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As filed with the Securities and Exchange Commission on September 28, 1998
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended June 30, 1998
or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission File Number 0-19092
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ROSS SYSTEMS, INC.
Two Concourse Parkway
Suite 800
Atlanta, Georgia 30328
(770) 351-9600
Incorporated in Delaware I.R.S. Employer Identification No.
94-2170198
Securities registered pursuant to Section 12(b) of the Act:
Title of each class: None Name of each exchange on: None
------------------------------
Securities registered pursuant to Section 12(g) of the Act: Common Stock,
$0.001 par value, Preferred Shares Purchase Rights
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES (x) NO ( )
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. ( )
The aggregate market value of the Registrant's voting stock held by
non-affiliates of the Registrant, based upon the closing sale price of the
Common Stock on September 18, 1998 in the over-the-counter market as reported by
NASDAQ, was approximately $54,230,000. Shares of voting stock held by each
officer and director and by each person who owns 5% or more of the outstanding
Common Stock have been excluded in that such persons may be deemed to be
affiliates. This determination of affiliate status is not necessarily a
conclusive determination for other purposes.
As of September 18, 1998, the Registrant had outstanding 21,871,632
shares of Common Stock.
DOCUMENTS INCORPORATED BY REFERENCE
Parts of the Proxy Statement for the Registrant's 1998 Annual Meeting of
Stockholders to be held November 18, 1998 are incorporated by reference in Part
III of this Form 10-K Report.
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ROSS SYSTEMS, INC.
ANNUAL REPORT ON FORM 10K
YEAR ENDED JUNE 30, 1998
TABLE OF CONTENTS
Page No.
--------
PART I
Item 1. Business........................................................................................... 1
Item 2. Properties......................................................................................... 6
Item 3. Legal Proceedings.................................................................................. 6
Item 4. Submission of Matters to a Vote of Security Holders................................................ 6
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.............................. 7
Item 6. Selected Financial Data............................................................................ 8
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.............. 9
Item 7.A. Quantitative and Qualitative Disclosures about Market Risk......................................... 16
Item 8. Financial Statements and Supplementary Data........................................................ 17
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure............... 17
PART III
Item 10. Directors and Executive Officers of the Registrant................................................. 18
Item 11. Executive Compensation............................................................................. 19
Item 12. Security Ownership of Certain Beneficial Owners and Management..................................... 19
Item 13. Certain Relationships and Related Transactions..................................................... 19
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K................................... 20
SIGNATURES 21
PART I
ITEM 1. BUSINESS
THIS REPORT ON FORM 10-K (THE "REPORT") CONTAINS FORWARD LOOKING STATEMENTS
REGARDING FUTURE EVENTS WITH RESPECT TO ROSS SYSTEMS, INC. ACTUAL EVENTS OR
RESULTS COULD DIFFER MATERIALLY DUE TO A NUMBER OF FACTORS, INCLUDING THOSE
DESCRIBED HEREIN AND IN DOCUMENTS INCORPORATED HEREIN BY REFERENCE, AND THOSE
FACTORS DESCRIBED UNDER "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITIONS AND RESULTS OF OPERATIONS".
General
The following summary is qualified in its entirety by, and should be read in
conjunction with the more detailed information and financial data, including the
financial statements and notes thereto, appearing elsewhere in this Report.
Unless otherwise stated in this document, references to (a) the "Company" or (b)
"Ross" shall mean Ross Systems, Inc., a Delaware corporation.
The Company believes that it is a leading supplier of enterprise-wide
business systems and related services to companies installing open
systems/client-server software products, in particular in the process
manufacturing markets. Customers are primarily medium-sized (with annual
sales of $50 million to $2 billion) companies upgrading internal systems to
improve profitability through the availability of timely and accurate
information, as well as large companies modernizing their management
information systems operations in order to reduce costs. The Company licenses
its products to customers through a direct sales force and independent
distributors. Since inception, the Company has licensed approximately 13,000
software products to an installed base of over 3,200 customers worldwide.
Products
The Company markets a broad range of sophisticated business application software
that addresses the financial, manufacturing, distribution, supply chain
management and human resource needs of manufacturers, healthcare providers and
not-for-profit institutions. In addition, the Company supports a large installed
base of companies which utilize the Company's financial and human resource
software products exclusively. The Company's software product license fees are
based on the modules licensed, the processor size and the number of concurrent
users supported by the hardware on which the modules operate.
General Business and Manufacturing Products
The Company has developed a series of products designed for the open
systems/client-server environment, which allow a user to access and
manipulate data from their desktop personal computers. These products
incorporate an integrated, modular, on-line, feature-rich and user-friendly
operating environment. The integration of these products allows the sharing
of data between application products with a common user interface.
User-friendly features include the "point-and-click" selection of
information. The Company's open systems/client-server applications function
in a relational database management system ("RDBMS") environment that
provides for a high degree of data availability and integrity. Additionally,
because the Company's Renaissance CS financial, manufacturing and
distribution applications were developed with the GEMBASE fourth generation
language ("4GL"), the Company believes they are easily modified and expanded.
The Renaissance CS Financial Series combines these higher productivity
technologies with the feature set found in the Company's traditional, award
winning Renaissance products.
The Company offers a comprehensive Enterprise Resource Planning ("ERP")
solution including financials, manufacturing, distribution, maintenance,
transportation management and human resources. In addition, the Company has
delivered functionality specifically tailored to the unique formula and
specifications-based requirements of process manufacturers, including food,
consumer packaged goods, pharmaceutical and biotech, chemical, primary
metals, and pulp and paper companies. The Company believes that this native
functionality is superior to the alternative presented by many of the
Company's competitors, which is to try to adapt systems from the discrete
manufacturing sector.
GEMBASE is a programming environment that delivers a central data dictionary,
complete screen painting, editing and debugging capabilities, and links to
several popular RDBMSs. GEMBASE itself is written in the C programming language
to facilitate portability across multiple hardware and RDBMS platforms. Because
the Renaissance CS financial, manufacturing and distribution products were
developed in GEMBASE, customers often find it easy to customize their own
applications.
The Company also markets a strategic management tool called Strategic
Application Modeler that helps companies define and map their business
processes. The Company believes that this product shortens the implementation
time period of application software systems and allows users to manage those
applications throughout their life cycle.
The Company's Renaissance CS Human Resource Series is a comprehensive, human
resource management system including payroll processing. The client component
has a Windows and NT graphical user interface, which includes the customizable
toolbar feature. The host server processing is COBOL based, to efficiently
provide for the heavy batch processing requirements of payroll.
The Renaissance CS server applications run on Microsoft's Windows NT (with
support for both the Intel and Alpha chips); Compaq Corporation's ("Compaq")
Alpha, UNIX, and Open VMS operating systems; International Business Machines
Corporation's ("IBM") RS/6000; Hewlett-Packard Company's ("HP") HP-UX; and
Fujitsu's DS-90 UNIX. The Renaissance CS currently supports three RDBMSs: Oracle
Systems Corporation's Oracle 7, Oracle 8 and RDB. In addition, the Company
believes it is prepared to support SQL Server 7 upon general availability from
Microsoft.
The Company's client components have the "look and feel" of Microsoft Windows PC
applications, complete with scroll bars, buttons, pop-up menus, dialog boxes and
dynamic data exchange links to popular spreadsheets and word processors.
Although the Renaissance CS architecture enables customers to capitalize on the
power of the PC, the Company believes that its ability to continue to support
installed terminal type workstations will prove popular among customers who
prefer to not replace existing terminals.
The Company's Renaissance classic line of general business accounting
applications are feature-rich and well-integrated. The Company has continued to
enhance these applications to serve existing customers and has delivered support
for customers that use Oracle's RDB RDBMS. The Company will continue to market
the Renaissance classic products to its installed base of customers, as well as
to accounts that want to operate exclusively in a Compaq/DEC proprietary
environment. To provide a long-term growth path for Renaissance classic
customers, the Company now offers them the ability to easily upgrade to its new
products inexpensively. The Company's migration product, "Biz2000," allows
Renaissance classic customers to use the Company's client/server applications
while maintaining their Renaissance classic general ledger and management
reports. Biz2000 is designed to allow the Company's customers to migrate to full
client/server computing at their own pace.
The Company introduced support for the Microsoft NT operating environment at the
end of fiscal 1997. At the close of fiscal 1998, approximately seventy percent
of the new product licenses were sold on the Microsoft NT environment. The
Company believes that it continues to match the marketplace in the growth of new
technologies while focusing on maintaining superior functionality.
Other Products
The Company resells complementary software products licensed from third parties,
including programs module for custom reporting of information maintained by the
Company's programs (Business Objects, Speedware and FRx), systems management
software, and certain middle-ware products. Additionally, the Company has
entered into agreements which enable it to resell RDBMS products and other
products that are sublicensed to end users in conjunction with certain of the
Company's open systems/client-server products. License revenues from the
products described in this paragraph constituted less than 10% of total software
product license revenues in fiscal 1998.
Services
The Company's worldwide services operation complements its open
systems/client-server growth initiative. The Company offers a broad selection of
services to install and optimize each available software product. Services
provided by the Company fall into two broad categories, Professional Services
and Client Support. In addition, the Company has established professional
service relationships with large international information systems consulting
firms to provide independent service offerings to customers who may prefer a
consulting alternative for their project implementation.
Professional Services
The Company's Professional Services organization provides business application
experience, technical expertise and product knowledge to complement the
Company's products and to provide solutions to clients' business requirements.
The major types of services provided include the following:
Management Consulting involves in-depth analysis of the client's specific needs
and the preparation of detailed plans that list step-by-step actions and
procedures necessary to achieve a timely and successful implementation of the
Company's software products. Management Consulting services are generally
offered on a time and materials basis.
Technical Consulting involves evaluating and managing the client's needs by
supplying custom systems, custom interfaces, data conversions, and system
conversions. These consultants participate in a wide range of activities,
including requirements definition, and software design, development and
implementation. These consultants also provide advanced technology services
focused on networking, and database administration and tuning. These services
are generally offered on a time and materials basis.
Education Services are offered to clients either at the Company's education
facilities or at the client's location, as either standard or customized
classes. These classes are priced at either fixed daily rates or on a per class
basis.
Third party consulting partners have been established to take advantage of
specific industry expertise and to support the implementation demands of the
company's growing customer base. The Company has developed relationships with
Deloitte & Touche, Higman Health Care and Andersen Consulting to support client
implementation service needs worldwide in key vertical markets.
Client Support
The Company's Client Support functions include web-based support, telephone
support, technical publications and product support guides, which are provided
under the Company's standard maintenance agreements, under which most of the
Company's installed customers are supported. The annual maintenance fee for
these services is based upon a percentage of the then-current list price for the
licensed software. The standard maintenance agreement entitles clients to new
product releases and product enhancements.
Marketing and Sales
The Company sells its products and services primarily through its direct sales
force. At June 30, 1998, there were 138 sales and marketing employees. In
support of its sales force, the Company conducts comprehensive marketing
programs which include telemarketing, direct mailings, advertising, promotional
material, seminars, trade shows, public relations and on-going customer
communication.
One aspect of the Company's marketing strategy is to maintain strong working
relationships with Microsoft, Compaq, HP and IBM. The Company at times conducts
joint advertising, co-operative training and sales seminars with these
companies. During fiscal 1998, the Company also entered into relationships with
several large consulting and implementation firms. The Company classifies its
consulting alliances in two categories based on the nature of the relationship
and type of service delivered: strategic and specialist. Strategic allies
include Andersen Consulting, Deloitte & Touche LLP and Higman Healthcare.
Specialist consulting allies provide unique knowledge of an aspect of an
enterprise software system and include such companies as Raytheon Systems,
Motherwell Information Systems and Walsh Automation. The Company believes that
these relationships will help generate new joint business opportunities,
increase the value of total projects licensed and provide added resource for the
implementation of the Company's products.
The Company is headquartered in Atlanta, Georgia, with sales, service and
support centers in the major US business locations of: Framingham (Boston),
Chicago, Dallas, Long Beach (Los Angeles), Teaneck (New York City), Redwood City
(San Francisco) and Escondido (San Diego). The Company has subsidiaries in
Brussels, Belgium; Toronto and Ottawa, Canada; Paris, France; Berlin, Germany;
Utrecht, the Netherlands; Barcelona and Madrid, Spain; Lisbon, Portugal and
London and Northampton, the United Kingdom.
The Company has distribution arrangements with distributors in the following
countries: Argentina, Australia, Brazil, Chile, Colombia, Czech Republic,
Germany, Hong Kong, Hungary, India, Indonesia, Ireland, Italy, Japan, Jordan,
Lebanon, Malaysia, Mexico, New Zealand, Pakistan, Peru, Poland, Rumania, Russia,
Saudi Arabia, Singapore, Slovak Republic, Taiwan, Thailand, Uruguay and
Venezuela. These distributors pay the Company royalties from the marketing of
the Company's products and maintenance services.
International revenues (from foreign operations and export sales) represented
approximately 30%, 39% and 40% of the Company's revenues in fiscal 1998, 1997
and 1996, respectively. The Company intends to broaden its presence in
international markets by expanding its international sales force and by entering
into additional distribution agreements.
Product Development and Acquisitions
To meet the increasingly sophisticated needs of its customers and
address potential new markets, the Company continually strives to enhance its
existing product functionality and add new product features. The Company
surveys the needs of its customers annually through ballots and at its user
conference and incorporates many of their recommendations into its products.
The Company also conducts a variety of forms of market research with industry
analyst groups and targeted industries to determine strategies for new
features and functions. The Company is committed to achieving advances in
computer systems technology and to expanding the breadth of its product line.
The key elements of this strategy are:
New Operating Environments
The Company intends to expand its potential markets by enabling its products
to operate in additional open systems/client-server computing environments.
In fiscal 1997, the Company released a Microsoft Windows NT version of its
products and is planning to support Microsoft's new release of SQL server 7
when available from Microsoft.
Product Line Expansion
The Company intends to expand its potential markets by developing new
products which address the needs of additional prospective customers,
including those in key international markets related to both language,
currency and local accounting custom and procedure.
