<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
FOR QUARTER ENDED JUNE 30, 1999
COMMISSION FILE NUMBER 0-23117
BEST SOFTWARE, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<CAPTION>
<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 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 the number of shares outstanding of each of issuer's classes of common
stock as of the latest practicable date:
<TABLE>
<CAPTION>
NUMBER OF SHARES OUTSTANDING ON
TITLE OF CLASS JULY 31, 1999
-------------- -------------
<S> <C>
Common Stock, no par value 11,716,204
</TABLE>
<PAGE> 2
BEST SOFTWARE, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PART I FINANCIAL INFORMATION PAGE
<S> <C> <C>
Item 1. Condensed Consolidated Financial Statements
Consolidated Balance Sheets as of June 30,
1999 and December 31, 1998 3
Consolidated Statements of Operations for the
three months and six months ended June 30,
1999 and 1998 4
Consolidated Statements of Cash Flows for the
six months ended June 30, 1999 and 1998 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 11
PART II OTHER INFORMATION
</TABLE>
2
<PAGE> 3
PART I
ITEM 1. FINANCIAL STATEMENTS
BEST SOFTWARE, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1999 1998
----------- ------------
(UNAUDITED)
ASSETS
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 20,352 $ 29,549
Short-term marketable securities 4,964 16,731
Accounts receivable, net of allowance of $667 and $938 respectively 9,794 8,198
Prepaid expenses and other current assets 4,155 3,130
----------- ----------
Total current assets 39,265 57,608
----------- ----------
Property and equipment, net 5,180 4,333
Acquired intangibles, net 11,407 7,178
Long-term marketable securities 17,656 -
Other long-term assets 5,475 5,451
----------- ----------
TOTAL ASSETS $ 78,983 $ 74,570
=========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES:
Accounts payable and accrued expenses $ 12,856 $ 14,255
Deferred maintenance and services revenue 21,053 19,350
Notes payable 183 264
----------- ----------
Total Current Liabilities 34,092 33,869
Deferred maintenance and services revenue 754 616
----------- ----------
Total Liabilities 34,846 34,485
----------- ----------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Preferred stock, $0.01 par value; 1,000,000 shares - -
authorized, none issued
Common stock, no par value; 40,000,000 shares 38,342 38,079
authorized; 11,748,548 and 11,687,676 shares
issued and outstanding, respectively
Additional paid-in capital 1,431 1,281
Accumulated other nonowners' equity (32) (172)
Accumulated earnings 4,396 897
----------- ----------
Total shareholders' equity 44,137 40,085
----------- ----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 78,983 $ 74,570
=========== ==========
</TABLE>
See accompanying notes to the consolidated financial 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
JUNE 30, JUNE 30,
------------------------ ----------------------
1999 1998 1999 1998
------------------------ ----------------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
REVENUE:
License fees and royalties $ 10,233 $ 8,339 $ 19,575 $ 15,142
Services 11,420 7,914 22,120 14,809
---------- --------- --------- ----------
Total 21,653 16,253 41,695 29,951
---------- --------- --------- ----------
COST OF REVENUE:
License fees and royalties 571 455 911 895
Services 3,910 2,807 7,275 4,946
---------- --------- --------- ----------
Total 4,481 3,262 8,186 5,841
---------- --------- --------- ----------
GROSS MARGIN 17,172 12,991 33,509 24,110
---------- --------- --------- ----------
OPERATING EXPENSES:
Sales and marketing 7,531 5,847 15,083 10,551
Research and development 3,775 2,700 7,115 4,821
General and administrative 2,499 2,024 4,670 3,734
Write-off of purchased research and development - - 1,200 3,850
Amortization of acquired intangibles 579 273 929 273
---------- --------- --------- ----------
Total 14,384 10,844 28,997 23,229
---------- --------- --------- ----------
Operating income 2,788 2,147 4,512 881
Other income, net 531 558 1,122 1,152
---------- --------- --------- ----------
Income from operations before income taxes 3,319 2,705 5,634 2,033
Income tax provision 1,260 1,040 2,135 770
---------- --------- --------- ----------
NET INCOME $ 2,059 $ 1,665 $ 3,499 $ 1,263
========== ========= ========= ==========
Basic net income per share $ 0.18 $ 0.14 $ 0.30 $ 0.11
========== ========= ========= ==========
Diluted net income per share $ 0.17 $ 0.14 $ 0.29 $ 0.10
========== ========= ========= ==========
Basic weighted average shares outstanding 11,722 11,568 11,711 11,276
========== ========= ========= ==========
Diluted weighted average shares outstanding 12,173 12,249 12,272 12,052
========== ========= ========= ==========
</TABLE>
See accompanying notes to the consolidated financial statements
4
<PAGE> 5
BEST SOFTWARE, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
-----------------------
1999 1998
---------- ---------
(UNAUDITED)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
NET INCOME $ 3,499 $ 1,263
ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH PROVIDED BY
OPERATING ACTIVITIES:
Depreciation and amortization 2,192 1,016
Write-off of purchased research and development 1,200 3,850
Other non-cash charges or credits 205 (1,101)
(Increase) decrease in current assets:
Accounts receivable (net) (1,596) (340)
Prepaid expenses and other current assets (1,347) (355)
Increase (decrease) in current liabilities:
Accounts payable and accrued expenses (1,399) 1,660
Deferred maintenance and services revenue 1,841 1,530
----------- ---------
NET CASH PROVIDED BY OPERATING ACTIVITIES 4,595 7,523
----------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment (1,916) (1,155)
Purchase of marketable securities (26,925) (21,037)
Proceeds from sale of marketable securities 21,045 17,178
Acquisitions, net of cash acquired (6,178) (6,800)
----------- ---------
NET CASH USED IN INVESTING ACTIVITIES (13,974) (11,814)
----------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from exercise of stock options and warrants 263 265
Purchase and retirement of treasury stock - (355)
Repayment of notes payable (81) (1,391)
----------- ---------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 182 (1,481)
----------- ---------
Effect of exchange rate changes - 17
----------- ---------
Net decrease in cash and cash equivalents (9,197) (5,755)
