Receivables Accounts receivable and installment receivables are net of allowances for doubtful accounts of $1,888,000, $1,734,000, and $1,781,000, at September 30, 1996, 1995, and 1994, respectively. The Company markets computer software systems to customers in diversified industries. Ongoing credit evaluations of its customers' financial condition are made and generally no collateral is required. Revenue Recognition Revenue from product licensing is recognized after delivery and customer acceptance without contingencies. Each license contract entitles the customer to maintenance and enhancements for a period ranging from six months to one year. The portion of the contract fee associated with providing maintenance is deferred and recognized ratably over the period as maintenance fees. The Company uses the same percentage to compute maintenance included in the product licensing amount as it uses to price subsequent year maintenance. Revenue and related royalty and agent commission costs from maintenance contracts are deferred and recognized ratably over the renewal periods. In connection with long-term leases of software, the portion of the 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 corresponding 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) 1996 1995 1994 - --------------------------------------------------------- Equipment $29,272 $25,065 $23,644 Furniture 9,288 8,572 7,704 Leasehold improvements 912 742 613 --------------------------------- 39,472 34,379 31,961 Accumulated depreciation and amortization 30,777 27,038 23,455 --------------------------------- $ 8,695 $ 7,341 $ 8,506 ================================= 13 Costs in Excess of Net Assets of Purchased Businesses The excess of the purchase price over the net assets of BBE 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) 1996 1995 1994 - ------------------------------------------------------- Costs in excess of net assets of purchased businesses $1,056 $1,056 $1,056 Accumulated amortization 396 369 343 -------------------------- $ 660 $ 687 $ 713 ========================== 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) 1996 1995 1994 - ------------------------------------------------------- Cost of marketable securities $2,850 $ 1,193 $ 847 Unrealized gain 625 230 293 -------------------------- $3,475 $ 1,423 $1,140 ========================== The unrealized gain is recorded net of tax in a separate stockholders' equity account as follows: -------------------------- September 30, -------------------------- (Dollars in thousands) 1996 1995 1994 - ------------------------------------------------------- Unrealized gain $ 625 $ 230 $ 293 Deferred income tax (255) (98) (123) -------------------------- $ 370 $ 132 $ 170 ========================== Purchased and Internally Developed Software Capitalized software consists of purchases of completed software products from outside vendors and internal costs associated with the development of software. Such costs are capitalized and amortized in accordance with guidelines set forth in Financial Accounting Standard No. 86, "Accounting for Costs of Computer Software to be Sold, Leased, or Otherwise Marketed" (FAS 86). All software costs are amortized to cost of revenue on the basis of each product's projected revenues or on a straight-line basis over the remaining estimated economic life of the products, whichever is greater. The estimated economic lives range from five to seven years. Amortization of capitalized software was $4,814,000, $5,315,000, and $4,112,000 for 1996, 1995, and 1994, respectively. Cost of Product Licensing Cost of product licensing consists of royalties paid to software authors, amortization of capitalized software, and outside costs of providing consulting and educational services to customers. 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 of hardware associated with sales of certain client/server products, and the costs of operating a computer services division. 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) 1996 1995 1994 - --------------------------------------------------------- Total costs $21,430 $18,700 $16,850 Less amounts capitalized 3,611 3,050 3,365 --------------------------- $17,819 $15,650 $13,485 =========================== These costs do not include expenditures relating to the joint development project with IBM to develop systems management products in support of new CICS releases which were reimbursed by IBM totaling $1,375,000, $2,080,000 and $2,540,000 in 1996, 1995 and 1994, respectively. Accounting for Income Taxes The Company adopted Statement of Financial Accounting Standards No. 109 ("FAS 109"), "Accounting for Income Taxes," in its first quarter of fiscal 1994 and applied its provisions retroactively. Net Income Per Share Net income per share is computed using the weighted average number of common shares outstanding and shares issuable assuming the exercise of outstanding options using the treasury stock method. Fully diluted earnings per share is not disclosed because it is not materially different from primary earnings per share. All shares and per share amounts have been restated to retroactively reflect the 3-for-2 stock split described in Note 8. 