Product Acquisition and Alliances
In support of its product line expansion strategy, the Company intends to
acquire products or develop relationships with providers of complementary
software to supplement its existing product offerings. The Company believes
that the acquired software components will extend the functionality and
overall value of the core product line, while third party software components
will both enhance the usability and presentation of the data provided by the
system and provide specialized functional extensions. The Company has
agreements with FRx Software Corporation, Business Objects, Inc., Speedware,
SRC Software, Inc., The Cimulation Centre, Citrix Systems, Inc., Logility,
Inc., Numetrix Limited and Optical Technology Group, Inc. In 1998, the
Company acquired Bizware, Inc. ("Bizware") a software service provider
specializing in Ross implementation and upgrade conversions. After the fiscal
year end, the Company likewise acquired Hipoint Systems Corporation, a
Canadian software service provider. Both acquisitions were primarily
non-cash, stock transactions.
Competition
The business applications software market is intensely competitive. The
Company competes with a broad range of applications software companies. The
Company's competitors include the following: general business application
software providers, such as Baan Company NV, Oracle Corporation, and SAP AG;
as well as business applications software providers in specific vertical
markets that offer products that compete with the Company's in process
manufacturing products, such as Marcam Solutions, Inc. In the human resource
market, the Company competes with various business applications software
providers, including PeopleSoft, Inc. Many of the Company's competitors have
greater financial and business resources than the Company.
The principal competitive factors in the market for business application
software include product reputation, product functionality, performance, quality
of customer support, size of installed base, financial stability, hardware and
software platforms supported, price, and timeliness of installation. The Company
believes it competes effectively with respect to these factors.
Proprietary Rights and Licenses
The Company provides its products to end users generally under nonexclusive,
nontransferable licenses which generally have terms of at least 20 years.
Under the general terms and conditions of the Company's standard license
agreements, the licensed software may be used solely for internal operations
on designated computers at specific sites. The Company makes source code
available for certain portions of its products.
The Company has registered "RENAISSANCE", "RENAISSANCE CS", "COMMAND", "PROMIX",
"CROSSVIEW", "MAPS" and "ROSS SYSTEMS" as trademarks in the United States. The
Company has also secured registration of its copyrights in the United States for
19 of its products. Although the Company takes steps to protect its trade
secrets, there can be no assurance that misappropriation will not occur or that
copyright and trade secret protection will be available in certain countries.
The Company does not hold any patents, and currently relies on a combination
of trade secret, copyright and trademark laws, and license agreements to
protect its proprietary rights in its products. The Company believes its
products, trademarks, copyrights and other proprietary rights do not infringe
the rights of third parties, although there can be no assurances in this
regard.
The Company believes that, because of the rapid pace of technological change in
the computer software industry, trade secret and copyright protection are less
significant than factors such as the knowledge, ability and experience of the
Company's employees, frequent product enhancements, and the timeliness and
quality of support services.
Employees
As of June 30, 1998, the Company employed a total of 582 full time employees,
including 138 in sales and marketing, 92 in product development, 297 in
professional services and client support, and 55 in finance, administration and
operations. The Company's employees are not represented by a labor union, and
the Company believes that its employee relations are excellent.
ITEM 2. PROPERTIES
The Company's corporate headquarters, research and development, sales,
marketing, consulting and support facilities are located in Atlanta, Georgia,
where the Company occupies approximately 57,000 square feet. The Company also
maintains a regional office in Redwood City, California, which occupies
approximately 36,500 square feet, for research and development, sales and
consulting; a regional office in Waltham, Massachusetts, which occupies
approximately 4,300 square feet for research and development and consulting; and
a regional office in Teaneck, New Jersey, which occupies approximately 15,000
square feet for sales, consulting and support. Space is also rented by the
Company in Alameda, California for certain research and development, consulting
and support activities, and in Escondido, California for certain research and
development, sales, consulting and support activities.
The Company also leases additional regional offices in Chicago, Illinois;
Long Beach, California and Irving, Texas. International offices are
maintained in Berlin, Germany; London, England; Northampton, England; Paris,
France; Utrecht, Netherlands; Barcelona and Madrid, Spain; Lisbon, Portugal;
Zaventem, Belgium; Ottawa and Mississauga, Canada. The Company believes its
facilities are adequate for its current needs and that the Company can obtain
suitable additional space as required.
ITEM 3. LEGAL PROCEEDINGS
As of, and for the fiscal year ended June 30, 1998, the Company is not a
party to any pending litigation other than ordinary routine litigation that
is incidental to the operations of the business, and the Company is not aware
of any threatened litigation. For a discussion of litigation and litigation
settlements pre-fiscal 1998 and fiscal 1998 accounting adjustments for such
settlement amounts, see "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Litigation Settlements and Expenses."
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
SHAREHOLDER MATTERS
The following table sets forth the range of high and low sales prices for the
Company's Common Stock on the NASDAQ National Market for each of the quarters
of fiscal 1998 and 1997. The Company's Common Stock trades under the NASDAQ
symbol ROSS.
Fiscal 1998 High Low
- ----------- ---- ---
First quarter.............................................................................................. $5 $3-7/16
Second quarter............................................................................................. $4-15/16 $3
Third quarter.............................................................................................. $3-1/2 $2-7/16
Fourth quarter............................................................................................. $5-1/16 $2-7/8
Fiscal 1997
First quarter.............................................................................................. $6-1/4 $4-1/8
Second quarter............................................................................................. $9-5/8 $5-3/8
Third quarter.............................................................................................. $9-5/8 $4-1/16
Fourth quarter............................................................................................. $5-3/8 $2
The Company has never declared or paid cash dividends on its Common Stock, and
it is the Company's present intention to retain earnings to finance the
expansion of its business. In addition, the Company's line of credit agreement
with its lender contains certain covenants which limit the Company's ability to
pay cash dividends. As of September 18, 1998, the approximate number of
stockholders of record of the Company's common stock was 416.
ITEM 6. SELECTED FINANCIAL DATA
CONSOLIDATED FINANCIAL DATA
(In thousands, except per share data)
Years Ended June 30,
--------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
Statements of Operations Data:
Total revenues.................................................. $91,684 $78,773 $69,789 $72,470 $76,396
Operating earnings (loss)....................................... $4,140 $(622) $(177) $(15,487) $(18,173)
Net earnings (loss)............................................. $2,595 $(2,353) $(1,541) $(15,528) $(18,714)
Diluted net earnings (loss) per share........................... $0.13 $(0.13) $(0.10) $(1.28) $(1.86)
Shares used in computing diluted net earnings (loss) per share.. 21,390 18,515 15,089 12,105 10,066
Balance Sheet Data:
Working capital................................................. $5,544 $(8,273) $(8,535) $(16,023) $(11,569)
Total assets.................................................... 78,189 69,715 58,049 55,061 60,536
Long-term debt, less current portion............................ 8,918 394 36 228 626
Redeemable preferred stock...................................... _ 1,053 _ _ _
Total shareholders' equity...................................... 30,774 22,060 18,792 8,922 11,137
Prior years' Results of Operations have been reclassified to conform with the
fiscal 1998 presentation.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
STATEMENTS IN THE MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS WHICH EXPRESS THAT THE COMPANY "BELIEVES",
"ANTICIPATES", OR "PLANS TO" AS WELL AS OTHER STATEMENTS WHICH ARE NOT
HISTORICAL FACT, ARE FORWARD LOOKING STATEMENTS WITHIN THE MEANING OF THE
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995. ACTUAL EVENTS OR RESULTS MAY
DIFFER MATERIALLY AS A RESULT OF THE RISKS AND UNCERTAINTIES DESCRIBED HEREIN
AND ELSEWHERE INCLUDING, IN PARTICULAR THOSE FACTORS DESCRIBED UNDER "BUSINESS"
SET FORTH IN PART I OF THIS REPORT AS WELL AS IN OTHER RISKS AND UNCERTAINTIES
IN THE DOCUMENTS INCORPORATED HEREIN BY REFERENCE.
Overview
The Company's software product license revenues can fluctuate from quarter to
quarter depending upon, among other things, such factors as overall trends in
the United States and international economies, new product introductions by the
Company, hardware vendors and other software vendors as well as customer buying
patterns. Because the Company typically ships software products within a short
period after orders are received, and therefore maintains a relatively small
backlog, any weakening in customer demand can have an almost immediate adverse
impact on revenues and operating results. Moreover, a substantial portion of the
revenues for each quarter is attributable to a limited number of sales and tends
to be realized in the latter part of the quarter. Thus, even short delays or
deferrals of sales near the end of a quarter can cause substantial fluctuations
in quarterly revenues and operating results. Finally, certain agreements signed
during a quarter may not meet the Company's revenue recognition criteria
resulting in deferral of such revenue to future periods. Because the Company's
operating expenses are based on anticipated revenue levels and a high percentage
of the Company's expenses are relatively fixed, a small variation in the timing
of the recognition of specific revenues can cause significant variation in
operating results from quarter to quarter.
Results of Operations
The following table sets forth certain items reflected in the Company's
consolidated statements of operations as a percentage of total revenues for the
periods indicated, and a comparison of such statements is shown as a percentage
increase or decrease from the prior year's results:
Percentage of Revenue
--------------------- Percentage
Year Ended June 30, Increase
--------------------- (Decrease)
1998 1997 1996 1998/1997 1997/1996
---- ---- ---- --------- ---------
Revenues:
Software product licenses....................................................... 41% 39% 36% 24% 20%
Consulting and other services................................................... 31 29 28 24 19
Maintenance..................................................................... 28 32 36 1
---- ---- ---- --- ---
Total revenues............................................................... 100% 100% 100% 16% 13%
---- ---- ---- --- ---
---- ---- ---- --- ---
Operating expenses:
Costs of software product licenses.............................................. 4% 4% 3% 22% 65%
Costs of consulting, maintenance and other services............................. 39 36 37 27 11
Software product license sales and marketing.................................... 30 30 30 16 10
Product development............................................................. 12 15 18 1 (7)
General and administrative...................................................... 8 10 10 (10) 11
Provision for uncollectible accounts............................................ 2 4 1 (48) 243
Provision for settlement of litigation claim.................................... 0 1 0 * *
Amortization of other assets.................................................... 1 1 1 38 65
---- ---- ---- --- ---
Total operating expenses..................................................... 96 101 100 10 14
---- ---- ---- --- ---
Operating earnings (loss).................................................... 4 (1) 0 * 251
Other expense, net................................................................. (1) (1) (2) 26 (25)
---- ---- ---- --- ---
Earnings (loss) before income taxes.......................................... 3 (2) (2) (293) 10
Income tax benefit (expense)....................................................... 0 1 0 (53) 470
---- ---- ---- --- ---
Net earnings (loss).......................................................... 3% (3)% (2)% * (53)%
---- ---- ---- --- ---
---- ---- ---- --- ---
- -------------
* Not meaningful
Revenues. Total revenues increased 16%, to $91,684,000, in fiscal 1998 from
$78,773,000 in 1997. Fiscal 1997 revenues represented a 13% increase from
revenues of $69,790,000 in fiscal 1996. Software product license revenues
increased 24% from fiscal 1997 to 1998 and increased 20% from fiscal 1996 to
1997. Consulting revenues increased 24% from fiscal 1997 to 1998 and increased
19% from fiscal 1996 to 1997. Maintenance revenues from first year and
renewed maintenance agreements, both of which are recognized ratably over the
maintenance period, were virtually unchanged from fiscal 1997 to 1998 and
increased 1% from fiscal 1996 to 1997.
Fiscal 1998 North American and European software product license revenues
increased from fiscal 1997's results by 32% and 30%, or $6,336,000 and
$1,986,000, respectively. This increase was offset by a decrease in software
product license revenues from the Asia/Pacific Rim market of $842,000, or
20%. The Company believes that the decrease in Asia/Pacific Rim market was
largely a result of depressed economic conditions in that area. The Company
believes the increase in North American revenues was principally a result of
increased demand for the Company's Open-Systems/Client Server products during
fiscal 1998. The Company believes that the increased North American demand is
attributable to several factors, including increased marketing focus on
Client Server applications by the Company during fiscal 1998, and the release
of new functionality in the Company's 4.x version of Renaissance CS. European
revenues increased principally as a result of the addition of the Company's
Spanish subsidiary and one large agreement that significantly impacted
revenues in Germany. Software product license revenues in Spain and Germany
increased 184% and 853%, or $2,347,000 and $768,000, respectively. These
increases were somewhat offset by declines in the Benelux and UK markets. The
Company's open systems/client-server applications represented approximately
93% of software product license revenues for fiscal 1998, as compared to 93%
in fiscal 1997 and 94% in fiscal 1996. Total open systems/client-server
software product license revenues increased approximately 22% from fiscal
1996 to 1997, offset by a 5% decline in software product license revenues
from the Company's traditional Renaissance product line during the same
period.
Fiscal 1997 North American and Pacific Rim software product license revenues
increased from fiscal 1996's results by approximately 16% and 214%, or
$2,724,000 and $2,804,000, respectively. This increase was offset by a
decrease in European software product license revenues of approximately 6%,
or $419,000. The Company believes the increase in North American revenues was
principally a result of increased demand for the Company's Renaissance CS
Series, sales of which increased approximately 22% from fiscal 1996's
results. The Company believes this increase in demand was the result of the
streamlining and reorganization of its sales and marketing structure to focus
on three key market sectors: process manufacturing, healthcare and
not-for-profit entities. The Company believes the increase in Pacific Rim
revenues is the result of an overall effort to increase direct and
distributor-related sales and marketing efforts in the region. One result of
this increased effort was the recording of a large contract in the first
quarter of fiscal 1997 that represented approximately 90% of the increase.
Despite the addition of a Spanish subsidiary at the end of the second
quarter, overall European software license revenues decreased in fiscal 1997.
The Company believes that this decrease is primarily related to an overall
sluggishness in the European economy.
Revenues from consulting and other services (which are recognized as performed)
correlate with software product license revenues (which are recognized upon
delivery), so that when software product license revenues increase, future
period services revenues generally increase as a result. Fiscal 1998 consulting
and other services revenues increased 24%, or $5,393,000, over fiscal 1997
results. The Company experienced growth in the North American and European
markets of 29% and 17%, respectively. A fiscal 1998 decline of 28% in
Asia/Pacific Rim consulting revenues offset the North American and European
gains. The Company believes that the decrease in the Asia/Pacific Rim market was
due largely to depressed economic conditions in that area and the conclusion of
a significant consulting agreement during early fiscal 1998. The Company
believes that the North American and European gains are attributable largely to
the increase in software product license revenues over the prior fiscal year.
