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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
FOR THE FISCAL YEAR ENDED JUNE 30, 1996
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.
(Exact name of registrant as specified in its charter)
1100 JOHNSON FERRY ROAD
SUITE 750
ATLANTA, GEORGIA 30342 94-2170198
CALIFORNIA (404) 851-1872 (I.R.S. Employer
(State of (Address and telephone of Identification
incorporation) principal executive offices) Number)
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SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
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None None
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
Common Stock, no par value
(Title of class)
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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 15, 1996 in the over-the-counter market as reported by
NASDAQ, was approximately $89,133,406. 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 13, 1996, Registrant had outstanding 17,850,511 shares of
Common Stock, 500,000 shares of Series C Convertible Preferred Stock and 500,000
shares of Series D Convertible Preferred Stock.
DOCUMENTS INCORPORATED BY REFERENCE
Parts of the Proxy Statement for Registrant's 1996 Annual Meeting of
Shareholders to be held November 20, 1996 are incorporated by reference in Part
III of this Form 10-K Report.
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THIS IS PAGE 1 OF 43 PAGES.
INDEX TO EXHIBITS ON PAGE 22.
ROSS SYSTEMS, INC.
ANNUAL REPORT ON FORM 10-K
YEAR ENDED JUNE 30, 1996
TABLE OF CONTENTS
PAGE NO.
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PART I
Item 1. Business................................................................................. 1
Item 2. Properties............................................................................... 5
Item 3. Legal Proceedings........................................................................ 5
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 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
GENERAL
Ross Systems, Inc. (the "Company") is a supplier of enterprise-wide business
systems and related services to companies installing open systems/client-server
software products. Customers include medium-sized companies upgrading internal
systems to improve the availability of timely and accurate information, as well
as divisions of larger companies. The Company licenses its products to customers
through a direct sales force and distributors. As of June 30, 1996, the Company
has licensed approximately 11,500 software products to over 2,800 customers
worldwide.
PRODUCTS
The Company markets a broad range of sophisticated business application
software that addresses the financial, manufacturing, maintenance, distribution
and human resource needs of businesses, governments, non-profit agencies and
other information-intensive organizations. 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 open
systems/client-server environments which allows users to access and manipulate
data, previously confined to centralized computer operations, 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 applications and a common user
interface. User-friendly features include the "point-and-click" selection of
information. The Company's open systems/client-server applications are fully
functional 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"),
they are easily modified and expanded.
The Renaissance CS Financial Series combines these new technologies with the
well-proven feature set found in the Company's traditional, award winning
Renaissance products.
The Company offers a comprehensive Enterprise Resource Planning solution
including financials, manufacturing, distribution, maintenance and human
resources. In addition, the Company has delivered functionality specifically
tailored to the unique requirements of process manufacturers including food,
consumer packaged goods, pharmaceutical and biotech, chemical, primary metals,
and pulp and paper companies, which previously had 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, maintenance and
distribution products were developed in GEMBASE, customers can easily customize
their own applications.
During fiscal 1996, the Company introduced the Strategic Application
Modeler, a powerful strategic management tool that helps companies define and
map their business processes, speed the implementation of their application
software systems and 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 native windows graphical user
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interface, including the use of customizable toolbars. The server processing is
COBOL based, to meet the heavy batch processing requirements of payroll.
The Renaissance CS server applications run on Digital Equipment Corporation
("DEC") VMS, Open VMS and Digital UNIX operating systems, Hewlett Packard
Company ("HP") MPE/iX, and HP's HP-UX, and International Business Machines
Corporation ("IBM") AIX versions of UNIX. Renaissance CS currently supports
three RDBMSs, Oracle Systems Corporation's ("Oracle") Oracle and Rdb and Sybase,
Inc's ("Sybase") SQL Server.
The Company's client components have the total "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 will enable customers to
capitalize on the power of the PC, the Company believes that its ability to
continue to support "dumb" terminals will prove popular among customers who are
not yet ready to replace existing terminals with high-powered, new machines.
The Company's traditional Renaissance line of general business accounting
applications are feature-rich and well-integrated and were developed in the
COBOL programming language to work primarily with the DEC VMS operating system
and RMS file system. The Company has continued to enhance these applications to
serve existing customers. The Company will continue to market the traditional
Renaissance products to its installed base of customers, as well as to accounts
that want to operate exclusively in a DEC proprietary environment. To provide a
long-term growth path for traditional Renaissance customers, the Company now
offers them the ability to upgrade to its new products. Also, during fiscal
1996, the Company released a migration product ("Classic Plus") which allows
traditional Renaissance customers to use the Company's client/server
applications while maintaining their traditional Renaissance general ledger and
management reports. Classic Plus is designed to allow the Company's customers to
migrate to full client/ server computing at their own pace.
OTHER PRODUCTS
The Company resells complementary software products licensed from third
parties, including a program module for custom reporting of information
maintained by the Company's programs (Crossview Plus), systems management
software, and certain DEC software products. Additionally, the Company has
entered into agreements which enable it to resell Oracle, Rdb and Sybase 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 1996.
SERVICES
The Company's services operation plays a critical role in its open
systems/client-server initiative. Complementing the Company's family of software
products is a broad selection of client services. Services provided by the
Company fall into two broad categories, Professional Services and Client
Support.
PROFESSIONAL SERVICES
The Company's Professional Services organizations provide business
application experience, technical expertise and product knowledge to complement
its 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.
2
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.
CLIENT SUPPORT
The Company's Client Support, which includes telephone support, technical
publications and an electronic bulletin board, and web based support, is
provided under the Company's standard maintenance agreements, which most of the
Company's customers have entered into. The annual maintenance fee for these
services is generally based upon a percentage of the then-current list price for
the licensed software. The standard maintenance agreement also entitles clients
to new releases and product enhancements.
MARKETING AND SALES
The Company sells its products and services primarily through its direct
sales force. At June 30, 1996, there were 101 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.
A key aspect of the Company's sales and marketing strategy is to build and
maintain strong working relationships with DEC, HP and IBM marketing
representatives. The Company believes that its sales force is able to leverage
the extensive worldwide resources of DEC, HP and IBM through joint marketing
programs. The expansion of the Company's international marketing and sales
activity has, in part, been the result of its relationships with DEC, HP and
IBM. Accordingly, the Company plans to continue to build on these relationships
worldwide. Under various agreements with DEC, HP and IBM, the Company has been
provided with numerous computer systems, as well as related peripheral equipment
and system software licenses. The Company also receives funding from DEC, HP and
IBM for direct mail, seminars and telemarketing activities, and to assist in the
development of certain of its products.
The Company has also established reseller relationships with vertical market
specialists. By partnering with prominent hardware and software companies, the
Company believes it can both expand its access to markets and lower its costs of
distribution.
The Company has offices at its headquarters in Atlanta, Georgia and in the
following North American metropolitan areas: Boston, Chicago, Dallas, Los
Angeles, New York City, San Francisco, San Diego, and Toronto. The Company has
subsidiaries in Belgium, France, Germany, the Netherlands and the United
Kingdom.
The Company has distribution arrangements with distributors in the following
countries: Australia (Melbourne and Sydney), Brazil (Rio de Janeiro), Germany
(Gebaude), Hong Kong, Hungary (Budapest), India (New Delhi), Indonesia
(Jakarta), Ireland (Dublin), Italy (Parma), Japan (Tokyo and Yokohama), Jordan
(Amman), Malaysia (Kuala Lumpur), New Zealand (Auckland), Pakistan (Karachi),
Poland (Warsaw), Portugal (Lasboa), Singapore, Spain (Barcelona and Madrid),
Taiwan (Taipei), Thailand (Bangkok), and the United Kingdom (Surrey). 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 40%, 40% and 31% of the Company's revenues in fiscal
1996, 1995 and 1994, respectively. The Company intends
3
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 enhances its existing products
and adds new products. The Company surveys the needs of its customers annually
at its users conference and incorporates many of their recommendations into its
products. 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:
EXPANSION TO NEW OPERATING ENVIRONMENTS. The Company is expanding its
potential markets by enabling its products to operate in additional open
systems/client-server computing environments. The Company is currently
devoting a significant effort to developing a Microsoft Windows NT version
of its products. The Company's Renaissance CS series operates with UNIX
operating systems, including those applications which have been developed
with GEMBASE to operate on Oracle, Rdb and Sybase RDBMSs.
PRODUCT LINE EXPANSION. The Company is expanding its potential markets by
developing new products which address the needs of additional prospective
customers, including those in key international markets.
PRODUCT ACQUISITION. In support of its product line expansion strategy, the
Company seeks to acquire and integrate complementary software to supplement
its existing product offerings. Key components of this strategy are the
upgrading of acquired software to incorporate additional functionality and
to integrate well with the Company's other products.
Certain software product development costs are capitalized and amortized
over the economic lives of the related products, generally three to five years.
COMPETITION
The business applications software market is intensely competitive. Due to
the breadth of the Company's product line, it competes with a broad range of
applications software companies. The Company's primary competitors include the
following: business application software providers which offer products on
multiple platforms, such as Baan, Oracle, Peoplesoft and SAP; business
application software providers that have ported their software from the IBM
mainframe environment, such as Dun and Bradstreet Software; and business
applications software providers in vertical markets that offer products that
compete with the Company's process manufacturing products, such as Datalogix and
Marcam Corporation. In the human resource market, the Company competes with
various business applications software providers, including Peoplesoft.
Additionally, the Company faces competition from third-party business
application processing providers operating on minicomputers such as the IBM
AS/400. Many of the Company's competitors have substantially greater financial,
technical, marketing and sales resources than the Company.
The principal competitive factors in the market for business application
software include product functionality, performance, size of installed base,
vendor and product reputation, financial stability, supported hardware and
software platforms, price, quality of customer support, and timeliness of
enhancing products. 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 have terms of 20 years to perpetuity. Under the
general terms and conditions of the Company's standard license agreements, the
licensed software may be used solely for internal operations
4
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.