Cash and cash equivalents, beginning of period 29,549 33,164
----------- ---------
Cash and cash equivalents, end of period $ 20,352 $ 27,409
=========== =========
SUPPLEMENTAL DISCLOSURE
Cash paid during the period for:
Income taxes $ 1,835 $ 1,669
Interest $ 9 $ 35
240,000 shares issued to HR Management Software GmbH - $ 3,630
</TABLE>
See accompanying notes to the consolidated financial statements
5
<PAGE> 6
BEST SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying unaudited condensed 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 audited financial statements and the footnotes thereto for
the year ended December 31, 1998 filed in the Company's Form 10-K with the
Securities and Exchange Commission ("SEC"). These condensed financial statements
are unaudited and do not include certain information and footnote disclosures
normally included in annual financial statements as permitted by SEC rules and
regulations. Operating results for the three months and six months ended June
30, 1999 are not necessarily indicative of the results of operations expected
for the full fiscal year.
In the opinion of management, the accompanying unaudited condensed
financial statements reflect all adjustments, consisting of only normal
recurring accruals, necessary for a fair presentation of the financial position
of the Company as of June 30, 1999, the results of its operations for the
three-month and six-month periods ended June 30, 1999 and 1998, and cash flows
for the six-month periods ended June 30, 1999 and 1998. The preparation of
financial statements in conformity with generally accepted accounting principles
requires management to make certain assumptions and estimates that affect the
reported amounts of assets and liabilities at the date of financial statements
and the reported amount of revenue and expenses during the reporting period.
Actual results could differ from those estimates.
In general, the functional currency of a foreign operation is deemed to be
the local country's currency. Consequently, assets and liabilities of operations
outside the United States are translated into US dollars using the exchange rate
in effect at the balance sheet date. Revenue and expense accounts for those
operations are translated using the average exchange rate during the period. The
effects of the foreign currency translation adjustments are included as a
separate component of shareholders' equity under accumulated other non-owners'
equity caption.
2. SOFTWARE REVENUE RECOGNITION
In October 1997, The American Institute of Certified Public Accountants
(the "AICPA") issued Statement of Position ("SOP") SOP 97-2, "Software Revenue
Recognition". The Company adopted SOP 97-2 effective January 1, 1998. The
adoption of SOP 97-2 did not have a material impact on the Company.
The AICPA has also issued SOP 98-9, "Modification of SOP 97-2, Software
Revenue Recognition with Respect to Certain Transactions" effective for
transactions entered into in fiscal years beginning after March 15, 1999. The
Company has completed evaluating this statement and believes that its provision
will not have a material impact on the Company's results of operations.
6
<PAGE> 7
BEST SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
3. NET INCOME PER COMMON SHARE
In accordance with Statement of Financial Accounting Standard No. 128,
"Earnings per Share", basic net income per share and diluted net income per
share can be reconciled as indicated below:
(In thousands, except per share data)
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30,
-----------------------------------------------------------------------------
1999 1998
----------------------------------- ----------------------------------
(UNAUDITED) (UNAUDITED)
PER-SHARE PER-SHARE
INCOME SHARES AMOUNT INCOME SHARES AMOUNT
<S> <C> <C> <C> <C> <C> <C>
Basic net income per share:
Income available to common shareholders $ 2,059 11,722 $ 0.18 $ 1,665 11,568 $ 0.14
Effect of dilutive securities
Options and warrants 451 681
---------- ------- --------- -------
Diluted net income per share:
Income available to common shareholders $ 2,059 12,173 $ 0.17 $ 1,665 12,249 $ 0.14
========== ======= ========= =======
</TABLE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
-----------------------------------------------------------------------------
1999 1998
----------------------------------- ----------------------------------
(UNAUDITED) (UNAUDITED)
PER-SHARE PER-SHARE
INCOME SHARES AMOUNT INCOME SHARES AMOUNT
<S> <C> <C> <C> <C> <C> <C>
Basic net income per share:
Income available to common shareholders $ 3,499 11,711 $ 0.30 $ 1,263 11,276 $ 0.11
Effect of dilutive securities
Options and warrants 556 776
---------- ------- --------- -------
Diluted net income per share:
Income available to common shareholders $ 3,499 12,267 $ 0.29 $ 1,263 12,052 $ 0.10
========== ======= ========= =======
</TABLE>
4. ACQUISITIONS
In March 1999, the Company acquired the assets of OmniVista Software
Corporation ("OmniVista"), a leading provider of planning and analytical
software. The acquisition price was $5.0 million in cash, $350,000 in assumed
net liabilities and acquisition expenses of approximately $350,000. The
acquisition was accounted for as a purchase and the Company recorded a charge
for $1.2 million in the first quarter of 1999 associated with in-process
research and development ("IPR&D"). The Company used an independent third-party
appraiser to assess and value the IPR&D. The value assigned was determined by
identifying significant research projects for which technological feasibility
had not been established. The purchase price allocation represents the estimated
fair market value based on risk-adjusted cash flows related to the incomplete
products. The excess of the purchase price over the fair value of the net assets
of approximately $4.5 million represents completed technology and product base
of approximately $1.7 million, assembled work force of $275,000, and customer
base and strategic alliances of $2.5 million. These intangible assets will be
amortized over four to six years. The Company believes that the assumptions used
in the IPR&D and intangible valuations were reasonable at the time of the
acquisition. No assurance can be given, however, that the underlying assumptions
or the events associated with such projects will transpire as estimated. For
these reasons, actual results may vary from projected results.