Additionally, the Company has increased its consulting capacity by expanding the
number of outside consultants used to perform implementations, consulting and
other professional services. These consultants normally cost more and generate
lower gross margins than services performed by Company employees, but are
necessary to meet the growing demand for consulting services related to the
Company's products. Fiscal 1997 consulting and other services revenues increased
19%, or $3,579,000 from fiscal 1996 results. For the year, North American and
European consulting revenues increased 12% and 20%, or $1,590,000 and
$1,292,000,
respectively. The Company also had consulting services revenue in the Pacific
Rim of $697,000 in fiscal 1997. The Company believes that consulting revenues
increased during fiscal 1997 as a result of the increase in software product
license revenue over fiscal 1996.
Maintenance agreements are renewed annually by most of the Company's maintenance
customers. Maintenance revenues were virtually unchanged from fiscal 1997 to
1998 and increased 1% from fiscal 1996 to 1997. Maintenance revenues have
remained relatively constant as a net result of increases in the Company's
Renaissance CS maintenance revenues offset by some maintenance contracts which
have expired without renewal.
As a percentage of total revenues, the Company's international operations have
remained relatively consistent at 31%, 33% and 31% in fiscal years 1998, 1997
and 1996, respectively. In fiscal 1998, the Company experienced growth in
Europe, partially offset by a decrease in Asia/Pacific Rim revenues. European
revenues for fiscal 1998 increased 15%, or $3,039,000, offset by a decrease in
Asia/Pacific Rim of 20%, or $1,082,000. The increase in fiscal 1997's results
were due to the Company's increased presence in the Pacific Rim, including one
large contract in the first quarter (see details below), combined with
relatively unchanged European results in that year. In fiscal 1996, decreases in
total European revenues were only partially offset by increases in revenues from
the Pacific Rim. Fiscal 1996 declines in European revenues were primarily
attributable to overall decreases in European personnel during fiscal 1996,
whereas increases in the Pacific Rim were primarily a result of improved
execution by the sales organizations in these locations.
The Company's large Pacific Rim contract represents a distributor agreement with
a Japanese company (the "Distributor") whereby the Distributor has an exclusive
license to reproduce and sell certain Ross products in the Pacific Rim. In
exchange for this distribution right, the agreement, which is renewable
annually, called for the Company to receive at least a "minimum annual royalty"
equal to $2.5 million in fiscal 1997 and 1998, $4 million in fiscal 1999 and
$4.5 million in fiscal 2000. These royalty payments are based on sales quotas
for the period that the Distributor agrees to meet or exceed in order to keep
its exclusive distributorship. The Distributor met its quota for fiscal 1997 and
1998. In August 1998 the Distributor agreed to renew its exclusive
distributor relationship with the Company for fiscal 1999. The Company
recognizes revenue at the greater of the annual minimum royalty amount or a
contractually defined amount determined from licenses sold by the distributor.
However, due to economic conditions in Asia/Pacific Rim, the Company and its
distributor renegotiated the distributor agreement for fiscal 1999 to an annual
minimum royalty of $2.5 million. Accordingly, the Company expects to recognize
$2.5 million in fiscal 1999.
In June 1997, the Company entered into a license agreement with another
distributor whereby the distributor received a license, valued at $1.3 million,
to distribute the Company's Renaissance CS product. The Company recognized this
revenue in June 1997. Simultaneously, the Company received certain software
products and components from this distributor in exchange for the aforementioned
license agreement. The value of the license agreement was ascribed to the assets
received in this non-monetary transaction. These assets are included in
capitalized software costs and are being amortized over four years.
Revenues have been derived from a relatively large number of customers. No
single customer accounted for more than 10% of revenues during fiscal 1998, 1997
or 1996.
Costs of software product licenses. Costs of software product licenses
include expenses related to royalties paid to third parties and product
documentation and packaging. Third party royalty expenses will vary from
quarter to quarter based on the mix of products being sold. Many of the
Company's newer products have third party royalty obligations associated with
them that had not existed previously. Costs of software product licenses for
fiscal 1998 increased by 22% to $3,536,000 from $2,905,000 in fiscal 1997.
Costs of software product licenses for fiscal 1997 increased by 65% from
$1,757,000 in fiscal 1996. These increases are directly related to the
increase in the Company's software product license revenues for the same
periods. The Company's gross profit margin resulting from software product
license revenues for fiscal 1998 was 91%, an increase from 90% in fiscal 1997
and a decrease from 93% in fiscal 1996. Increases in third party royalty
expenses led to the decline in these margins from fiscal 1996 to 1997. The
margin increased slightly in fiscal 1998 from fiscal 1997 as a result of
selling a different mix of third party products resulting in higher margins
for the Company.
Costs of consulting, maintenance and other services. Costs of consulting,
maintenance and other services include expenses related to consulting and
training personnel, personnel providing customer support pursuant to maintenance
agreements, and other costs of sales. The Company also uses outside consultants
to supplement Company personnel in meeting peak customer consulting demands.
Costs of consulting, maintenance and other services increased 27% to $36,106,000
in fiscal
1998 from $28,511,000 in fiscal 1997. As software license activity has
increased in fiscal 1998 over fiscal 1997, more internal and outside
consultants were required by the Company to service these new customers. The
increase in costs over the prior year is largely a result of the additional
fiscal 1998 expenses related to the Company's fiscal 1997 acquisition of its
Spanish subsidiary and the fiscal 1998 acquisition of its business partner
Bizware, as well as additional services personnel hired by the company during
fiscal 1998. The additional fiscal 1998 expenses related to the Spanish and
Bizware subsidiaries were approximately $3,158,000. The fiscal 1998 increase
was principally a result of increased personnel-related expenses of
$3,558,000 (including the increases from the acquisition of the Spanish and
Bizware subsidiaries), increases in costs related to outside consultants of
$2,601,000 and increased travel expenditures of $485,000 compared to the
prior year. While the Company trained its additional staff, it incurred
higher outside consulting expenses to meet short-term customer demands.
Fiscal 1997 costs of consulting, maintenance and other services increased 11%
from $25,769,000 in fiscal 1996. The fiscal 1997 increase was due largely to
increases in personnel-related expenses of approximately $1,220,000,
increases in expenses related to outside consultants of approximately
$1,000,000, and increases in facilities and supplies related expenses of
approximately $485,000 compared to the prior year. Total costs of consulting,
maintenance and other services for Ross Spain during fiscal 1997 was
approximately $1,670,000. Ross Spain was purchased at the end of the second
quarter of fiscal 1997 and thus its activity is not included in the fiscal
1996 results.
Gross Profit Margins. The Company's gross profit margins resulting from
consulting, maintenance and other services revenues for fiscal 1998, 1997 and
1996 were 32%, 41% and 42%, respectively. The decline in gross profit margins
from fiscal 1997 to 1998 was due largely to the increased usage of outside
consultants, whose work results in lower margins for the Company. Additionally,
in order to meet increasing customer demands and fill services and consulting
personnel vacancies, there were increases in personnel expenses related to the
hiring and training of new services and consulting personnel who must undergo
training before beginning to generate revenue. The deterioration in the gross
profit margin from fiscal 1996 to 1997 was due largely to the increase in
personnel expenses related to the hiring and training of new services and
consulting personnel and the time required until these new personnel begin to
generate revenue.
Software Product License Sales and Marketing Expenses. Software product
license sales and marketing expenses increased 13% in fiscal 1998 over 1997,
and increased 14% in fiscal 1997 over 1996. A portion of the increase
for fiscal 1998 was due to the aforementioned acquisition of the Spanish
subsidiary at the end of the second quarter of fiscal 1997 and the
acquisition of Bizware in January 1998. Additionally, the Company experienced
a general increase in personnel-related expenses, along with the additional
commission expenses related to the aforementioned increases in software
product license revenue from fiscal 1997 to 1998. For fiscal 1998, the
additional expenses attributable to the Spanish and Bizware subsidiaries were
approximately $1,226,000 over the same period of the prior year. Also for
fiscal 1998, personnel-related expenses including salaries and commissions
increased approximately $2,097,000, facilities expenses increased
approximately $315,000 and travel-related expenses increased approximately
$526,000 from the same period in the prior year as a result of increases in
sales and marketing personnel (inclusive of the Spanish and Bizware
increases). The increase in sales and marketing expenses during fiscal 1997
was largely the result of an increase in personnel-related expenses,
including salaries and commissions, of approximately $530,000, an increase in
travel-related expenses of approximately $930,000, and an increase of
approximately $870,000 in marketing expenses related to the promotion of the
Company's Renaissance CS products. These expense increases were partially
offset by a decrease of approximately $150,000 in facilities expenses related
to the consolidation of several offices during the year.
Product Development Expenses. A summary of the components of product development
expenditures for the past three years follows (in thousands):
Year Ended June 30,
1998 1997 1996
---- ---- ----
Expenses...................................................................................... 10,960 $10,880 $12,472
Amortization of previously capitalized software development costs............................. (7,520) (7,112) (5,935)
--------- --------- ---------
--------- --------- ---------
Expenses, net of amortization................................................................. 3,440 3,768 6,537
Capitalized software development costs........................................................ 10,055 8,879 8,253
--------- --------- ---------
--------- --------- ---------
Total expenditures......................................................................... $13,495 $12,647 $14,790
--------- --------- ---------
--------- --------- ---------
Total expenditures as a percent of total revenues............................................. 15% 16% 22%
--------- --------- ---------
--------- --------- ---------
Capitalized software, net of amortization, as a percent of total expenditures................. 19% 14% 16%
--------- --------- ---------
--------- --------- ---------
As a percentage of total revenues, fiscal 1998 product development expenditures
decreased from 1997 expenditures. This decrease is largely attributable to the
growth in revenues experienced during fiscal 1998. Total development
expenditures increased slightly from fiscal 1997 levels. Product development
expenditures during fiscal 1998 have been primarily focused on continued
enhancements to existing products and developing new products. During fiscal
1998, software development costs capitalized included amounts attributable to
the development of additional international features for the Company's
Renaissance CS products, developing the 4.X series of Renaissance CS, and
developing year 2000 compliance for the Company's Renaissance Classic products.
The Company does not expect to have any additional expenditures related to the
year 2000 compliance upgrade on its Renaissance Classic products. The Company
believes that its Renaissance CS products have been year 2000 compliant since
their introduction in 1992.
General and Administrative Expenses. General and administrative expenses
decreased 10% to $7,258,000 in fiscal 1998 from $8,050,000 in fiscal 1997.
Fiscal 1997 represented an increase of 11% from $7,258,000 in fiscal 1996. The
major cause of the decrease in fiscal 1998 related to personnel and travel
related expenses. During fiscal 1997, the Company moved its finance and
administrative headquarters to Atlanta from California and therefore incurred an
increased level of employee and travel costs. These increased expenses did not
repeat in fiscal 1998. The increase in fiscal 1997 was largely the result of
personnel, travel, and other costs related to the move of the Company's finance
and administrative headquarters from California to Georgia. These costs,
including payroll, travel, temporary employees and leased equipment, increased
approximately $799,000.
Provision for Doubtful Accounts and Returns. In fiscal 1998, 1997 and 1996,
the Company recorded provisions of $1,830,000, $3,534,000, and $1,029,000,
respectively. The fiscal 1998 decrease in the provision was due to the
increased quality of the Company's accounts receivable, as evidenced by a 7%
drop in the Company's days sales outstanding.
Litigation Settlements and Expenses. The fiscal 1998 litigation settlement
amount represents an adjustment to the charge that was recorded during fiscal
1997. During fiscal 1997, the Company settled a dispute with a customer with the
understanding that the settlement and related legal fees would be covered under
the Company's business insurance. The Company subsequently learned that the
insurer took exception to the Company's settlement with its customer and
withheld payment on the claim, pending arbitration. In June 1997, the Company
recorded a charge of $615,000, pending settlement with its insurer, to cover the
potential settlement and legal fees. In fiscal 1998, the insurer paid the
Company $381,000 in settlement of the previously accrued claim.
Amortization of Other Assets. Amortization of intangible assets resulted in
charges of $1,024,000, $742,000, and $451,000 in fiscal 1998, 1997 and 1996,
respectively. These charges related to the purchase of the Company in 1988 and
its subsequent acquisitions of other products and companies. During fiscal 1998,
the Company purchased Bizware, Inc. The related intangible assets are being
amortized over periods ranging from two to seven years. Also during fiscal 1998,
the Company capitalized approximately $431,000 of debt issuance costs related to
the receipt of $10,000,000 of convertible debenture financing. For a description
of the convertible debenture financing, see "Liquidity and Capital Resources."
These costs are being amortized over five years. During fiscal 1997, the Company
acquired its Spanish distributor. The related goodwill of $1,541,000 is being
amortized over seven years.
Restructuring Charges. During the second quarter of fiscal 1994, the Company
accrued $1,936,000 in restructuring costs associated with its planned reduction
of staffing levels and to eliminate excess facilities resulting from the
personnel reductions. During fiscal 1996, the reserve for restructuring charges
was reduced to $94,000 as a result of the cost of a lease termination in
Bristol, England and continued lease payments for the Waltham, Massachusetts
facility. By February 1997, the entire reserve balance was reversed as a result
of the remaining lease payments on the Waltham facility.
Other Income and Expense. Fiscal 1998, 1997 and 1996 other income is composed
largely of interest income of $100,000, $110,000 and $86,000, respectively.
Fiscal 1998 interest income declined from 1997 as a result of lower invested
cash balances compared to fiscal 1997 and 1996. Interest expense increased from
fiscal 1997 to 1998 as a result of increased borrowings under the Company's
revolving credit facilities and increased capital lease activities. Interest
expense decreased from fiscal 1996 to 1997 due to lower average debt balances
during the year and a general decline in interest rates.
