<PAGE> 1
===============================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
FORM 10-Q
(Mark one)
[x] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the quarterly period ended September 30, 1999
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period________to___________
COMMISSION FILE NUMBER 0-23117
BEST SOFTWARE, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<CAPTION>
VIRGINIA 7372 54-1222526
<S> <C> <C>
(state or other jurisdiction of (Primary Standard Industrial (IRS Employer
incorporation or organization) Classification Code Number) Identification Number)
</TABLE>
11413 ISAAC NEWTON SQUARE
RESTON, VIRGINIA 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 [ ]
As of October 31, 1999, there were outstanding 11,768,338 shares of common
stock, no par value, of Best Software, Inc.
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<PAGE> 2
BEST SOFTWARE, INC.
Form 10-Q
Quarterly Period Ended September 30, 1999
Table of Contents
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements 1
Condensed Consolidated Balance Sheets as of September 30, 1999 and
December 31, 1998 1
Condensed Consolidated Statements of Operations for the three months and
nine months ended September 30, 1999 and 1998 2
Condensed Consolidated Statements of Cash Flows for the nine months
ended September 30, 1999 and 1998 3
Notes to Condensed Consolidated Financial Statements 4
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 9
Item 3. Quantitative and Qualitative Disclosures about Market Risk 17
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 17
Item 2. Changes in Securities and Use of Proceeds 17
Item 3. Defaults Upon Senior Securities 17
Item 4. Submission of Matters to a Vote of Security Holders 17
Item 5. Other Information 17
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits 17
(b) Reports on Form 8-K 17
SIGNATURE 18
</TABLE>
<PAGE> 3
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
BEST SOFTWARE, INC.
Condensed Consolidated Balance Sheets
(in thousands, except per share amount)
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
------ ------
(unaudited)
<S> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents $24,688 $29,549
Short-term investments 4,997 16,731
Accounts receivable, net of allowance of
$539 and $938, respectively 9,779 8,198
Prepaid expenses and other 3,211 3,130
------- -------
Total Current Assets 42,675 57,608
Other Assets
Property and equipment, net 5,293 4,333
Acquired intangibles, net 14,694 7,178
Marketable securities 17,523 -
Other assets 5,152 5,451
------- -------
Total Other Assets 42,662 16,962
------- -------
Total Assets $85,337 $74,570
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Accounts payable $13,869 $14,255
Deferred maintenance and services revenues 22,256 19,350
Notes payable 120 139
------- -------
Total Current Liabilities 36,245 33,744
Other Liabilities
Notes payable - 125
Deferred maintenance and services revenues 832 616
------- -------
Total Other Liabilities 832 741
------- -------
Total Liabilities 37,077 34,485
Commitments and Contingencies
Shareholders' Equity
Preferred stock, $0.01 par value; 1,000 shares
authorized, none issued - -
Common stock, no par value; 40,000 shares
authorized, 11,767 and 11,688 shares issued
and outstanding, respectively 38,449 38,079
Additional paid-in capital 2,941 1,281
Deferred compensation (56) (95)
Accumulated other comprehensive income (loss) 166 (77)
Accumulated earnings 6,760 897
------- -------
Total Shareholders' Equity 48,260 40,085
------- -------
Total Liabilities and Shareholders' Equity $85,337 $74,570
======= =======
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements.
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<PAGE> 4
BEST SOFTWARE, INC.
Condensed Consolidated Statements of Operations
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Three Months Nine Months
Ended September 30, Ended September 30,
1999 1998 1999 1998
---- ---- ---- ----
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
Revenues
License fees and royalties $10,458 $ 9,035 $30,033 $24,177
Services 12,812 8,967 34,932 23,776
------- ------- ------- -------
Total Revenues 23,270 18,002 64,965 47,953
Cost of Revenues
License fees and royalties 435 422 1,346 1,317
Services 4,589 3,051 11,864 7,997
------- ------- ------- -------
Total Cost of Revenues 5,024 3,473 13,210 9,314
------- ------- ------- -------
Gross Margin 18,246 14,529 51,755 38,639
Operating Expenses
Sales and marketing 7,979 6,559 23,062 17,110
Research and development 3,810 2,898 10,925 7,719
General and administrative 2,461 2,264 7,131 5,998
Write-off of purchased research
and development - - 1,200 3,850
Amortization of acquired intangibles 725 273 1,654 546
------- ------- ------- -------
Total Operating Expenses 14,975 11,994 43,972 35,223
------- ------- ------- -------
Operating Income 3,271 2,535 7,783 3,416
Other income, net 544 606 1,666 1,758
------- ------- ------- -------
Income Before Taxes 3,815 3,141 9,449 5,174
Provision for Income Taxes 1,450 1,200 3,585 1,970
------- ------- ------- -------
Net Income $ 2,365 $ 1,941 $ 5,864 $ 3,204
======= ======= ======= =======
Net Income Per Common Share
Basic $ 0.20 $ 0.17 $ 0.50 $ 0.28
Diluted $ 0.19 $ 0.16 $ 0.48 $ 0.26
Shares Used for Computation
Basic 11,754 11,610 11,725 11,389
Diluted 12,356 12,284 12,309 12,122
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements.
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<PAGE> 5
BEST SOFTWARE, INC.