7
<PAGE> 8
BEST SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
4. ACQUISITIONS -- (CONTINUED)
In March 1999, the Company acquired HR Management & Software AG ("HRS AG"),
a Swiss Company and provider of human resource software in the European
marketplace. The acquisition price was approximately $900,000 in cash. The
acquisition was accounted for as a purchase. The Company assigned $632,000 to
intangible assets related to the completed technology base and the assembled
workforce, which is amortized over seven years. The Company recorded
approximately $610,000 in tangible assets consisting primarily of cash and
accounts receivable and $342,000 in assumed liabilities of HRS AG.
In March 1998, the Company acquired HR Management Software GmbH ("HRS"), a
German Company and provider of human resource software in the European
marketplace. The acquisition price was for approximately $10.4 million,
consisting of $6.4 million in cash, 240,000 shares of Common Stock, and
acquisition costs of approximately $400,000. The acquisition was accounted for
as a purchase and the Company recorded a charge of approximately $3.9 million in
the first quarter of 1998 for amounts allocated to in-process research and
development. The Company assigned approximately $6.5 million to intangible
assets and existing technology and is amortizing this over the expected economic
useful lives, which range from three to seven years. The Company recorded
approximately $2.7 million in tangible assets consisting primarily of accounts
receivable and fixed assets and $2.7 million in assumed liabilities of HRS.
Results of operations for all acquisitions have been included with those of
the Company for periods subsequent to the corresponding date of acquisition.
The following consolidated proforma information assumes the HRS acquisition
occurred on January 1, 1998.
(In thousands, except per share data)
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
JUNE 30,
1998
----------
(unaudited)
<S> <C>
Revenue $ 31,403
Income from operations before income taxes 2,049
----------
Net income $ 1,279
==========
Earnings per share $ 0.11
==========
</TABLE>
5. COMPREHENSIVE INCOME
In June 1997, the Financial Accounting Standards Board issued Statements of
Financial Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive
Income". The Company adopted SFAS No. 130 effective January 1, 1998 which
requires companies to report comprehensive income which is the total of net
income plus all changes in equity during the period except those resulting from
investment by owners and distribution to owners. The Company's comprehensive
income, as presented below, consists of net income and, where applicable, the
unrealized gains on marketable securities and foreign currency translation
adjustments.
8
<PAGE> 9
BEST SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
5. COMPREHENSIVE INCOME -- (CONTINUED)
(In thousands)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
-----------------------------
1999 1998
----------- -----------
<S> <C> <C>
Net Income $ 3,499 $ 1,263
Other comprehensive income:
Foreign currency translation adjustments - 10
Unrealized gain on marketable securities 131 -
----------- -----------
Comprehensive Income $ 3,630 $ 1,273
=========== ===========
</TABLE>
6. SEGMENT REPORTING
In 1998, the Company adopted SFAS No. 131, which establishes standards for
reporting information about operating segments in annual financial statements
and requires selected information about operating segments in interim financial
statements. Operating segments are defined as components of an enterprise about
which separate financial information is available that is regularly reviewed by
the chief operating decision maker of decision making group, in deciding how to
allocate resources and in assessing performance.
The Company has identified three reportable segments. Accounting Products
Group ("APG"), Human Resources Products Group ("HRPG"), and international
operations. Each is a strategic business unit that offers different products and
services or serves different geographic markets. They are managed separately as
each business requires different technology, domain expertise, marketing
strategy and knowledge, and level of services.
(In thousands)
<TABLE>
<CAPTION>
AS OF
-----------------------------------------------------------
JUNE 30, 1999 DECEMBER 31, 1998
------------------------ ------------------------
Segment Long-lived Segment Long-lived
assets assets assets assets
---------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
APG $ 12,348 $ 7,533 $ 6,941 $ 2,522
HRPG 18,956 2,658 16,728 2,697
---------- ----------- ----------- -----------
Total Domestic 31,304 10,191 23,669 5,219
---------- ----------- ----------- -----------
International 11,327 7,255 10,117 7,013
Unallocated Corporate 36,352 166 40,784 213
---------- ----------- ----------- -----------
Total $ 78,983 $ 17,612 $ 74,570 $ 12,445
========== =========== =========== ===========
</TABLE>
The portion of cash and cash equivalents, short-term and long-term
marketable securities and related interest income, that are not identifiable
with a specific segment are reflected in "Unallocated Corporate" line. All
inter-segment balances for the presented periods are eliminated for presentation
purposes.