Income Taxes. The Company recorded income tax expense of $382,000 during fiscal
1998. This expense relates to foreign withholding taxes expensed during the year
($337,000), and accruals for other state taxes payable ($45,000). At June 30,
1998, the Company had net income taxes payable of $397,000, related primarily to
various taxing jurisdictions in North America, principally Canada where the
Company has used all of its net operating loss carryforwards. The Company
anticipates recording significant future foreign withholding tax expenses
related to the aforementioned Japanese distributorship agreement, representing
10% of future annual royalty payments from this agreement. The Company recorded
income tax expense of $809,000 during fiscal 1997. This expense relates to
foreign withholding taxes paid during the year ($722,000) and accruals for other
state taxes payable ($87,000). At June 30, 1997, the Company had income taxes
payable of approximately $199,000, which primarily related to taxes payable to
various taxing jurisdictions within North America. At June 30, 1998, the Company
had net operating loss carryforwards of approximately $41,900,000, $10,441,000,
and $14,501,000 for federal, California and foreign tax purposes, respectively.
These carryforwards, if not utilized, will expire between fiscal 1999 and 2012,
with the majority expiring in 2009 and 2010.
Liquidity and Capital Resources
While the Company required $11,618,000 for investing activities (primarily
capitalized software costs), the Company financed its continuing operations for
the fiscal year ended June 30, 1998 through cash generated from operations and
funds received in a private debt and equity financing and available credit
facilities.
At June 30, 1998, the Company had $7,248,000 of cash and cash equivalents. The
Company also has a revolving credit facility with an asset-based lender with a
maximum credit line of $15,000,000, a maturity date of October 31, 2000, and an
interest rate equaling the Prime Rate plus 2%. Borrowings under the credit
facility are collateralized by substantially all assets of the Company. At June
30, 1998, the Company had $3,770,000 outstanding against the $15,000,000
revolving credit facility, and based on the eligible accounts receivable at June
30, 1998, the Company's cash and remaining borrowing capacity under the
revolving credit facility total approximately $12,661,000.
On December 29, 1995, the Company entered into a Subscription Agreement (the
"Agreement") with a foreign institutional investor pursuant to which the
investor purchased 500,000 shares of the Company's Series A Mandatory Redeemable
Convertible Preferred Stock for an aggregate purchase price of $2,000,000. In
connection with this transaction, the investor granted the Company options (the
"Options") to require the investor to purchase shares of the Company's Mandatory
Redeemable Convertible Preferred Stock with an aggregate value of $4,000,000
during the period from and including July 1, 1996 through and including December
30, 1998. The Company created and reserved 500,000 shares of its Series B
Mandatory Redeemable Convertible Preferred Stock and 500,000 shares of its
Series C Mandatory Redeemable Convertible Preferred Stock for issuance and sale
to the investor upon exercise of the Options. In addition, the Company granted
the investor a warrant (the "Warrant") to purchase 400,000 shares of the
Company's Common Stock at an exercise price of $5.576 per share during the
period from and including July 1, 1997 through and including December 29, 2000.
Pursuant to the Agreement, the Company exercised its first Option on July 8,
1996. Concurrently, the investor also agreed to invest an additional $2,000,000
under terms similar to those in the Agreement. In exchange for the additional
investment, the Company granted the investor a warrant for an additional 640,000
shares of the Company's Common Stock. This warrant was exercisable during the
period from and including July 1, 1997 through and including December 29, 2000,
at a maximum price of $8.00 per share. The gross proceeds from the July 1996
transactions were $4,000,000. The Company exercised its final Option to require
the investor to invest $2,000,000 on January 6, 1997 when the investor purchased
200 shares of the Company's newly created Series E Redeemable Preferred Stock.
During fiscal 1996, the investor converted all of their Series A Mandatory
Redeemable Convertible Preferred Stock to common stock. During fiscal 1997, the
investor converted all of their Series B and Series C Mandatory Redeemable
Convertible Preferred Stock and 93 shares of their Series E Mandatory Redeemable
Convertible Preferred Stock to common stock.
On April 23, 1998, the Company issued and sold 353,000 shares of its Common
Stock to this investor upon the exercise of the warrant to purchase 640,000
shares of the Company's Common Stock mentioned above. The Company and the
investor also agreed to cancel the remaining 287,000 shares of Common Stock
subject to the warrant. The aggregate exercise price paid by this investor was
$1,141,946, representing a per share exercise price of $3.23. The Company and
the investor agreed to reduce the exercise price from that set forth in the
warrant certificate, dated July 3, 1996, representing the warrant in
consideration for the cancellation. The Company has used the proceeds from this
exercise to fund its current operations. On April 24, 1998, the Company issued
286,633 shares of it's Common Stock to this investor upon the conversion of the
remaining 107 shares of the Series E Mandatory Redeemable Convertible Preferred
Stock. Because this transaction
involved the exchange of one security for another security, the investor paid no
additional consideration to the Company.
On February 6, 1998, the Company closed a private placement of up to $10,000,000
of convertible subordinated debentures to certain institutional investors (the
"Investors") pursuant to Regulation D promulgated under the Securities Act of
1933, as amended. The Investors invested $6,000,000 on February 6, 1998 and
$4,000,000 on June 11, 1998 ("the Second Closing Debentures").
On September 18, 1998, the Company notified the Investors that Ross will
redeem the Second Closing Debenture for the redemption price of $4,320,000
(108% of the face amount of the Second Closing Debenture) on October 7, 1998
at a premium of 108% of the face amount plus accrued interest.
The Company's ability to meet its cash requirements for operations and
recurring capital expenditures will depend upon funds expected to be
generated from operations, the remaining proceeds from the aforementioned
convertible debentures, and amounts available under its line of credit
facility.
New accounting pronouncements
In February 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128, "Earnings Per Share" ("Statement 128")
and Statement of Financial Accounting Standards No. 129, "Disclosure of
Information About Capital Structure" ("Statement 129"). Statement 128 specifies
the computation, presentation and disclosure requirements for Earnings Per Share
("EPS"), and is designed to improve the EPS information provided in financial
statements by simplifying the existing computational guidelines, revising the
disclosure requirements, and increasing the comparability of EPS data on an
international basis. Per the requirements of Statement 128, the Company adopted
Statement 128 for fiscal 1998. Statement 129 consolidates the existing
requirements to disclose certain information about an entity's capital
structure, and its adoption for fiscal 1998 has not changed the Company's
current capital structure disclosures.
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130 "Reporting Comprehensive Income"
("Statement 130") and Statement of Financial Accounting Standards No. 131
"Disclosures about Segments of an Enterprise and Related Information"
("Statement 131"). Statement 130 establishes standards for the reporting and
display of comprehensive income and its components in a full set of
general-purpose financial statements. Statement 131 requires that a public
business enterprise report financial and descriptive information about its
reportable operating segments. Generally, financial information is required to
be reported on the basis that it is used internally for evaluating segment
performance and deciding how to allocate resources to segments. Statements 130
and 131 are required to be adopted in the Company's fiscal year 1999. The
Company has not yet determined the impact of Statements 130 and 131 on its
future financial statement disclosures.
In February 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 132 "Employer's Disclosures About Pensions
and Other Postretirement Benefits" ("Statement 132"). Statement 132 revises
employer's disclosures about pension and other postretirement benefit; however,
it does not change the measurement or recognition of those plans. Statement 132
is required to be adopted for the Company's fiscal year 1999. The Company does
not provide such benefits at this time and does not anticipate that Statement
132 will have a significant impact on its financial statement disclosures.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133 "Accounting for Derivative Instruments
and Hedging Activities" ("Statement 133"). Statement 133 establishes accounting
and reporting standards for derivative instruments including certain derivative
instruments embedded in other contracts, (collectively referred to as
derivatives) and for hedging activities. Statement 132 is required to be adopted
for the Company's fiscal year 2000. The Company does not anticipate that
Statement 133 will have a significant impact on its financial statements or
financial statement disclosures.
In December 1997, the American Institute of Certified Public Accountants issued
Statement of Position No. 97-2 "Software Revenue Recognition" ("SOP 97-2"). This
SOP provides guidance on applying generally accepted accounting principles in
recognizing revenue on software transactions. The requirements of SOP 97-2 are
effective for transactions entered into in the Company's fiscal year 1999. The
Company does not expect there to be a significant impact on its future Balance
Sheets and Statements of Operations upon the adoption of SOP 97-2.
Year 2000 Implications
The Company believes that the current release level of its "Renaissance
Classic" and "Renaissance C/S " application software are the Company
believes, fully compliant with year 2000 functional requirements. The Company
has conducted a complete assessment and is currently implementing a plan to
address potential year 2000 compatibility issues of computer programs and
information systems across its entire operation by December 31, 1998. The
Company has as a result of its audit, identified specific areas that have the
potential to impact on the ability of certain of the Company's computerized
information systems to accurately process information that is date-sensitive.
The Company has made implementation of this plan a priority, but the Company
believes that this effort will not have a material adverse impact on the
Company's operations or its financial condition.
ITEM 7.A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this Item is incorporated by reference herein from
Part IV Item 14(a) (1) and (2).
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
The Company filed a Current Report on Form 8-K/A dated July 2, 1998 which
reported under Item 4, that the Company terminated, by dismissal, its
relationship with Coopers & Lybrand LLP as principal accountants. At the same
time, the Company announced the engagement of Arthur Andersen LLP as principal
accountants. The decision to change accountants was approved by the Audit
Committee of the Board of Directors. The Company also stated that there were no
disagreements between Coopers & Lybrand LLP and the Company.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information concerning the Company's directors required by this Item is
incorporated by reference to the Company's Proxy Statement.
Executive Officers
The executive officers of the Company and their ages at June 30, 1998 are as
follows:
Name Age Position
- ---- --- --------
Dennis V. Vohs ..................................................... 54 Chairman of the Board and Chief Executive Officer
J. Patrick Tinley .................................................. 50 President, Chief Operating Officer and Director
Robert B. Webster .................................................. 51 Vice President, Chief Financial Officer and Secretary
Joseph L. Southworth ............................................... 48 Exec. Vice President Product Development & Support
Donald F. Campbell ................................................. 47 Vice President, Worldwide Marketing
Malcolm Marais ..................................................... 42 Vice President, Professional Services
Peter Van Houten ................................................... 45 Vice President, North American Sales
Oscar Pierre ....................................................... 42 Vice President, European and Latin American Operations
The executive officers are elected by and serve at the discretion of the Board
of Directors. There are no family relationships among the executive officers of
the Company.
Section 16(a) of the Securities Exchange Act of 1934 requires the Company's
executive officers and directors to file initial reports of share ownership and
report changes in ownership with the Securities and Exchange Commission (the
"SEC"). Such persons are required by SEC regulations to furnish the Company with
copies of all Section 16(a) forms filed by such persons.
Based solely on the Company's review of such forms furnished to the Company and
written representations from certain reporting persons, the Company believes
that all filing requirements applicable to the Company's executive officers and
directors were complied with.
Mr. Vohs has served as Chairman of the Board and Chief Executive
Officer since November 1988. Prior to joining the Company, Mr. Vohs
held various executive positions with Management Science America, Inc.
over an 18 year period. Prior to MSA, he held various technical
positions at IBM.
Mr. Tinley joined the Company in November 1988 as Executive Vice
President, Business Development and has served as Executive Vice
President, Product Development and Executive Vice President, Product
Development & Client Services. Mr. Tinley was promoted to President and
Chief Operating Officer in 1995 and has been a director of the Company
since 1993. Prior to 1988, Mr. Tinley held management positions with
Management Science of America, Inc. and Royal Crown Companies.
Mr. Webster joined the Company in June 1998 as Vice President, Chief
Financial Officer and Secretary. Prior to joining the Company, Mr.
Webster served, since February 1995, as Executive Vice President/CFO of
Americom Holdings, Inc. a direct mail marketing company and prior as
Vice President/CFO of Sunds Defibrator, Inc a Pulp process machinery
manufacturer.
Mr. Southworth joined the Company in 1988 and has served as the
Executive Vice President, Development and Support since May 1996. Prior
to 1996, Mr. Southworth served as Vice President, Advanced Technology
Consulting, Vice President, Worldwide Marketing and Vice President,
Consulting Services. Prior to joining the Company, he was Director of
Information Technology at Coopers & Lybrand.
Mr. Campbell joined the Company in November 1994 as Vice President,
Worldwide Marketing. Prior to joining the Company, Mr. Campbell served
as the Senior Vice President, Marketing for Comdata Corporation from
August 1989 to April 1994. From April 1994 to November 1994, Mr.
Campbell was an independent consultant.
Mr. Marais has served as Vice President Professional Services since
June of 1998. Prior to that, he was Director of Client Services
Marketing from December 1996 to June 1998. For the period May 1995 to
December 1996, he worked as a Director of Business Development for a
unit of Deloitte & Touche Consulting Services Group. For the prior two
years, he was independently employed as a consultant.
Mr. VanHouten was promoted to Vice President, North American Sales in
January 1996. From January 1987 to January 1996, Mr. Van Houten served
in various sales capacities, most recently as Regional Vice President,
Northeastern Sales. Prior to joining the Company, he served as Vice
President of Sales & Marketing at Lifelines Technologies.
Mr. Pierre joined the Company in 1997 as Vice President, European and
Latin American Operations. Prior to the acquisition, he was the
majority shareholder of the Company's Spanish business partner. From
April 1990 to 1995, Mr. Pierre was founder and majority shareholder of
Software International S.A.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item is incorporated by reference to
the Company's Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item is incorporated by reference to
the Company's Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item is incorporated by reference to
the Company's Proxy Statement.
-----------
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) The following documents are filed as a part of this Report:
1. Consolidated Financial Statements. The following
Consolidated Financial Statements of Ross Systems, Inc. are
filed as part of this report:
Page
----
Fiscal 1998 Report of Arthur Andersen LLP, Independent Public Accountants.......................... F-1
Fiscal 1996 and 1997 Report of Coopers & Lybrand L.L.P., Independent Accountants................... F-2
Fiscal 1996 Report of KPMG, Independent Accountants................................................ F-3
Consolidated Balance Sheets as of June 30, 1998 and 1997........................................... F-4
Consolidated Statements of Operations - Years Ended June 30, 1998, 1997, and 1996.................. F-5
Consolidated Statements of Cash Flows - Years Ended June 30, 1998, 1997, and 1996.................. F-6
Consolidated Statements of Shareholders' Equity - Years Ended June 30, 1998, 1997, and 1996........ F-7
Notes to Consolidated Financial Statements......................................................... F-8
2. Financial Statement Schedule. The following financial
statement schedule of Ross Systems, Inc. for the Years Ended
June 30, 1998, 1997, and 1996 is filed as part of this Report
and should be read in conjunction with the Consolidated
Financial Statements of Ross Systems, Inc.