Like many software companies, 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, 1996, the Company employed a total of 440 full time
employees, including 101 in sales and marketing, 86 in product development, 205
in professional services and client support, and 48 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 20,500 square feet. The Company's also
operates a regional office in Redwood City, California, which occupies
approximately 56,500 square feet, for administration, research and development,
sales, consulting and support, of which approximately 16,900 square feet have
been subleased, under a lease that expires in 1997; a regional office in
Waltham, Massachusetts, which occupies approximately 32,000 square feet for
research and development, consulting and support, of which approximately 25,300
square feet have been subleased; 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 and
Arlington, Texas 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 an additional regional office in Chicago, Illinois.
International offices are maintained in Berlin, Germany; London, England;
Northampton, England; Paris, France; Utrecht, Netherlands; and Zaventem,
Belgium. Additional North American sales offices are rented in El Segundo,
California; Irving, Texas; and Mississauga, Canada.
The Company believes its facilities are adequate for its current needs and
that suitable additional space will be available as required.
ITEM 3. LEGAL PROCEEDINGS
The Company has settled two previously disclosed, significant lawsuits. The
first suit, filed on December 29, 1992 in the Superior Court for Santa Clara
County in California, by Argonaut Information Systems of California Inc.
("Argonaut"), was settled on June 30, 1995. The settlement, which was reached
following a decision by an arbitrator, was for approximately $4.8 million in
cash to be paid $1 million upon signing and the balance in nine equal monthly
installments of principal (plus interest at 12%) commencing
5
on signing and concluding on February 1, 1996 and, in addition, the Company
issued shares of its Common Stock to Argonaut with an estimated value of
$808,000 in exchange for a license to certain technology. These payments were in
addition to payments previously made to Argonaut. On February 1, 1996, the
Company made the final payment to Argonaut as required under the settlement
agreement.
The second suit, captioned BARRETT, ET AL. V. ROSS SYSTEMS, was filed on
January 3, 1994 as a securities class action in the U.S. District Court for the
Northern District of California. On October 11, 1995, the parties reached a
definitive agreement for settlement of this matter. This agreement required the
Company to contribute (i) 500,000 shares of its Common Stock or (ii) shares of
its Common Stock with a market value of $3 million, whichever was greater. In
addition, the Company's insurance carrier agreed to make a cash payment of $2.8
million toward the settlement, $680,000 of which otherwise would have been paid
to the Company under an existing legal expense reimbursement agreement. The
definitive settlement agreement was approved by the court on December 13, 1995
and on January 24, 1996 the Company issued 308,351 shares of its Common Stock
valued at $900,000 to the plaintiffs as the first payment under the settlement
agreement. On or about June 17, 1996, the Company issued an additional 350,000
shares of Common Stock valued at $2.1 million to the plaintiffs, representing
the final payment required under the settlement agreement.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
6
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
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 1996 and 1995. The Company's Common Stock trades under the
Nasdaq symbol ROSS.
FISCAL 1996 HIGH LOW
-------------------------------- ------- -------
First Quarter................... $ 7 3/4 $ 5
Second quarter.................. $ 7 $ 2 3/16
Third quarter................... $ 3 3/4 $ 2 1/4
Fourth quarter.................. $ 8 1/8 $ 3 1/2
FISCAL 1995 HIGH LOW
-------------------------------- ------- -------
First quarter................... $ 5 1/8 $ 2 7/8
Second quarter.................. $ 6 1/8 $ 3
Third quarter................... $ 6 1/8 $ 4 1/8
Fourth quarter $ 5 5/8 $ 3 1/2
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 13, 1996, the approximate number of shareholders of record
of the Company's Common Stock was 493.
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ITEM 6. SELECTED FINANCIAL DATA
SELECTED CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
YEARS ENDED JUNE 30,
---------------------------------------------
1996 1995 1994 1993 1992
------- -------- -------- ------- -------
STATEMENTS OF OPERATIONS DATA:
Total revenues................ $68,337 $ 71,279 $ 75,995 $87,102 $75,470
Operating earnings (loss)..... (177) (15,487) (18,173) (502) 6,451
Net earnings (loss)........... $(1,541) $(15,528) $(18,714) $(1,124) $ 4,022
Net earnings (loss) per
share....................... $ (0.10) $ (1.28) $ (1.86) $ (0.12) $ 0.40
Shares used in computing net
earnings (loss) per share... 15,089 12,105 10,066 9,733 10,126
BALANCE SHEET DATA:
Working capital............... $(8,535) $(16,023) $(11,569) $20,448 $17,148
Total assets.................. 58,049 55,061 60,536 75,033 62,078
Long-term debt, less current
portion..................... 36 228 626 6,662 1,128
Total shareholders' equity.... 18,792 8,922 11,137 28,863 30,003
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 PERIOD PRESENTED.
8
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
VARIABILITY OF QUARTERLY RESULTS. 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, and 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. Consequently, the Company could meet or exceed its
internal estimates of aggregate contracting activity, but not be able to meet
its internal estimates for revenues. 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.
EQUITY FINANCING TRANSACTIONS. The Company recently completed two private
placements of equity securities. Please refer to "Liquidity and Capital
Resources" for a description of these transactions.
9
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.
PERCENTAGE OF TOTAL PERCENTAGE
REVENUES INCREASE
---------------------- (DECREASE)
----------------
YEAR ENDED JUNE 30, 1996 1995
---------------------- VERSUS VERSUS
1996 1995 1994 1995 1994
---- ---- ---- ------ ------
Revenues:
Software product licenses........................................... 35% 34% 33% (0.3)% (4.1)%
Consulting and other services....................................... 28 31 34 (12.7) (15.4)
Maintenance......................................................... 37 35 33 (0.2) 1.4
---- ---- ---- ------ ------
Total revenues.................................................... 100% 100% 100% (4.1)% (6.2)%
---- ---- ---- ------ ------
---- ---- ---- ------ ------
Operating expenses:
Costs of consulting, maintenance and other services................. 38% 39% 48% (7.0)% (23.7)%
Software product license sales and marketing........................ 31 38 38 (21.8) (6.3)
Product development................................................. 18 17 16 3.6 (2.5)
General and administrative.......................................... 11 11 10 (4.1) 3.1
Provision for doubtful accounts and returns......................... 2 3 7 (67.1) (57.2)
Amortization of other assets........................................ -- 1 2 (39.8) (35.7)
Litigation settlements and expenses................................. -- 13 -- (100.0) *
Restructuring charges............................................... -- -- 3 * *
---- ---- ---- ------ ------
Total operating expenses.......................................... 100 122 124 (21.0) (7.9)
---- ---- ---- ------ ------
Operating loss.................................................. -- (22) (24) (98.9) (14.8)
Other expense, net.................................................... 2 -- 1 818.8 (75.4)
---- ---- ---- ------ ------
Loss before income taxes........................................ (2) (22) (25) (109.0) (16.5)
Income tax expense.................................................... -- -- -- (254.3) 100.0
---- ---- ---- ------ ------
Net loss........................................................ (2)% (22)% (25)% (90.1)% (17.0)%
---- ---- ---- ------ ------
---- ---- ---- ------ ------
- ------------------------
* Not meaningful
REVENUES. Total revenues decreased 4%, to $68,337,000, in fiscal 1996 from
$71,279,000 in 1995. Fiscal 1995 revenues represented a 6% decrease from
revenues of $75,995,000 in 1994. Software product license revenues were
virtually unchanged from fiscal 1995 to 1996 and decreased 4% from fiscal 1994
to 1995. Consulting revenues decreased 13% from fiscal 1995 to 1996 and
decreased 15% in fiscal 1995 from 1994. Maintenance revenues from first year and
renewed maintenance agreements, both of which are recognized ratably over the
maintenance period, were nearly constant from fiscal 1995 to 1996 and increased
1% from fiscal 1994 to 1995.
Fiscal 1996 North American and Pacific Rim software product license revenues
increased from fiscal 1995's results by approximately 13% and 61%, or $1,811,000
and $499,000, respectively. This increase was offset by a decrease in European
software product license revenues of approximately 27%, or $2,392,000. The
increase in North American revenues was principally a result of increased demand
for the Company's Renaissance CS Manufacturing Series, sales of which increased
from fiscal 1995's results. The Company believes this increase in demand was
impacted by the final settlement of two significant lawsuits early in fiscal
1996 and a certain alleviation of customer concerns with respect to the
Company's financial condition. Fiscal 1996 decreases in European software
product license revenues were primarily related to
10
overall decreases in the European sales personnel during the year, especially in
the United Kingdom. The Company's open systems/client-server applications
represented approximately 94% of software product license revenues for fiscal
1996 as compared to 90% in fiscal 1995 and 81% in fiscal 1994. Total open
systems/client-server software product license revenues increased approximately
3% from fiscal 1995 to 1996. Offsetting the open systems/client-server increase
was a 34% decline in software product license revenues from the Company's
traditional Renaissance product line during the same period.
The Company experienced a 4% decline in software product license revenues
from fiscal 1994 to 1995. This decline was a result of a decrease in North
American software product license revenues offset by increases in European and
Pacific Rim software product license revenues. The Company believes the decline
in North American revenues was principally a result of the sale of the PRO/FIT
product line. In addition, customer concerns at that time regarding the
Company's financial condition, including resolution of an arbitration proceeding
unfavorably impacted fiscal 1995 sales, particularly in the Company's third
fiscal quarter. The Company also believes that improvements in European and
Pacific Rim revenues were primarily related to better software product license
sales execution by the Company's International operations.