Condensed Consolidated Statements of Cash Flows
(in thousands)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
1999 1998
---- ----
(unaudited) (unaudited)
<S> <C> <C>
Cash and cash equivalents at beginning of period $ 29,549 $ 33,164
-------- --------
Cash flows from operating activities
Net income 5,864 3,204
Adjustments to reconcile net income to cash
provided by operating activities
Depreciation and amortization 4,006 1,628
Write-off of purchased research and development 1,200 3,850
Other 468 (1,324)
(Increase) decrease in current assets
Accounts receivables, net (1,056) (567)
Prepaid expenses and other 683 (873)
Increase (decrease) in current liabilities
Accounts payable and accrued expenses (602) 3,831
Deferred maintenance and services revenues 2,669 1,912
-------- --------
Net cash provided by operating activities 13,232 11,661
Cash flows from investing activities
Purchases of property and equipment (2,895) (2,362)
Purchases of marketable securities (26,925) (38,727)
Proceeds from sales of marketable securities 21,139 30,395
Acquisitions, net of cash acquired (9,423) (6,800)
-------- --------
Net cash used for investing activities (18,104) (17,494)
Cash flows from financing activities
Proceeds from exercise of stock options 390 318
Purchase and retirement of common stock - (355)
Repayments of notes payable (622) (1,157)
-------- --------
Net cash used for financing activities (232) (1,194)
-------- --------
Effect of foreign currency exchange rate changes 243 5
-------- --------
Net decrease in cash and cash equivalents (4,861) (7,022)
-------- --------
Cash and cash equivalents at end of period $ 24,688 $ 26,142
======== ========
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements.
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3
<PAGE> 6
BEST SOFTWARE, INC.
Notes to Condensed Consolidated Financial Statements
(unaudited)
1. Basis of Presentation
The accompanying condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles (GAAP).
These interim financial statements should be read in conjunction with the
audited consolidated financial statements contained in Best Software, Inc.'s
(Best Software or "the Company") Annual Report to the United States Securities
and Exchange Commission (SEC) on Form 10-K for the year ended December 31, 1998
("the 1998 Form 10-K"). The interim financial statements contained in this
report are unaudited and, as permitted by GAAP as well as SEC rules and
regulations, do not include certain information and disclosures normally
included in audited financial statements filed annually with the SEC.
In the opinion of management, the accompanying condensed consolidated
financial statements reflect all adjustments, consisting of only normal
recurring accruals, necessary for a fair presentation of the Company's
financial position, results of operations and cash flows for the periods
presented. The preparation of financial statements in conformity with GAAP
requires management to make certain assumptions and estimates that affect the
reported amounts of assets and liabilities as of the date of financial
statements and the reported amount of revenues and expenses during the
reporting period. Actual results could differ from those estimates. In
addition, the Company's operating results for interim periods may not be
indicative of the results of operations for a full fiscal year.
The effects of changes in foreign currency exchange rates (principally
changes in the value of the German Mark in terms of U.S. Dollars) on the
Company's financial position and results of operations are reflected on the
Company's balance sheet as a separate component of shareholders' equity under
"Accumulated other comprehensive income (loss)." Generally, the functional
currency of a foreign operation is deemed to be the local country's currency.
Consequently, for financial reporting purposes, assets and liabilities of the
Company's operations outside the U.S. are translated into U.S. Dollars using
the exchange rate in effect as of the balance sheet date. Revenues and expenses
for those operations are translated using the average exchange rate for the
period.
2. Software Revenue Recognition
In October 1997, The American Institute of Certified Public Accountants
("the AICPA") issued Statement of Position (SOP) 97-2, "Software Revenue
Recognition" (SOP 97-2). 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's
financial condition or results of operations.
In December 1997, the AICPA issued SOP 98-9, "Modification of SOP 97-2,
Software Revenue Recognition with Respect to Certain Transactions" (SOP 98-9),
effective for transactions entered into in fiscal years beginning after March
15, 1999. The Company believes that implementation of SOP 98-9 will not have a
material impact on its financial condition or results of operations.
3. Net Income per Common Share
Net income per common share (EPS) is presented on both a basic and diluted
basis in accordance with Statement of Financial Accounting Standard (SFAS) No.
128, "Earnings per Share." Basic EPS is computed by dividing net income by the
weighted average number of
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<PAGE> 7
shares of common stock outstanding during the period. Diluted EPS reflects the
maximum dilution that would result after giving effect to dilutive securities.
The table below presents the computation of basic and diluted EPS (in
thousands, except per share amounts):
<TABLE>
<CAPTION>
Three Months Nine Months
Ended September 30, Ended September 30,
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net income:
Net income (Basic) $ 2,365 $ 1,941 $ 5,864 $ 3,204
Adjustments - - - -
------- ------- ------- -------
Net income (Diluted) $ 2,365 $ 1,941 $ 5,864 $ 3,204
======= ======= ======= =======
Common shares:
Weighted average shares of common stock
outstanding (Basic) 11,754 11,610 11,725 11,389
Incremental shares related to outstanding
stock option and warrants 602 674 584 733
------- ------- ------- -------
Weighted average shares of common stock
outstanding (Diluted) 12,356 12,284 12,309 12,122
------- ------- ------- -------
EPS-Basic $ 0.20 $ 0.17 $ 0.50 $ 0.28
------- ------- ------- -------
EPS-Diluted $ 0.19 $ 0.16 $ 0.48 $ 0.26
======= ======= ======= =======
</TABLE>
4. Comprehensive Income
Comprehensive income was $2.6 million and $6.1 million for the three months
and nine months ended September 30, 1999, respectively, and $2.0 million and
$3.3 million for the three months and nine months ended September 30, 1998,
respectively. Comprehensive income encompasses net income and "other
comprehensive income," which includes all other non-owner changes in
stockholders' equity. The Company's other comprehensive income represents
foreign currency translation adjustments (see also Note 1).