9
<PAGE> 10
BEST SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
6. SEGMENT REPORTING -- (CONTINUED)
(In thousands)
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30,
---------------------------------------------------------------------------------------------------
1999 1998
------------------------------------------------ -----------------------------------------------
Write-off of Write-off of
Revenue from purchased Segment Revenue from purchased Segment
external research and operating profit external research and operating profit
customers development (loss) customers development (loss)
<S> <C> <C> <C> <C> <C> <C>
APG $ 9,726 $ 2,501 $ 8,705 $ 3,142
HRPG 9,285 1,881 6,120 813
--------- ---------- ----------- -----------
Total Domestic 19,011 4,382 14,825 3,955
--------- ---------- ----------- -----------
International 2,642 (543) 1,428 (774)
Unallocated Corporate (520) (476)
--------- ----------- ---------- ----------- ------------ -----------
Total $ 21,653 $ - $ 3,319 $ 16,253 $ - $ 2,705
========= =========== ========== =========== ============ ===========
</TABLE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
---------------------------------------------------------------------------------------------------
1999 1998
------------------------------------------------ -----------------------------------------------
Write-off of Write-off of
Revenue from purchased Segment Revenue from purchased Segment
external research and operating profit external research and operating profit
customers development (loss) customers development (loss)
<S> <C> <C> <C> <C> <C> <C>
APG $ 20,116 $ 1,200 $ 5,531 $ 16,807 $ 5,959
HRPG 16,582 2,749 11,589 2,095
--------- --------- ---------- --------- --------- ----------
Total Domestic 36,698 1,200 8,280 28,396 8,054
--------- --------- ---------- --------- --------- ----------
International 4,997 (936) 1,555 $ 3,850 (4,810)
Unallocated Corporate (1,710) (1,211)
--------- --------- ---------- --------- --------- ----------
Total $ 41,695 $ 1,200 $ 5,634 $ 29,951 $ 3,850 $ 2,033
========= ========= ========== ========= ========= ==========
</TABLE>
The Unallocated Corporate amounts represent primarily general and
administrative expenses and interest income on investments that are not
associated with any specific business segment.
10
<PAGE> 11
ITEM 2. MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
This Management's Discussion and Analysis of Financial Condition and
Results of Operations contains forward-looking statements that involve risks and
uncertainties. For this purpose, the following discussion of the financial
condition and results of operations of the Company should be read in conjunction
with the Company's most recent Form 10-K, the Consolidated Financial Statements
and Notes thereto. 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.
Important factors known to Best Software, Inc. that could cause such material
differences are discussed under the caption "Certain Factors That May Affect
Future Results" in Item 7 of the Company's annual report on Form 10-K, which is
incorporated herein by reference. 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
Best Software, Inc. is a leading supplier of corporate resource management
software solutions, helping organizations to better manage their people, assets
and budgeting processes. The Company's feature-rich, cost-effective solutions
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 reaches its customer base and target market through a
multi-channel sales and marketing strategy that includes its network of
value-added resellers, accounting firms and consultants ("Business Partners"), a
direct-response telesales operation, strategic marketing alliances and a direct
sales organization. As of June 30, 1999, the Company had over 48,000 licensed
customer locations, representing over 136,000 licensed seats.
In March 1999, the Company acquired the assets of OmniVista Software
Corporation, a leading provider of planning and analytical applications
software. The acquisition price was $5.0 million in cash, $350,000 in assumed
net liabilities and acquisition expenses of approximately $350,000. This new
product line will be distributed under the "Best! Imperativ Analytics" label,
which includes an allocation tool and the capabilities to provide flexible
budgets. Also in the first quarter of 1999, the Company acquired HR Management
& Software AG, a Swiss-based human resource software distributor. The
acquisition strengthens the Company's European presence and extends its
professional services capacity for the international version of Best! Imperativ
HRMS planned for release later this year.
In 1998, the Company extended its human resource and payroll offerings
through a number of acquisitions. In March 1998, the Company acquired HR
Management Software GmbH, a leading provider of human resource software in the
European marketplace. In October 1998, the Company acquired certain
technological assets of HRSoft, Inc., a leading provider of human resource
software. In December 1998, the Company acquired a 25% share of S&P AG, a
provider of payroll software in the European marketplace.
REVENUE
In addition to revenue from product licenses, the Company derives
significant recurring 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. Under these agreements, the
Company provides technical support and periodic software updates. The Company
also provides consulting services, which include installation, implementation,
set-up and data conversion services. Training and consulting revenue are
anticipated to have lower gross margins than revenue from maintenance and
support agreements.
The Company recognizes revenue on license fees upon shipment of the
product, net of provisions for returns and
11
<PAGE> 12
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 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.
RESULTS OF OPERATIONS
The following table sets forth certain consolidated statements of
operations data expressed as a percentage of total revenue except for the cost
of revenue which is expressed as a percentage of its corresponding revenue.