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
decline, future period services revenues generally decline as a result. Fiscal
1996 consulting and other services revenues decreased 13%, or $2,800,000 from
fiscal 1995 results. For the year, North American and European consulting
revenues decreased 16% and 6%, or $2,409,000 and $391,000, respectively. The
Company believes that consulting revenues decreased during fiscal 1996 as a
result of quarterly decreases in software product license revenues during fiscal
1995 and the first two quarters of fiscal 1996, and also as a result of
decreases in the number of consulting personnel during fiscal 1996. Consulting
and other services revenues declined 15%, or $4,027,000, from fiscal 1994 to
1995. This decline was a result of the sale of the PRO/FIT division which the
company sold in the first quarter of fiscal 1995. On a pro forma basis, after
excluding the results of PRO/FIT, fiscal 1995 consulting revenues actually
increased 2% over 1994.
Maintenance agreements are renewed annually by most of the Company's
maintenance customers. Maintenance revenues were nearly constant from fiscal
1995 to 1996 and increased 1% from fiscal 1994 to 1995. Maintenance revenues
have remained relatively constant as a result of traditional Renaissance
customers not renewing maintenance agreements, offset by increases in the
Company's Renaissance CS maintenance revenues.
As a percentage of total revenues, the Company's international operations
remained constant at 40% in fiscal 1996 and 1995, as compared to 31% in 1994.
Decreases in total European revenues during fiscal 1996 were partially offset by
increases in revenues from the Pacific Rim and Canada. Fiscal 1996 declines in
European revenues were primarily attributable to overall decreases in European
personnel during fiscal 1996, whereas increases in the Pacific Rim and Canada
were primarily a result of improved execution by the sales organizations in
these locations. Fiscal 1995 increases in international revenues were primarily
a result of improved execution by the Company's new European management team put
in place during fiscal 1994.
Revenues have been derived from a relatively large number of customers. No
single customer accounted for more than 10% of revenues during fiscal 1996, 1995
or 1994.
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, product documentation, packaging and associated manufacturing costs,
and other costs of sales. Costs of consulting, maintenance and other services
decreased 7% to $26,074,000 in fiscal 1996 from $28,048,000 in fiscal 1995.
Fiscal 1995 costs represented a 24% decrease from 1994. On a pro forma basis,
after excluding results of the PRO/FIT division, costs of consulting,
11
maintenance and other services in fiscal 1996 decreased 4%, or $1,119,000 from
fiscal 1995 results. This decrease in fiscal 1996 from the prior year, is
primarily related to reductions in personnel-related expenses of approximately
$1,148,000, decreases in facilities related costs of $391,000 and decreases in
travel expenses of approximately $169,000. These decreases were partially offset
by increased outside consulting expenses and approximately $457,000 of cost
transfers related to consulting personnel who were temporarily working in the
sales organization. There were no similar cost transfers between the two
organizations during fiscal 1996. The decrease in fiscal 1995 related primarily
to reductions in personnel-related expenses associated with the sale of the
PRO/FIT division and other staff reductions, as well as decreased usage of
outside consultants during fiscal 1995 to meet short-term customer consulting
requirements.
The Company's gross profit margins resulting from consulting, maintenance
and other services revenues for fiscal 1996, 1995 and 1994 were 41%, 41% and
28%, respectively. The unchanged gross profit margin from fiscal 1995 to 1996
was a result of a decline in consulting and other services revenues, partially a
result of the sale of the PRO/FIT division in the first quarter of fiscal 1995,
offset by the declines in consulting and other services expenses discussed
above. The gross profit margin increase from fiscal 1994 to 1995 was a result of
year-over-year decreases in consulting staff expenses due to reductions in
consulting personnel during the second half of fiscal 1994 and all of fiscal
1995.
SOFTWARE PRODUCT LICENSE SALES AND MARKETING EXPENSES. Software product
license sales and marketing expenses decreased 22% in fiscal 1996 over 1995, and
6% in fiscal 1995 over 1994. The decrease in sales and marketing expenses during
fiscal 1996 were primarily due to of decreases in personnel-related expenses,
marketing programs and travel expenses from prior year levels. Also, fiscal 1995
results included approximately $457,000 of cost transfers related to consulting
personnel temporarily working in the sales organization. No such cost transfers
were made during fiscal 1996. Fiscal 1995 declines in software product license
sales and marketing expenses were a result of lower variable compensation
expense based on a decline in software product license revenues and a decline in
personnel-related and travel expenses.
The Company's gross profit (loss) margins resulting from software product
license revenues for fiscal 1996, 1995 and 1994 were 12%, (13)% and (16)%,
respectively. The improvement in fiscal 1996 gross profit margins over fiscal
1995 were primarily due to of decreases in sales and marketing expenses as
described above. The fiscal 1995 improvement over 1994 was a result of decreases
in personnel-related expenses, variable sales compensation and travel expenses,
partially offset by declines in software product license revenues. (See
preceding "Revenues" discussion.)
PRODUCT DEVELOPMENT EXPENSES. A summary of the components of product
development expenditures for the past three years follows (in thousands):
YEAR ENDED JUNE 30,
-------------------------------
1996 1995 1994
--------- --------- ---------
Expenses..................................................... $ 12,472 $ 12,034 $ 12,339
Amortization of previously capitalized software development
costs...................................................... (5,935) (4,284) (3,202)
--------- --------- ---------
Expenses, net of amortization................................ 6,537 7,750 9,137
Capitalized software development costs....................... 8,253 8,325 6,877
--------- --------- ---------
Total expenditures......................................... $ 14,790 $ 16,075 $ 16,014
--------- --------- ---------
--------- --------- ---------
Total expenditures as a percent of total revenues............ 22% 23% 21%
--------- --------- ---------
--------- --------- ---------
Capitalized software, net of amortization, as a percent of
total expenditures......................................... 16% 25% 23%
--------- --------- ---------
--------- --------- ---------
12
The Company continued to direct product development expenditures toward
enhancing existing products and developing new products. During fiscal 1996, the
Company's software development expenditures included amounts attributable to
developing new versions of GEMBASE, the Company's fourth generation language,
developing new releases of the Renaissance CS Financial, Manufacturing and Human
Resource series and porting Renaissance CS to operate with additional databases.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
decreased 4% to $7,258,000 in fiscal 1996 from $7,568,000 in fiscal 1995. Fiscal
1995 represented an increase of 3% from $7,339,000 in 1994. The major causes of
the decrease in general and administrative expenses during fiscal 1996 were:
decreases in travel expenses, personnel-related costs and other administrative
expenses; partially offset by increased legal expenditures and increased
expenses associated with two customer settlements. The amounts for customer
settlements related to agreements between the Company and certain of its
customers to resolve product related disputes between the parties. Fiscal 1995's
increase in general and administrative expenses principally resulted from
increases in personnel-related costs and expenses associated with customer
settlements; offset by a foreign exchange gain and a decrease in legal expenses.
PROVISION FOR DOUBTFUL ACCOUNTS AND RETURNS. In fiscal 1996, 1995 and 1994,
the Company recorded provisions of $1,029,000, $2,401,000 and $5,614,000,
respectively. The fiscal 1996 provision consisted of the following components:
(a) $517,000 for (i) 49 specific customer accounts receivable which the Company
identified as being potentially uncollectible as a result of payment history or
possible disputes, and (ii) adjustments to the Company's general provision for
uncollectible accounts receivable; (b) credits of $228,000 issued by the Company
to 33 customers (these credits are typically issued to resolve disputes
regarding (i) consultant billing rates and/or hours billed, or (ii) applicable
distributor royalty rates); and, (c) $284,000 for 9 customers related to
resolution of other disputes (these disputes typically relate to (i) changes in
customer requirements resulting from changes in their business or (ii) products
and services which have not fully met customer expectations).
The fiscal 1995 provision consisted of the following components: (a)
$1,473,000 for (i) 156 specific customer accounts receivable which the Company
identified as being potentially uncollectible as a result of payment history or
possible disputes, and (ii) adjustments to the Company's general provision for
uncollectible accounts receivable; (b) credits of $814,000 issued by the Company
to 74 customers (these credits are typically issued to resolve disputes
regarding (i) consultant billing rates and/or hours billed, or (ii) applicable
distributor royalty rates); and, (c) $114,000 for three customers related to
resolution of other disputes (these disputes typically relate to (i) changes in
customer requirements resulting from changes in their business or (ii) products
and services which have not fully met customer expectations).
LITIGATION SETTLEMENTS AND EXPENSES. On June 30, 1995, the Company and
Argonaut Information Systems of California, Inc. ("Argonaut") reached a final
settlement regarding an acquisition earn-out that was submitted to binding
arbitration in July 1994. In relation to the earn-out, the Company made accruals
of $5,500,000 in September 1992, and $4,423,000 in March 1995, of which
$5,132,000 had been paid to Argonaut as of June 30, 1995. The claim was settled
following an arbitrators decision. In addition to amounts previously paid, the
Company agreed to pay Argonaut $3,330,000, plus interest, costs and attorney's
fees of $1,461,000. On July 6, 1995, the Company also issued 190,000 shares of
its Common Stock to Argonaut with a value of approximately $808,000 in exchange
for a non-exclusive, worldwide, royalty-free license to certain additional
Argonaut technology, of which $552,000 was expensed in March 1995. In addition,
$248,000 of legal expense incurred in connection with this matter was included
in the provision. In conjunction with the settlement agreement, the parties
agreed to payment terms and the complete settlement of all claims. Under the
terms of the settlement agreement, the Company agreed to pay Argonaut
approximately $4.8 million, plus interest, during the period July 1995 to
February 1996. The Company made its final payment under the settlement agreement
to Argonaut in February 1996. In exchange for the cash payments, the issuance of
the common stock and the license of the technology, both parties released all
their claims against each other.
13
On or about October 11, 1995, the Company and the plaintiffs in a securities
class action lawsuit reached a definitive agreement for settlement of this
matter. This agreement, which is subject to court approval, required the Company
to contribute (i) 500,000 shares of its Common Stock or (ii) shares of its
Common Stock with a market value of $3 million, whichever was greater. In
addition, the Company's insurance carrier agreed to make a cash payment of $2.8
million toward the settlement, $680,000 of which otherwise would have been paid
to the Company under an existing legal expense reimbursement agreement.