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 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 losses included in determining net income in 1996, 1995, and 1994 were 14 approximately $919,000, $513,000, and $764,000, respectively. These amounts are included in the consolidated statements of income under the caption interest and other income, net. The Company had approximately $34.5 million, $26.3 million and $20.4 million of open forward exchange contracts at September 30, 1996, 1995 and 1994, respectively. Beginning the last quarter of fiscal 1994, the Company implemented an economic hedge strategy for a portion of its anticipated intercompany royalty transactions. Gains and losses on these contracts are deferred and recognized in the period in which the transaction is complete. In connection with this strategy, the Company had no outstanding contracts at September 30, 1996, but had approximately $9.7 million and $18.3 million of forward contracts at September 30, 1995 and 1994, respectively. At September 30, 1994, the carrying value approximated the market value while at September 30, 1995, the deferred loss was approximately $670,000. Reclassifications Beginning in the first quarter of 1996, changes have been made in the classification of revenue and operating expense in the Consolidated Statements of Income. 1995 and 1994 have been reclassified to conform to these changes. "Product licensing" consists of licensing of software products (net of the bundled maintenance) plus consulting and education services related to those products. "Maintenance Fees and Other" consists of revenue from maintenance, hardware sales, computer services and royalties from IBM related to the jointly developed CICS product now being sold by IBM. "Cost of Product Licensing" includes royalties paid to independent software authors, amortization of purchased and internally developed software and the outside cost of providing consulting and educational services to customers. "Cost of Maintenance Fees and Other" includes the cost of maintenance support as well as royalties paid to independent software authors, amortization of purchased and internally developed software, the cost of hardware associated with certain sales of client/server products and costs related to operating the computer services division. "Product Development" consists of engineering and development costs less costs capitalized under FAS86. 2. 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) 1996 1995 1994 - ------------------------------------------------------- Minimum lease payments receivable $86,937 $62,553 $39,001 Less unearned interest 8,852 6,399 4,177 ----------------------------- Net investment in sales type leases 78,085 56,154 34,824 Amount due within one year 38,944 23,931 14,813 ----------------------------- Amount due after one year $39,141 $32,223 $20,011 ============================= Minimum lease payments receivable during each of the succeeding fiscal years are as follows: - ------------------------------------------------- Year (Dollars in thousands) - ------------------------------------------------- 1997 $43,424 1998 23,283 1999 13,817 2000 5,598 2001 815 -------- $86,937 ======== 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 1996 and 1994 had present values of $15,849,000 and $6,376,000, respectively. No lease contract receivables were sold during 1995. The uncollected present value of receivables that have been sold was approximately $17,842,000, $4,050,000, and $6,950,000 at September 30, 1996, 1995 and 1994, respectively. 3. Product Acquisitions In April 1994, the Company acquired the net assets of Sysnet, a.s., an Oslo, Norway-based provider of system administration software for UNIX systems and other distributed client/server systems, for $4.1 million in cash plus maximum potential additional consideration of $1.4 million based upon future results. Payment terms included an initial payment of $3.0 million in cash with another $1.1 million to be paid in four annual installments of $275,000 which began in April 1995. (See Note 5.) The transaction was accounted for using the purchase method and an independent appraisal was performed of all assets acquired. As a result, $3,251,000 or approximately 78% of the purchase price was written off as a one-time charge related to purchased research and development. Revenues and expenses of Sysnet prior to the acquisition were insignificant. The Company's consolidated financial statements include the results of operations of the acquired entity subsequent to the purchase date. 15 4. Income Taxes Pretax income consists of the following: ------------------------------- Years Ended September 30, ------------------------------- (Dollars in thousands) 1996 1995 1994 - ------------------------------------------------------- Domestic $13,388 $ 9,944 $ 5,675 Foreign 11,667 10,004 5,841 ------------------------------- $25,055 $19,948 $11,516 =============================== The provision for taxes on income consists of the following: ------------------------------- Years Ended September 30, ------------------------------- (Dollars in thousands) 1996 1995 1994 - ------------------------------------------------------- Federal Current $4,756 $1,884 $ 672 Deferred (1,141) (293) (850) ------------------------------- 3,615 1,591 (178) State Current 1,013 1,075 899 Deferred (322) (516) (314) ------------------------------- 691 559 585 Foreign Current 2,880 4,001 3,116 Deferred (171) (151) 47 ------------------------------- 2,709 3,850 3,163 ------------------------------- $7,015 $6,000 $3,570 =============================== No provision for residual federal taxes has been made on approximately $42,000,000 of accumulated undistributed earnings of the Company's foreign subsidiaries, since it is the Company's intention to permanently invest such earnings in its foreign operations. Determination of the amount of unrecognized deferred tax liabilities is not practicable. The provision for taxes on income differs from the amount computed by applying the statutory tax rate of 35% for 1996 and 1995 and 34% for 1994 to income before taxes as follows: -------------------------- Years Ended September 30, -------------------------- 1996 1995 1994 -------------------------- Computed expected tax provision 35.0% 35.0% 34.0% State income tax, net of federal benefit 1.8% 1.4% 3.4% Permanently invested earnings of foreign subsidiaries, net of foreign income taxes (5.9%) (8.0%) (5.4%) Goodwill amortization and other permanent items 0.4% 0.5% 0.5% Research & development credit (0.6%) (2.3%) (1.5%) Net change in valuation allowance (2.0%) 3.7% -- Other (0.7%) (0.3%) -- -------------------------- 28.0% 30.0% 31.0% ========================== 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) 1996 1995 1994 - ------------------------------------------------------ Deferred Tax Assets: Net operating loss carryforwards $ 2,513 $ 1,791 $ 1,218 Foreign tax credit carryforwards 29 17 237 Research credit carryforwards 52 898 3,266 AMT credit carryforwards -- 650 531 Deferred maintenance revenue 11,307 9,564 7,395 Accrued expenses 2,134 1,694 1,251 Bad debt allowance 563 520 533 Other 594 506 194 --------------------------- Total gross deferred tax asset 17,192 15,640 14,625 Less valuation allowance 1,340 1,946 3,946 --------------------------- Total deferred tax asset 15,852 13,694 10,679 --------------------------- Deferred Tax Liabilities: Unrealized gain on marketable securities (255) (98) (123) Software capitalization, net (3,065) (2,943) (2,870) Other (346) -- (443) --------------------------- Total deferred tax liability (3,666) (3,041) (3,436) --------------------------- Net deferred tax asset $12,186 $10,653 $7,243 =========================== The net valuation allowance decreased $606,000 from 1995 to 1996 as a result of reversing allowances for capital losses carryforwards and foreign net operating losses. The effect of this decrease is reflected in the effective income tax rate. The net valuation allowance decreased $2,000,000 from 1994 to 1995 as a result of reversing the allowance of $2,782,000 for foreign tax credits. Since these credits were attributable to stock option deductions, the benefit was credited to paid-in capital and does not affect the effective income tax rate. This reversal was partially offset by an addition of $782,000 to the allowance for carryforwards of capital losses and foreign net operating losses. None of the allowance at September 30, 1996 is attributable to stock option deductions. Management believes future taxable income will be sufficient to realize the deferred tax benefit of the net deferred tax asset. 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, 1996 are as follows: - ---------------------------------------------- Year (Dollars in thousands) - ---------------------------------------------- 1997 $7,742 1998 6,643 1999 5,140 2000 2,729 2001 814 Thereafter 2,266 ---------- $25,334 ========== 16 Total rent expense under operating leases was $7,760,000, $7,700,000 and $5,800,000, for 1996, 1995, and 1994, respectively. Capital Leases The Company leases certain computer equipment under long-term capital leases. Capitalized costs of $13,745,000, $11,343,000, and $11,235,000, are included in equipment, furniture and leasehold improvements at September 30, 1996, 1995 and 1994, respectively. Accumulated depreciation amounted to $11,131,000, $9,944,000, and $8,254,000, at September 30, 1996, 1995 and 1994, 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, 1996: - ------------------------------------------------------- Year (Dollars in thousands) - ------------------------------------------------------- 1997 $1,150 1998 653 1999 593 2000 582 2001 611 ---------- Total minimum lease payments 