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------ -----------------------
1999 1998 1999 1998
----------- ---------- ---------- ----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
REVENUE:
License fees and royalty 47.3% 51.3% 46.9% 50.6%
Services 52.7 48.7 53.1 49.4
----------- ---------- ---------- ----------
Total 100.0 100.0 100.0 100.0
----------- ---------- ---------- ----------
COST OF REVENUE:
License fees and royalty 5.6 5.5 4.6 5.9
Services 34.2 35.4 32.9 33.4
----------- ---------- ---------- ----------
Total 20.7 20.1 19.6 19.5
----------- ---------- ---------- ----------
GROSS MARGIN 79.3 79.9 80.4 80.5
----------- ---------- ---------- ----------
OPERATING EXPENSES:
Sales and marketing 34.8 36.0 36.2 35.2
Research and development 17.4 16.5 17.1 16.1
General and administrative 11.5 12.5 11.2 12.5
Write-off of purchased research and development - - 2.8 12.9
Amortization of acquired intangibles 2.7 1.7 2.2 0.9
----------- ---------- ---------- ----------
Total 66.4 66.7 69.5 77.6
----------- ---------- ---------- ----------
OPERATING INCOME 12.9 13.2 10.9 2.9
Other income, net 2.4 3.4 2.7 3.8
----------- ---------- ---------- ----------
Income from operations before income taxes 15.3 16.6 13.6 6.7
----------- ---------- ---------- ----------
Income tax provision 5.8 6.4 5.2 2.6
----------- ---------- ---------- ----------
NET INCOME 9.5% 10.2% 8.4% 4.1%
=========== ========== ========== ==========
</TABLE>
License Fees and Royalties Revenue -- License fees and royalties revenue
consists of fees from software licenses and royalties. License fees and
royalties revenue increased by approximately $2.0 million (23%) and $4.4
million (29%) for the three months and six months ended June 30, 1999 from the
corresponding periods in 1998, respectively. The increase in license fees and
royalties revenue was primarily due to an increase in the APG and HRPG product
lines, which resulted mostly from increased sales of higher priced Imperativ,
multi-user products and royalties. As a percentage of total revenue, license
fees and royalties revenue decreased to 47.3% and 46.9% for the three months
and six months ended June 30, 1999 from 51.3% and 50.6% for the three months
and six months ended June 30, 1998, respectively. The decrease was primarily
due to the increased efforts in providing support services to our customers and
the additional revenue from the European operations acquired in March 1998
which produce a higher relative percentage of service revenue.
Services Revenue -- Services revenue includes revenue from maintenance and
support agreements, training, consulting and implementation services. Services
revenue increased by approximately $3.5 million (44%) and $7.3 million (49%) for
the three months and six months ended June 30, 1999 from the corresponding
periods in 1998, respectively. The increase in services revenue was primarily
attributable to an increase in the number of maintenance and support agreements
as a result of a larger installed base of customers throughout the United States
and
12
<PAGE> 13
international operations and higher average contract value. 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 implementation,
installation, set-up and data conversion activities. Services revenue, as a
percentage of total revenue, increased to 52.7% and 53.1% for the three months
and six months ended June 30, 1999 from 48.7% and 49.4% for the three months and
six months ended June 30, 1998, respectively. The increase was primarily due to
the acquisition of the European operations in March 1998 which contribute
relatively higher service revenue.
Cost of License Fees and Royalties Revenue -- Cost of license fees and
royalties revenue consists primarily of the costs of media, product manuals,
shipping and fulfillment, and royalties paid to third parties. Cost of license
fees and royalties revenue increased by approximately $116,000 (25%) and $16,000
(2%) for the three months and six months ended June 30, 1999 from the
corresponding periods in 1998, respectively. The increase was primarily due to
an increase in direct costs and to a lesser extent to the net shipping costs for
the period. As a percentage of license fees and royalties revenue, cost of
license fees and royalties revenue increased to 5.6% and decreased to 4.6% for
the three months and six months ended June 30, 1999 from 5.5% and 5.9% for the
three months and six months ended June 30, 1998, respectively. This was
primarily due to increase in sales of higher margin Windows-based and multi-user
products, Imperativ products and cost improvements on the license media and
fulfillment operations.
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
increased by approximately $1.1 million (39%) and $2.3 million (47%) for the
three months and six months ended June 30, 1999 from the corresponding periods
in 1998, respectively. The increase in cost of services revenue was primarily
due to increases in service personnel to meet the demands of the higher number
of maintenance and support based customers and the increased services related to
the European operations. The cost of services revenue, as a percentage of
services revenue, was 34.2% and 32.9% for the three months and six months ended
June 30, 1999, and 35.4% and 33.4% of services revenue for the three months and
six months ended June 30, 1998, respectively.
Sales and Marketing -- Sales and marketing expenses consist primarily of
the costs of the Company's sales and marketing personnel as well as the costs of
direct mail, advertising, and other sales and marketing activities. Sales and
marketing expenses increased by approximately $1.7 million (29%) and $4.5
million (43%) for the three months and six months ended June 30, 1999 from the
corresponding periods in 1998, respectively. This increase was primarily
attributable to hiring additional personnel for the National Accounts ramp up
and increased marketing activities as a result of new product releases and
increased web site and corporate brand awareness activities. As a percentage of
total revenue, sales and marketing expenses decreased to 34.8% and increased to
36.2% for the three months and six months ended June 30, 1999 from 36.0% and
35.2% of the total revenue for the three months and six months ended June 30,
1998, respectively.