Accordingly, the Company made an accrual of $3,680,000 in fiscal 1995. In
addition, $251,000 of legal expense incurred in connection with this matter was
included in the provision. The settlement does not constitute an admission of
liability by the Company. During fiscal 1996, the Company issued 658,351 shares
of its common stock to the plaintiffs in settlement of this litigation.
The Company recorded all amounts in its fiscal 1995 results of operations
related to the settlement of these matters.
AMORTIZATION OF OTHER ASSETS. Amortization of intangible assets resulted in
charges of $451,000, $749,000 and $1,164,000 in fiscal 1996, 1995 and 1994,
respectively. These charges related to the purchase of the Company in 1988 and
its subsequent acquisitions of other products and companies. Amortization
amounts have declined as related balances have become fully amortized.
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.
Fiscal 1994 activity related to these restructuring costs was as follows (in
thousands):
REMAINING
INITIAL CASH NET ASSET IMPACT OF RESERVE AS OF
RESERVE PAYMENTS WRITEDOWNS RE-ESTIMATES JUNE 30, 1995
--------- ----------- ----------- ------------- -------------
Elimination of excess facilities.................... $ 1,301 $ (12) -- $ (177) $ 1,112
Severance pay and related costs..................... 635 (576) -- 177 236
--------- ----- ----- ----- ------
Total............................................. $ 1,936 $ (588) $ -- $ -- $ 1,348
--------- ----- ----- ----- ------
--------- ----- ----- ----- ------
During the last two quarters of fiscal 1994, 70 employees were terminated as
a result of the restructuring efforts, with approximately 30 employees expected
to be terminated in the first two quarters of fiscal 1995. Additionally, the
Company began evaluating sublease alternatives for the identified facilities,
with the expectation that the subleases or office closures would be completed
during fiscal 1995. Based on its evaluation of remaining personnel to be
terminated, in conjunction with more current information resulting from on-going
sublease evaluations, the Company estimated that approximately $177,000 no
longer considered necessary for facilities subleases would be required to
accommodate the cash payments associated with the remaining staff reductions.
Fiscal 1995 activity related to these restructuring costs was as follows (in
thousands):
REMAINING
RESERVE AS OF CASH NET ASSET IMPACT OF RESERVE AS OF
JUNE 30, 1994 PAYMENTS WRITEDOWNS RE-ESTIMATES JUNE 30, 1995
------------- ----------- ------------- ------------- ---------------
Elimination of excess facilities............... $ 1,112 $ (428) $ 274 $ (462) $ 496
Severance pay and related costs................ 236 (353) -- 117 --
------ ----- ----- ----- -----
Total........................................ $ 1,348 $ (781) $ 274 $ (345) $ 496
------ ----- ----- ----- -----
------ ----- ----- ----- -----
During the first four months of fiscal 1995, 32 employees were terminated
and related termination payments were made, thus completing this component of
the Company's restructuring plan.
14
During the first quarter of fiscal 1995, a sublease was executed for a
portion of the Waltham, Massachusetts office and, in October 1994, a second
sublease of available space in the same facility was finalized. As a result of
these subleases (in addition to the monthly lease payments, net of sublease
receipts, which were charged against the reserve), the Company paid certain
direct sublease costs and reversed the applicable portion of its related
deferred rent liability, and applied these amounts against the reserve. Net cash
outflows from remaining lease payments will continue to be charged against the
reserve until the lease expires in February 1997.
During fiscal 1995, the Company determined that its restructuring reserve
was overstated by approximately $345,000, and reversed that portion of the
restructuring charge previously accrued.
During fiscal 1996, the Company only charged net cash outflows from the
Waltham, MA sublease payments and the termination costs related to its Bristol,
England lease against the restructuring reserve. At June 30, 1996, the Company
had a remaining restructuring charge liability of approximately $94,000, all of
which will be utilized by February 1997, as a result of net cash outflows during
the period.
OTHER INCOME AND EXPENSE. Fiscal 1996 other income is composed of $86,000
of interest income; whereas, fiscal 1995 other income includes interest income
of $133,000 and a $755,000 gain on the sale of certain assets related to the
Company's PRO/FIT product line in the first quarter of fiscal 1995. Fiscal 1996
interest income decreased from 1995 as a result of the Company having less
available cash to invest in interest bearing investments. Fiscal 1995 interest
income was relatively unchanged from 1994. Interest expense increased from
fiscal 1994 to 1995 and from fiscal 1995 to 1996 due to increased borrowings
under the Company's revolving credit facilities and increased capital lease
activity.
INCOME TAXES. The Company recorded income tax expense of $142,000 during
fiscal 1996. This tax expense related to foreign withholding taxes paid during
the year and accruals for other taxes payable. At June 30, 1996, the Company had
income taxes recoverable of approximately $670,000 which related to tax
prepayments and net operating losses which have been carried back to prior
years. Operating results for fiscal 1995 include an income tax benefit of
$92,000. This benefit is principally the result of recoverable income and
withholding taxes. These benefits were offset by foreign withholding taxes paid
during the year. Fiscal 1994 operating results include no income tax expense or
benefit.
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its continuing operations through cash generated
from operations, existing cash balances, available credit facilities and funds
raised from private equity financings. At June 30, 1996, the Company had
$1,862,000 of cash and cash equivalents and total borrowings of $8,605,000
against a $10,000,000 revolving credit facility. Borrowings under the credit
facility are collateralized by substantially all assets of the Company. During
fiscal 1996, the Company used $12,419,000 net cash for operating and investing
activities which consisted of $2,981,0000 of cash used for operations and
$9,438,000 of cash used for investing activities. Net cash provided by financing
activities was $10,573,000, principally resulting from two private equity
financings and borrowings under the Company's revolving credit facility.
On December 29, 1995, the Company entered into a Subscription Agreement with
a foreign institutional investor pursuant to which the investor purchased
500,000 shares of the Company's Series A Preferred Stock for an aggregate
purchase price of $2 million. In connection with this transaction, the investor
granted the Company options (the "Options") to require the investor to purchase
shares of the Company's Preferred Stock with an aggregate value of $4 million
during the period from and including July 1, 1996 through and including December
30, 1998. The Company has created and reserved 500,000 shares of its Series B
Preferred Stock and 500,000 shares of its Series C 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.
Under certain circumstances the holders of the Series A, B and C Preferred Stock
may require the
15
Company to redeem their shares at stated value plus dividends accrued at 2% per
annum from their original issue. On January 2, 1996, the Company received net
cash from the investor of approximately $1,870,000, after payment of placement
agent fees and other related offering expenses. The Company has used the
proceeds from this transaction to satisfy vendor obligations and to increase
working capital. On or about January 26, 1996, the Company was advised by the
National Association of Securities Dealers, Inc. (the "NASD") that it would be
required to obtain shareholder approval before exercising the Options because of
the possibility that the number of shares issued upon conversion of the Series
A, B and C Preferred Stock (if converted at a price below the price at which the
Series A Preferred stock was sold) could exceed 20% of the Common Stock
outstanding on the date of issuance of the Series A Preferred stock, thus
triggering the shareholder approval requirement set forth in Part III, Section
6(i)(d) of Schedule D to the By-Laws of the NASD, or limit the number of shares
issuable under the agreement to be less than 20% of the Company's total
outstanding shares on December 29, 1995. Accordingly, in July 1996, the Company
reached an agreement with the investor to limit the number shares issueable
under the Options to less than 20% of the Company's outstanding shares on
December 29, 1995. In July 1996, the Company exercised its Series B Preferred
Stock Option, and the investor agreed to invest an additional $2 million under
terms similar to those of the original Options. 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 is exercisable during the
period from July 1, 1997 through and including December 29, 2000, and will be
exercisable at a price between $6.46 and $8.00 per share. The gross proceeds
from the July 1996 transactions were $4,000,000.
In addition, on February 23, 1996, the Company closed a private placement of
shares of its Series D Preferred Stock (the "Series D") to a small number of
institutional investors (the "Transaction"). The total gross proceeds from the
Transaction were $5,000,000. The Series D is convertible into shares of the
Company's Common Stock at a conversion price equal to the lower of (i) $2.65, or
(ii) 82% of the Market Price prior to the date on which Series D shares are
converted into Common Stock. Under the NASD By-Laws, shareholder approval is
required prior to the issuance of securities in connection with a private
placement which could result in the sale or issuance by the Company "of common
stock (or securities convertible into or exercisable for common stock) equal to
20% or more of the common stock or 20% or more of the voting power outstanding
before the issuance for less than the greater of book or market value of the
stock" (Part III, Section 6 (i)(1)(d) of Schedule D to the NASD By-Laws). In
cases where "the delay in securing shareholder approval would seriously
jeopardize the financial viability of the enterprise" (Part III, Section 6
(i)(1)(e)), the NASD By-Laws further provide for an exception to the shareholder
approval requirement upon application to the NASD. The Company received from the
NASD such an exception, which was conditional upon the Audit Committee of the
Company's Board of Directors approving the exception and the notification of
shareholders of the Company's election not to seek their approval of the
Transaction. The Company notified the shareholders of the election not to seek
their approval of the transaction on February 13, 1996 and by February 28, 1996,
the Company had received approximately $4,575,000 from the Transaction, after
payment of placement agent fees and other related offering expenses. The Company
has used the proceeds from this transaction to satisfy vendor obligations and to
increase working capital. As of June 30, 1996, all shares issued under the
Transaction have been converted into Common Stock.
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, amounts available under its credit facility, funds to be
received in the future from the Options, in addition to the funds already
received from the two private equity financings described above. In addition,
the Company is presently investigating alternative sources of capital available
to strengthen its balance sheet and improve its liquidity. The Company believes
it is likely that any amounts raised in connection with these investigations
would require the issuance of additional shares of its Common Stock.
