<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES ACT OF 1934
FOR QUARTER ENDED SEPTEMBER 30, 1997
COMMISSION FILE NUMBER 333-33275
BEST SOFTWARE, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C> <C>
VIRGINIA 7372 54-1222526
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification No.)
</TABLE>
11413 ISAAC NEWTON SQUARE
RESTON, VA 20190
(703) 709-5200
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
---------------
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 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 No X
----- -----
Indicate the number of shares outstanding of each of issuer's classes of common
stock as of the latest practicable date:
<TABLE>
<CAPTION>
Title of Class Number of Shares Outstanding on November 10, 1997
-------------- -------------------------------------------------
<S> <C>
Common Stock, no par value 10,898,698
</TABLE>
<PAGE> 2
BEST SOFTWARE, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Consolidated Balance Sheets as of March 31, 1997, September 30, 1997,
and Pro Forma September 30, 1997 3
Consolidated Statements of Operations for the Three and Six Months
ended September 30, 1997 and 1996 4
Consolidated Statements of Cash Flows for the Six Months
ended September 30, 1997 and 1996 5
Notes to Consolidated Financial Statements 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 8
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 18
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 18
SIGNATURES 19
EXHIBIT INDEX 20
</TABLE>
2
<PAGE> 3
PART I
ITEM 1. FINANCIAL STATEMENTS
BEST SOFTWARE, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
PRO FORMA
MARCH 31, SEPTEMBER 30, SEPTEMBER 30,
1997 1997 1997
----------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 13,365 $ 8,962 $ 41,510
Accounts receivable, net of allowance ($832 and $966 respectively) 2,124 3,672 3,672
Inventory 183 159 159
Prepaid expenses and other current assets 895 1,347 1,347
Deferred tax asset 350 400 400
---------- ---------- ----------
Total 16,917 14,540 47,088
---------- ---------- ----------
Property and equipment, net 1,774 1,775 1,775
Deferred tax asset 2,450 2,400 2,400
Other assets 19 35 35
---------- ---------- ----------
Total $ 21,160 $ 18,750 $ 51,298
========== ========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable and accrued expenses $ 6,520 $ 8,443 $ 8,443
Note payable 650 650 650
Deferred maintenance and services revenue 10,605 12,927 12,927
Obligation under capital leases 54 8 8
---------- ---------- ----------
Total 17,829 22,028 22,028
---------- ---------- ----------
Note payable, net of current portion 650 - -
Deferred maintenance and services revenue 1,683 1,686 1,686
---------- ---------- ----------
Total liabilities 20,162 23,714 23,714
---------- ---------- ----------
Redeemable convertible preferred stock:
Class A preferred stock, $0.01 par value; 41,667
shares authorized, issued and outstanding at
March 31, 1997 and September 30, 1997,
convertible into 625,005 shares of common stock
upon the closing of an initial public offering
(at liquidation value) 500 500 -
Redeemable common stock warrants 642 792 -
Shareholders' equity (deficit):
Preferred stock, $0.01 par value; 1,000,000 shares
authorized, none issued - - -
Common stock, no par value; 40,000,000 shares
authorized; 6,979,483, 7,436,223 and
10,897,888 issued and outstanding, respectively 455 788 33,980
Additional paid-in capital 228 138 786
Deferred compensation -- (131) (131)
Accumulated deficit (827) (7,051) (7,051)
---------- ---------- ----------
Total shareholders' equity (deficit) (144) (6,256) 27,584
---------- ---------- ----------
Total $ 21,160 $ 18,750 $ 51,298
========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
3
<PAGE> 4
BEST SOFTWARE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------------- --------------------------
1997 1996 1997 1996
----------- ------------ ----------- -----------
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Revenue:
License fees and royalty $5,889 $4,603 $11,246 $9,667
Services 5,936 4,688 11,225 9,123
---------- ---------- ---------- ----------
Total 11,825 9,291 22,471 18,790
---------- ---------- ---------- ----------
Cost of revenue:
License fees and royalty 556 362 927 939
Services 1,492 1,241 2,962 2,755
---------- ---------- ---------- ----------
Total 2,048 1,603 3,889 3,694
---------- ---------- ---------- ----------
Gross margin 9,777 7,688 18,582 15,096
---------- ---------- ---------- ----------
Operating expenses:
Sales and marketing 4,418 2,999 8,722 6,953
Research and development 2,077 1,464 4,125 3,281
General and administrative 1,584 1,250 3,168 2,773
---------- ---------- ---------- ----------
Total 8,079 5,713 16,015 13,007
---------- ---------- ---------- ----------
Operating income 1,698 1,975 2,567 2,089
Other income (expense), net 82 87 (212) 98
---------- ---------- ---------- ----------
Income from operations before income taxes 1,780 2,062 2,355 2,187
Income tax provision 685 940 910 985
---------- ---------- ---------- ----------
Net income $1,095 $1,122 $1,445 $ 1,202
========== ========== ========== ==========
Pro forma net income per share $0.11 $0.12 $0.15 $0.13
========== ========== ========== ==========
Pro forma weighted average shares outstanding 9,581 9,402 9,646 9,400
========== ========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
4
<PAGE> 5
BEST SOFTWARE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
SEPTEMBER 30,
-------------------------------
1997 1996
----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
Net income $ 1,445 $ 1,202
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 754 675
Compensation associated with stock options 7 6
Modification of warrants and amortization of debt discount 86 -
Tax benefit from option exercises 538 -
Deferred tax asset - 1,033
(Increase) decrease in assets:
Accounts receivable (1,548) 1,091
Inventory 24 355
Prepaid expenses and other assets (468) (1,078)
Increase (decrease) in liabilities:
Accounts payable and accrued expenses 1,923 (275)
Deferred maintenance and services revenue 2,325 1,945
----------- -----------
Net cash provided by operating activities 5,086 4,954
----------- -----------
Cash flows from investing activities:
Purchases of property and equipment (755) (478)
----------- -----------
Net cash used in investing activities (755) (478)
----------- -----------
Cash flows from financing activities:
Repayment of notes payable (650) (1,500)
Cash dividends paid to shareholders (7,565) -
Proceeds from exercise of stock options and warrants 360 -
Purchase and retirement of treasury stock (833) (170)
Principal payments under capital lease obligation (46) (41)
----------- -----------
Net cash used in financing activities (8,734) (1,711)
----------- -----------
Net increase (decrease) in cash and cash equivalents (4,403) 2,765
Cash and cash equivalents, beginning of period 13,365 8,105
----------- -----------
Cash and cash equivalents, end of period $ 8,962 $ 10,870
=========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
5
<PAGE> 6
BEST SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF MARCH 31, 1997 AND SEPTEMBER 30, 1997 (UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying consolidated financial statements and notes thereto have been
prepared in accordance with generally accepted accounting principles for
interim financial information and should be read in conjunction with the
financial statements and related notes included in the Best Software, Inc.
("Company") Registration Statement on Form S-1, dated September 30, 1997.