Research and Development -- Research and development expenses consist
primarily of personnel costs and fees paid to outside consultants who research,
develop, maintain and enhance the Company's existing software product lines and
develop new products. Research and development expenses increased by
approximately $1.1 million (40%) and approximately $2.3 million (48%) for the
three months and six months ended June 30, 1999 from the corresponding periods
in 1998, respectively. This increase was primarily due to the increased expenses
relating to the development of the Company's new budgeting and Imperativ
products. As a percentage of total revenue, research and development expenses
increased to 17.4% and 17.1% for the three months and six months ended June 30,
1999 from 16.5% and 16.1% of total revenue for the three months and six months
ended June 30, 1998, respectively.
General and Administrative -- General and administrative expenses include
the costs of corporate operations, accounting and finance, legal, human
resources and other infrastructure costs. General and administrative expenses
increased by approximately $475,000 (23%) and $936,000 (25%) for the three
months and six months ended June 30, 1999 from the corresponding periods in
1998, respectively. The 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. As a percentage of total
revenue, general and administrative expenses decreased by approximately a full
percentage point to 11.5% and 11.2% for the three months and six months ended
June 30, 1999 from 12.5% for both the three months and six months ended June 30,
1998, respectively.
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<PAGE> 14
Write-off of Purchased Research and Development -- A charge of $1.2 million
was recorded in the first quarter of 1999 for the appraised valuation of the
purchased IPR&D costs acquired from OmniVista (see Note 4 to Consolidated
Financial Statements), which represents 2.8% of total revenue for the six months
ended June 30, 1999. Similarly, in first quarter of 1998, a charge of
approximately $3.9 million was recorded for the purchased IPR&D costs acquired
from HR Management Software GmbH (see Note 4 to Consolidate Financial
Statements) which represented 12.9% of total revenue for the six months ended
June 30, 1998.
OmniVista Acquisition -- In connection with the acquisition of OmniVista in
March 1999, the Company allocated $1.2 million of the $5.7 million purchase
price to incomplete research and development projects. This allocation
represents the estimated fair value based on future cash flows that have been
adjusted by the project's cost-based completion percentage of approximately 21
percent. At the acquisition date, the development of these projects had not yet
reached technological feasibility and the IPR&D in progress had no alternative
future uses. Therefore, these costs were expensed as of the acquisition date,
accordingly. The remainder of the purchase price was allocated to completed
technology, other intangibles and goodwill. These amounts are being amortized
over periods ranging from four to six years.
The Company used an independent third-party appraiser to assess and value
the IPR&D. The value assigned was determined by identifying significant research
projects for which technological feasibility had not been established. In the
case of OmniVista, this included the development, programming and testing
activities associated with the creation of a multi-dimensional product
extension, report writer, and other emerging technologies. The value assigned to
purchased in-process technology was determined by estimating the contribution of
the purchased in-process technology in developing a commercially viable product,
estimating the resulting net cash flows from the expected sales of such a
product, adjusted by the project's cost-based completion percentage and
discounted to the present value using an appropriate discount rate.
Revenue growth rates for OmniVista were estimated by a third party
appraiser based on a detailed forecast prepared by management, as well as the
appraiser's discussions with finance, marketing, and engineering representatives
of the Company and OmniVista. Revenue growth rates beyond 2000 were based on
industry growth expectations. Allocation of total OmniVista projected revenues
to IPR&D was based on the appraiser's discussions with the Company and OmniVista
management.
Selling, general and administrative expenses and profitability estimates
were determined based on management forecasts as well as an analysis of
comparable companies' margin expectations, including those of the Company.
The projections utilized in the transaction pricing and purchase price
allocation analysis exclude the potential synergistic benefits related
specifically to the Company's ownership. Due to the nature of the forecast and
the risks associated with the projected growth and profitability of the
development projects, a discount rate of 30 percent was used to discount cash
flows from the in-process products. Because the in-process projects are such an
integral part of the business enterprise, only a moderate increase in the
discount rate for the in-process technology was deemed appropriate.
Remaining development efforts for OmniVista's research and development
include various phases of development, programming and testing. Anticipated
completion dates for the projects in progress will occur in 1999 at which time
the Company expects to begin generating the economic benefits from the
technologies. Funding for such projects is expected to be obtained from
internally generated sources.
No assurance can be given, however, that the underlying assumptions used to
estimate sales, development costs, profitability, or the events associated with
such projects will transpire as estimated. For these reasons, actual results may
vary from projected results.
Amortization of Acquired Intangibles -- The acquired intangibles and
goodwill resulting from the 1998 acquisition of HR Management Software GmbH and
1999 acquisition of OmniVista are being amortized over useful lives of three to
seven years. As a result the Company recognized amortization charges of
approximately $579,000 and $929,000 for the three months and six months ended
June 30, 1999, respectively.
Other Income -- Other income consists primarily of earnings from
investments in marketable securities, net of
14
<PAGE> 15
related expenses. Other income (net) decreased by 4.8% and 2.6% to approximately
$531,000 and $1.1 million for the three months and six months ended June 30,
1999, respectively.