16
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 June 19, 1996 which
reported under Item 4, that the Company terminated, by dismissal, its
relationship with KPMG Peat Marwick LLP ("Peat Marwick") as principal
accountants. At the same time the Company announced the engagement of Coopers &
Lybrand L.L.P. 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 Peat Marwick and the Company.
------------------------
17
PART III
Certain information required by Part III is incorporated by reference in
this Report from the registrant's definitive proxy statement to be filed
pursuant to Regulation 14A (the "Proxy Statement").
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, 1996 are as
follows:
NAME AGE POSITION
- -------------------- --- -------------------------------------------------
Donald F. Campbell 45 Vice President, Worldwide Marketing
Christopher Hodge 46 Vice President, European Operations
Joesph L. Southworth 46 Senior Vice President, Product Development,
Consulting Services and Support
J. Patrick Tinley 48 President, Chief Operating Officer and Director
Peter Van Houten 43 Vice President, North American Sales
Dennis V. Vohs 52 Chairman of the Board and Chief Executive Officer
James A. Watts, Jr. 54 Vice President, Finance and Administration, Chief
Financial Officer and Secretary
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, except that a statement of changes in beneficial
ownership for former officer John B. Koontz, reporting the sale of 9,554 shares
of Company Common Stock, for the filing period August 1995 was filed after the
stipulated due date. The late filing was subsequently discovered and the Company
confirmed that the required report had been later filed.
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. Hodge has served as the Company's Vice President, European Operations
since July 1995. From the period July 1994 to July 1995, Mr. Hodge was the
Managing Director of UK Operations and held several sales related positions with
the Company. Prior to joining the Company, Mr. Hodge served as Director of
European Operations for Synon (European) Ltd. from 1990 to June 1993. From July
1993 to July 1994, Mr. Hodge served as Managing Director of Silvon Software Ltd.
18
Mr. Southworth has served as the Company's Senior Vice President,
Development, Services and Support since May 1996. Prior to that time, Mr.
Southworth was the Vice President, Advanced Technology Consulting from September
1994 to May 1996. For the period April 1989 to September 1994, Mr. Southworth
served as Vice President, Worldwide Marketing.
Mr. Tinley joined the Company in November 1988 as Executive Vice President,
Business Development, was promoted to Executive Vice President, Product
Development in June 1990, was promoted to Executive Vice President, Product
Development and Client Services in January 1995 and was promoted to President
and Chief Operating Officer in July 1995. Mr. Tinley has been a director of the
Company since 1993.
Mr. Van Houten 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 for the Company, most recently as Regional Vice
President, Northeastern Sales.
Mr. Vohs has served as Chairman of the Board and Chief Executive Officer of
the Company since November 1988.
Mr. Watts joined the Company in May 1996 as Vice President, Finance and
Administration, Chief Financial Officer and Secretary. Prior to joining the
Company, Mr. Watts served as Chief Financial and Chief Executive Officer of
Colorocs Corporation, a company involved in the development and sale of color
printers and copiers, from September 1990 to October 1993. From October 1993 to
July 1995, Mr. Watts was Chief Executive Officer and Owner of Integratec
Med/Services, Inc., a Houston based company involved in accounts receivable
recovery for hospitals. In addition, Mr. Watts was an independent consultant
from July 1995 to May 1996.
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.
19
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 1996 Report of Coopers & Lybrand L.L.P., Independent Accountants...... F-1
Fiscal 1996 Report of KPMG, Independent Auditors............................. F-2
Fiscal 1995 Report of KPMG Peat Marwick LLP, Independent Auditors............ F-3
Consolidated Balance Sheets--June 30, 1996 and 1995.......................... F-4
Consolidated Statements of Operations--Years Ended June 30, 1996, 1995, and
1994....................................................................... F-5
Consolidated Statements of Cash Flows--Years Ended June 30, 1996, 1995, and
1994....................................................................... F-6
Consolidated Statements of Shareholders' Equity--Years Ended June 30, 1996,
1995, and 1994............................................................. 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, 1996, 1995, and
1994 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
are filed as part of, or incorporated by reference into, this Report.
(b) REPORTS ON FORM 8-K.
The Company filed a Report on Form 8-K with the Securities and Exchange
Commission dated April 23, 1996 which reported under Item 5, that the Company
issued a Press Release announcing the results for the third quarter of fiscal
1996 ended March 31, 1996.
The Company filed a Report on Form 8-K with the Securities and Exchange
Commission dated April 23, 1996 which reported under Item 5, that the Company
issued a Press Release announcing that James A. Watts was appointed Vice
President and Chief Financial Officer of the Company. The Company further
announced that the former Chief Financial Officer, Selby F. Little, III, was
leaving the Company at the end of May 1996.
The Company filed a Current Report on Form 8-K/A dated June 19, 1996 which
reported under Item 4, that the Company terminated, by dismissal, its
relationship with KPMG Peat Marwick LLP ("Peat Marwick") as principal
accountants. At the same time the Company announced the engagement of Coopers &
Lybrand L.L.P. 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 Peat Marwick and the Company.
20
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 Redwood
City, State of California, on the th day of September, 1996.
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
- ------------------------------ -------------------------- -------------------
Chairman of the Board and
/s/ DENNIS V. VOHS Chief Executive Officer
- ------------------------------ (Principal Executive Sep. 26, 1996
Dennis V. Vohs Officer)
Vice President, Finance
and Administration,
/s/ JAMES A. WATTS, JR. Chief Financial Officer
- ------------------------------ (Principal Financial and Sep. 26, 1996
James A. Watts, Jr. Accounting Officer) and
Secretary
/s/ MARIO M. ROSATI
- ------------------------------ Director Sep. 26, 1996
Mario M. Rosati
- ------------------------------ Director Sep. , 1996
Bruce J. Ryan
/s/ J. PATRICK TINLEY
- ------------------------------ President, Chief Operating Sep. 26, 1996
J. Patrick Tinley Officer and Director
/s/ A. DAVID TORY
- ------------------------------ Director Sep. 26, 1996
A. David Tory
21
ROSS SYSTEMS, INC.
ANNUAL REPORT ON FORM 10-K
YEAR ENDED JUNE 30, 1996
ROSS SYSTEMS, INC.
INDEX TO EXHIBITS
EXHIBIT
NO. DESCRIPTION
- ----------- -------------------------------------------------------------------------------------------
3.1 Article of Incorporation, as amended (1)
3.2 Certificate of Determination of Rights, Preferences and Privileges of Series A, Preferred
Stock, Series B Preferred Stock and Series C Preferred Stock of Ross Systems, Inc.(2)....
3.3 Bylaws, as amended (3).....................................................................
10.1 Subscription Agreement dated December 29, 1995 between Registrant and Fletcher
International Limited (4)................................................................
10.2 Form of Stock Purchase Agreement dated February 13, 1996 between Registrant and several
investors (5)............................................................................
11.1 Statement regarding Computation of Per Share Earnings......................................
21.1 Listing of Subsidiaries of Registrant......................................................
23.1 Consent of Coopers & Lybrand L.L.P.........................................................
23.2 Consent of KPMG............................................................................
23.3 Consent of KPMG Peat Marwick LLP...........................................................
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
Quarterly Report on Form 10-Q for the period ended December 31, 1995, as
amended by the exhibits filed with the Registrant's Current Report on Form
8-K dated February 13, 1996.
(2) Incorporated by reference to the exhibit filed with the Registrant's
Quarterly Report on Form 10-Q for the period ended March 31, 1996 filed May
6, 1996.
(3) Incorporated by reference to the exhibit filed with the Registrant's Annual
Report on Form 10-K filed September 27, 1993.
(4) Incorporated by reference to the exhibit filed with the Registrant's Report
on Form 10-Q for the period ended December 31, 1995 filed February 14, 1996.
(5) Incorporated by reference to the exhibit filed with the Registrant's Report
on Form 10-Q for the period ended March 31, 1996 filed May 6, 1996.
22
FISCAL 1996 REPORT OF COOPERS & LYBRAND L.L.P., INDEPENDENT ACCOUNTANTS
To the Board of Directors and
Shareholders of Ross Systems, Inc.:
We have audited the consolidated balance sheet of Ross Systems, Inc. and
subsidiaries (the "Company") as of June 30, 1996, and the related consolidated
statements of operations, shareholders' equity, and cash flows for the year then
ended. In connection with our audit of the consolidated financial statements, we
also have audited the financial statement schedule for the year ended June 30,
1996. These 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 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 statements reflect 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 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 and the report of the other auditors provides a
reasonable basis for our opinion.
In our opinion, based on our audit and the report of the other auditors, the
consolidated financial statements referred to above present fairly, in all
material respects, the financial position of Ross Systems, Inc. as of June 30,
1996, and the results of its operations and its cash flows for the year then
ended in conformity with generally accepted accounting principles. Also in our
opinion, based on our audit and the report of the other auditors, the related
financial statement schedule, when considered in relation to the basic
consolidated financial statements taken as as whole, presents fairly, in all
material respects, the information set forth therein.
COOPERS & LYBRAND L.L.P.
Atlanta, Georgia
September 26, 1996
F-1
FISCAL 1996 REPORT OF KPMG, INDEPENDENT AUDITORS
To the Board of Directors and Shareholders
Ross Systems, Inc.:
We have audited 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") as of June 30, 1996 and
the related combined statements of operations and shareholders' equity for the
year then ended. 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
the 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 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 results of
their 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
F-2
FISCAL 1995 REPORT OF KPMG PEAT MARWICK LLP, INDEPENDENT AUDITORS
The Board of Directors and Shareholders
Ross Systems, Inc.:
We have audited the consolidated balance sheet of Ross Systems, Inc. and
subsidiaries (the Company) as of June 30, 1995, and the related consolidated
statements of operations, shareholders' equity and cash flows for each of the
years in the two year period then ended. In connection with our audits of the
consolidated financial statements, we also have audited the financial statement
schedule for the years ended June 30, 1995 and 1994. These 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
audits.