5. Operating Segments and Related Disclosures
In 1998, the Company adopted SFAS No. 131, "Disclosures About Segments of
an Enterprise and Related Information" (SFAS 131), which established standards
for reporting information about operating segments in financial statements.
According to the provisions of SFAS 131, "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, or
decision making group, in deciding how to allocate resources and in assessing
performance.
The Company has three reportable operating segments: Financial
Applications, Human Resources Applications and International operations. Each
of these operating segments 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.
Financial information for each of the Company's reportable operating
segments is presented in the following tables (in thousands).
(tables begin on the following page)
5
<PAGE> 8
<TABLE>
<CAPTION>
Three Months Nine Months
Ended September 30, Ended September 30,
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues from external customers:
Financial Applications $10,271 $ 9,921 $30,387 $26,728
Human Resources Applications 9,836 6,218 26,418 17,807
------- ------- ------- -------
Total Domestic 20,107 16,139 56,805 44,535
International operations 3,163 1,863 8,160 3,418
Other - - - -
------- ------- ------- -------
$23,270 $18,002 $64,965 $47,953
======= ======= ======= =======
Segment operating income (loss), exclusive of write-off
of purchased research and development and amortization
of acquired intangibles:
Financial Applications $ 3,092 $ 3,745 $10,034 $ 9,703
Human Resources Applications 2,668 803 5,554 2,898
------- ------- ------- -------
Total Domestic 5,760 4,548 15,588 12,601
International operations (321) (175) (694) (848)
Other (1,443) (1,565) (4,257) (3,941)
------- ------- ------- -------
$ 3,996 $ 2,808 $12,303 $ 7,812
======= ======= ======= =======
Write-off of purchased research and development:
Financial Applications $ - $ - $(1,200) $ -
Human Resources Applications - - - -
------- ------- ------- -------
Total Domestic - - (1,200) -
International operations - - - (3,850)
Other - - - -
------- ------- ------- -------
$ - $ - $(1,200) $(3,850)
======= ======= ======= =======
Amortization of acquired intangibles:
Financial Applications $ (208) $ - $ (415) $ -
Human Resources Applications (64) - (193) -
------- ------- ------- -------
Total Domestic (272) - (608) -
International operations (453) (273) (1,046) (546)
Other - - - -
------- ------- ------- -------
$ (725) $ (273) $(1,654) $ (546)
======= ======= ======= =======
Segment operating income (loss):
Financial Applications $ 2,884 $ 3,745 $ 8,418 $ 9,703
Human Resources Applications 2,604 803 5,362 2,898
------- ------- ------- -------
Total Domestic 5,488 4,548 13,780 12,601
International operations (774) (448) (1,740) (5,244)
Other (1,443) (1,565) (4,257) (3,941)
------- ------- ------- -------
$ 3,271 $ 2,535 $ 7,783 $ 3,416
======= ======= ======= =======
</TABLE>
(this space intentionally left blank)
6
<PAGE> 9
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
---- ----
<S> <C> <C>
Segment assets:
Financial Applications $13,282 $ 6,941
Human Resources Applications 7,313 16,728
------- -------
Total Domestic 20,595 23,669
International operations 15,651 10,117
Other 49,091 40,784
------- -------
$85,337 $74,570
======= =======
Long-lived assets:
Financial Applications $ 7,445 $ 2,522
Human Resources Applications 2,385 2,697
------- -------
Total Domestic 9,830 5,219
International operations 10,755 7,013
Other 102 213
------- -------
$20,687 $12,445
======= =======
</TABLE>
The "Other" line item in the tables above reflects cash and cash
equivalents, marketable securities and interest income thereon and other
related activity of a general corporate nature not identifiable with a
particular operating segment. For presentation purposes, the tables above
exclude inter-segment activity. The Financial Applications and Human Resources
Applications operating segments were previously referred to as the Accounting
Products Group and the Human Resources Products Group, respectively.
6. Supplemental Information - Condensed Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
1999 1998
---- ----
<S> <C> <C>
Cash paid during the year for:
Income taxes $ 2,351 $ 3,040
Interest $ 5 $ 44
Material non-cash transactions:
Issuance of 240,000 shares of common stock to
HR Management Software GmbH $ - $ 3,630
</TABLE>
See also Note 7 related to acquisitions activity.
7. Acquisitions
S&P AG
In August 1999, the Company acquired the remaining ownership interests in
S&P AG (S&P), a provider of payroll software in the European marketplace. The
Company acquired a 25% interest in S&P in December 1998. The original
investment entailed a cash outlay of approximately $0.6 million and was
reflected as an Other Asset on the Company's balance sheets. The Company used
the equity method of accounting for the original investment.