Certain information and footnote disclosures normally included in annual
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted as permitted by rules and regulations
of the Securities and Exchange Commission. Interim results of operations for
the three and six month periods ended September 30, 1997 are not necessarily
indicative of operating results for the full fiscal year.
In the opinion of management, all adjustments (consisting of normal recurring
entries) necessary for the fair presentation of the consolidated financial
position, results of operations, and changes in cash flows for the periods
presented have been included. The preparation of financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates.
Unaudited Pro Forma Information
The unaudited pro forma information is being presented to show the effect of
the closing of the Initial Public Offering, including the net proceeds received
by the Company and the mandatory conversion of the redeemable convertible
preferred stock into common stock. The pro forma information also reflects the
expiration of warrant redemption rights and the partial exercise of a warrant
that occurred immediately prior to the closing of this offering. The holder of
the warrant to purchase 472,500 shares of common stock has elected to partially
exercise the warrant for 102,687 shares of common stock in a cashless exercise
transaction. As a result of this transaction, the holder of the warrant
received 86,660 shares of common stock.
2. PRO FORMA NET INCOME PER SHARE
Pro forma net income per share has been computed based on the weighted average
number of common shares and common equivalent shares outstanding during each
period. Common equivalent shares outstanding include preferred stock, as
if-converted, and the common equivalent shares calculated for the stock options
and warrants using the treasury stock method for all periods presented.
Pursuant to accounting practices prescribed by the Securities and Exchange
Commission, common stock and common stock options issued within the twelve
month period prior to the initial public offering at a price less than the
proposed public offering price have been included in the calculation of
earnings per share as if they were outstanding for all periods presented. The
calculation used the treasury stock method and the offering price of $13.00
per share. Pro forma net income per share reflects the expiration of the
warrant redemption rights and the partial exercise of the common stock warrant
and the assumed issuance at an offering price of $13.00 per share of a
sufficient number of shares of common stock to fund the dividends paid as of
June 30, 1997 in excess of earnings.
6
<PAGE> 7
3. INITIAL PUBLIC OFFERING
Effective October 3, 1997, the Company sold 2,750,000 shares of common stock at
an offering price of $13.00 per share (the "Initial Public Offering"). The
transaction generated approximately $32 million of net proceeds to the Company.
As a result of the Initial Public Offering, all of the Company's outstanding
preferred stock automatically converted into shares of its common stock, and
certain warrant redemption rights expired and the partial exercise of a warrant
occurred. Following the offering, the unexercised warrants remain exercisable.
4. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
The American Institute of Certified Public Accountants has issued a Statement
of Position that supersedes Statement of Position 91-1, Software Revenue
Recognition, and is effective for transactions entered into in fiscal years
beginning after December 15, 1997. The Company believes that the changes would
not have a material financial impact on the Company.
In March 1997, the Financial Accounting Standards Board issued Statement No.
128, "Earnings Per Share" ("SFAS No. 128"). SFAS No. 128 is effective for
financial statements issued after December 15, 1997. SFAS No. 128 requires dual
presentation of basic and diluted earnings per share. The Company believes the
presentation of diluted earnings per share will not materially differ from
earnings per share as presently presented. Basic earnings per share includes no
dilution and is computed by dividing net income available to common
shareholders by the weighted average number of common shares outstanding for
the period. The Company has calculated the basic net income per share for the
three and six months ended September 30, 1997 at $0.15 and $0.20, respectively.
7
<PAGE> 8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion of the financial condition and results of
operations of the Company should be read in conjunction with the Consolidated
Financial Statements and Notes thereto. This Management's Discussion and
Analysis of Financial Condition and Results of Operations contains
forward-looking statements that involve risk and uncertainties. For this
purpose, any statements contained herein that are not statements of historical
fact may be deemed to be forward-looking statements. Without limiting the
foregoing, the words "believes", "anticipates", "plans", "expects", and similar
expressions are intended to identify forward-looking statements. Set forth
below under the heading "Risk Factors", is a statement of the risks and
uncertainties relating to the Company's business, the Company's near term
outlook with respect thereto and the forward-looking statements set forth
herein. These and other important factors could cause the Company's actual
results to differ materially from those indicated by such forward-looking
statements. The Company undertakes no obligations to publicly update or revise
any forward-looking statements, whether as a result of new information, future
events or otherwise.
OVERVIEW
The Company is a leading provider of asset, human resources and payroll
management software solutions for middle market businesses. The Company's
feature-rich, cost-effective solutions are easy to implement and enhance
productivity by automating management, compliance and reporting functions in
areas of specialized expertise that entail complex and frequently changing laws
and regulations. The Company's solutions have been designed to complement core
accounting systems and are scaleable from stand-alone desktop applications
running on personal computers to multi-user work group and client/server
programs designed for use on personal computer local area networks.
The Company launched its FAS asset management product line in 1983 and a
professional tax preparation software product line in 1985. In 1991, the
Company acquired the Abra human resources and payroll management product line.
Between 1992 and 1994, the Company purchased a write-up product line for
accountants, a small business accounting software product line (the "MYOB
product line") and a service bureau payroll product line for accountants. The
Company thereafter decided to focus primarily on serving middle market
businesses, and sold its professional tax preparation software business in
April 1994 and its service bureau payroll and write-up product lines for
accountants in August 1995 (together, the "Divested Product Lines"). In May
1996, the Company licensed its MYOB product line to a third party. Under such
license (the "MYOB License"), the Company is to receive royalties over the
four-year license term, which ends in June 2000. The royalty rate escalates
over each of the four years in the license period and is based on the total
revenue of the licensee attributable to the MYOB product line. The Company
currently derives substantially all of its revenue from its FAS and Abra
product lines and related services and from the MYOB License (collectively, the
"Ongoing Business").
Prior to fiscal 1994, substantially all of the Company's revenues from the
FAS and Abra product lines were derived from licenses of DOS-based versions of
these products. Since fiscal 1994, the Company has introduced Windows versions
of these products and, since fiscal 1995, a significant number of the Company's
DOS customers have migrated to the Company's Windows-based products.
Additionally, since the introduction of multi-user versions of its products in
fiscal 1995 and fiscal 1996, the Company has sold an increased number of
multi-user licenses of its FAS and Abra products. Upon the introduction of a
new product or an enhanced version of an existing product, the Company has
typically derived significant license fee revenue from trade-ups by existing
customers. Typically, the license fees paid for trade-ups are lower than the
license fees for an initial license. In addition, the Windows-based products
and the multi-user products generally have higher average license fees and
gross margins than the DOS-based products.
In addition to revenue from product licenses, the Company derives
significant recurring revenue from maintenance and support agreements. Under
its maintenance and support agreements, the Company provides technical support
and periodic software updates. In late fiscal 1997, the Company launched its
consulting services, which include installation, set-up and conversion
services. Training and consulting revenue are anticipated to have lower gross
margins than revenue from maintenance and support agreements. Maintenance and
support agreements are generally priced as a percentage of the initial license
fee for the underlying products.