Schedule Page
- -------- ----
II Valuation and Qualifying Accounts.................................................... S-1
Schedules not listed above have been omitted because they are not
applicable or are not required, or the information required to be set forth
therein is included in the Consolidated Financial Statements or Notes thereto.
3. Exhibits. The Exhibits listed on the accompanying Index to
Exhibits immediately following the financial statement
schedules are filed as part of, or incorporated by reference
into, this Report.
(b) Reports on Form 8-K.
On August 19, 1997, the Company filed a report on form 8-K which stated under
item 5 that the Company had made a press release with regards to the
financial results of its fourth quarter of fiscal 1997, ended June 30, 1997.
On January 28, 1998, the Company filed a report on form 8-K which stated
under item 5 that the Company made a press release with regards to the
financial results of its second quarter of fiscal 1998, ended December 31,
1997.
On February 12, 1998, the Company filed a report on form 8-K which stated
under item 5 that the Company closed a private placement of up to $10,000,000
of convertible subordinated debentures to certain institutional investors
pursuant to regulation D promulgated under the Securities Act of 1933, as
amended. The investors invested $6,000,000 on February 6, 1998 and will
invest $4,000,000 four months after such date upon the fulfillment of certain
conditions. The material agreements between the Company and each investor
were filed as exhibits.
On May 6, 1998, the Company filed a report on Form 8-K which reported an
issuance of common stock pursuant to the exercise of a warrant and reported a
conversion of manditorily convertible Series E preferred Stock into common
stock.
On July 2, 1998, the Company filed a report of Form 8-K which reported under
item 4, that the Company had appointed Arthur Andersen LLP as its auditor for
the fiscal year ended June 30, 1998. This change was due to the pending July
1, 1998 merger of Coopers & Lybrand L.L.P. with Price Waterhouse & Company.
The merger would have created a potential independence conflict since the
Company's President and Chief Operating Officer has a brother who is a
partner in the Atlanta office of Price Waterhouse & Company.
On July 23, 1998, the Company filed a report on Form 8-K/A which amended the
June 29, 1998 filing above to correctly identify the Company's state of
incorporation as Delaware rather than California.
On July 24, 1998, the Company filed a report of Form 8-K which reported under
item 5, that, effective June 25, 1998, the Company had merged with Ross
Systems Inc., a California corporation, with the Company being the surviving
entity for the purposes of effecting a change in domicile from California to
Delaware.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized, in the City of
Atlanta, State of Georgia, on the 28th day of September, 1998.
ROSS SYSTEMS, INC.
By: /s/ DENNIS V. VOHS
--------------------------------------------
Dennis V. Vohs, Chairman of the Board
and Chief Executive Officer
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Dennis V. Vohs his attorney-in-fact, with
the power of substitution, for him in any and all capacities, to sign any
amendments to this Report on Form 10-K, and to file the same, with exhibits
thereto and other documents in connection therewith, with the Securities and
Exchange Commission, hereby ratifying and confirming all that the said
attorney-in-fact, or his substitute or substitutes, may do or cause to be done
by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934,
this Report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
/s/ Dennis V. Vohs Chairman of the Board and Chief September 28, 1998
---------------------- Executive Officer (Principal
Dennis V. Vohs Executive Officer)
/s/ Robert B. Webster Vice President, Finance and September 28, 1998
---------------------- Administration, Chief Financial
Robert B. Webster Officer (Principal Financial and
Accounting Officer) and Secretary
/s/ J. William Goodhew Director September 28, 1998
----------------------
J. William Goodhew
/s/ Mario M. Rosati Director September 28, 1998
----------------------
Mario M. Rosati
/s/ Bruce J. Ryan Director September 28, 1998
----------------------
Bruce J. Ryan
/s/ J. Patrick Tinley President, Chief Operating September 28, 1998
---------------------- Officer and Director
J. Patrick Tinley
ROSS SYSTEMS, INC.
ANNUAL REPORT ON FORM 10-K
YEAR ENDED JUNE 30, 1998
ROSS SYSTEMS, INC.
INDEX TO EXHIBITS
Exhibit Description
No. -----------
---
2.1 Agreement and Plan of Merger of the Registrant and Ross Systems, Inc.,
a California corporation (1)
3.1 Certificate of Incorporation of the Registrant, as amended (1)
3.2 Certificate of Designation of Rights, Preferences and Privileges of
Series B Preferred Stock of the Registrant (2)
3.3 Bylaws of the Registrant (1)
10.1 Subscription Agreement dated December 29, 1995 between Registrant and
Fletcher International Limited (3)
10.2 Subscription Agreement dated June 28, 1996 between Registrant and
Fletcher International Limited (4)
10.3 Amendment No. 1 dated July 8, 1996 to the December 29, 1995
Subscription Agreement and the June 28, 1996 Subscription Agreement
between Registrant and Fletcher International Limited (4)
10.4 Amendment No. 2 dated June 10, 1997 to the December 29, 1995
Subscription Agreement and the June 28, 1996 Subscription Agreement
between Registrant and Fletcher International Limited
10.5 Preferred Shares Rights Agreement, dated as of September 4, 1998,
between the Registrant and BankBoston, N.A. (2)
21.1 Listing of Subsidiaries of Registrant
23.1 Consent of Arthur Andersen LLP
23.2 Consent of Coopers & Lybrand LLP
23.3 Consent of KPMG
24.1 Power of Attorney (included on page 21)
27 Financial Data Schedule
- -----------
(1) Incorporated by reference to the exhibit filed with the Registrant's
current Report on Form 8-K filed July 24, 1998.
(2) Incorporated by reference to the exhibit filed with the Registrant's
Registration Statement on Form 8-A filed September 4, 1998.
(3) Incorporated by reference to the exhibit filed with the Registrant's
Quarterly Report on Form 10-Q for the period ended December 31, 1995
filed February 14, 1996.
(4) Incorporated by reference to the exhibit filed with the Registrant's
Quarterly Report on Form 10-Q for the period ended September 30, 1996
filed November 8, 1996.
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Ross Systems, Inc.:
We have audited the accompanying consolidated balance sheet of Ross
Systems, Inc. and subsidiaries as of June 30, 1998 and the related consolidated
statements of operations, shareholders' equity and cash flows for the year then
ended. The consolidated financial statements and financial statement schedule
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statements and financial
statement schedule based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Ross
Systems, Inc. and subsidiaries as of June 30, 1998 and the results of its
operations and its cash flows for the year then ended in conformity with
generally accepted accounting principles.
Our audit was made for the purpose of forming an opinion on the basic financial
statements taken as a whole. The schedule listed in the index of financial
statements is presented for purposes of complying with the Securities and
Exchange Commission's rules and are not part of the basic financial statements.
This schedule has been subjected to the auditing procedures applied in the audit
of the basic financial statements and, in our opinion, fairly states in all
material respects the financial data required to be set forth therein in
relation to the basic financial statements taken as a whole.
Arthur Andersen LLP
Atlanta, Georgia
August 17, 1998
(Except for the matters
discussed in Note 1 to
which the date is
September 25, 1998)
REPORT OF COOPERS & LYBRAND L.L.P., INDEPENDENT ACCOUNTANTS
The Board of Directors and Shareholders
Ross Systems, Inc.:
We have audited the consolidated balance sheets of Ross Systems, Inc.
and subsidiaries (the "Company") as of June 30, 1997 and 1996, and the related
consolidated statements of operations, shareholders' equity and cash flows for
the years then ended. In connection with our audits of the consolidated
financial statements, we also have audited the financial statement schedules for
the years ended June 30, 1997 and 1996. These consolidated financial statements
and financial statement schedules are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements and financial statement schedules based on our audits. We
did not audit the combined balance sheets of Ross Systems (UK) Ltd., Ross
Systems France S.A., Ross Systems Deutschland GmbH, Ross Systems Europe N.V.,
and Ross Systems Nederland B.V. (the "foreign entities"), wholly-owned
subsidiaries of the Company, as of June 30, 1996 and the related combined
statements of operations and shareholders' equity for the year then ended, which
statement reflects total assets and revenues constituting 22 percent and 29
percent, respectively, of the related consolidated totals. We also did not audit
the combined foreign entities' financial statement schedule for the year ended
June 30, 1996. Those combined financial statements and financial statement
schedule were audited by other auditors whose report has been furnished to us,
and our opinion, insofar as it relates to the amounts included for the foreign
entities is based solely on the report of the other auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits and the report of the other auditors provide a
reasonable basis for our opinion.
In our opinion, based on our audits and the report of the other
auditors, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Ross
Systems, Inc. and subsidiaries as of June 30, 1997 and 1996, and the results of
its operations and its cash flows for the years then ended in conformity with
generally accepted accounting principles. Also in our opinion, based on our
audits and the report of the other auditors, the related financial statement
schedule, when considered in relation to the basic consolidated financial
statements taken as a whole, presents fairly, in all material respects, the
information set forth therein.
COOPERS & LYBRAND L.L.P.
Atlanta, Georgia
August 21, 1997
FISCAL 1996 REPORT OF KPMG, INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders
Ross Systems, Inc.:
We have audited the combined balance sheet of Ross Systems (UK) Ltd.,
Ross Systems France S.A., Ross Systems Deutschland GmbH, Ross Systems Europe
N.V., and Ross Systems Nederland B.V. (the "foreign entities") as of June 30,
1996 and the related combined statements of operations and shareholders' equity
for the year then ended (not presented separately herein). In connection with
our audit of the combined foreign entities' financial statements, we also have
audited the combined foreign entities' financial statement schedule for the year
ended June 30, 1996. These combined financial statements and financial statement
schedule are the responsibility of Ross Systems Inc.'s (the "Company")
management. Our responsibility is to express an opinion on these combined
financial statements and financial statement schedule based on our audit.
We conducted our audit in accordance with United States generally
accepted auditing standards. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the overall accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
The Company declined to present a statement of cash flows for the year
ended June 30, 1996. Presentation of such statement summarizing the Company's
operating, investing and financing activities is required by generally accepted
accounting principles.
In our opinion, except that the omission of a statement of cash flows
results in an incomplete presentation as explained in the preceding paragraph,
the combined financial statements referred to above present fairly, in all
material respects, the combined financial position of Ross Systems (UK) Ltd.,
Ross Systems France S.A., Ross Systems Deutschland GmbH, Ross Systems Europe
N.V., and Ross Systems Nederland B.V. as of June 30, 1996, and the combined
results of operations for the year then ended, in conformity with United States
generally accepted accounting principles. Also in our opinion, the related
financial statement schedule, when considered in relation to the basic combined
financial statements taken as a whole, presents fairly, in all material
respects, the information set forth therein.
KPMG
Bristol, United Kingdom
September 26, 1996
ROSS SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share data)
June 30,
--------
1998 1997
---- ----
ASSETS
Current assets:
Cash and cash equivalents........................................................................ $7,248 $4,010
Accounts receivable, less allowance for doubtful accounts and returns of $1,974 and $3,495, in
1998 and 1997, respectively................................................................... 34,878 31,700
Prepaids and other current assets................................................................ 1,915 2,225
-------- --------
Total current assets.......................................................................... 44,041 37,935
Property and equipment.............................................................................. 4,409 4,540
Computer software costs............................................................................. 24,339 21,666
Other assets........................................................................................ 5,400 5,574
-------- --------
Total assets............................................................................... $78,189 $69,715
-------- --------
-------- --------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current installments of debt..................................................................... $4,607 $12,310
Accounts payable................................................................................. 6,359 9,188
Accrued expenses................................................................................. 8,950 8,393
Income taxes payable............................................................................. 397 199
Deferred revenues................................................................................ 18,184 16,118
-------- --------
Total current liabilities..................................................................... 38,497 46,208
Long-term debt, less current installments........................................................... 8,918 394
-------- --------
Total liabilities............................................................................. 47,415 46,602
-------- --------
-------- --------
Commitments and contingencies (Note7)
Mandatorily redeemable preferred stock.............................................................. - 1,053
-------- --------
Shareholders' equity:
Common stock, no par value; 45,000,000 shares authorized; 19,245,000 shares issued and
outstanding................................................................................... - 73,756
Common stock, $0.001 par value; 45,000,000 shares authorized; 21,106,867 shares issued and
outstanding................................................................................... 21 _
Additional paid-in capital..................................................................... 79,646 _
Accumulated deficit.............................................................................. (47,745) (50,340)
Cumulative translation adjustment................................................................ (1,148) (1,356)
-------- --------
Total shareholders' equity.................................................................... 30,774 22,060
-------- --------
Total liabilities and shareholders' equity.......................................................... $78,189 $69,715
-------- --------
-------- --------
See accompanying Notes to Consolidated Financial Statements.