The acquisition of the remaining ownership interest in S&P included a cash
outlay of approximately $3.3 million. The acquisition was treated as a purchase
for accounting purposes. The Company recorded tangible assets of approximately
$1.2 million, primarily cash and accounts receivable, and assumed liabilities
totaling $0.2 million. Based on the result of a third-
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<PAGE> 10
party appraisal, the Company recorded the excess of the purchase price over the
fair value of the net assets acquired as intangible assets, including completed
technology and product base. These intangible assets are being amortized over
five to seven years.
As part of the acquisition agreement, the Company agreed to make
contingent payments to the sellers based on certain aspects of S&P's financial
performance through the year 2001. Any contingent payments will be reflected as
increases in goodwill when the related obligations are incurred and amortized
over the then remaining useful life of the goodwill.
OmniVista Software Corporation
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 and $0.4 million in
assumed net liabilities. Acquisition expenses totaled approximately $0.3
million. The acquisition was treated as a purchase for accounting purposes.
In the first quarter of 1999, the Company recognized a charge of $1.2
million associated with IPR&D acquired from OmniVista. The Company used an
independent third-party appraiser to assess and value the IPR&D. The value
assigned to the IPR&D 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
acquisition price over the fair value of the net assets of approximately $4.5
million represents completed technology and a product base of approximately
$1.7 million, an assembled work force of $0.3 million and a customer base and
strategic alliances valued at $2.5 million. These intangible assets are being
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.
As part of the acquisition agreement, the Company agreed to make
contingent payments to the sellers based on certain aspects of OmniVista's
financial performance through March 2002. Any contingent payments will be
reflected as increases in goodwill when the related obligations are incurred
and amortized over the then remaining useful life of the goodwill.
HR Management & Software AG
In March 1999, the Company acquired HR Management & Software AG, a Swiss
company and provider of human resource software in the European marketplace.
The acquisition price was approximately $0.9 million in cash. The acquisition
was treated as a purchase for accounting purposes. The Company assigned $0.6
million to the acquired customer base and assembled workforce. These intangible
assets are being amortized over seven years. The Company recorded tangible
assets of approximately $0.6 million (primarily cash and accounts receivable)
and assumed liabilities totaling $0.3 million.
HR Management Software GmbH
In March 1998, the Company acquired HR Management Software GmbH, a German
company that was also a provider of human resource software in the European
marketplace. The acquisition price was approximately $10.4 million, consisting
of $6.4 million in cash, 240,000 shares of the Company's common stock and
acquisition costs of $0.4 million. The acquisition was treated as a purchase
for accounting purposes.
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<PAGE> 11
The Company recorded tangible assets of approximately $2.7 million,
primarily of accounts receivable and fixed assets, and assumed liabilities
totaling $2.7 million. The Company assigned approximately $6.5 million to
intangible assets. These intangible assets, primarily amounts allocated to
existing technology, are being amortized over periods ranging from three to
seven years. In the first quarter of 1998, the Company recognized a charge of
approximately $3.9 million related to acquired IPR&D associated with this
acquisition.
The results of operations related to the aforementioned acquisitions are
reflected in the Company's results of operations for periods subsequent to the
corresponding date of acquisition. The exclusion of the combined pro forma
results of operations of acquired entities with those of the Company's for
periods prior to their respective dates of acquisition are not material to the
comparability of the Company's results of operations as presented herein.
ITEM 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
The following discussion of Best Software's financial condition and results
of operations should be read in conjunction with Part II, Item 7 of its 1998
Form 10-K. The information contained herein is not a comprehensive discussion
and analysis of the financial condition and results of operations, but rather
updates disclosures made in the Company's 1998 Form 10-K.
Certain information contained herein should be considered "forward-looking
information," which is subject to a number of risks and uncertainties.
Statements contained herein that are not statements of historical fact may be
deemed to be forward-looking information. Without limiting the foregoing, the
words "believes," "anticipates," "plans," "expects," and similar expressions
are intended to identify forward-looking information. Important factors known
to the Company that could cause such material differences are discussed under
the caption "Certain Factors That May Affect Future Results" contained in Part
II, Item 7 of the Company's 1998 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
information. The Company undertakes no obligations to publicly update or revise
any forward-looking information, whether as a result of new information, future
events or otherwise.
Overview
Best Software is a leading supplier of corporate resource management
software solutions, which help organizations to better manage their people,
assets and planning. The Company's feature-rich, cost-effective solutions
enhance employee 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 financial 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 National Accounts direct sales organization. As of September
30, 1999, the Company had over 49,000 licensed customer locations, representing
over 138,000 licensed seats. As of December 31, 1998, the Company had over
47,000 licensed customer locations, representing approximately 133,000 licensed
seats.
The Company derives a majority of its revenues from product license fees
and from services revenues, which include maintenance and support agreements,
training and consulting services. 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
9
<PAGE> 12
support and periodic software updates. The Company also provides training and
consulting services, which include installation, implementation, set-up and
data conversion services. Training and consulting services revenue typically
have lower gross margins than revenues from license sales and maintenance and
support agreements.
The Company recognizes revenue on product 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, the
Company recognizes revenue upon acceptance of the product by the customer.
Revenues from maintenance and support agreements are recognized pro rata over
the term of the agreements, typically one year. Revenues from other services,
such as training and consulting services, are recognized as the services are
provided.