8
<PAGE> 9
The Company recognizes revenue on license fees upon shipment of the
product, net of provisions for returns and allowances, provided that no
significant Company obligations remain and that collection of the resulting
account receivable is probable. For products with free trial periods, revenue
is recognized upon acceptance of the product by the customer. Revenue from the
MYOB License is recognized ratably within each year of the term of the license
agreement, based on specified annual royalty payments. Revenue from
maintenance and support agreements is recognized pro rata over the term of the
agreements, which is generally one year. Revenue from other services, such as
training and consulting, is recognized as the services are provided.
OPERATING RESULTS
The following table sets forth for the periods indicated certain
consolidated statement of operations data expressed as a percentage of total
revenue. The Company's historical financial statements include operating
results relating to the Divested Product Lines and the MYOB product line and,
therefore, are not indicative of the results of operations attributable to the
Ongoing Business. The periods through June 30, 1996 include results from the
Divested Product Lines and MYOB product line.
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
SEPTEMBER30 SEPTEMBER30
---------------------------- -----------------------------
1997 1996 1997 1996
----------- ----------- ----------- ------------
UNAUDITED UNAUDITED UNAUDITED UNAUDITED
<S> <C> <C> <C> <C>
Revenue:
License fees and royalty . . . . . . . . . . . . . . 49.8% 49.5% 50.0% 51.4%
Services . . . . . . . . . . . . . . . . . . . . . . 50.2 50.5 50.0 48.6
-------- ------- ------- -------
Total . . . . . . . . . . . . . . . . . . . . . . . 100.0 100.0 100.0 100.0
-------- ------- ------- -------
Cost of revenue:
License fees and royalty 4.7 3.9 4.1 5.0
Services . . . . . . . . . . . . . . . . . . . . . . 12.6 13.4 13.2 14.7
-------- ------- ------- -------
Total . . . . . . . . . . . . . . . . . . . . . . . 17.3 17.3 17.3 19.7
-------- ------- ------- -------
Gross margin . . . . . . . . . . . . . . . . . . . . . 82.7 82.7 82.7 80.3
-------- ------- ------- -------
Operating expenses:
Sales and marketing . . . . . . . . . . . . . . . . . 37.4 32.3 38.8 37.0
Research and development . . . . . . . . . . . . . . 17.5 15.7 18.4 17.5
General and administrative . . . . . . . . . . . . . 13.4 13.4 14.1 14.7
-------- ------- ------- -------
Total . . . . . . . . . . . . . . . . . . . . . . . 68.3 61.4 71.3 69.2
-------- ------- ------- -------
Operating income . . . . . . . . . . . . . . . . . . 14.4 21.3 11.4 11.1
Other income (expense), net . . . . . . . . . . . . . .7 .9 (.9) .5
-------- ------- ------- -------
Income from operations before income taxes . . . . . . 15.1 22.2 10.5 11.6
Income tax provision . . . . . . . . . . . . . . . . . (5.8) (10.1) (4.1) (5.2)
-------- ------- ------- -------
Net income 9.3% 12.1% 6.4% 6.4%
======== ======= ======= =======
</TABLE>
THREE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
License Fees and Royalty Revenue. License fees and royalty revenue
consists of fees from software licenses and royalties from the MYOB License.
License fees and royalty revenue increased from $4.6 million for the three
months ended September 30, 1996 to $5.9 million for the three months ended
September 30, 1997, representing an increase of 27.9%. As a percentage of total
revenue, license fees and royalty revenue was 49.5% for the three months ended
September 30, 1996 and 49.8% for the three months ended September 30, 1997,
respectively. The dollar increase in license fees and royalty revenue was due
to an increase in license fee revenue from FAS and Abra products, which
resulted primarily from increased sales of higher priced Windows-based and
multi-user products. Royalties from the MYOB License increased from $221,000
during the three months ended September 30, 1996 to $413,500 for the three
months ended September 30, 1997.
9
<PAGE> 10
Services Revenue. Services revenue includes revenue from maintenance and
support agreements and training and consulting services. Services revenue
increased from $4.7 million for the three months ended September 30, 1996 to
$5.9 million for the three months ended September 30, 1997, representing an
increase of 26.6%. As a percentage of total revenue, services revenue decreased
from 50.5% for the three months ended September 30, 1996 to 50.2% for the three
months ended September 30, 1997. The dollar increase in services revenue was
primarily due to an increase in the number of maintenance and support
agreements, which resulted from a larger installed base of customers, and a
higher average contract value resulting from increased sales of higher priced
license products. To a lesser extent, the increase in services revenue was due
to the Company's increased focus on offering training and other consulting
services, which include installation, set-up and data conversion activities.
Cost of License Fees and Royalty Revenue. Cost of license fees and
royalty revenue consists primarily of the costs of media, product manuals,
shipping and fulfillment, and royalties paid to third parties. Cost of license
fees and royalty revenue increased from $362,000 for the three months ended
September 30, 1996 to $556,000 for the three months ended September 30, 1997,
representing an increase of 53.6%. As a percentage of license fees and royalty
revenue, cost of license fees and royalty revenue increased from 7.9% to 9.4%
for the three-month periods ended September 30, 1996 and 1997, respectively.
The increase in cost of license fees and royalty revenue as a percentage of
license fees and royalty revenue was primarily due to higher trade up sales
during the three months ended September 30, 1997 compared to the corresponding
period in 1996, which contribute slightly lower margins than new customer
sales, due to lower revenue received for a tradeup sale as compared to a new
customer sale.
Cost of Services Revenue. Cost of services revenue consists primarily of
personnel costs, telephone charges and other costs related to providing
telephone support, training and consulting services. Cost of services revenue
was $1.2 million for three months ended September 30, 1996 compared to $1.5
million for the three month period ended September 30, 1997, representing a
20.2% increase. As a percentage of services revenue, cost of services revenue
decreased from 26.5% to 25.1% for the three-month periods ended September 30,
1996 and 1997, respectively. The decrease in cost of services revenue as a
percentage of services revenue was primarily due to the effect of services
revenue growing at a faster rate than expenses.
Sales and Marketing. Sales and marketing expenses consist primarily of
direct mail programs, advertising, and other marketing programs, personnel
costs, commissions, travel and operating costs. Sales and marketing expenses
increased from $3.0 million for the three months ended September 30, 1996, to
$4.4 million for the three months ended September 30, 1997, representing an
increase of 47.3%. As a percentage of total revenue, sales and marketing
expenses increased from 32.3% to 37.4% for the three-month periods ended
September 30, 1996 and 1997, respectively. The increase was primarily due to
increased costs associated with the establishment of the Company's Canadian
operations, website activities and increased lead generation, advertising and
corporate brand awareness activities.
Research and Development. Research and development expenses consist
primarily of personnel costs and fees paid to outside consultants. Research and
development expenses increased from $1.5 million for the three months ended
September 30, 1996 to $2.1 million for the three months ended September 30,
1997, representing an increase of 41.9%. As a percentage of total revenue,
research and development expenses increased from 15.7% to 17.5% for the
three-month periods ended September 30, 1996 and 1997, respectively. The
increase in research and development expenses was primarily the result of
increased expenses relating to the development of a new budgeting product, the
development of 32 bit versions of certain existing products, and to a lesser
extent, the expenses incurred to localize the Company's FAS and Abra product
lines for licensing in Canada.