Income Tax Provision -- The Company's effective tax rate was 37.9% for both
the three months and six months ended June 30, 1999, as compared to 37.4% and
37.9% for the corresponding periods in 1998. The provision for income taxes for
the three months and six months ended June 30, 1999 is based upon the Company's
estimate of the effective tax rate for calendar year 1999.
LIQUIDITY AND CAPITAL RESOURCES
The Company has funded its operations primarily from cash provided by the
operating activities. As of June 30, 1999, the Company had approximately $5.2
million in net working capital, including $20.4 million in cash and cash
equivalents and approximately $5.0 million in high quality short-term marketable
securities. This excludes approximately $17.7 million long-term marketable
securities, which are primarily invested on government related securities.
For the six months ended June 30, 1999 and 1998, net cash provided by
operating activities was approximately $4.6 million and $7.5 million,
respectively. The decrease in cash provided by operating activities was
primarily due to an increase in accounts receivable and prepaid expenses
partially offset by a decrease in accounts payable and accrued expenses.
Net cash used in investing activities was $14.0 million for the six months
ended June 30, 1999. Included in this amount is $6.2 million paid in connection
with acquisitions, $1.9 million in capital expenditures and approximately $6.0
million in additional investment in marketable securities. For the six months
ended June 30, 1998, net cash used in investing activities was $11.8 million.
Similarly, such a use of cash consisted of $1.2 million for capital
expenditures, $6.8 million cash paid for acquisitions and additional investment
in marketable securities of approximately $4.0 million. 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 royalties obligations arising
from licenses of certain products and technologies used in the Company's
products.
Cash flows provided from financing activities was $182,000 principally as a
result of proceeds from exercise of stock options offset by partial repayment of
notes payable. For the six months ended June 30, 1998, the cash used in
financing activities was approximately $1.5 million primarily due to repayment
of notes payable for $1.4 million.
The Company believes that its current liquidity, together with anticipated
cash flow from operations, will satisfy the Company's anticipated working
capital and capital expenditures requirements for at least the next 12 months.
YEAR 2000 ISSUES
Certain computer programs were written using two digits rather than four to
define the applicable calendar year. Such programs may recognize a date using
"00" as the year 1900 rather than the year 2000. This is referred to as the
"Year 2000 Issue" or "Y2K Problem".
The Company has established an internal Y2K readiness committee consisting
of at least one member of every functional department. The committee has
developed a Year 2000 readiness plan and will develop contingency plans as the
need arises.
The Company has completed certain internal testing of the file server
versions of its human resources and payroll products, as well as its client
server human resources products, and has confirmed that they are Year 2000
compatible. ITAA certification (meaning that the Company has been found to meet
the information technology industry's best software development practices for
addressing the Year 2000 issue) has been obtained for the Abra Suite and Best!
Imperativ HRMS products. The Company has further determined that the Abra Tax
File product is not Year 2000 compatible, but it is currently anticipated that
the effort and cost to resolve this issue will be minimal and that a release,
now planned for the third quarter of 1999, will resolve the problem. The DOS
versions of the Abra product lines are not Year 2000 compatible. Existing
customers of these DOS versions have been informed that the Company will not
support the DOS products beyond 1999. The Company sold its People Manager HR
product, which was not
15
<PAGE> 16
Year 2000 compatible, to an unrelated third party. Existing customers of this
product have been informed that the Company will not support the People Manager
product beyond current support contract commitments.
The Company has completed testing of its Windows-based FAS products. For
the FAS Windows 95/98 Novell and Microsoft NT-based products and the Best!
Imperativ Asset Accounting product, the only significant date-related
restriction of which the Company is currently aware is that the "placed in
service date" field will not allow new assets to be entered in years beyond the
year 2019. By definition, this restriction will not negatively impact a user of
the existing FAS products for approximately 20 years. The Company's next
generation of FAS Windows products, scheduled for release within the next two to
three years, will not contain this date-related restriction. The DOS versions
and certain Windows 3.1 and 3.11-based products of FAS are not Year 2000
compatible. Existing customers of these versions have been informed that the
Company will not support these products beyond 1999. The Company is conducting
campaigns to convert these customers to its Year 2000 compatible products. The
Company's German subsidiary has completed testing of its currently marketed
Windows based products. A patch insuring Y2K compatibility will be shipped to
the installed customer base by September 30, 1999. Support for all non-Y2K
compatible DOS products is being discontinued and the customer base for such
products has been informed of this.
Notwithstanding the above, there can be no assurances that the Company's
current products do not contain undetected errors or defects associated with
Year 2000 date functions that may materially and/or adversely affect the
Company's financial condition or results of future operations.
The Company has not specifically tested third party software that is
incorporated into its products, but the Company has obtained assurances from its
third-party licensors that the licensed software will not have date-related Year
2000 issues. Despite this, unknown errors in the Company's third-party licensed
software may materially and/or adversely affect the Company.
Some analysts have stated that a significant amount of litigation will
arise out of Year 2000 compliance issues, and the Company is aware of an
increasing number of lawsuits against other software vendors. Although no
lawsuits have been filed against the Company, the outcome of any such lawsuits
and the impact on the Company cannot be determined at the present time because
of the unique nature of such potential litigation. Furthermore, because it is in
the business of selling software products, the Company's risk of being subjected
to lawsuits relating to Year 2000 issues with its software products is likely to
be greater than that of companies in other non-software related industries.