Recent Acquisitions & Investments
In 1999, the Company has further expanded its human resource and payroll
offerings, especially in the European marketplace. The Company has also
acquired a leading provider of planning and analytical applications software.
In August 1999, the Company acquired the remaining ownership interest in
S&P, a German company and provider of payroll software in the European
marketplace. In March 1999, the Company acquired HR Management & Software AG, a
Swiss company and provider of human resource software in the European
marketplace. These acquisitions strengthen the Company's European presence and
extend its professional services capacity for the international version of
Best! Imperativ HRMS planned for release in the year 2000.
In March 1999, the Company acquired OmniVista, a leading provider of
planning and analytical applications software. The products acquired from
OmniVista, including products that were developed from "in-process" projects at
the time the Company acquired OmniVista, will be distributed as part of the
Company's "Best! Imperativ Active Planner" product. Best! Imperativ Active
Planner allows companies to make faster and more informed responses to changing
business conditions. It can help an organization to reduce the time it spends
on budgeting and financial planning. The product offerings further enhance the
Company's line of corporate resource management software solutions. The
OmniVista acquisition is discussed in detail under "Results of Operations"
below. In addition, in October 1999, the Company invested in one of its
domestic "value-added resellers." This investment is related to the Company's
increasing focus on further developing the distribution channels for its Best!
Imperativ products as well as increasing its professional services capacity.
In 1998, the Company extended its human resource and payroll offerings
through a number of acquisitions. In March 1998, the Company acquired
Germany-based HR Management Software GmbH ("HRMS-Germany"), 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, a provider of payroll software in the European marketplace.
As discussed above, the Company recently acquired the remaining ownership
interests in S&P.
See Note 7 under Notes to Condensed Consolidated Financial Statements
contained in Part I, Item 1 of this report for additional information related
to these acquisitions.
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
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<PAGE> 13
than the year 2000. This is referred to as the "Year 2000 Issue" or "Year 2000
Problem." The Company has an internal Year 2000 (Y2K) readiness committee
consisting of at least one member of every functional department. This
committee is implementing a Y2K readiness plan as well as developing
contingency plans, as necessary.
The Company has completed 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 Y2K compatible. Information
Technology Association of America certification (meaning that the Company has
been found to meet the information technology industry's best software
development practices for addressing the Y2K issue) has been obtained for the
Abra Suite and Best! Imperativ HRMS products. In addition, the Company has also
completed internal testing of its budgeting and analytical line of products and
found them to be Y2K compatible.
The Company has completed testing of its Windows-based Fixed Asset System
(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 that the Company is currently aware of is related to
the "placed in service date" field, which will not allow new assets to be
entered in years beyond the year 2019. By definition, this restriction will not
affect users of the existing FAS products for approximately 20 years. The
Company's next generation of Windows-based FAS 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 Y2K compatible. Existing customers of these versions have been
informed that the Company will not support these products after 1999. The
Company is conducting campaigns to convert these customers to its Y2K
compatible products. The Company's European operations have completed testing
of their currently marketed Windows-based products. A patch insuring Y2K
compatibility of these products was shipped to the installed customer base in
September 1999. Support for all non-Y2K compatible DOS products is being
discontinued and the customer base for such products has been informed of this
fact.
The Company has distributed a Y2K compatible release to its Tax File
service and related product and all current customers of Tax File have been
required to install it. The DOS versions of the Company's Abra product lines
are not Y2K compatible. Existing customers of these DOS versions have been
informed that the Company will not support these products after 1999. The
Company sold its People Manager Human Resources product, which was not Y2K
compatible, to an unrelated third-party in March 1999. Existing customers of
this product have been informed that the Company will not support the People
Manager product beyond current support contract commitments. The client server
version of the Company's ExecuTrack product has been tested and found to be Y2K
compliant. The file server version of ExecuTrack has been tested and the Y2K
issues that were found are expected to be fixed by the Company's third-party
reseller of that product in early December 1999.
The Company has not specifically tested third-party software that is
incorporated into its products, but has obtained assurances from each of its
third-party licensors that the licensed software will not have date-related Y2K
problems. Despite this, unknown errors or defects associated with Y2K date
functions in the Company's third-party licensed software could exist. Although
the Company is currently analyzing the impact, if any, of the Y2K issues
surrounding such third-party interactions, failure of any critical technology
components to operate properly in Y2K and beyond could have a material adverse
impact on the Company's financial condition and results of operations and
require the Company to incur unanticipated expenses to remedy any such
problems.
Notwithstanding the above, there can be no assurance that the Company's
current products are free of undetected errors or defects associated with Y2K
date functions; such occurrences could result in a material adverse affect on
the Company's financial condition and results of
11
<PAGE> 14
operations.
Some analysts have stated that a significant amount of litigation will
arise out of Y2K compliance issues. Although no such lawsuits have been filed
against the Company, the Company is aware of an increasing number of such
lawsuits against other software vendors. The outcome of any such lawsuits
against the Company and the impact on the Company's financial condition and
results of operations 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 Y2K problems with its software products is likely to be
greater than that of companies in 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 be responsible for a Y2K problem. As a
result, the Company may be subjected to Y2K-related lawsuits independent of
whether its products and services are Y2K ready. The outcome of any such
lawsuits and the impact on the Company cannot be determined at this time.