General and Administrative. General and administrative expenses include
the costs of corporate operations, finance and accounting, human resources and
other general operations. General and administrative expenses increased from
$1.3 million for the three months ended September 30, 1996 to $1.6 million for
the three months ended September 30, 1997, representing an increase of 26.7%.
As a percentage of total revenue, general and administrative expenses remained
at 13.4% for both the three-month periods ended September 30, 1996 and 1997,
respectively. The dollar increase in general and administrative expenses was
the result of increased staffing and related expenses necessary to manage and
support the expansion of the Company's operations.
Other Income (Expense), Net. Other income (expense) consists primarily of
earnings from investments, net of any interest expense. Other income (expense),
net was $87,000 for the three months ended September 30, 1996 and $82,000 for
the three months ended September 30, 1997, representing a 5.7% decrease.
10
<PAGE> 11
Provision for Income Taxes. The provision for income taxes was $940,000
for the three months ended September, 1996 and $685,000 for the three months
ended September 30, 1997, representing 45.6% and 38.5% of income before taxes,
respectively. For the quarter ended September 30, 1996, the Company's effective
tax rate was higher due to valuation reserves recorded for certain deferred tax
assets.
SIX MONTHS ENDED SEPTEMBER 30, 1997 COMPARED TO SIX MONTHS ENDED SEPTEMBER 30,
1996
License Fees and Royalty Revenue. License fees and royalty revenue
increased from $9.7 million for the six months ended September 30, 1996 to
$11.2 million for the six months ended September 30, 1997, representing an
increase of 16.3%. As a percentage of total revenue, license fees and royalty
revenue was 51.4% for the six months ended September 30, 1996 compared to 50.0%
for the six months ended September 30, 1997. The dollar increase in license
fees and royalty revenue was due to an increase in license fee revenue from FAS
and Abra products, which resulted primarily from increased sales of higher
priced Windows-based and multi-user products. Royalties from the MYOB License
increased from $221,000 during the six months ended September 30, 1996 to
$635,000 for the six months ended September 30, 1997.
Services Revenue. Services revenue increased from $9.1 million for the six
months ended September 30, 1996 to $11.2 million for the six months ended
September 30, 1997, representing an increase of 23.0%. As a percentage of total
revenue, services revenue increased from 48.6% during the six months ended
September 30, 1996 to 50.0% for the six months ended September 30, 1997. The
dollar increase in services revenue was primarily due to an increase in the
number of maintenance and support agreements, which resulted from a larger
installed base of customers, and a higher average contract value resulting from
increased sales of higher priced license products. To a lesser extent, the
increase in services revenue was due to the Company's increased focus on
offering training and other consulting services, which include installation,
set-up and data conversion activities.
Cost of License Fees and Royalty Revenue. Cost of license fees and royalty
revenue decreased from $939,000 for the six months ended September 30, 1996 to
$927,000 for the six months ended September 30, 1997. As a percentage of
license fees and royalty revenue, cost of license fees and royalty revenue
decreased from 9.7% to 8.2% for the six-month periods ended September 30, 1996
and 1997, respectively. The decrease in cost of license fees and royalty
revenue as a percentage of license fees and royalty revenue was primarily due
to increased sales of higher margin Windows-based and multi-user products and
the elimination of license fees attributable to the lower margin MYOB product
line. To a lesser extent, the decrease was due to royalty revenue received
under the MYOB License, for which the associated costs were nominal.
Cost of Services Revenue. Cost of services revenue was $2.8 million for
six months ended September 30, 1996 compared to $3.0 million for the six month
period ended September 30, 1997, an increase of 7.5%. As a percentage of
services revenue, cost of services revenue decreased from 30.2% to 26.4% for
the six-month periods ended September 30, 1996 and 1997, respectively. The
decrease in cost of services revenue as a percentage of services revenue was
primarily due to the elimination of services related to the MYOB product line,
which historically had higher cost of services as a percentage of services
revenue than the Company's FAS and Abra product lines. To a lesser extent, the
decrease in cost of services revenue as a percentage of services revenue was
primarily due to the effect services revenue growing at a faster rate than
expenses.
Sales and Marketing. Sales and marketing expenses increased from $7.0
million for the six months ended September 30, 1996, to $8.7 million for the
six months ended September 30, 1997, representing an increase of 25.4%. As a
percentage of total revenue, sales and marketing expenses increased from 37.0%
to 38.8% for the six-month periods ended September 30, 1996 and 1997,
respectively. The increase was primarily due to increased costs associated with
the establishment of the Company's Canadian operations, website activities, and
increased lead generation, advertising and corporate brand awareness
activities.
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<PAGE> 12
Research and Development. Research and development expenses increased from
$3.3 million for the six months ended September 30, 1996 to $4.1 million for
the six months ended September 30, 1997, representing an increase of 25.7%. As
a percentage of total revenue, research and development expenses increased from
17.5% to 18.4% for the six-month periods ended September 30, 1996 and 1997,
respectively. The increase in research and development expenses was primarily
the result of increased expenses relating to the development of a new budgeting
product, the development of 32 bit versions of certain existing products, and,
to a lesser extent, the expenses incurred to localize the Company's FAS and
Abra product lines for licensing in Canada.
General and Administrative. General and administrative expenses increased
from $2.8 million for the six months ended September 30, 1996 to $3.2 million
for the six months ended September 30, 1997, representing an increase of 14.2%.
As a percentage of total revenue, general and administrative expenses decreased
from 14.7% for the six months ended September 30, 1996 to 14.1% for the six
months ended September 30, 1997. The dollar increase in general and
administrative expenses was the result of increased staffing and related
expenses necessary to manage and support the expansion of the Company's
operations. Since general and administrative expenses increased at a lower rate
than total revenue, such expenses decreased as a percentage of total revenue.
Other Income (Expense), Net. Other income (expense), net was $98,000 for
the six months ended September 30, 1996 and $(212,000) for the six months ended
September 30, 1997. Interest expense for the six months ended September 30,
1997 was primarily due to interest expense attributable to a payment of
$432,000 to a warrant holder, and the related reduction in the exercise price
of the warrant in connection with the June 1997 dividend to shareholders,
offset in part by increased interest income.
Provision for Income Taxes. The provision for income taxes was $985,000
for the six months ended September, 1996 and $910,000 for the six months ended
September 30, 1997, representing 45.0% and 38.6% of income before taxes,
respectively. For the six months ended September 30, 1996, the Company's
effective tax rate was higher due to valuation reserves for certain deferred
tax assets.
LIQUIDITY AND CAPITAL RESOURCES
The Company funds its operations through cash provided by operations. The
Company had cash and cash equivalents of $9.0 million at September 30, 1997.