We conducted our audits 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 audits provide 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, 1995, and the results of
their operations and their cash flows for each of the years in the two-year
period ended June 30, 1995, in conformity with generally accepted accounting
principles. Also in our opinion, 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.
KPMG PEAT MARWICK LLP
San Jose, California
August 18, 1995
except as to Note 15, which
is as of September 18, 1996
F-3
ROSS SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
ASSETS
JUNE 30,
----------------------
1996 1995
---------- ----------
Current assets:
Cash and cash equivalents............................................................... $ 1,862 $ 3,628
Accounts receivable, less allowance for doubtful accounts
and returns of $2,634 and $2,780, respectively........................................ 26,430 22,812
Notes receivable........................................................................ 220
Prepaids and other current assets....................................................... 1,724 2,157
Income taxes recoverable................................................................ 670 1,071
---------- ----------
Total current assets................................................................ 30,686 29,888
Property and equipment.................................................................... 4,022 5,073
Computer software costs................................................................... 19,845 17,528
Other assets.............................................................................. 3,496 2,572
---------- ----------
$ 58,049 $ 55,061
---------- ----------
---------- ----------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current installments of debt............................................................ $ 8,743 $ 4,998
Accounts payable........................................................................ 5,406 7,452
Accrued expenses........................................................................ 7,853 16,694
Deferred revenues....................................................................... 17,219 16,767
---------- ----------
Total current liabilities........................................................... 39,221 45,911
Long-term debt, less current installments................................................. 36 228
---------- ----------
Total liabilities................................................................... 39,257 46,139
---------- ----------
Commitments and contingencies (Note 7)
Shareholders' equity:
Common stock, no par value; authorized 25,000,000 shares; issued and outstanding
17,847,000 and 13,986,000 shares...................................................... 67,435 55,854
Accumulated deficit..................................................................... (47,987) (46,446)
Cumulative translation adjustment....................................................... (656) (486)
---------- ----------
Total shareholders' equity.......................................................... 18,792 8,922
---------- ----------
$ 58,049 $ 55,061
---------- ----------
---------- ----------
See accompanying Notes to Consolidated Financial Statements.
F-4
ROSS SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
YEARS ENDED JUNE 30,
----------------------------------
1996 1995 1994
---------- ---------- ----------
Revenues:
Software product licenses................................................... $ 23,988 $ 24,070 $ 25,099
Consulting and other services............................................... 19,239 22,039 26,066
Maintenance................................................................. 25,110 25,170 24,830
---------- ---------- ----------
68,337 71,279 75,995
---------- ---------- ----------
Operating expenses:
Costs of consulting, maintenance and other services......................... 26,074 28,048 36,784
Software product license sales and marketing................................ 21,230 27,157 28,992
Product development......................................................... 12,472 12,034 12,339
General and administrative.................................................. 7,258 7,568 7,339
Provision for doubtful accounts and returns................................. 1,029 2,401 5,614
Litigation settlements and expenses......................................... 9,154
Amortization of other assets................................................ 451 749 1,164
Restructuring charges....................................................... (345) 1,936
---------- ---------- ----------
68,514 86,766 94,168
---------- ---------- ----------
Operating loss.......................................................... (177) (15,487) (18,173)
Other income (expense):
Other income................................................................ 86 888 144
Interest expense............................................................ (1,308) (1,021) (685)
---------- ---------- ----------
Loss before income taxes................................................ (1,399) (15,620) (18,714)
Income tax (benefit) expense.................................................. 142 (92) --
---------- ---------- ----------
Net loss................................................................ $ (1,541) $ (15,528) $ (18,714)
---------- ---------- ----------
---------- ---------- ----------
Net loss per common and common equivalent share............................... $ (0.10) $ (1.28) $ (1.86)
---------- ---------- ----------
---------- ---------- ----------
Common and common equivalent shares used in computing loss per common share... 15,089 12,105 10,066
---------- ---------- ----------
---------- ---------- ----------
See accompanying Notes to Consolidated Financial Statements.
F-5
ROSS SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
YEARS ENDED JUNE 30,
----------------------------------
1996 1995 1994
---------- ---------- ----------
Cash flows from operating activities:
Net loss.................................................................... $ (1,541) $ (15,528) $ (18,714)
Adjustments to reconcile net loss to net cash provided by
(used for) operating activities:
Restructuring charges..................................................... -- (345) 1,936
Litigation settlements and expenses....................................... -- 9,154 --
Depreciation and amortization of property and equipment................... 2,401 2,371 2,217
Amortization of computer software costs................................... 5,935 4,284 3,202
Amortization of other assets.............................................. 451 749 1,164
Allowance for doubtful accounts and returns, net.......................... (802) (393) 1,561
Deferred income taxes..................................................... -- 3,293
Gain on sale of assets.................................................... -- (755) (25)
Changes in operating assets and liabilities:
Accounts receivable..................................................... (5,203) 5,951 3,028
Prepaids and other current assets....................................... 320 (468) 88
Income taxes recoverable................................................ 430 61 (1,101)
Accounts payable........................................................ (1,797) (716) 1,983
Accrued expenses........................................................ (4,855) (2,340) 923
Income taxes payable.................................................... -- (504) (2,013)
Deferred revenues....................................................... 1,680 (2,451) 2,887
---------- ---------- ----------
Net cash provided by (used for) operating activities.................. (2,981) (930) 429
---------- ---------- ----------
Cash flows from investing activities:
Computer software costs capitalized......................................... (8,253) (8,325) (6,877)
Purchases of property and equipment......................................... (1,480) (1,072) (1,734)
Acquisitions and divestitures (Note 2)...................................... 220 1,980 --
Other, net.................................................................. 75 (50) 18
---------- ---------- ----------
Net cash used for investing activities................................ (9,438) (7,467) (8,593)
---------- ---------- ----------
Cash flows from financing activities:
Repayments of borrowings and capital leases................................. (585) (4,707) (3,218)
Proceeds from borrowings.................................................... 4,162 5,000
Proceeds from private equity financings, net................................ 6,395 11,279
Proceeds from common stock issuances........................................ 601 703 719
---------- ---------- ----------
Net cash provided by financing activities............................. 10,573 7,275 2,501
---------- ---------- ----------
Effect of foreign currency exchange rates on cash and cash
equivalents................................................................. 80 (66) 181
---------- ---------- ----------
Decrease in cash and cash equivalents......................................... (1,766) (1,188) (5,482)
Cash and cash equivalents at beginning of year................................ 3,628 4,816 10,298
---------- ---------- ----------
Cash and cash equivalents at end of year...................................... $ 1,862 $ 3,628 $ 4,816
---------- ---------- ----------
---------- ---------- ----------
See accompanying Notes to Consolidated Financial Statements.
F-6
ROSS SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(IN THOUSANDS)
COMMON STOCK CUMULATIVE TOTAL
-------------------- ACCUMULATED TRANSLATION SHAREHOLDERS'
SHARES AMOUNT DEFICIT ADJUSTMENT EQUITY
--------- --------- ------------ ------------- ------------
Balances as of June 30, 1993, as previously
reported........................................ 9,969 $ 41,881 $ (11,278) $ (814) $ 29,789
Restatement of deferred revenues.................. -- -- (926) -- (926)
--------- --------- ------------ ----- ------------
Balances as of June 30, 1993, as restated......... 9,969 41,881 (12,204) (814) 28,863
Exercise of stock options......................... 101 246 -- -- 246
Issuance of stock for acquisition................. 37 272 -- -- 272
Issuance of stock pursuant to employee stock
purchase plan................................... 117 473 -- -- 473
Effect of foreign currency translation............ -- -- -- (3) (3)
Net loss.......................................... -- -- (18,714) -- (18,714)
--------- --------- ------------ ----- ------------
Balances as of June 30, 1994...................... 10,224 42,872 (30,918) (817) 11,137
Exercise of stock options......................... 105 362 -- -- 362
Issuance of stock for licensed technology......... 272 1,000 -- -- 1,000
Issuance of stock in private equity financing,
net............................................. 3,291 11,279 -- -- 11,279
Issuance of stock pursuant to employee stock
purchase plan................................... 94 341 -- -- 341
Effect of foreign currency translation............ -- -- -- 331 331
Net loss -- -- (15,528) -- (15,528)
--------- --------- ------------ ----- ------------
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 common stock upon conversion of
preferred stock from 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
--------- --------- ------------ ----- ------------
--------- --------- ------------ ----- ------------
See accompanying Notes to Consolidated Financial Statements.
F-7
ROSS SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(A) BASIS OF PRESENTATION
The accompanying consolidated financial statements include the accounts of
Ross Systems, Inc. (the "Company") and its subsidiaries, all of which are wholly
owned. All significant intercompany balances and transactions have been
eliminated in consolidation.
(B) 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.
(C) CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS
The Company considers all highly liquid investments purchased with original
maturities of three months or less to be cash equivalents.
To date, the Company's short-term investments have not been significant.
(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
Net earnings (loss) per common and common equivalent share are computed by
dividing net earnings or net loss by the weighted average number of common
shares and common stock equivalents determined to be outstanding during the
periods. Common stock equivalents are not considered in the calculation of net
loss per share when their effect would be antidilutive.
(F) AMORTIZATION OF OTHER ASSETS
The other assets described in Notes 2 and 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
7 to 10
Goodwill...................................................... 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 periodically reviews the carrying
F-8
ROSS SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(1) ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
amounts of these assets for indications of impairment, based on expected
undiscounted cash flows related to the acquired entities or products.