With respect to internal information technology (IT) systems, the Company
has completed its assessment and testing of the mission-critical systems for
its Reston, Virginia and St. Petersburg, Florida locations, namely its AS 400
information management system, and has determined that minimal modifications
are required for the system to be made Y2K compatible. A third-party reviewer
of the system has recommended certain additional testing to insure Y2K
compatibility. The additional modifications and testing are expected to be
completed in late November 1999. The Virginia and Florida locations utilize the
Company's own payroll and human resource applications, both of which are Y2K
compatible. The Company's Virginia and Florida call center phone systems have
both been recently upgraded and are now Y2K compatible. The Company is in the
process of installing a new general ledger system used by its U.S.-based
operations and for the additional purpose of consolidating its multi-national
operations. This project is scheduled for completion in December 1999. In
addition, the Company expects to upgrade its existing general ledger system to
a Y2K compatibility version in late November 1999. The cost to upgrade or
replace these systems was previously budgeted for in the Company's 1999
operating plan. The Company's European operations have completed the assessment
and testing of their mission-critical accounting software. Although it has been
internally determined that this accounting software is Y2K compatible without
further modification, an upgrade to the accounting software that ensures its
Y2K compatibility will be installed by the end of November 1999. Assessment and
testing of their mission-critical Customer Resource Management (CRM)
information software has also been completed. That system was found to be Y2K
compatible.
For both IT and non-IT systems, the Company's campaign to contact its
significant suppliers and vendors of products and services and follow-up
efforts to obtain and analyze responses to this campaign have been completed.
The project did not uncover any material deficiencies. The initial campaign to
contact significant suppliers and vendors of OmniVista, the provider of
planning and analytical software that the Company acquired in March 1999, was
completed in early July 1999. The campaign to contact the significant suppliers
and vendors of products and services for the Company's European operations was
completed in October 1999. Follow up efforts to obtain and analyze responses to
this campaign are 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 Y2K readiness. In this
regard, the Company faces certain risks and uncertainties to the extent that
such third parties with whom the Company transacts business on a worldwide
basis do not have business systems, products or significant suppliers that are
Y2K compatible. The Company is developing contingency plans in case of unknown
but possible Y2K problems that may affect its business systems or suppliers.
Generally, these contingency plans entail the use of manual workarounds or
alternate suppliers.
12
<PAGE> 15
To date, the costs of the Company's Y2K remediation efforts have not been
material. In addition, the Company does not expect the costs necessary to
complete its Y2K preparedness efforts to be material. The costs of the above IT
and non-IT measures related to the Company's Y2K preparedness are being funded
from current operations. Although these costs include certain third-party
costs, such as for software, hardware and consulting services, most of the
Company's Y2K remediation efforts have entailed the use of internal resources.
The Company is not tracking the cost of internal resources associated with its
Y2K preparedness efforts. To date, the Company has incurred third-party costs
related to its Y2K remediation efforts totaling approximately $0.5 million.
Additional third-party costs related to these efforts are expected to be
immaterial. There can be no assurance, however, that there will not be a delay
in or increased costs associated with the above measures, particularly as the
Company nears completion of its Y2K preparedness efforts. It is possible that
any such delays in or increased costs related to these efforts could result in
a material adverse impact on the Company's financial condition and results of
operations.
RESULTS OF OPERATIONS
The table below presents the line items included in the Company's
Condensed Consolidated Statements of Operations (which are contained in Part I,
Item 1A of this report) as a percentage of total revenues, except line items
categorized under Cost of Revenues which are expressed as a percentage of its
corresponding revenue.
<TABLE>
<CAPTION>
Three Months Nine Months
Ended September 30, Ended September 30,
1999 1998 1999 1998
---- ---- ---- ----
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
Revenues
License fees and royalties 44.9% 50.2% 46.2% 50.4%
Services 55.1 49.8 53.8 49.6
----- ----- ----- -----
Total Revenues 100.0 100.0 100.0 100.0
Cost of Revenues
License fees and royalties 1.9 2.4 2.1 2.7
Services 19.7 16.9 18.2 16.7
----- ----- ----- -----
Total Cost of Revenues 21.6 19.3 20.3 19.4
----- ----- ----- -----
Gross Margin 78.4 80.7 79.7 80.6
Operating Expenses
Sales and marketing 34.2 36.4 35.5 35.7
Research and development 16.4 16.1 16.8 16.1
General and administrative 10.6 12.6 11.0 12.6
Write-off of purchased research
and development - - 1.7 8.0
Amortization of acquired intangibles 3.1 1.5 2.6 1.1
----- ----- ----- -----
Total Operating Expenses 64.3 66.6 67.6 73.5
----- ----- ----- -----
Operating Income 14.1 14.1 12.1 7.1
Other income, net 2.3 3.4 2.5 3.7
----- ----- ----- -----
Income Before Taxes 16.4 17.5 14.6 10.8
Provision for Income Taxes 6.2 6.7 5.4 4.1
----- ----- ----- -----
Net Income 10.2% 10.8% 9.0% 6.7%
===== ===== ===== =====
</TABLE>
13
<PAGE> 16
License fees and royalties revenues-License fees and royalties revenues
increased $1.4 million (15.7%) and $5.9 million (24.2%) for the three and nine
months ended September 30, 1999 from the corresponding periods in 1998,
respectively. The increase in license fees and royalties was driven primarily
from the increase of licenses from the Company's new Imperativ Human Resources
solutions and to a lesser extent to new licenses of its Abra Suite and FAS
offerings. For the three and nine months ended September 30, 1999, new licenses
revenues increased 41% and 38 % from the corresponding periods in 1998,
respectively. The growth in new license fees was offset by a decrease in
revenues associated with customers migrating from the Company's DOS-based
products to newer versions of the Company's Windows-based solutions. This
occurred mainly in the FAS product offerings. As a percentage of total
revenues, license fees and royalties revenues are growing at a rate slightly
slower than the growth being experienced in Services revenue, causing the mix
of revenue between License fees and royalties and Services to shift more toward
Services revenue. This shift is being fueled primarily by the success of the
Company's Imperativ offerings, which have significantly more need for
professional services than the Company's Abra Suite and FAS offerings. To a
lesser extent, the growth of the Company's European operations is contributing
to the shift in the revenue mix, as the European product offerings, which
generally produce a higher relative percentage of services revenue.