Upon the closing of the Initial Public Offering on October 3, 1997, the Company
had cash and cash equivalents of $42.0 million.
For the six months ended September 30, 1997 and 1996, net cash provided by
operating activities was $5.1 million and $5.0 million, respectively. The
increase in cash provided by operating activities was primarily a result of
higher profitability and increased deferred maintenance and service deferred
revenue.
Net cash used in investing activities for the six months ended September
30, 1997 and 1996 was $755,000 and $478,000, respectively. In both periods, net
cash used in investing activities was for the purchase of property and
equipment. Although the Company does not currently have any material
identifiable commitments for capital expenditures, the Company expects to
continue to invest in the acquisition of property and equipment in the ordinary
course of its business. The Company does not have any material commitments
related to its royalty obligations arising from licenses of certain products
and technologies used in the Company's products.
Net cash used in financing activities for the six months ended September
30, 1997 and 1996 was $8.7 million and $1.7 million, respectively. During the
six months ended September 30, 1997, the principal use of cash was the payment
of a dividend, the repurchase of treasury shares and the repayment of a note.
During the six months ended September 30, 1996, the principal use of cash was
the repurchase of treasury shares and the repayment of a note.
The Company believes that the net proceeds from this offering and cash
generated from operations will be sufficient to fund its operations for at
least the next 12 months.
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<PAGE> 13
RISK FACTORS
Significant Fluctuations in Quarterly Operating Results. The Company has
experienced, and expects to continue to experience, significant fluctuations in
its quarterly operating results. There can be no assurance that the Company
will be profitable in any particular quarter. The Company's future quarterly
operating results will depend upon a number of factors, including the demand
for its products, the type and level of services purchased by its customers,
the mix of sales through direct and indirect sales channels, the level of
product and price competition that it encounters, the length of its sales
cycles, the timing of larger customer implementations, the timing and success
of sales and marketing programs, particularly direct mail campaigns, the timing
and acceptance of new product introductions and product enhancements by the
Company and its competitors, the timing and amount of the Company's product
development programs, the mix of products and services sold, the timing of new
hires, market acceptance of new products, competitive conditions in the
industry and general economic conditions. The Company's expense levels are
based, in significant part, on anticipated revenue trends. Because a high
percentage of these expenses are relatively fixed in the short term, if revenue
levels fall below expectations, the Company's operating results are likely to
be materially and adversely affected. Historically, the Company's revenues and
earnings for the first calendar quarter have been lower than those for the
preceding quarter because a disproportionate number of customers purchase the
Company's products in the fourth calendar quarter in anticipation of the close
of their own fiscal years and the ensuing tax season. In addition, margins in
the first calendar quarter have historically been lower due to the shipment by
the Company of large numbers of annual software updates in that quarter
reflecting regulatory changes. The Company anticipates that the sales cycle for
its enhanced client/server products, upon their introduction, will generally be
longer than that associated with its current products. Any significant
lengthening of the Company's sales cycle could have a material adverse effect
on the Company's business, operating results and financial condition and, in
particular, could contribute to significant fluctuations in operating results
on a quarterly basis. As a result of these and other factors, the Company's
quarterly operating results are subject to variation, and the Company believes
that quarter-to-quarter comparisons of its operating results are not
necessarily meaningful and should not be relied upon as an indication of future
performance. In addition, due to all the foregoing factors, the Company's
operating results in future periods may be below the expectations of securities
analysts and investors. In that event, the market price of the Company's Common
Stock would likely be materially adversely affected.
Product Concentration; Discontinued Product Lines. The Company currently
derives substantially all of its revenue from its FAS and Abra product lines
and related services. These product lines are expected to continue to account
for a substantial portion of the Company's revenues for the foreseeable future.
Accordingly, the Company's future operating results will depend, in part, on
maintaining and increasing acceptance of these products and related services.
Any factors adversely affecting the pricing of or demand for these products and
services or an increase in competition for such products and services could
have a material adverse effect on the Company's business, operating results and
financial condition. The Company's historical consolidated financial statements
for the applicable periods include results of operations relating to certain
product lines subsequently sold or licensed by the Company. Accordingly, the
Company's historical consolidated financial statements are not indicative of
operating results attributable to the Ongoing Business. In addition, the
Company derives revenue from the exclusive license of its MYOB product line to
a third party (the "MYOB License"), which will expire in June 2000.
New Products and Rapid Technological Change. The market for business
application software is characterized by rapid technological advancements,
changes in customer requirements, frequent new product introductions and
enhancements and changing industry standards. The life cycles of the Company's
products are difficult to estimate and the Company's current market position
could be undermined by rapid technological changes and the introduction of new
products and enhancements by new or existing competitors. The Company's growth
and future success will depend, in part, upon its ability to enhance its
current products and introduce new products in order to keep pace with products
offered by the Company's competitors, adapt to technological advancements and
changing industry standards and produce additional functionality to address the
increasingly sophisticated requirements of its customers. The Company currently
has a number of new product development efforts underway, including the
development of enhanced client/server versions of its FAS and Abra products and
the development of a new budgeting software product. The Company's product
development efforts are expected to require substantial additional investment
by the Company. There can be no assurance that the Company will have sufficient
resources to make the necessary investment or that it will not experience
difficulties that could delay or prevent the successful development,
introduction or marketing of new products or enhancements. In addition, there
can be no assurance that such products or enhancements will meet the
requirements of the marketplace or achieve market acceptance or that the
Company's customers will migrate to client/server environments at the rate
expected by the Company. If the market for the Company's products shifts
rapidly towards the client/server environment, the absence of enhanced
client/server versions of its FAS and Abra products, or any delay in the
commercial availability or market acceptance of such products, could have a
material adverse effect on the Company's business, operating results and
financial condition. In addition,
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<PAGE> 14
the Company's enhanced client/server products are being developed to operate on
corporate Intranets, among other applications, and the success of these
products will depend upon growth in the number of middle market businesses
implementing corporate Intranets. If businesses do not adopt and deploy
corporate Intranets at the rate anticipated by the Company, the Company's
business, operating results and financial condition may be materially and
adversely affected. Any failure by the Company to anticipate or respond
adequately to technological advancements, customer requirements and changing
industry standards, or any significant delays in the development, introduction
or availability of new products or enhancements, could have a material adverse
effect on the Company's business, operating results and financial condition.
Product Migration. Prior to fiscal 1994, substantially all of the
Company's revenue from its FAS and Abra products was derived from DOS-based
versions of those products. Since fiscal 1994, when the Company introduced
Windows-based versions of its FAS and Abra products, a significant number of
the Company's DOS installed base of customers for these product lines has
migrated to the Company's Windows-based products. However, there can be no
assurance that in the future a significant percentage of the Company's
remaining installed base of DOS customers will migrate to the Company's
Windows-based products. In particular, the Company believes that smaller
customers are less likely to migrate to the Company's Windows-based products
because the cost of migrating is high relative to their size and because, in
many cases, the DOS-based products adequately meet their needs. If a
significant number of the Company's remaining DOS customers elect not to
migrate to the Company's Windows-based products, purchase competitive products
or encounter problems in implementing the Company's Windows-based products, the
Company's business, operating results and financial condition could be
materially and adversely affected.