ROSS SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
Years ended June 30,
--------------------
1998 1997 1996
---- ---- ----
Revenues:
Software product licenses............................................................... $38,029 $30,549 $25,440
Consulting and other services........................................................... 28,211 22,818 19,239
Maintenance............................................................................. 25,444 25,406 25,110
--------- --------- ---------
Total revenues 91,684 78,773 69,789
--------- --------- ---------
Operating expenses:
Costs of software product licenses...................................................... 3,536 2,905 1,757
Costs of consulting, maintenance and other services..................................... 36,106 28,511 25,769
Software product license sales and marketing............................................ 27,211 24,158 21,230
Product development..................................................................... 10,960 10,880 12,472
General and administrative.............................................................. 7,258 8,050 7,258
Provision for uncollectible accounts.................................................... 1,830 3,534 1,029
Provision / settlement of litigation claim.............................................. (381) 615 -
Amortization of other assets............................................................ 1,024 742 451
--------- --------- ---------
Total operating expenses 87,574 79,395 69,966
--------- --------- ---------
Operating earnings (loss)............................................................ 4,140 (622) (177)
Other income (expense):
Interest income......................................................................... 100 110 86
Interest expense........................................................................ (1,263) (1,032) (1,308)
--------- --------- ---------
Earnings (loss) before income taxes.................................................. 2,977 (1,544) (1,399)
Income tax expense (benefit)............................................................... 382 809 (142)
--------- --------- ---------
Net earnings (loss).................................................................. $2,595 $(2,353) $(1,541)
--------- --------- ---------
--------- --------- ---------
Net earnings (loss) per common share - basic (Note 1)...................................... $0.13 $(0.13) $(0.10)
--------- --------- ---------
--------- --------- ---------
Net earnings (loss) per common share - diluted (Note 1).................................... $0.13 $(0.13) $(0.10)
--------- --------- ---------
--------- --------- ---------
Shares used in per share computation - basic (Note 1)...................................... 19,734 18,515 15,089
--------- --------- ---------
--------- --------- ---------
Shares used in per share computation - diluted (Note 1).................................... 21,390 18,515 15,089
--------- --------- ---------
--------- --------- ---------
See accompanying Notes to Consolidated Financial Statements.
ROSS SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Years ended June 30,
--------------------
1998 1997 1996
---- ---- ----
Cash flows from operating activities:
Net earnings (loss)................................................................. $2,595 $(2,353) $(1,541)
Adjustments to reconcile net earnings (loss) to net cash (used in) provided by
operating activities:
Litigation settlements and expenses.............................................. _ 615 _
Depreciation and amortization of property and equipment.......................... 2,902 2,220 2,401
Amortization of computer software costs.......................................... 7,520 7,112 5,935
Amortization of other assets..................................................... 1,024 742 451
Provision for uncollectible accounts............................................. 1,830 3,534 1,029
Changes in operating assets and liabilities, net of acquisition:
Accounts receivable............................................................ (4,225) (8,306) (7,034)
Prepaids and other current assets.............................................. 320 (624) 320
Income taxes recoverable / payable............................................. 188 582 430
Accounts payable............................................................... (2,601) 2,025 (1,797)
Accrued expenses............................................................... 521 (677) (4,855)
Deferred revenues.............................................................. 2,207 (1,638) 1,680
Other, net................................................................... (86) (13) _
--------- --------- ---------
Net cash provided by (used in) operating activities......................... 12,195 3,219 (2,981)
--------- --------- ---------
Cash flows from investing activities:
Purchases of property and equipment................................................. (1,242) (1,677) (1,480)
Computer software costs capitalized................................................. (10,055) (8,879) (8,253)
Acquisitions and divestitures....................................................... 69 (48) 220
Other............................................................................... (390) 311 75
--------- --------- ---------
Net cash used in investing activities....................................... (11,618) (10,293) (9,438)
--------- --------- ---------
Cash flows from financing activities:
Net line of credit activity......................................................... (7,856) 3,381 4,162
Capital lease payments.............................................................. (263) (58) (585)
Payment of debt issuance costs.................................................... (431) _ _
Proceeds from issuance of convertible debentures.................................. 10,000 _ _
Proceeds from issuance of common stock.............................................. 1,262 254 601
Proceeds from private equity financings, net........................................ _ 5,720 6,395
--------- --------- ---------
Net cash provided by financing activities................................... 2,712 9,297 10,573
--------- --------- ---------
Effect of exchange rate changes on cash................................................ (51) (75) 80
--------- --------- ---------
Net increase (decrease) in cash and cash equivalents................................... 3,238 2,148 (1,766)
Cash and cash equivalents at beginning of fiscal year.................................. 4,010 1,862 3,628
--------- --------- ---------
Cash and cash equivalents at end of fiscal year........................................ $7,248 $4,010 $1,862
--------- --------- ---------
--------- --------- ---------
See accompanying Notes to Consolidated Financial Statements
ROSS SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(In thousands)
Common Stock
------------
Cumulative Total
Paid in Accumulated Translation Shareholders'
Shares Amount Capital Deficit Adjustment Equity
------ ------ ------- ------- ---------- ------
Balances as of June 30, 1995 ...................... 13,986 $ 55,854 _ $(46,446) $ (486) $ 8,922
Exercise of stock options ......................... 128 397 _ _ _ 397
Issuance of stock for product acquisitions ........ 315 1,495 _ _ _ 1,495
Issuance of stock in settlement of litigation ..... 691 3,090 _ _ _ 3,090
Issuance of stock in private equity financings, net 2,651 6,395 _ _ _ 6,395
Issuance of stock pursuant to employee stock
purchase plan .................................. 76 204 _ _ _ 204
Effect of foreign currency translation ............ _ _ _ _ (170) (170)
Net loss .......................................... _ _ _ (1,541) _ (1,541)
-------- -------- -------- --------- -------- --------
Balances as of June 30, 1996 ...................... 17,847 $ 67,435 _ $(47,987) $ (656) $ 18,792
Exercise of stock options ......................... 44 125 _ _ _ 125
Issuance of stock for purchase of distributor ..... 217 1,297 _ _ _ 1,297
Issuance of stock in private equity financings, net 1,079 4,667 _ _ _ 4,667
Issuance of stock pursuant to employee stock ...... 58 232 _ _ _ 232
purchase plan
Effect of foreign currency translation ............ _ _ _ _ (700) (700)
Net loss .......................................... _ _ _ (2,353) _ (2,353)
-------- -------- -------- --------- -------- --------
Balances as of June 30, 1997 ...................... 19,245 $ 73,756 _ $(50,340) $(1,356) $ 22,060
Exercise of stock options ......................... 11 35 _ _ _ 35
Exercise of common stock warrants ................. 353 1,142 _ _ _ 1,142
Conversion of preferred stock ..................... 287 1,053 _ _ _ 1,053
Conversion of convertible debentures .............. 392 1,616 _ _ _ 1,616
Issuance of stock for acquisition ................. 703 2,057 _ _ _ 2,057
Issuance of stock pursuant to employee stock
purchase plan .................................. 116 301 _ _ _ 301
Stock issuance costs .............................. _ (293) _ _ _ (293)
Effect of foreign currency translation ............ _ _ _ _ 208 208
Reincorporation ................................... _ (79,646) 79,646 _ _ _
Net earnings ...................................... _ _ _ 2,595 _ 2,595
-------- -------- -------- --------- -------- --------
Balances as of June 30, 1998 ...................... 21,107 $ 21 $79,646 $(47,745) $(1,148) $ 30,774
-------- -------- -------- --------- -------- --------
-------- -------- -------- --------- -------- --------
See accompanying Notes to Consolidated Financial Statements.
ROSS SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) Description of Business and Summary of Significant Accounting Policies
(a) Business of the Company
The Company develops and markets proprietary financial, manufacturing,
distribution and human resources software packages, complemented by a relational
fourth generation programming environment. It also provides services such as
professional consulting services, custom application development, education and
on-line support. The Company operates in one business segment and no individual
customer accounted for more than 10% of total revenues. The Company does not
have a concentration of credit risk in any one industry or geographic region.
(b) Basis of Presentation
The accompanying consolidated financial statements include the accounts
of Ross Systems, Inc. (the "Company") and its wholly owned subsidiaries. All
significant intercompany balances and transactions have been eliminated in
consolidation.
(c) Cash and Cash Equivalents
The Company considers all highly liquid investments purchased with
original maturities of three months or less to be cash equivalents.
(d) Property and Equipment
Property and equipment are stated at cost. Depreciation is accumulated
using the straight-line and declining balance methods over the estimated useful
lives of the respective assets, generally three to seven years. Leasehold
improvements and equipment under capital leases are amortized using the
straight-line method over the shorter of the terms of the related leases or the
respective useful lives of the assets.
(e) Net Earnings (Loss) Per Common and Common Equivalent Share
Basic earnings (loss) per common share are computed by dividing net
earnings or net loss by the weighted average number of common shares outstanding
during the period. Diluted earnings per common and common equivalent share is
computed by dividing net earnings by the weighted average number of common and
common equivalent shares outstanding during the period. Common stock equivalents
are not considered in the calculation of net loss per share when their effect
would be antidilutive.
The following is a reconciliation of the numerators of diluted earnings (loss)
per share.
For the year ended June 30,
1998 1997 1996
---- ---- ----
Net earnings (loss) .................................... $ 2,595 $(2,353) $(1,541)
Payment in kind interest on convertible debentures...... 77 _ _
$ 2,672 $(2,353) $(1,541)
The only difference between the denominator for basic and diluted net earnings
per share for the year ended June 30, 1998 is the effect of common stock
equivalents.
(f) Amortization of Other Assets
The other assets described in Note 4 are amortized using the
straight-line method over the following estimated useful lives:
Acquired software technology........................................................... 3 to 5 years
Covenants not to compete............................................................... 3 to 5 years
Goodwill............................................................................... 7 to 10 years
Other assets have generally resulted from business combinations
accounted for as purchases and are recorded at the lower of unamortized cost or
fair value. The Company annually reviews the carrying amounts of these assets
for indications of impairment, based on expected undiscounted cash flows related
to the acquired entities or products. Impairment of value, if any, is recognized
in the period it is determined.
(g) Revenue Recognition
The Company recognizes revenues from licenses of computer software
provided that a noncancelable license agreement has been signed, the software
and related documentation have been shipped, there are no material uncertainties
regarding customer acceptance, collection of the resulting receivable is deemed
probable, and no significant other vendor obligations exist. The revenue
associated with any license agreements containing cancellation or refund
provisions is deferred until such provisions lapse. Where the Company has future
obligations, if such obligations are insignificant, related costs are accrued
immediately. When the obligations are significant, the software product license
revenues are deferred. Future contractual obligations can include software
customization, requirements to provide additional products in the future and
porting products to new platforms. Contracts which require significant software
customization are accounted for on the percentage-of-completion basis. Revenues
related to significant obligations to provide future products or to port
existing products are deferred until the new products or ports are completed.
Service revenues generated from professional consulting and training
services are recognized as the services are performed. Maintenance revenues,
including revenues bundled with original software product license revenues, are
deferred and recognized over the related contract period, generally 12 months.
(h) Computer Software Costs
The Company capitalizes computer software product development costs
incurred in developing a product once technological feasibility has been
established and until the product is available for general release to customers.
Technological feasibility is established when the Company either (i) completes a
detail program design that encompasses product function, feature and technical
requirements and is ready for coding and confirms that the product design is
complete, that the necessary skills, hardware and software technology are
available to produce the product, that the completeness of the detail program
design is consistent with the product design by documenting and tracing the
detail program design to the product specifications, and that the detail program
design has been reviewed for high- risk development issues and any related
uncertainties have been resolved through coding and testing or (ii) completes a
product design and working model of the software product, and the completeness
of the working model and its consistency with the product design have been
confirmed by testing. The Company evaluates realizability of the capitalized
amounts based on expected revenues from the product over the remaining product
life. Where future revenue streams are not expected to cover remaining amounts
to be amortized, the Company either accelerates amortization or expenses
remaining capitalized amounts. Amortization of such costs is computed on a
straight-line basis over the expected economic life of the product (not to
exceed five years). As of June 30, 1998 and 1997, capitalized computer software
costs approximated $57,885,000 and $47,191,000, respectively, and related
accumulated amortization totaled $33,546,000 and $25,525,000, respectively.
Software costs related to the development of new products incurred prior to
establishing technological feasibility or after general release are expensed as
incurred.
(i) Income Taxes
In accordance with Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes" ("Statement 109"), the Company utilizes the asset
and liability method of accounting for income taxes. Under the asset and
liability method of Statement 109, deferred tax assets and liabilities are
established to recognize the future tax consequences attributable to differences
between the financial statement carrying amounts of existing assets and
liabilities and their respective tax bases.
(j) Foreign Operations and Currency Translation
The local currencies of the Company's foreign subsidiaries are the
functional currencies. Assets and liabilities of foreign subsidiaries are
translated into U.S. dollars at current exchange rates, and the resulting
translation gains and losses are included as an adjustment to shareholders'
equity. Transaction gains and losses relate to U.S. dollar denominated
intercompany receivables recorded in the financial statements of the Company's
foreign subsidiaries and are reflected in income. Where related intercompany
balances have been designated as long-term, gains and losses are included as an
adjustment to shareholders' equity. Net gains and losses arising from foreign
currency transactions for all periods have not been significant.
(k) Reclassifications
Certain 1997 and 1996 amounts have been reclassified to conform with
the 1998 financial statement presentation.
(l) Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the dates of the financial
statements and the reported amounts of revenues and expenses during the
reporting periods. Actual results could differ from these estimates.
(m) Advertising Costs
The Company generally expenses advertising costs as incurred.
Advertising costs for the fiscal years ended June 30, 1998, 1997 and 1996 were
$1,819,535, $1,617,494 and $905,953, respectively.
(n) New Accounting Pronouncements
In October 1995, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("Statement 123"). Statement 123 encourages, but does not require,
the recognition of expense for stock-based awards based on their fair value on
the date of grant. Upon adoption of Statement 123 on July 1, 1996, the Company
has continued to account for all employee stock-based compensation, including
stock options, using the "intrinsic value" method under Accounting Principles
Board Opinion No. 25, "Accounting for Stock Issued to Employees, ("APB 25"),
rather than the "fair value" approach encouraged by Statement 123. However, as
required by Statement 123, the Company will provide pro forma disclosures of
what net earnings (loss) and net earnings (loss) per share would have been had
the new fair value method been used.
The Company has elected to follow APB 25, and related interpretations
in accounting for its employee stock options. Under APB 25, because the exercise
price of the Company's stock options equals the market price of the underlying
stock on the date of grant, no compensation expense is recognized.
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128, "Earnings Per Share"
("Statement 128"), and Statement of Financial Accounting Standards No. 129,
"Disclosure of Information About Capital Structure" ("Statement 129"). Statement
128 specifies the computation, presentation and disclosure requirements for
Earnings Per Share ("EPS") and is designed to improve the earnings per share
information provided in financial statements by simplifying the existing
computational guidelines, revising the disclosure requirements, and increasing
the comparability of earnings per share data on an international basis. Per the
requirements of Statement 128, the Company adopted Statement 128 during the
fiscal year ended June 30, 1998 and has restated fiscal 1997 and 1996 to conform
with the requirements of the pronouncement. Statement 129 consolidates the
existing requirements to disclose certain information about an entity's capital
structure, and its adoption for fiscal 1998 has not changed the Company's
current capital structure disclosures.