3,589 Less amount representing interest 508 ---------- Present value of future minimum lease payments 3,081 Amount due within one year 961 ---------- Amount due after one year $ 2,120 ========== Notes Payable The Company incurred a note payable as a result of the acquisition in 1994 as described in Note 3. The noninterest bearing obligation, net of discount based on an imputed interest rate of 8.25%, had a balance of $492,000 at September 30, 1996. The Company has an equipment note at 8.25% which had a balance of $170,000 at September 30, 1996. The notes payable are due as follows: - ------------------------------------------------ Year (Dollars in thousands) - ------------------------------------------------ 1997 $ 293 1998 319 1999 50 ---------- Total notes payable 662 Amount due within one year 293 ---------- Amount due after one year $ 369 ========== Total interest expense related to capital lease obligations and notes payable was $223,000, $438,000, and $655,000 in 1996, 1995 and 1994, respectively. Line of Credit During 1995, the Company entered into arrangements for the Japanese subsidiary for two lines of credit totaling $1,800,000. As of September 30, 1996 and 1995, there were outstanding balances of $990,000 and $400,000, respectively. Interest rates on these lines of credit range from 1.63% to 1.93% per annum Litigation The Company is involved in certain legal actions and claims arising in the ordinary course of business. Management believes that such litigation and claims will be resolved without material effect on the Company's financial position or results of operations. 6. Common Stock Stock option plans In October 1995, the Board of Directors adopted the 1995 Stock Option Plan (the 1995 plan). The 1995 plan, as amended, authorized the grant of up to 1,125,000 shares of the Company's common stock to key employees and consultants of the Company. The 1995 plan also authorized the transfer of the remaining available shares of the expired 1986 plan (as described below) to the 1995 plan. The exercise price is 100% of the fair market value of the stock on the date such options are granted. In November 1993, the Board of Directors adopted the 1993 Nonemployee Directors' Stock Option Plan (the 1993 plan). The 1993 plan, as amended, authorized the grant of up to 168,750 shares of the Company's common stock to nonemployee directors of the Company. The exercise price is 100% of the fair market value of the stock on the date such options are granted. Under the terms of the 1986 Incentive Stock Option Plan (1986 ISO), as amended, and the 1986 Supplemental Stock Option Plan (the 1986 plan), as amended, the Company may grant options to purchase up to 7,965,000 shares of the Company's common stock to key employees and directors of the Company. The option price must be at least 100% of the market value at the date of grant in the case of the 1986 ISO plan and at least 85% of the market value at the date of grant in the case of the supplemental plan. The 1986 plan and 1986 ISO 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 vest at a rate of twenty to twenty-five percent per year, or in the case of some employees, vesting occurs quarterly at the same annual rate. 17 The number of options exercisable under all plans was 2,369,799, 2,086,124, and 1,833,092 at September 30, 1996, 1995 and 1994, respectively. The Company accounts for stock options in accordance with APB Opinion No. 25, "Accounting for Stock Issued to Employees." The Company intends to continue to apply APB No. 25 for purposes of determining net income and to adopt the pro forma disclosure requirements under SFAS 123. "Accounting for Stock Based Compensation," for fiscal 1997. Employee Stock Purchase Plan The Company adopted an Employee Stock Purchase Plan and, as amended, has reserved an aggregate total of 1,940,625 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. At September 30, 1996 there were 153,510 shares available for future purchases of which 70,346 were committed to be issued in October 1996. Stock Incentive Plan In April 1988, 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. The Board has reserved 134,438 shares for issuance under the plan. At September 30, 1996, there were 11,262 shares available for future awards. 18 The following table summarizes activity of the stock option plans for the three years ended September 30, 1996:
Outstanding Options -------------------------------------------------- Options Potential Available for Aggregate Price Future Grant Number Proceeds Per Share -------------------------------------------------------------------- Balance, September 30, 1993 1,090,122 3,760,715 $14,194,314 $ 2.30 - $ 8.00 Authorized increase 168,750 -- -- -- Options granted (941,288) 941,288 7,026,663 6.97 - 8.26 Options exercised -- (983,772) (2,873,848) 2.30 - 6.63 Options canceled 205,438 (205,438) (1,033,020) 2.74 - 8.00 -------------------------------------------------------------------- Balance, September 30, 1994 523,022 3,512,793 17,314,109 2.30 - 8.26 Authorized increase 1,350,000 -- -- -- Options granted (1,207,125) 1,207,125 13,486,605 9.30 - 13.47 Options exercised -- (486,137) (1,906,868) 2.30 - 8.26 Options canceled 115,068 (115,068) (761,563) 2.74 - 13.33 -------------------------------------------------------------------- Balance, September 30, 1995 780,965 4,118,713 28,132,283 2.74 - 13.47 Authorized increase 1,125,000 -- -- -- Options granted (930,488) 930,488 14,838,361 14.67 - 16.83 Options exercised -- (620,682) (2,888,584) 2.74 - 13.47 Options canceled 92,136 (92,136) (819,734) 5.04 - 14.67 - ------------------------------------------------------------------------------------------------------------ Balance, September 30, 1996 1,067,613 4,336,383 $39,262,326 $ 2.74 - $16.83 ============================================================================================================
19 7. Foreign Operations The following table summarizes selected financial information of the Company's operations by geographic location: ----------------------------------- Years Ended September 30, ----------------------------------- (Dollars in thousands) 1996 1995 1994 - -------------------------------------------------------- Revenues: United States and Canada $ 61,140 $ 56,727 $ 54,432 Europe 82,817 74,144 60,944 Other 23,221 23,496 16,420 ----------------------------------- Consolidated $ 167,178 $154,367 $131,796 ----------------------------------- Operating income: United States and Canada $ 8,525 $ 4,750 $ 2,039 Europe 9,171 8,044 4,587 Other 1,418 3,250 2,887 ----------------------------------- Consolidated $ 19,114 $ 16,044 $ 9,513 ----------------------------------- Identifiable assets: United States and Canada $ 109,387 $ 87,403 $ 76,190 Europe 96,338 77,711 59,787 Other 11,477 8,207 4,562 Eliminations (10,138) (9,413) (8,913) ----------------------------------- Consolidated $ 207,064 $163,908 $131,626 =================================== Included in operating income but excluded from revenues are royalties charged to international operations by domestic operations which aggregated $19,036,000, $17,550,000 and $15,136,000 in 1996, 1995, and 1994, respectively. 8. Events Subsequent to Auditors' Report Stock split On November 7, 1996, the Company's Board of Directors authorized a 3-for-2 split of common stock payable on December 10, 1996, to shareholders of record as of November 18, 1996. The stock split is effected in the form of a stock dividend. The stated par value of each share remained $0.001. A total of $6,000 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. 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 November 30, 1996 was 473. The Company has not paid any cash dividends since 1978 on its common stock, with the exception of payment of partial shares as a result of the stock splits in 1994, 1995 and 1996. The Company anticipates that for the foreseeable future, it will continue to retain its earnings for use in its business. The table on page 2 reflects the range of high and low closing bid quotations for each period indicated as reported by NASDAQ. These quotations represent prices between dealers without adjustment for retail markups, markdowns or commissions, and may not represent actual transactions. The Board of Directors and Stockholders Boole & Babbage, Inc. We have audited the accompanying consolidated balance sheets of Boole & Babbage, Inc. as of September 30, 1996, 1995 and 1994, 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 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, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Boole & Babbage, Inc. at September 30, 1996, 1995 and 1994, 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 25, 1996 20 EX-21.1 4 SUBSIDIARIES OF REGISTRANT Exhibit 21.1 Subsidiaries of Registrant Boole & Babbage, Europe Boole & Babbage, Australasia Pty Ltd. Boole & Babbage a.s. Joint Systems & Technology, Inc. EX-23.1 5 CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS Exhibit 23.1 CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS We consent to the incorporation by reference in this Annual Report (Form 10-K) of Boole & Babbage, Inc. of our report dated October 25, 1996, included in the 1996 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, 33-55588, 33-79782 and 333-02723) pertaining to the 1986 Incentive Stock Option Plan, the 1986 Supplemental Stock Option Plan, the Employee Stock Purchase Plan, the 1993 Nonemployee Directors' Stock Option Plan and the 1995 Stock Option Plan of Boole & Babbage, Inc. of our report dated October 25, 1996, 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. /s/ ERNST & YOUNG LLP San Jose, California December 26, 1996 EX-27 6 FINANCIAL DATA SCHEDULE
5 1,000 12-MOS SEP-30-1996 OCT-01-1995 SEP-30-1996 35,305 24,750 108,415 1,888 0 136,273 39,472 30,777 207,064 84,090 0 18 0 0 93,007 207,064 167,178 167,178 0 31,662 116,032 370 223 25,055 7,015 18,040 0 0 0 18,040 1.00 1.00
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