Risks Associated with Sales Channels. To date, the Company has sold its
products and services primarily through a network of value-added resellers,
accounting firms and consultants (together, "Business Partners"), a
direct-response telesales operation, strategic marketing alliances and a direct
sales force focusing on national accounts. The Company's ability to achieve
significant revenue growth in the future will depend, in large part, upon its
ability to establish and maintain relationships with its Business Partners,
strategic alliance partners and national accounts and upon the success of its
direct mail campaigns and telesales efforts. The Company's ability to
successfully market its products, including its enhanced client/server products
under development, will depend on its ability to adapt its sales channels to
address the evolving markets for such products. Failure to do so could have a
material and adverse effect on the Company's business, operating results and
financial condition.
The Company's ability to achieve significant revenue growth in the future
will depend, in part, on its success in recruiting and training sufficient
direct sales personnel and expanding its Business Partner network. Although the
Company is currently investing, and plans to continue to invest, significant
resources to develop and expand its direct sales force and Business Partner
network, the Company has at times experienced and may continue to experience
difficulty in recruiting qualified personnel for its direct sales force and
identifying, certifying, and/or maintaining qualified Business Partners. There
can be no assurance that the Company will be able to maintain or successfully
expand its direct sales force or Business Partner network or that any such
expansion will result in an increase in revenue. Further, there can be no
assurance that a sufficient number of direct sales personnel or Business
Partners will be able to successfully address the client/server market. Any
failure by the Company to expand its direct sales force or its Business Partner
network could have a material adverse effect on the Company's business,
operating results and financial condition. In addition, if the Company is
successful in expanding its direct sales force, there can be no assurance that
its direct sales personnel will be successful in increasing the Company's
revenue to a sufficient extent to cover the increased expenses associated with
such expansion. The Company's agreements with its Business Partners generally
are nonexclusive and may be terminated by either party at any time without
cause. The Company's Business Partners are not within the control of the
Company, are not obligated to purchase products from the Company and may also
represent or refer product lines of its competitors. Business Partners' sales
tend to fluctuate based on their implementation schedules and internal
resources, which are beyond the control of the Company. There can be no
assurance that these Business Partners will continue their current
relationships with the Company or that they will not give higher priority to
the sale or referral of other products, which could include products of
competitors. A reduction in sales efforts or discontinuance of sales or
referrals of the Company's products by its Business Partners could lead to
reduced sales and could materially adversely affect the Company's business,
operating results and financial condition. The Company expects that any
material increase in the Company's indirect sales as a percentage of total
revenue will materially and adversely affect the Company's average selling
prices and gross margins due to the lower unit prices that the Company receives
through indirect channels.
The Company's strategy of marketing its products directly to end-users and
indirectly through its Business Partners may result in distribution channel
conflicts. The Company's direct sales efforts may compete with those of its
indirect channels and, to the extent more than one Business Partner targets the
same customer, such Business Partners may come into conflict with each other.
There
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<PAGE> 15
can be no assurance that channel conflict will not adversely affect the
Company's relationships with its customers or Business Partners or its ability
to attract other Business Partners.
Competition. The market for the Company's products is intensely competitive
and rapidly changing. The Company faces different competitors for each of its
product lines. The Company's asset management products compete principally with
products offered by the Bureau of National Affairs, Inc. in the single-user and
work group environments, and the Company anticipates that its enhanced
client/server asset management products, when introduced, will compete with
products offered by PeopleSoft, Inc., Oracle Corporation and others. The
Company's human resources and payroll management products compete primarily
with products offered by Spectrum Human Resources Corporation, Human Resources
Microsystems and Ceridian Corporation (FLX) in the single-user and work group
environment, and the Company anticipates that its enhanced client/server human
resources and payroll products, when introduced, will compete with products
offered by PeopleSoft, Inc., Ultimate Software Group, Inc. and SAP AG in the
client/server environment. The Company's human resource and payroll management
products also compete with payroll service bureaus, such as ADP, Inc. and
PayChex, Inc., and with in-house management information systems staffs. Some of
the Company's existing competitors, as well as a number of potential new
competitors, have larger technical staffs, more established and larger sales
and marketing organizations and greater financial resources than the Company.
There can be no assurance that the Company will continue to compete
successfully with its existing competitors or will be able to compete
successfully with new competitors. In addition, there can be no assurance that
competitors will not develop products that are superior to the Company's
products or achieve greater market acceptance. Competitive pressures in the
form of aggressive price competition could also have a material adverse effect
on the Company's business, operating results and financial condition. The
Company's future success will depend significantly upon its ability to increase
its share of its target markets, to maintain and increase its renewal revenues
from existing customers and to sell additional products, product enhancements,
maintenance and support agreements and training and consulting services to
existing customers and new customers. There can be no assurance that the
Company will continue to compete favorably or that competition will not have a
material adverse effect on the Company's business, operating results or
financial condition.
Timely Release of Periodic Updates to Reflect Tax Law and Other Regulatory
Changes. The Company's asset, human resources and payroll management software
products are affected by changes in laws and regulations and generally must be
updated annually or periodically to maintain their accuracy and
competitiveness. There can be no assurance that the Company will be able to
release these annual or periodic updates on a timely basis in the future.
Failure to do so could have a material adverse effect on market acceptance of
the Company's products, which could have a material adverse effect on the
Company's business, operating results and financial condition. In addition,
significant changes in tax laws and regulations or other regulatory provisions
applicable to the Company's products could require the Company to make a
significant investment in product modifications, which could have a material
adverse effect on the Company's business, operating results and financial
condition.
Product Errors; Product Liability. Software products such as those offered
by the Company typically contain undetected errors or failures when first
introduced or as new versions are released. Testing of the Company's products
is particularly challenging because it is difficult to simulate the wide
variety of computing environments in which the Company's customers may deploy
these products. Despite extensive testing, the Company from time to time has
discovered defects or errors in its products. Accordingly, there can be no
assurance that such defects, errors or difficulties will not cause delays in
product introductions and shipments, result in increased costs and diversion of
development resources, require design modifications or decrease market
acceptance or customer satisfaction with the Company's products. In addition,
there can be no assurance that, despite testing by the Company and by current
and potential customers, errors will not be found after commencement of
commercial shipments, resulting in loss of or delay in market acceptance, which
could have a material adverse effect upon the Company's business, operating
results and financial condition.