(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. Any cancellation or refund
provisions contained in the license agreement are reviewed to determine the
likelihood of their exercise. If the Company determines that the likelihood of
the exercise of such provisions is other than remote, the software product
license revenues are deferred until such time as the Company determines that the
likelihood of the exercise of the provisions is remote. 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 ratably over the related contract period, generally
twelve 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
amortization period. 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, 1996 and 1995, capitalized computer
software costs approximated $38,629,000 and $30,377,000, respectively, and
related accumulated amortization totaled $18,784,000 and $12,849,000,
respectively. Software costs related to the development of new products incurred
prior to establishing technological feasibility or after general release are
expensed as incurred.
F-9
ROSS SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(1) ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(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 1995 and 1994 amounts have been reclassified to conform with the
1996 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) NEW ACCOUNTING PRONOUNCEMENTS
The Company has elected to follow Accounting Principles Board Opinion No.
25, "ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES" ("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 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
will continue to account for all employee-stock based compensation, including
stock options, using the "intrinsic value" method under 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 and net earnings per share would have been had the new fair value
method been used.
F-10
ROSS SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(2) ACQUISITIONS AND DIVESTITURES
During fiscal 1993, the Company accrued $5,500,000 in connection with
earn-out payments related to the Company's 1990 acquisition of certain assets of
Argonaut Information Systems of California, Inc. ("Argonaut"). On June 30, 1995,
the Company and Argonaut reached a final settlement regarding an acquisition
earn-out that was submitted to binding arbitration in July 1994, for which the
Company accrued another $3,330,000 and interest, costs and attorneys fees of
$1,461,000. As of June 30, 1995, the Company had paid $5,132,000 of the
$9,923,000 aggregate accrual. The Company also agreed to issue 190,000 shares of
its Common Stock to Argonaut with a value of approximately $808,000 in exchange
for a non-exclusive, worldwide, royalty-free license to certain additional
Argonaut technology, of which $552,000 was expensed in March 1995. On July 6,
1995, the Company issued these shares. In addition, $248,000 of legal expense
incurred in connection with the Argonaut litigation during fiscal 1995 has been
included as part of the Company's "Litigation settlements and expenses" on the
accompanying 1995 Statement of Operations. In conjunction with the settlement
agreement, the parties agreed to payment terms and the complete settlement of
all claims. Under the terms of the settlement agreement, the Company agreed to
pay Argonaut $1 million upon signing and the balance in nine installments of
principal (plus interest at 12%). In exchange for the cash payments, the
issuance of the common stock and the license of the technology, both parties
released all claims against each other. In February 1996, the Company made its
final payment to Argonaut under the settlement agreement, thereby satisfying
this obligation.
On September 30, 1994, the Company sold substantially all of its assets
related to its PRO/FIT distribution software product line for $2,200,000 in
notes receivable. These assets included software, related trademarks and
copyrights, customer contracts, accounts receivable, and equipment aggregating
$2,070,000. The purchaser assumed all obligations pursuant to customer
maintenance contracts acquired aggregating $625,000. The Company realized a
$755,000 gain on the sale of these net assets. At June 30, 1995, $220,000 of the
purchase price was receivable from the purchaser pursuant to a related
promissory note. The note receivable carried an interest rate of 7.05% per year.
The note was fully paid by June 30, 1996.
(3) PROPERTY AND EQUIPMENT
A summary of property and equipment follows:
JUNE 30,
----------------------
1996 1995
---------- ----------
(IN THOUSANDS)
Computer equipment.................................................... $ 11,506 $ 11,821
Furniture and fixtures................................................ 3,667 4,086
Leasehold improvements................................................ 1,729 1,334
---------- ----------
16,902 17,241
Less accumulated depreciation and amortization........................ (12,880) (12,168)
---------- ----------
$ 4,022 $ 5,073
---------- ----------
---------- ----------
F-11
ROSS SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(4) OTHER ASSETS
A summary of other assets follows:
JUNE 30,
--------------------
1996 1995
--------- ---------
(IN THOUSANDS)
Purchased computer software technology................................... $ 3,328 $ 2,596
Covenants not to compete................................................. 1,005 1,005
Goodwill................................................................. 3,851 3,851
Other.................................................................... 1,861 780
--------- ---------
10,045 8,232
Less accumulated amortization............................................ (6,549) (5,660)
--------- ---------
$ 3,496 $ 2,572
--------- ---------
--------- ---------
During fiscal 1996, the Company settled certain of its accounts receivable
from a former distributor by way of assignment of the former distributions
customer base. The total amount capitalized was $749,000 and is being amortized
over three years.
On September 30, 1995, the Company purchased the Plant Maintenance module
from CHAMPS Software, Inc. ("Champs"). In exchange for the software, the Company
issued Champs 125,000 shares of Common Stock with a value of $687,500. This
amount was recorded as purchased computer software technology and is being
amortized in accordance with Company policy for such assets.
(5) ACCRUED EXPENSES
A summary of accrued expenses follows:
JUNE 30,
--------------------
1996 1995
--------- ---------
(IN THOUSANDS)
Accrued vacation and other employee benefits............................. $ 1,343 $ 1,786
Accrued commissions...................................................... 1,992 1,250
Deferred rent............................................................ 502 825
Accrued acquisition expenses............................................. -- 372
Accrued litigation settlements........................................... -- 8,231
Sales and use taxes payable.............................................. 1,483 1,366
Restructuring charges.................................................... 94 496
Customer settlements..................................................... 214 451
Royalties................................................................ 843 245
Other.................................................................... 1,382 1,672
--------- ---------
$ 7,853 $ 16,694
--------- ---------
--------- ---------
(6) DEBT
The Company has a $10,000,000 revolving credit facility which is
collateralized by substantially all assets of the Company. The revolving credit
facility expires on October 31, 1997; carries an interest rate
F-12
ROSS SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(6) DEBT (CONTINUED)
which can vary from 1% to 3% above the prime rate depending on Company
profitability and certain equity capital raising activities; 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,
1996 and 1995, $8,605,000 and $4,443,000 were outstanding under the Company's
revolving credit facilities, respectively.
As of June 30, 1996 and 1995, the Company had outstanding capital lease
obligations aggregating $174,000 and $783,000, respectively.
(7) COMMITMENTS AND CONTINGENCIES
During fiscal 1995, the Company settled two significant lawsuits. The first
suit was filed on December 29, 1992 in the Superior Court for Santa Clara County
in California, by Argonaut (see Note 2 "Acquisitions and Divestitures"). At June
30, 1995, the Company agreed to pay $4.8 million, plus interest, as its
obligation under the settlement agreement. As of June 30, 1996, the Company had
satisfied all obligations under the settlement agreement and no remaining
amounts are due.
The second suit, captioned BARRETT, ET AL. V. ROSS SYSTEMS, was filed on
January 3, 1994 as a securities class action in the U.S. District Court for the
Northern District of California. This suit was settled on or about October 11,
1995, and the Company accrued $3.7 million during fiscal 1995 as its share of
the settlement. During fiscal 1996, the Company issued 658,351 shares of common
stock to the plaintiffs in settlement of the Company's obligation.
The Company recorded all amounts in its fiscal 1995 results of operations
related to the settlement of these matters.
The Company leases facilities and certain equipment under operating leases
which expire at various dates through fiscal 2001. 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, 1996, future
minimum lease payments under noncancelable operating leases were as follows (in
thousands):
FISCAL YEAR
- -------------------------------------------------------------------------------------
1997................................................................................. $ 4,337
1998................................................................................. 2,376
1999................................................................................. 1,488
2000................................................................................. 572
2001................................................................................. 93
---------
Total future minimum lease payments.................................................. $ 8,866
---------
---------
Rent expense approximated $3,225,000, $5,063,000 and $6,054,000 for fiscal
1996, 1995 and 1994, respectively. Included in fiscal 1996 rent expense is
income from certain noncancelable subleases of approximately $1,006,000.
F-13
ROSS SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(7) COMMITMENTS AND CONTINGENCIES (CONTINUED)
As of June 30, 1996, future sublease income to be received is as follows (in
thousands):
FISCAL YEAR
- -------------------------------------------------------------------------------------
1997................................................................................. $ 856
1998................................................................................. 178
1999................................................................................. 178
2000................................................................................. 147
---------
Total future sublease income......................................................... $ 1,359
---------
---------
(8) CAPITAL STOCK
(A) 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. As of June 30, 1996, the Company had issued, converted and
retired 500,500 shares of Preferred Stock. In addition, under a December 29,
1995 subscription agreement between the Company and an investor, the investor
granted the Company options (the "Options") to require the investor to purchase
shares of the Company's Preferred Stock with an aggregate value of $4 million
during the period from and including July 1, 1996 through and including December
30, 1998. The Company has created and reserved 500,000 shares of its Series B
Convertible Preferred Stock and 500,000 shares of its Series C Convertible
Preferred Stock for issuance and sale to the investor upon exercise of the
Options. In addition, the Company has created and issued an aggregate of 500
shares of its Series D Convertible Preferred Stock.
(B) NON-VOTING COMMON STOCK
The Company's Restated Articles of Incorporation authorize the issuance of
up to 2,000,000 shares of non-voting common stock. No shares of non-voting
common stock were outstanding as of June 30, 1996.
(C) PRIVATE EQUITY FINANCING
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 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
Convertible Preferred Stock. As of June 30, 1996 all of the Preferred Stock
issued had been converted into the Company's Common Stock.
(D) WARRANTS
In connection with the issuance of the Company's Series A Convertible
Preferred Stock and the pending subsequent issuances of the Company's Series B
and Series C Convertible Preferred Stock the Company granted a warrant to the
"investor" to purchase 400,000 shares of the Company's Common Stock
F-14
ROSS SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(8) CAPITAL STOCK (CONTINUED)
at an exercise price of $5.576 per share during the period from and including
July, 1, 1997 through and including December 29, 2000.
(9) EMPLOYEE STOCK PLANS
(A) STOCK OPTION PLANS
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.