In June 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 130, "Reporting Comprehensive Income"
("Statement 130"), and Statement of Financial Accounting Standards No. 131,
"Disclosures About Segments of an Enterprise and Related Information"
("Statement 131"). Statement 130 establishes standards for the reporting and
display of comprehensive income and its components in a full set of
general-purpose financial statements. Statement 131 requires that a public
business enterprise report financial and descriptive information about its
reportable operating segments. Generally, financial information is required to
be reported on the basis that it is used internally for evaluating segment
performance and deciding how to allocate resources to segments. Statements 130
and 131 are required to be adopted in the Company's fiscal year 1999. The
Company has not yet determined the impact of Statements 130 and 131 on its
future financial statement disclosures.
In February, 1998, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 132 "Employer's Disclosures
About Pensions and Other Postretirement Benefits" ("Statement 132"). Statement
132 revises employer's disclosures about pension and other postretirement
benefits; however, it does not change the measurement or recognition of those
plans. Statement 132 is required to be adopted for the Company's fiscal year
1999. The Company does not provide such benefits at this time and does not
anticipate that Statement 132 will have a significant impact on its financial
statement disclosures.
In June, 1998, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 133 "Accounting for Derivative
Instruments and Hedging Activities" ("Statement 133"). Statement 133 establishes
accounting and reporting standards for derivative instruments including certain
derivative instruments embedded in other contracts, (collectively referred to as
derivatives) and for hedging activities. Statement 133 is required to be adopted
for the Company's fiscal year 2000. The Company does not anticipate that
Statement 133 will have a significant impact on its financial statements or
financial statement disclosures.
In December 1997, the American Institute of Certified Public
Accountants issued Statement of Position No. 97-2, "Software Revenue
Recognition" ("SOP 97-2"). This SOP provides guidance on applying generally
accepted accounting principles in recognizing revenue on software transactions.
The requirements of SOP 97-2 are effective for transactions entered into in the
Company's fiscal year 1999. The Company does not expect there to be a
significant impact on its future balance sheets and statements of operations
upon the adoption of SOP 97-2.
(2) Acquisitions and Divestitures
On January 6, 1998, the Company acquired the assets of its business
partner, Bizware Corporation, in exchange for shares of the Company's common
stock valued at approximately $2.0 million. The acquisition was accounted for as
a purchase, and accordingly, the results of operations of the acquired business
have been included in the Company's results of operations since the date of
acquisition. The pro forma effects on total revenues, net earnings, and net
earnings per share of including this subsidiary in the Company's consolidated
statement of operations are not significant.
On December 30, 1996, the Company acquired a 100% ownership interest in
Ross Iberica, its distributor in Spain and Portugal for the past five years, in
exchange for shares of the Company's common stock valued at approximately
$1,400,000. The acquisition was accounted for as a purchase, and accordingly,
the results of operations of the acquired business have been included in the
Company's results of operations since the date of acquisition. The pro forma
effects on total revenues, net earnings, and net earnings per share of including
this subsidiary in the Company's consolidated statement of operations are not
significant.
(3) Property and Equipment
A summary of property and equipment follows:
June 30,
--------
1998 1997
---- ----
(In thousands)
Computer equipment.................................................................................. $9,186 $13,186
-------- ---------
Furniture and fixtures.............................................................................. 3,009 3,833
Leasehold improvements.............................................................................. 1,635 1,935
-------- ---------
13,830 18,954
Less accumulated depreciation and amortization...................................................... (9,421) (14,414)
-------- ---------
$4,409 $4,540
-------- ---------
-------- ---------
(4) Other Assets
A summary of other assets follows:
June 30,
--------
1998 1997
---- ----
(In thousands)
Purchased computer software technology.................................................................... $3,890 $3,459
Covenants not to compete.................................................................................. 1,285 1,005
Goodwill.................................................................................................. 5,461 5,394
Other..................................................................................................... 2,590 1,755
-------- --------
13,226 11,613
Less accumulated amortization............................................................................. (7,826) (6,039)
-------- --------
$5,400 $5,574
-------- --------
-------- --------
The Company annually reviews the carrying amounts of the assets noted above for
indications of impairment. Any impairment is recognized in the period it is
determined.
(5) Accrued Expenses
A summary of accrued expenses follows:
June 30,
--------
1998 1997
---- ----
(In thousands)
Accrued vacation and other employee benefits ................................................................ $ 876 $1,270
Accrued commissions ......................................................................................... 3,144 2,210
Deferred rent ............................................................................................... 136 140
Sales and use taxes payable ................................................................................. 1,429 1,385
Customer settlements ........................................................................................ _ 360
Interest payable ............................................................................................ 115 95
Professional fees ........................................................................................... 110 35
Royalties ................................................................................................... 1,326 1,574
Other ....................................................................................................... 1,814 1,324
------ ------
$8,950 $8,393
------ ------
During fiscal 1997, the Company settled a dispute with a customer with
the understanding that the settlement and related legal fees would be covered
under the Company's business insurance. The Company subsequently learned that
the insurer took exception to the Company's settlement with its customer and
withheld payment on the claim, pending arbitration. In fiscal 1997, the Company
recorded a charge of $615,000 to cover the potential settlement and legal fees.
During fiscal 1998, the Company received a reimbursement from the insurance
company of $381,000 which it recorded as a credit to operating expenses.
(6) Debt
The Company has a $15,000,000 revolving credit facility which is
collateralized by substantially all assets of the Company. The revolving credit
facility expires on October 31, 2000, carries an interest rate at the prime rate
plus 2% (10.5% at June 30, 1998), and restricts the Company's ability to enter
into any acquisition or merger not in the Company's regular line of business and
to pay any cash dividends on the Company's stock. The revolving credit facility
may be withdrawn if (a) the Company fails to pay any principal or interest
amount due or (b) there is a material impairment of the Company's business which
would prevent loan repayment and (c) any of these events are not remedied by the
Company within allowable periods. On June 30, 1998 and 1997, $3,770,000 and
$11,657,000 were outstanding under the Company's revolving credit facility,
respectively.
Long term debt consists of convertible debentures. (See note 8.)
As of June 30, 1998 and 1997, the Company had outstanding capital lease
obligations aggregating $421,000 and $44,000, respectively. As of June 30, the
Company's future obligations under capital leases are as follows (in thousands):
Fiscal Year: 1998 1997
------ ------
1999 ...................................... $210 $ 46
2000 ...................................... 205 _
2001 ...................................... 119 _
2002 ...................................... _ _
2003 ...................................... _ _
Thereafter ................................ _ _
Total future capital lease payments........ 534 46
Less amounts representing interest......... 113 2
------ ------
$421 $ 44
------ ------
(7) Commitments and Contingencies
The Company leases facilities and certain equipment under operating
leases which expire at various dates through fiscal 2016. Certain leases include
renewal options and rental escalation clauses to reflect changes in price
indices, real estate taxes, and maintenance costs. As of June 30, 1998, future
minimum lease payments under noncancelable operating leases were as follows (in
thousands):
Fiscal Year
- -----------
1999........................................................................................... $4,166
2000........................................................................................... 2,693
2001........................................................................................... 1,542
2002........................................................................................... 739
2003........................................................................................... 334
Thereafter..................................................................................... 2,722
-----------
Total future minimum lease payments............................................................ $12,196
-----------
The Company has an irrevocable letter of credit outstanding in the amount of
$670,000 which was issued in exchange for a waiver of an event of default under
an operating lease covenant in 1997.
Rent expense approximated $3,510,000 $3,084,000, and $3,225,000, for
fiscal 1998, 1997, and 1996, respectively. Included in fiscal 1998 rent expense
is income from certain noncancelable subleases of approximately $190,000.
As of June 30, 1998, future sublease income to be received is as
follows (in thousands):
Fiscal Year
- -----------
1999............................................................................................... 190
2000............................................................................................... 71
-------
Total future sublease income....................................................................... $261
-------
-------
(8) Capital Stock
(a) Manditorily Redeemable Preferred Stock
In fiscal 1991, the Company authorized a new class of no par value
preferred stock consisting of 5,000,000 shares. The Board of Directors is
authorized to issue the preferred stock in one or more series and to fix the
rights, preferences, privileges and restrictions of such stock, including
dividend rights, dividend rates, conversion rights, voting rights, terms of
redemption, redemption prices, liquidation preferences and the number of shares
constituting any series or the designation of such series, without further vote
or action by the shareholders. All preferred stock was issued with a mandatory
redemption factor. As of June 30, 1997, the Company had 107 shares of
manditorily redeemable preferred stock outstanding. As of June 30, 1998, the
Company had no shares of its manditorily redeemable convertible preferred stock
outstanding.
(b) Private Equity Financing and Warrants
During fiscal 1996, the Company completed two private placements of
equity securities. On January 2, 1996, the Company received approximately
$1,820,000 in cash proceeds, net of offering expenses, for the issuance of
500,000 shares of the Company's Series A manditorily redeemable convertible
preferred stock. In addition, on February 28, 1996, the Company received
approximately $4,575,000 in cash proceeds, net of offering expenses, for the
issuance of 500 shares of the Company's Series D manditorily redeemable
convertible preferred stock.
During fiscal 1997, the Company completed two additional private
placements of equity securities with the same investor who had purchased and
converted the Company's Series A manditorily redeemable convertible preferred
stock. On July 8, 1996, the Company received approximately $3,737,000 in cash
proceeds, net of offering expenses, for the issuance of 500,000 shares of the
Company's Series B manditorily redeemable convertible preferred stock and
500,000 shares of the Company's Series C manditorily redeemable convertible
preferred stock. Additionally, on January 6, 1997, the Company received
approximately $1,983,000 in cash proceeds, net of offering expenses, for the
issuance of 200 shares of the Company's Series E manditorily redeemable
convertible preferred stock. All of the Series A, B, C, D and 93 shares of the
Series E manditorily redeemable convertible preferred stock were converted to
common stock by June 30, 1997. Therefore, as of June 30, 1997, 107 shares of the
Company's Series E Redeemable manditorily redeemable convertible preferred stock
remained outstanding. These remaining shares were converted in April 1998, and
the Company issued 286,633 shares of common stock.
In connection with the issuance of the Company's Series A manditorily
redeemable convertible preferred stock and the subsequent issuances of the
Company's Series B and Series C manditorily redeemable convertible preferred
stock, the Company granted a warrant to the investor to purchase 400,000 shares
of the Company's Common Stock at an exercise price of $5.576 per share during
the period from and including July, 1, 1997 through and including December 29,
2000.
Additionally, in connection with the subsequent issuance of the Company's Series
E manditorily redeemable convertible preferred stock, the Company granted
another warrant to the investor to purchase 640,000 shares of the Company's
Common Stock at a maximum exercise price of $8.00 per share during the period
from and including July, 1, 1997 through and including December 29, 2000.
On April 23, 1998, the Company issued and sold 353,000 shares of its
Common Stock to this investor upon the exercise of the warrant to purchase
640,000 shares of the Company's Common Stock mentioned above. The Company and
the investor also agreed to cancel the remaining 287,000 shares of Common
Stock subject to the warrant. The aggregate exercise price paid by this
investor was $1,141,946, representing a per share exercise price of
$3.234975. The Company and the investor agreed to reduce the exercise price
from that set forth in the warrant certificate, dated July 3, 1996,
representing the warrant in consideration for the cancellation.
(c) Convertible Debentures
On February 6, 1998, the Company closed a private placement of up to
$10,000,000 of convertible subordinated debentures to certain institutional
investors (the "Investors") pursuant to Regulation D promulgated under the
Securities Act of 1933, as amended. The Investors invested $6,000,000 on
February 6, 1998 and another $4,000,000 on June 11, 1998. As of June 30, 1998,
$1,539,000 of the debentures have been converted to 392,000 shares of common
stock. The remaining $8,461,000 of convertible debentures is reflected as long
term debt in the accompanying balance sheet. Unless previously converted, the
remaining $8,461,000 of the convertible debentures mature on February 6, 2000.
Through the issuance of additional common shares, the Company paid interest in
kind of $77,000 related to these debentures. This payment in kind interest is
added back to net earnings in the determination of diluted earnings per share.
(See note 1.)
(d) Reincorporation
In June, 1998, the Company effected a change in its legal domicile from
California to Delaware by creating a Delaware corporation which was the
surviving entity of a merger with the California corporation. With this
reincorporation, the shares of the Delaware corporation have a stated par value
of $0.001 per share.
(9) Employee Stock Plans
At June 30, 1998, the Company had three stock-based compensation plans,
which are described below. The Company applies APB opinion no. 25 and related
Interpretations in accounting for its plans. Accordingly, no compensation cost
has been recognized for its Stock Option Plan and its Stock Purchase Plan. There
has been no activity in its Other Employee Plan. Had compensation cost for the
Company's Stock Option and Stock Purchase Plans been determined based on the
fair value at the grant dates for awards under those plans consistent with the
method of Statement 123, the Company's net earnings (loss) and net earnings
(loss) per share would have been the pro forma amounts indicated below (in
thousands, except per share data):
Year ended June 30,
-------------------
1998 1997 1996
---- ---- ----
Net earnings (loss):
As reported....................................................................... $2,595 ($2,353) ($1,541)
Pro forma......................................................................... 951 (4,414) (3,634)
Net earnings (loss) per share:
As reported basic................................................................. $0.13 ($0.13) ($0.10)
As reported diluted............................................................. 0.13 (0.13) (0.10)
Pro forma basic................................................................... 0.08 (0.24) (0.24)
Pro forma diluted............................................................... 0.08 (0.24) (0.24)
For purposes of computing the pro forma amounts above, the
Black-Scholes option pricing model was used. The assumptions used in this model
are disclosed for the individual plans below.
(a) Stock Option Plan
The Company has reserved 2,100,000 shares of common stock for issuance
under its 1988 Incentive Stock Plan (the "Plan"). Under the Plan, the Company
may issue options to purchase shares of the Company's common stock to eligible
employees, officers, directors, independent contractors and consultants. The
term of the options issued under the Plan cannot exceed ten years from the date
of grant. Options granted to date generally become exercisable over four to five
years based on the grantees' continued service with the Company.