Although the Company has not experienced any material product liability
claims to date, the sale and support of software products and the performance of
related services by the Company entails the risk of such claims. Many of the
Company's products and services are used by or performed for customers in
connection with the preparation and filing of tax returns and other regulatory
reports. If any of the Company's products contain errors that produce
inaccurate results upon which users rely, or cause users to misfile or fail to
file required information, the Company could be subject to liability claims
from users which could, in turn, materially adversely affect the Company's
business, operating results and financial condition. The Company attempts to
limit its product liability exposure to users through contractual limitations
on liability, including appropriate disclaimers in its "shrink wrap"
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<PAGE> 16
license agreement with end users. The Company's software license agreements
generally provide that the software is provided "as is" without warranty of any
kind. There can be no assurance, however, that the contractual limitations used
by the Company will be enforceable or will provide the Company with adequate
protection against product liability claims. The Company also maintains errors
and omissions insurance. There can be no assurance, however, that such coverage
will be sufficient to cover any claims made in the future, will continue to be
available on reasonable terms, or that the insurer will not disclaim coverage
as to any future claim. A successful claim for product or service liability
brought against the Company could have a material adverse effect upon the
Company's business, operating results and financial condition.
Acquisitions. The Company may, from time to time, pursue acquisitions of
businesses, customer bases, products or technologies that complement or expand
its existing business. The Company evaluates potential acquisition
opportunities from time to time, including those that could be material in size
and scope. Acquisitions involve a number of risks, including the diversion of
management's attention from day-to-day operations to the assimilation of the
operations and personnel of the acquired companies and the incorporation of
acquired operations, customer bases, products or technologies. Such
acquisitions could also have adverse short-term effects on the Company's
operating results, and could result in dilutive issuances of equity securities,
the incurrence of debt and the loss of key employees. In addition, many
business acquisitions must be accounted for as purchases and, because most
software-related acquisitions involve the purchase of significant intangible
assets, these acquisitions typically result in substantial amortization charges
and charges for acquired research and development projects, which could have a
material adverse effect on the Company's operating results. There can be no
assurance that any such acquisitions will occur or that, if such acquisitions
do occur, the acquired businesses, customer bases, products or technologies
will generate sufficient revenue to offset the associated costs or effects.
Protection of Intellectual Property; Risks of Infringement. The Company's
success is heavily dependent upon its proprietary technology. The Company
regards its software as proprietary, and relies primarily on a combination of
trade secret, copyright and trademark law, trade secret confidentiality
agreements and contractual provisions to protect its proprietary rights. The
Company has no patents or patent applications pending, and existing trade
secret and copyright laws afford only limited protection. Despite the Company's
efforts to protect its proprietary rights, unauthorized parties may attempt to
copy aspects of the Company's products or to obtain and use information that
the Company regards as proprietary. Policing unauthorized use of the Company's
products is difficult and, while the Company is unable to determine the extent
to which piracy of its software products exists, software piracy can be
expected to be a persistent problem, particularly in international markets and
as a result of the growing use of the Internet. In selling its products, the
Company relies primarily on "shrink wrap" licenses that are not signed by
licensees and, therefore, it is possible that such licenses may be
unenforceable under the laws of certain jurisdictions. In addition, the laws of
some foreign countries do not protect the Company's proprietary rights to the
same extent as do the laws of the United States. There can be no assurance that
the steps taken by the Company to protect its proprietary rights will be
adequate or that the Company's competitors will not independently develop
products or technologies that are substantially equivalent or superior to the
Company's products or technologies.
The Company is not aware that any of its products, trademarks or other
proprietary rights infringe the proprietary rights of third parties. However,
there can be no assurance that third parties will not assert infringement
claims against the Company in the future with respect to current or future
products. As the number of software products in the industry increases and the
functionality of these products further overlap, the Company believes that
software developers may become increasingly subject to infringement claims. Any
such claims, with or without merit, can be time-consuming and expensive to
defend, cause product shipment delays or require the Company to enter into
royalty or licensing agreements. Such royalty agreements, if required, may not
be available on terms acceptable to the Company, or at all, which could have a
material adverse effect on the Company's business, operating results and
financial condition.
International Operations. Although the Company's revenue from international
sales has historically been insignificant, the Company recently opened an
office in Canada and intends to increase its sales and marketing efforts in
other international markets. The Company anticipates that its international
operations will require the Company to recruit and hire a number of new
consulting, sales and marketing and support personnel in Canada and other
countries in which the Company establishes operations. In addition, the Company
has only limited experience in developing localized versions of its products
and in marketing and distributing its products internationally. Moreover, the
Company does not currently have relationships with any Business Partners that
target international markets. The Company's international sales and marketing
efforts will require significant investment by the Company in advance of
anticipated future revenue. There can be no assurance that the Company's
international sales and marketing efforts will be successful or will generate
significant revenue. There are a number of other risks inherent in
international business activities,
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including costs and risks of localizing products for foreign countries,
unexpected changes in regulatory requirements, tariffs and other trade
barriers, longer accounts receivable payment cycles, difficulties in managing
international operations, potentially adverse tax consequences, currency
fluctuations, difficulties in the repatriation of earnings, the burdens of
complying with a wide variety of foreign laws and exposures to gains and losses
on foreign currency transactions. There can be no assurance that such factors
will not have a material adverse effect on the Company's business, operating
results or financial condition.
Reliance on Microsoft Technologies. The Company's software products are
designed primarily to operate with Microsoft technologies, including Windows
NT, Windows 95, Windows 3.x, SQL Server, Visual FoxPro and Visual Basic, and
the Company's strategy requires that its products and technology be compatible
with new developments in Microsoft technology. A decreasing portion of the
Company's products are also designed to operate with Microsoft DOS. Although
the Company believes that Microsoft technologies are currently widely utilized
by businesses of all sizes, there can be no assurance that businesses will
continue to adopt such technologies as anticipated, will migrate from older
Microsoft technologies (such as DOS or earlier versions of Windows) to newer
Microsoft technologies or will not adopt alternative technologies that the
Company does not support. If businesses do not migrate from older technologies
and adopt the Microsoft technologies with which the Company's products are
compatible, the Company's business, operating results and financial condition
will be materially and adversely affected.
Dependence on Key Personnel. The Company's success depends, in
significant part, upon the continued services of its key technical, marketing,
sales and management personnel and on its ability to continue to attract,
motivate and retain highly qualified employees. The loss of key personnel could
have a material adverse effect on the Company's business, operating results and
financial conditions. The Company does not maintain key person life insurance
on any of its employees. Although the Company has employment agreements with
certain key employees, these employees, like all other employees, may
voluntarily terminate their employment with the Company at any time.
Competition for technical, marketing, sales and management employees is intense
and the process of locating personnel with the combination of skills and
attributes required to execute the Company's strategy can be difficult,
time-consuming and expensive. There can be no assurance that the Company will
be successful in attracting or retaining highly skilled technical, management,
sales and marketing personnel and the failure to attract, hire, assimilate or
retain such personnel could have a material adverse effect on the Company's
business, operating results and financial condition.
Control by Principal Shareholders, Officers and Directors. The present
directors, executive officers and principal shareholders of the Company and
their affiliates beneficially own approximately 53% of the outstanding Common
Stock. As a result, these shareholders will be able to exercise control over
all matters requiring shareholder approval, including the election of directors
and approval of significant corporate transactions. This concentration of
ownership may have the effect of delaying or preventing a change in control of
the Company.