Services revenues-Services revenues increased $3.8 million (42.9%) and $11.2
million (46.9%) for the three months and nine months ended September 30, 1999,
from the corresponding periods in 1998, respectively. The increases are
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
U.S., an increase in European operations, which generally produce a higher
relative percentage of service revenues and higher average contract value. In
addition, services revenues have increased in conjunction with sales of the
Company's Best! Imperativ products, which generally involve larger customers
and more comprehensive installations than the Company's other products. To a
lesser extent, the increase is due to the Company's increased focus on offering
training services. See also License fees and royalties revenues above related
to changes in services fees revenues as a percentage of total revenues.
Cost of license fees and royalties revenues-These expenses, which include the
costs of media, product manuals, shipping and fulfillment, and royalties paid
to third parties, increased $13,000 (3.1%) and $29,000 (2.2%) for the three
months and nine months ended September 30, 1999 from the corresponding periods
in 1998, respectively. The increases are primarily due to increases in direct
costs (sales volume related) and to a lesser extent the net shipping costs for
the period. As a percentage of license fees and royalties revenue, cost of
license fees and royalties revenue decreased primarily due to increase in sales
of higher-margin Best! Imperativ products and cost improvements on the license
media and fulfillment operations.
Cost of services revenues-These expenses, which include personnel costs,
telephone charges and other expenses related to providing telephone support,
training and consulting services, increased $1.5 million (50.4%) and $3.9
million (48.4%) for the three months and nine months ended September 30, 1999
from the corresponding periods in 1998, respectively, primarily due to
increased staff related to increased sales of Best! Imperativ products,
particularly in support of implementation and related services. As mentioned
above, these products typically involve more comprehensive installations than
the Company's other products. The Company has also increased personnel to meet
the demands of the higher number of maintenance and support based customers and
the increased services related to the Company's European operations.
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. These expenses
increased $1.4 million (21.6%) and $6.0 million (34.8%) for the three months
and nine months ended September 30, 1999 from the corresponding periods in
1998, respectively. These increases are primarily attributable to hiring
14
<PAGE> 17
additional personnel for the Company's National Accounts direct sales channel,
increased marketing activities related to new product releases and increased
corporate brand awareness activities.
Research and development-These expenses consist primarily of personnel costs
and fees paid to third parties who research, develop, maintain and enhance the
Company's existing software product lines and assist the Company with the
development of new products. These expenses increased $0.9 million (31.5%) and
$3.2 million (41.5%) for the three months and nine months ended September 30,
1999 from the corresponding periods in 1998, respectively. The increases are
primarily due to increased expenses related to the development of the Company's
new Best! Imperativ products, including development of a planning product and
international versions of these products.
General and administrative-These expenses include the costs of corporate
operations, accounting and finance, legal, human resources and other similar
expenses. General and administrative expenses increased $197,000 (8.7%) and
$1.1 million (18.9%) for the three months and nine months ended September 30,
1999 from the corresponding periods in 1998, respectively. These increases
relate to increased staffing and related expenses necessary to manage and
support the continued expansion of the Company's operations.
Write-off of purchased research and development-In the first quarter of 1999,
the Company recorded a charge of $1.2 million associated with the in-process
research and development ("IPR&D") acquired from OmniVista. In the first
quarter of 1998, the Company recorded a charge of $3.9 million related to the
IPR&D costs acquired from HRMS-Germany (see related information under
"Overview" above).
With respect to the OmniVista charge, the Company allocated $1.2 million of
the $5.7 million purchase price of OmniVista to IPR&D. The allocation was based
on the estimated fair value of the IPR&D based on expected future cash flows,
adjusted by the projects' cost-based completion percentage of approximately
21%. As of the acquisition date, the projects included as part of the IPR&D
costs had not yet reached technological feasibility and therefore had no
alternative future uses and were accordingly expensed. The remainder of the
purchase price of OmniVista was allocated to completed technology, other
intangible assets and goodwill. These assets 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 associated with the OmniVista acquisition. 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 discounting the result to a
present value using an appropriate interest 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. An allocation of OmniVista's
projected revenues to IPR&D was based primarily on the appraiser's discussions
with the Company's and OmniVista's senior 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 Best Software.