A summary of the status of the Company's Plan as of June 30, 1998, 1997
and 1996 and activity for the fiscal years then ended is presented below:
Number of Weighted Exercisable
Shares Average
Exercise Price
Balance as of June 30, 1995 1,034,000 $4.06
Granted (at fair value) 703,000 $4.81
Exercised (128,000) $3.09
Canceled (360,000) $4.58
----------
Balance as of June 30, 1996 1,249,000 $4.43 421,000
-----------
Granted (at fair value) 584,000 $5.62
Exercised (44,000) $3.47
Canceled (239,000) $4.56
-----------
Balance as of June 30, 1997 1,550,000 $4.88 620,000
-----------
Granted (at fair value) 728,000 $4.46
Exercised (78,000) $3.59
Canceled (312,000) $5.02
-----------
Balance as of June 30, 1998 1,888,000 $4.76 749,000
----------- -----------
-----------
The weighted average estimated grant date fair value of options granted
during fiscal 1998, 1997 and 1996 was $3.76, $3.38 and $2.86,
respectively.
The following table summarizes information about the stock options
outstanding at June 30, 1998:
Options Outstanding Options Exercisable
------------------- -------------------
Range of Shares Weighted Average Weighted Shares Weighted
Exercise Prices Outstanding Remaining Average Exercisable Average
---------------- ----------- Contractual Exercise ----------- Exercise
Life Price Price
---- ----- -----
$2.75_$2.81............... 116,000 6.9 years $2.79 64,000 $2.78
$3.63_$3.63............... 371,000 6.1 years 3.63 362,000 3.63
$3.81_$3.81............... 77,000 8.9 years 3.81 12,000 3.81
$3.88_$3.88............... 256,000 9.3 years 3.88 1,000 3.88
$4.13_$4.88............... 118,000 7.7 years 4.55 45,000 4.44
$5.06_$5.06............... 315,000 8.8 years 5.06 _ _
$5.13_$5.25............... 61,000 6.2 years 5.25 48,000 5.25
$5.50_$5.50............... 226,000 8.1 years 5.50 59,000 5.50
$6.38_$6.50............... 236,000 7.6 years 6.46 99,000 6.45
$6.75_$10.75.............. 112,000 6.0 years 7.24 59,000 7.68
--------- --------- ---- ------- -----
Totals.................... 1,888,000 7.7 years $4.76 749,000 $4.55
--------- --------- ----- ------- -----
--------- --------- ----- ------- -----
The following weighted average assumptions for the Company's Stock
Option Plan were used to determine the pro forma amounts noted above:
Year ended June 30,
1998 1997
---- ----
Expected life................................................................ 4.5 years 3.9 years
Expected volatility.......................................................... 75.1% 76.5%
Risk-free interest rate...................................................... 5.8% 6.2%
Expected dividend yield...................................................... * *
* Not applicable
(b) Employee Stock Purchase Plan
The Company has reserved 650,000 shares of common stock for issuance
under its 1991 Employee Stock Purchase Plan ("ESPP"). Under the ESPP, the
Company's employees may purchase, through payroll deductions of 1% to 10% of
compensation, shares of common stock at a price per share that is the lesser of
85% of its fair market value as of the beginning or end of the offering period.
Under the ESPP, the Company sold 116,000 shares, 57,803 shares and 75,907 shares
to employees in fiscal 1998, 1997 and 1996, respectively. The weighted average
fair value of those purchase rights granted in fiscal 1998 and 1997 was $1.21
and $1.52, respectively. As of June 30, 1998, 616,000 shares had been issued
under the ESPP.
The following weighted average assumptions for the Company's ESPP were
used to determine the pro forma amounts noted above:
Year ended June 30,
-------------------
1998 1997
---- ----
Expected life................................................................ 0.5 years 0.5 years
Expected volatility.......................................................... 75.5% 76.5%
Risk-free interest rate...................................................... 5.5% 5.7%
Expected dividend yield...................................................... * *
* Not applicable
(c) Other Employee Plan
In June 1992, the Company reserved 200,000 shares of common stock for
issuance to certain employees as payment under compensation agreements. As of
June 30, 1998, 10,000 shares had been issued under the plan.
(10) Income Taxes
Earnings (losses) before income taxes include foreign losses before
income taxes of approximately $6,200,000, $1,377,000 and $4,100,000 for fiscal
1998, 1997 and 1996, respectively. During fiscal 1997, the Company forgave
approximately $4,200,000 of intercompany debt owed from its foreign
subsidiaries. This forgiveness resulted in lower fiscal 1997 losses among the
subsidiaries.
Income tax expense (benefit) for the years ended June 30, 1998, 1997
and 1996 consists of the following (in thousands):
1998 1997 1996
---- ---- ----
Current:
Federal....................................................................... $_ $_ $_
Foreign....................................................................... 337 722 133
State......................................................................... 45 87 9
---- ----- -----
382 809 142
---- ----- -----
Deferred:
Federal....................................................................... _ _ _
Foreign....................................................................... _ _ _
State......................................................................... _ _ _
---- ----- -----
- - -
---- ----- -----
$382 $809 $142
---- ----- -----
---- ----- -----
For the years ended June 30, 1998, 1997 and 1996, the reconciliation
between the amounts computed by applying the United States federal statutory tax
rate of 34% to loss before income taxes and the actual tax expense follows (in
thousands):
1998 1997 1996
---- ---- ----
Income tax (benefit) expense at statutory rate................................................. $1,012 $(525) $(476)
State income tax (benefit) expense, net of federal income tax benefit.......................... 46 58 9
Change in beginning of year valuation allowance................................................ (1,604) (908) _
Losses for which no benefit is recognized...................................................... 395 1,081 305
Rate differential related to foreign income and foreign tax withholdings....................... 339 951 133
Amortization of other assets................................................................... 209 167 132
Other.......................................................................................... (15) (15) 39
------- ------ ------
------- ------ ------
$382 $809 $142
------- ------ ------
------- ------ ------
The tax effects of temporary differences that give rise to significant
portions of deferred tax assets and deferred tax liabilities at June 30, 1998
and 1997 were as follows (in thousands):
1998 1997
Accruals and reserves........................................................... $1,164 $1,597
Net operating loss carryforward (federal)....................................... 12,368 14,575
Net operating loss carryforward (state)......................................... 97 1,293
Net operating loss carryforward (foreign)....................................... 5,035 4,142
Foreign tax and research credit carryforwards................................... 2,914 2,802
------- --------
Total gross deferred tax assets.............................................. 21,578 24,409
Less valuation allowance..................................................... (12,465) (14,069)
------- --------
Net deferred tax assets...................................................... 9,113 10,340
------- --------
Capitalized computer software costs............................................. (8,492) (9,838)
Undistributed earnings of DISC subsidiary....................................... (271) (308)
Fixed assets depreciation differences........................................... (350) (194)
------- --------
Total gross deferred liabilities............................................. (9,113) (10,340)
------- --------
Net deferred taxes.............................................................. $_ $_
------- --------
------- --------
The net change in total valuation allowance for the year ended June 30,
1998 was a decrease of $1,604,000. The valuation allowance has been established
to recognize the uncertainty of utilizing loss and credit carryovers and certain
deferred assets.
At June 30, 1998, the Company had net operating loss carryforwards of
approximately $41,900,000, $10,441,000 and $14,501,000 for federal, California
and foreign tax purposes, respectively. At June 30, 1998, the Company also had
unused research and other credit carryforwards of approximately $2,056,000 and
$535,000 for federal and California tax purposes, respectively. The loss and
research credit carryforwards, if not utilized, will expire between fiscal 1998
and 2012.
The benefit from subsequent usage of approximately $1,466,000 of the
loss carryforwards attributable to stock option compensation will be allocated
to Common Stock.
(11) Subsequent Events
On September 1, 1998 The Board of Directors of the Company approved a
Preferred Shares Rights Agreement dated September 4, 1998, whereby it has
declared a dividend distribution of one Preferred Shares Purchase Right on each
outstanding share of the Company's Common Stock. Each right will entitle
stockholders to buy 1/1000th of a share of the Company's Series B Participating
Preferred Stock at an exercise price of $21.75. The Rights will become
exercisable following the tenth day after a person or group announces the
acquisition of 15% or more of the Company's Common Stock or announces
commencement of a tender offer the consummation of which would result in
ownership by the person or group of 15% or more of the Common Stock. The Company
will be entitled to redeem the Rights at $.01 per Right at any time on or before
the tenth day following acquisition by a person or group of 15% or more of the
Company's Common Stock.
On September 18, 1998 the Compensation Committee of the Board of
Directors of the Company approved an adjustment to the exercise price for
outstanding stock options held by all current employees certain outstanding
employee stock options, which have an exercise price of $3.00 and above. In
consideration for this repricing offer, officers of the Company participating
in the option repricing are required to forfeit 10% of the shares subject to
each option being repriced, while non-officer employees participating in the
option repricing are subject to a one year limitation on the exercisable of
repriced options subject to certain exceptions. The revised exercise price
will be established by reference to the closing price of the Company's Common
Stock on September 28, 1998.
(12) Foreign Operations
The Company markets its products worldwide. Revenues can be grouped
into two primary geographic segments: North America and Europe. Selected
financial data by primary geographic area for the years ended June 30, 1998,
1997 and 1996 follow (in thousands):
1998 1997 1996
---- ---- ----
Sales to unaffiliated customers:
North America........................................................................... $68,041 $57,894 49,753
Europe.................................................................................. 23,643 20,879 20,036
-------- --------
Total................................................................................ $91,684 $78,773 $69,789
-------- --------
Operating earnings (loss):
North America........................................................................... $10,330 $732 $3,740
Europe.................................................................................. (6,190) (1,354) (3,917)
-------- --------
Total................................................................................ $4,140 $(622) $(177)
-------- --------
Total assets:
North America........................................................................... $63,751 $53,617 $46,329
Europe.................................................................................. 14,438 16,098 11,720
-------- --------
Total................................................................................ $78,189 $69,715 $58,049
-------- --------
Export sales............................................................................... $8,906 $8,239 $7,334
-------- -------- --------
-------- -------- --------
(13) Supplemental Cash Flow Information
Supplemental cash flow information for the years ended June 30, 1998,
1997 and 1996 follows (in thousands):
1998 1997 1996
---- ---- ----
Cash payments:
Interest....................................................................................... $1,321 $1,013 $1,269
Income taxes................................................................................... $187 $435 $50
Noncash investing and financing activities:
Conversion of preferred stock.................................................................. $1,053 $4,667 _
Product purchased in exchange for distribution agreement....................................... _ $1,300 _
Acquisition of equipment under capital lease obligations....................................... $479 $29 $308
Conversion of convertible debentures........................................................... $1,539 _ _
Issuance of stock in settlement of litigation.................................................. _ _ $3,090
Issuance of stock for product/business acquisitions............................................ $2,057 $3,727 $1,495
Acquisition of distributor's customer base..................................................... _ _ $759
In June 1997, the Company entered into a license agreement with a
distributor whereby the distributor received a license, valued at $1.3 million,
to distribute the Company's Renaissance CS product. The Company recognized this
revenue in June 1997. Simultaneously, the Company received certain software
products and components from this distributor in exchange for the aforementioned
license agreement. The value of the license agreement was ascribed to the assets
received in this nonmonetary transaction. These assets are included in
capitalized software costs and are being amortized over four years.
(14) Restatement of Deferred Revenues
During fiscal 1996, the Company determined that its accounting process
for recognizing renewable maintenance credits issued resulted in an
understatement of its deferred revenue balances in prior years. Accordingly, the
Company restated its deferred revenues and accumulated deficit balances for all
prior periods presented. These adjustments did not change the previously
reported results of operations for any prior periods presented.
(15) Selected Unaudited Quarterly Information
Selected unaudited quarterly financial information for the years ended
June 30, 1998 and 1997 follows (in thousands, except per share data):
June 30, March 31, Dec. 31, Sept. 30,
1998 1998 1997 1997
---- ---- ---- ----
Total revenues........................................................... $27,526 $24,314 $20,025 $19,819
Operating earnings (loss)................................................ $2,049 $2,079 $(897) $909
Net earnings (loss)...................................................... $1,852 $1,678 $(1,283) $348
Net earnings (loss) per common share..................................... $0.09 $0.08 $(0.07) $0.02
June 30, March 31, Dec. 31, Sept. 30,
1997 1997 1996 1996
---- ---- ---- ----
Total revenues........................................................... $23,132 $19,016 $18,555 $18,070
Operating earnings (loss)................................................ $(2,001) $(628) $1,100 $907
Net earnings (loss)...................................................... $(2,667) $(989) $807 $496
Net earnings (loss) per common share..................................... $(0.14) $(0.05) $0.04 $0.03
(16) Fourth Quarter Adjustments
During the fourth quarter of fiscal 1997, the Company recorded a
provision for doubtful accounts and returns of $2,015,000 which included
$369,000 relating to one customer. The remaining increase is due principally to
increases in the Company's general and specific reserves totaling approximately
$1 million. The Company also recorded a charge of $615,000 in the fourth quarter
to cover the potential settlement and related legal fees associated with a
dispute with its insurer. Additionally, the Company reduced its accrual for
employee vacations by $244,000, representing the net present value of the
Company's liability at June 30, 1997.
SCHEDULE II
ROSS SYSTEMS, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
(in thousands)
Additions
---------
Description Balance at Charged to Charged Deductions(1) Balance at
- ----------- Beginning costs and to other ------------- End of period
of period expenses accounts -------------
--------- -------- --------
Year ended June 30, 1998 allowance for $3,495 $1,830 $_ $3,351 $1,974
doubtful accounts and returns.........
------------ --------- -------- ----------- ---------
Year ended June 30, 1997 allowance for $2,634 $3,534 $_ $2,673 $3,495
doubtful accounts and returns.........
------------ --------- -------- ----------- ---------
Year ended June 30, 1996 allowance for $2,780 $1,029 $_ $1,175 $2,634
doubtful accounts and returns.........
------------ --------- -------- ----------- ---------
(1) Represents net charge-offs of specific receivables.