Possible Volatility of Stock Price. The trading price of the Common Stock
is likely to be highly volatile and may be significantly affected by factors
such as actual or anticipated fluctuations in the Company's operating results,
announcements of technological innovations, new products or new contracts by
the Company or its competitors, developments with respect to patents,
copyrights or proprietary rights, conditions and trends in the software
industry, changes in financial estimates by securities analysts, general market
conditions and other factors. In addition, the public equity markets have from
time to time experienced significant price and volume fluctuations that have
particularly affected the market prices for the stock of technology companies.
These broad market fluctuations, as well as shortfalls in sales or earnings as
compared with securities analysts' expectations, changes in such analysts'
recommendations or projections and general economic and market conditions, may
materially and adversely affect the market price of the Company's Common Stock.
Anti-takeover Effect of Certain Charter, By-Law and Statutory Provision;
Possible Issuance of Preferred Stock. The Company's Amended and Restated
Articles of Incorporation and Amended and Restated By-Laws, as well as Virginia
corporate law, contain certain provisions that could have the effect of making
it more difficult for a third party to acquire, or of discouraging a third
party from attempting to acquire, control of the Company. These provisions
could limit the price that certain investors might be willing to pay in the
future for shares of the Company's Common Stock. Certain of these provisions
allow the Company to issue without shareholder approval preferred stock having
rights senior to those of the Common Stock. Other provisions impose various
procedural and other requirements that could make it more difficult for
shareholders to effect certain corporate actions. In addition, the Company's
Board of Directors is divided into three classes, each of which will serve for
a staggered three-year term, which may make it more difficult for a third party
to gain control of the Company's Board of Directors.
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Part II
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Annual Meeting of Shareholders of the Company was held on September
11, 1997. The following is a brief description of each matter voted upon at
the meeting and the number of affirmative votes and the number of negative
votes cast with respect to each matter.
(a) The shareholders elected to amend and restate the Company's
Articles of Incorporation increasing from 15,000,000 to
40,000,000 the aggregate number of authorized shares of Common
Stock of the Company, with 7,843,143 shares voting for and no
shares voting against or abstaining.
(b) The shareholders elected to amend and restate the Company's Articles
of Incorporation effective immediately following the closing of the
Initial Public Offering, to eliminate the Class A Redeemable
Convertible Preferred Stock, with 7,843,143 shares voting for and no
shares voting against or abstaining.
(c) The shareholders elected Timothy A. Davenport, Peter V. Del Presto and
Herbert R. Brinberg as directors of the Company. The votes for and
against (withheld) each nominee were as follows:
<TABLE>
<CAPTION>
Nominee Votes For Votes Withheld Votes Abstained
------- --------- -------------- ---------------
<S> <C> <C> <C>
Timothy A. Davenport 7,785,215 57,928 0
Peter V. Del Presto 7,785,215 57,928 0
Herbert R. Brinberg 7,785,215 57,928 0
</TABLE>
Effective October 3, 1997, Mr. Del Presto resigned from the
Board of Directors.
(d) The shareholders ratified the appointment of Arthur Andersen LLP as
the Company's independent auditors, with 7,785,215 shares voting for
and 57,928 shares voting against, and no shares abstaining.
(e) The shareholders approved the Company's Amended and Restated 1988
Incentive Stock Option Plan, with 7,724,673 shares voting for, no
shares voting against and 118,470 shares abstaining.
(f) The shareholders approved the amendments to the Company's Amended and
Restated 1992 Stock Option Plan, with 7,717,173 shares voting for,
7,500 shares
voting against, and 118,470 shares abstaining.
(g) The shareholders approved the Company's 1997 Employee Stock Purchase
Plan, with 7,759,143 shares voting for, no shares voting against and
84,000 shares abstaining.
(h) The shareholders approved the Company's 1997 Directors Stock Option
Plan, with 7,717,173 shares voting for, 41,970 voting against, and
84,000 shares abstaining.
(i) The shareholders approved the Company's 1997 Stock Incentive Plan,
with 7,724,673 shares voting for, 34,470 shares voting against, and
84,000 shares abstaining.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
11.1 Statement Re. Computation of Net Income Per Share
27.1 Financial Data Schedule, which is submitted electronically
to the Securities and Exchange Commission for information
only and not filed.
(b) Reports on Form 8-K:
None
18
<PAGE> 19
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by each of
the undersigned thereunto duly authorized.
BEST SOFTWARE, INC.
By: /s/ Timothy A. Davenport
----------------------------
Timothy A. Davenport
President and Chief Executive Officer
`
By: /s/ David N. Bosserman
--------------------------
David N. Bosserman
Executive Vice President, Chief Financial
Officer and Treasurer
`
19
<PAGE> 20
<TABLE>
<CAPTION>
EXHIBIT NO.
-----------
<S> <C> <C>
11.1 Computation of Earnings per Share 21
27 Financial Data Schedule*
</TABLE>
- ----------------
- - Submitted only with the electronic filing of this document with the
Commission pursuant to Regulation S-T under the Securities Act of
1933, as amended.
20
<PAGE> 1
EXHIBIT 11.1
BEST SOFTWARE, INC.
COMPUTATION OF EARNINGS PER SHARE
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
-------------------------- --------------------------
1997 1996 1997 1996
----------- ----------- ----------- -----------
UNUADITED UNUADITED UNUADITED UNUADITED
<S> <C> <C> <C> <C>
Weighted average common shares outstanding 7,436 6,533 7,219 6,531
Common stock equivalents:
Preferred stock 625 625 625 625
Dilutive effect of Stock options and warrants 946 1,670 1,228 1,670
Warrant exercise 87 87 87 87
Assumed common share issuance for dividends in excess 487 487 487 487
of earnings ---------- ---------- ---------- ----------
Pro forma weighted average shares outstanding 9,581 9,402 9,646 9,400
========== ========== ========== ==========
Net income $1,095 $1,122 $1,445 $1,202
========== ========== ========== ==========
Pro forma net income per share $0.11 $0.12 $0.15 $0.13
========== ========== ========== ==========
</TABLE>
21
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAR-31-1998
<PERIOD-START> JUL-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 8,862
<SECURITIES> 0
<RECEIVABLES> 4,638
<ALLOWANCES> (966)
<INVENTORY> 159
<CURRENT-ASSETS> 14,540
<PP&E> 7,557
<DEPRECIATION> 5,782
<TOTAL-ASSETS> 18,750
<CURRENT-LIABILITIES> 22,028
<BONDS> 0
0
500
<COMMON> 788
<OTHER-SE> (6,252)
<TOTAL-LIABILITY-AND-EQUITY> 18,750
<SALES> 11,825
<TOTAL-REVENUES> 11,825
<CGS> 556
<TOTAL-COSTS> 2,048
<OTHER-EXPENSES> 8,079
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (82)
<INCOME-PRETAX> 1,780
<INCOME-TAX> 685
<INCOME-CONTINUING> 1,095
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,095
<EPS-PRIMARY> .11
<EPS-DILUTED> .11
</TABLE>