Because computer systems may involve different hardware, firmware and software
components from different manufacturers, it may be difficult to determine which
component in a computer system may cause a Year 2000 issue. As a result, the
Company may be subjected to Year 2000-related lawsuits independent of whether
its products and services are Year 2000 ready. The outcome of any such lawsuits
and the impact on the Company cannot be determined at this time.
For IT related systems, the Company has completed its assessment and
testing of the Company's mission critical system for its Reston, VA and St.
Petersburg, FL locations, namely its AS 400 information management system and
has determined that minimal modifications are required for the system to be Year
2000 compatible. A third party reviewer of the system has recommended certain
additional testing to insure Year 2000 compatibility. Management's expectation
is that the additional testing and modifications will be completed by September
30, 1999. The Virginia and Florida locations utilize the Company's own payroll
and human resource applications which are Year 2000 compatible. A Virginia Call
Center Phone System was recently upgraded and is now Y2K ready. The Florida call
center phone system will be upgraded by September 30,1999. The Company is in the
process of upgrading the general ledger system used by its US based operations
and for consolidating its multi-national operations. The current schedule has
this project being completed in the December quarter of 1999. As a contingency
plan, the Company has a software upgrade, to its existing general ledger system,
available to be installed, if for any reason the implementation of new system is
not tracking to a completion by the middle of the fourth quarter. The Company
believes that the upgrade can be implemented in approximately one week, if such
action were required. The cost to upgrade or replace these systems was
previously budgeted for in the Company's 1999 operating plan, and is not
expected to exceed $500,000. The Company's German subsidiary has completed its
assessment and testing of its mission critical accounting software and has
determined that minimal modifications are required for the system to be Year
2000 compatible. Assessment and testing of its mission critical CRM information
software has also been completed. On or before October 31, 1999, that system
will be replaced with a fully Year 2000 compatible one.
For IT and non-IT systems, the initial campaign to contact significant
suppliers and vendors of products and services has been completed. Follow-up
efforts to obtain and analyze responses to this campaign will be ongoing with an
expected completion date of September 30, 1999. The initial campaign to contact
significant suppliers and vendors of OmniVista, the provider of planning and
analytical software that the Company acquired on March 25, 1999, was completed
in early July 1999. The Company's German subsidiary's campaign to contact its
significant suppliers and vendors of products and services has an expected
completion date of October 31, 1999. Follow up efforts to obtain and analyze
responses to this campaign will be ongoing with an expected completion date of
November 30, 1999. The Company is and will be placing significant reliance on
these suppliers' and vendors' statements regarding their Year 2000 readiness. In
this regard, the Company faces risks and uncertainties to
16
<PAGE> 17
the extent that such third parties with whom the Company transacts business on a
worldwide basis do not have business systems or products that comply with the
Year 2000 requirements. Although the Company is currently analyzing the impact,
if any, of the Year 2000 issues surrounding such third party interactions,
failure of any critical technology components to operate properly in the Year
2000 and beyond may have a material adverse impact on business operations or
require the Company to incur unanticipated expenses to remedy any problems.
Contingency plans will be prepared if it is determined that the compliance
objectives will not be met.
Management's assessment to date is that minimal modifications will be
necessary to the Company's IT and non-IT related systems to achieve Year 2000
compatibility. All costs of the above IT and non-IT measures are being funded
out of current operations, but have not been separately accounted for in the
past. Cost of the above measures includes systems software and hardware, outside
contractors, technical support from various internal groups and administrative
costs to manage. The Company's total cost relating to these activities has not
been and is not expected to be material to the overall financial position,
results of operations or cash flows of the Company. However, there can be no
assurance that there will not be a delay in or increased costs associated with
the above measures, or that the Company's significant vendors and suppliers will
adequately prepare for the Year 2000 issue. It is possible that any such delays,
increased costs, or supplier failures could have a material adverse impact on
the Company's operations and financial results.
17
<PAGE> 18
PART II
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS:
Financial Data Schedule, which is submitted electronically on to the
Securities and Exchange Commission for Information only and is not filed.
(b) REPORTS ON FORM 8-K:
None
18
<PAGE> 19
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
BEST SOFTWARE, INC.
Date: August 13, 1999
By: /s/ David N. Bosserman
--------------------------
David N Bosserman
Executive Vice President
Chief Financial Officer and Treasurer
19
<PAGE> 20
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO.
-----------
<S> <C>
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.
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> APR-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 20,352
<SECURITIES> 22,620
<RECEIVABLES> 10,461
<ALLOWANCES> 667
<INVENTORY> 167
<CURRENT-ASSETS> 39,265
<PP&E> 11,221
<DEPRECIATION> 6,041
<TOTAL-ASSETS> 78,983
<CURRENT-LIABILITIES> 34,092
<BONDS> 0
0
0
<COMMON> 38,342
<OTHER-SE> 5,795
<TOTAL-LIABILITY-AND-EQUITY> 78,983
<SALES> 21,653
<TOTAL-REVENUES> 21,653
<CGS> 4,481
<TOTAL-COSTS> 4,481
<OTHER-EXPENSES> 14,384
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 3,319
<INCOME-TAX> (1,260)
<INCOME-CONTINUING> 2,059
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,059
<EPS-BASIC> 0.18
<EPS-DILUTED> 0.17
</TABLE>