15
<PAGE> 18
The projections utilized in the transaction pricing and purchase price
allocation analysis excluded 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 interest rate of 30% was used to discount estimated
cash flows generated by the in-process products. Because the in-process
projects were such an integral part of OmniVista, only a moderate increase in
the discount rate for the in-process technology was deemed appropriate.
For projects that the Company acquired from OmniVista that had reached
technical feasibility and were continued, the efforts related to completing
these projects include various phases of development, programming and testing.
These projects are expected to be completed in 1999. Funding necessary to
complete these projects is expected to be provided from internally generated
sources. The Company continues to expect to realize economic benefits from
these acquired technologies; however, no assurance can be given that the
underlying assumptions used to estimate sales, development costs,
profitability, or other events associated with these projects will transpire as
forecasted. For these reasons, actual results may vary from projected results.
Amortization of acquired intangibles-The acquired intangibles and goodwill
resulting from the acquisitions discussed above under "Results of Operations"
are being amortized over useful lives of three to seven years.
Other income, net-This activity consists primarily of earnings from investments
in marketable securities, net of related expenses, which decreased marginally
for the three months and nine months ended September 30, 1999 versus the
comparable periods in 1998, respectively.
Provision for Income Taxes-The Company's effective tax rate was 38.0% and 37.9%
for the three months and nine months ended September 30, 1999, respectively,
compared to 38.2% and 38.1% for the corresponding periods in 1998. The
provisions for income taxes for the interim periods in 1999 are based on the
Company's estimate effective tax rate for full-year 1999.
LIQUIDITY AND CAPITAL RESOURCES
Historically, the Company has funded its operations primarily from cash
provided by operating activities. As of September 30, 1999, the Company had
$6.4 million in net working capital (defined as the excess of current assets
over current liabilities) compared to $5.2 million as of June 30, 1999 and
$23.7 million as of December 31, 1998. The decrease in working capital since
the end of 1998 is primarily attributable to the Company's investing in
marketable securities (principally governmental-related debt securities)
classified as long-term assets. As of September 30, 1999, these investments
totaled $17.5 million. As of June 30, 1999, the Company's balance sheet
reflected long-term marketable securities of $17.7 million.
For the nine months ended September 30, 1999 and 1998, net cash provided by
operating activities was $13.2 million and $11.7 million, respectively. The
increase in cash provided by operating activities can be primarily attributed
to an increase in the Company's results of operations, as discussed above under
"Results of Operations."
For the nine months ended September 30, 1999, net cash used for investing
activities was $18.1 million compared to a use of cash of $17.5 million for the
first nine months of 1998. The change primarily reflects changes in the
Company's investments in marketable securities. Year-over-year, the amount of
cash used to purchase property and equipment increased marginally. For the
first nine months of 1999 and 1998, cash used for acquisitions activity was
$9.4 million and $6.8 million, respectively (see discussion of acquisitions
activity under "Results of Operations" and Note 7 under Notes to Condensed
Consolidated Financial Statements). Although the Company does not currently
have any material identifiable commitments for
16
<PAGE> 19
capital expenditures, the Company expects to continue to invest in property and
equipment in the ordinary course of its business as required. The Company does
not have any material commitments related to its royalties obligations arising
from licenses of certain products and technologies used in certain of the
Company's products.
For the first nine months of 1999, cash used for financing activities was
$0.2 million, linked primarily to proceeds from the exercise of stock options
partially offset by repayments of notes payable. For the first nine months of
1998, cash used in financing activities was approximately $1.2 million
primarily related to repayments of notes payable.
The Company believes that its current liquidity, defined as cash and cash
equivalents and both short-term and long-term investments, combined with
anticipated cash flows from operating activities, will satisfy the Company's
anticipated working capital and capital expenditures requirements for at least
the next twelve months.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
There have been no material changes to the Company's disclosures related
to certain market risks as reported under Part II, Item 7A, "Quantitative and
Qualitative Disclosures About Market Risk," in the Company's 1998 Form 10-K.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
No new material legal proceedings have commenced during the time period
covered by this interim report.
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
None.
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
27. Financial Data Schedule
(b) Reports on Form 8-K
None.
17
<PAGE> 20
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.
<TABLE>
<S> <C>
BEST SOFTWARE, INC.
Date: November 12, 1999 By: /s/ David N. Bosserman
-----------------------------
David N. Bosserman
Executive Vice President, Chief
Financial Officer and Treasurer
(Principal Financial Officer)
</TABLE>
18
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JUL-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 24,688
<SECURITIES> 22,520
<RECEIVABLES> 10,318
<ALLOWANCES> 539
<INVENTORY> 213
<CURRENT-ASSETS> 42,675
<PP&E> 11,328
<DEPRECIATION> 6,701
<TOTAL-ASSETS> 85,337
<CURRENT-LIABILITIES> 36,245
<BONDS> 0
0
0
<COMMON> 38,449
<OTHER-SE> 9,811
<TOTAL-LIABILITY-AND-EQUITY> 85,337
<SALES> 23,270
<TOTAL-REVENUES> 23,270
<CGS> 5,024
<TOTAL-COSTS> 5,024
<OTHER-EXPENSES> 14,975
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 3,815
<INCOME-TAX> (1,450)
<INCOME-CONTINUING> 2,365
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,365
<EPS-BASIC> 0.20
<EPS-DILUTED> 0.19
</TABLE>