On August 29, 1994, the Company entered into an agreement with all optionees
(except outside directors) to reprice all stock options they held with an
exercise price in excess of $3.625. Optionees received new option grants that
maintained the same vesting schedules as the original options, had an exercise
price of $3.625 and expired ten years from date of grant, August 28, 2004. A
total of 205 optionees participated in the program, repricing 806,788 total
stock options. Optionees who elected to not participate in the program retained
their original options.
A summary of all stock option activity follows:
OPTIONS PRICE
------------- ------------------
Balance as of June 30, 1994................................ 1,058,000 $ .400 - 15.000
Granted.................................................... 1,326,000 3.625 - 5.250
Exercised.................................................. (105,000) 2.900 - 3.625
Canceled................................................... (1,245,000) 2.900 - 15.000
------------- ------------------
Balance as of June 30, 1995................................ 1,034,000 .400 - 12.125
Granted.................................................... 703,000 2.750 - 6.500
Exercised.................................................. (128,000) .400 - 5.250
Canceled................................................... (362,000) 2.750 - 10.000
------------- ------------------
Balance as of June 30, 1996
(of which 420,377 are exercisable)....................... 1,247,000 $ 2.750 - $12.125
------------- ------------------
------------- ------------------
(B) EMPLOYEE STOCK PURCHASE PLAN
Subject to shareholder approval, the Company has reserved 650,000 shares of
common stock for issuance under its 1991 Employee Stock Purchase Plan. Under
this plan, 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. As of June 30, 1996, 442,024 shares had been issued under the
plan.
F-15
ROSS SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(9) EMPLOYEE STOCK PLANS (CONTINUED)
(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, 1996, 10,000 shares had been issued under the plan.
(10) INCOME TAXES
Losses before income taxes include foreign losses before income taxes of
approximately $4,100,000, $4,900,000 and $3,500,000 for fiscal 1996, 1995 and
1994, respectively.
Income tax expense (benefit) for the years ended June 30, 1996, 1995 and
1994 consists of the following (in thousands):
1996 1995 1994
--------- --------- ---------
Current:
Federal.......................................................... $ -- $ -- $ (580)
Foreign.......................................................... 133 (112) (2,713)
State............................................................ 9 20 --
--------- --------- ---------
142 (92) (3,293)
--------- --------- ---------
Deferred:
Federal.......................................................... -- -- 2,647
Foreign.......................................................... -- -- 78
State............................................................ -- -- 568
--------- --------- ---------
-- -- 3,293
--------- --------- ---------
$ 142 $ (92) $ --
--------- --------- ---------
--------- --------- ---------
For the years ended June 30, 1996, 1995 and 1994, 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):
1996 1995 1994
--------- --------- ---------
Income tax (benefit) expense at statutory rate.................. $ (476) $ (5,311) $ (6,363)
State income tax (benefit) expense, net of federal income tax
benefit....................................................... 9 20 --
Change in beginning of year valuation allowance................. -- -- 3,293
Losses for which no benefit is recognized....................... 305 4,881 2,827
Rate differential related to foreign income and foreign tax
withholdings.................................................. 133 -- --
Amortization of other assets.................................... 132 233 243
Other........................................................... 39 85 --
--------- --------- ---------
$ 142 $ (92) $ --
--------- --------- ---------
--------- --------- ---------
F-16
ROSS SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(10) INCOME TAXES (CONTINUED)
The tax effects of temporary differences that give rise to significant
portions of deferred tax assets and deferred tax liabilities at June 30, 1996
and 1995 were as follows (in thousands):
1996 1995
---------- ----------
Accruals and reserves................................................. $ 2,358 $ 7,369
Net operating loss carryforward (federal)............................. 14,317 9,679
Net operating loss carryforward (state)............................... 1,155 579
Net operating loss carryforward (foreign)............................. 3,638 2,256
Foreign tax and research credit carryforwards......................... 2,421 3,189
---------- ----------
Total gross deferred tax assets................................... 23,889 23,072
Less valuation allowance.......................................... (14,977) (15,666)
---------- ----------
Net deferred tax assets........................................... 8,912 7,406
----------
Capitalized computer software costs................................... (8,271) (7,011)
Undistributed earnings of DISC subsidiary............................. (345) (298)
Fixed assets--depreciation differences................................ (296) (97)
---------- ----------
Total gross deferred liabilities.................................. (8,912) (7,406)
---------- ----------
Net deferred tax assets............................................... $ -- $ --
---------- ----------
---------- ----------
The net change in total valuation allowance for the year ended June 30, 1996
was a decrease of $689,000. The valuation allowance has been established to
recognize the uncertainty of utilizing loss and credit carryovers and certain
deferred assets.
At June 30, 1996, the Company had net operating loss carryforwards of
approximately $42,109,000, $12,419,000 and $10,500,000 for federal, California
and foreign tax purposes, respectively. At June 30, 1996, the Company also had
unused research and other credit carryforwards of approximately $1,886,000 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 2011.
The benefit from subsequent usage of approximately $1,183,000 of the loss
carryforwards attributable to stock option compensation will be allocated to
Common Stock.
(11) RESTRUCTURING CHARGES
Included in fiscal 1994 results is a $1,936,000 charge associated with the
Company's restructuring of its workforce and facilities. The restructuring
charge was recorded primarily for severance pay and related taxes and health
benefits associated with reducing staffing levels of $635,000, and approximately
$1,301,000 for eliminating excess facilities in both North America and Europe.
During fiscal 1995, the Company determined that its restructuring reserve was
overstated by approximately $345,000 and reversed that portion of the
restructuring charge previously accrued. As of June 30, 1996 and 1995, the
remaining restructuring reserves were approximately $94,000 and $496,000
respectively, and were included in accrued expenses. Net cash outfows from
remaining lease payments will continue to be charged against the reserve until
the lease expires in February 1997.
F-17
ROSS SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(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, 1996, 1995 and 1994
follow (in thousands):
1996 1995 1994
--------- ---------- ----------
Sales to unaffiliated customers:
North America............................................ $ 48,644 $ 48,532 $ 57,588
Europe................................................... 19,692 22,747 18,407
--------- ---------- ----------
Total................................................ $ 68,337 $ 71,279 $ 75,995
--------- ---------- ----------
--------- ---------- ----------
Operating earnings (loss):
North America............................................ $ 3,740 $ (10,640) $ (15,854)
Europe................................................... (3,917) (4,847) (2,319)
--------- ---------- ----------
Total................................................ $ (177) $ (15,487) $ (18,173)
--------- ---------- ----------
--------- ---------- ----------
Total assets:
North America............................................ $ 46,329 $ 41,442 $ 45,014
Europe................................................... 11,720 13,619 15,522
--------- ---------- ----------
Total................................................ $ 58,049 $ 55,061 $ 60,536
--------- ---------- ----------
--------- ---------- ----------
Export sales............................................... $ 7,334 $ 5,838 $ 4,470
--------- ---------- ----------
--------- ---------- ----------
(13) SUPPLEMENTAL CASH FLOW INFORMATION
Supplemental cash flow information for the years ended June 30, 1996, 1995
and 1994 follows (in thousands):
1996 1995 1994
--------- --------- ---------
Cash payments:
Interest......................................................... $ 1,269 $ 1,048 $ 691
Income taxes..................................................... $ 50 $ 944 $ 334
Noncash investing and financing activities:
Portion of acquisition funded by issuance of common stock to
selling shareholders........................................... -- -- $ 272
Issuance of stock for licensed technology........................ -- $ 1,000 --
Acquisition of equipment under capital lease obligations......... $ 308 $ 170 $ 794
Sale of product line for note receivable......................... -- $ 2,200 --
Issuance of stock in settlement of litigation.................... $ 3,090 -- --
Issuance of stock for product acquisitions....................... $ 1,495 -- --
Acquisition of a distributors customer base...................... $ 759 -- --
(14) SUBSEQUENT EVENT
On July 8, 1996, the Company sold 500,000 shares of its Series B Convertible
Preferred Stock and Series C Convertible Preferred Stock to a foreign investor
for an aggregate amount of $4,000,000. The $2,000,000 received for the sale of
the Series B Convertible Preferred Stock represented a previous Option
F-18
ROSS SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(14) SUBSEQUENT EVENT (CONTINUED)
granted the Company by the investor, and the $2,000,000 received for the sale of
the Series C Convertible Preferred Stock represented a new investment by the
investor. In consideration of the new investment, the Company granted the
investor a warrant to purchase 640,000 shares of Common Stock that are
exercisable during the period including July 1, 1997 through and including
December 29, 2000 and will be exercisable at a price between $6.46 and $8.00 per
share. The Company still holds its Option to require the investor to purchase an
additional 500,000 shares of Convertible Preferred Stock for an aggregate of
$2,000,000. See Note 8 "Capital Stock".
(15) 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 period presented.
(16) SELECTED UNAUDITED QUARTERLY INFORMATION
Selected unaudited quarterly financial information for the years ended June
30, 1996 and 1995 follows (in thousands, except per share data):
JUNE 30, MARCH 31, DEC. 31, SEPT. 30,
1996 1996 1995 1995
--------- ---------- --------- ---------
Total revenues................................... $ 19,732 $ 17,893 $ 16,496 $ 14,216
Operating earnings (loss)........................ $ 1,775 $ 1,151 $ 173 $ (3,276)
Net earnings (loss).............................. $ 1,535 $ 717 (202) $ (3,591)
Net earnings (loss) per common share............. $ 0.09 $ 0.05 $ (0.01) $ (0.25)
JUNE 30, MARCH 31, DEC. 31, SEPT. 30,
1995 1995 1994 1994
--------- ---------- --------- ---------
Total revenues................................... $ 20,023 $ 14,897 $ 18,424 $ 17,935
Operating loss................................... $ (3,400) $ (10,820) $ (840) $ (427)
Net earnings (loss).............................. $ (3,434) $ (10,989) $ (1,163) $ 58
Net earnings (loss) per common share............. $ (0.25) $ (0.80) $ (0.11) $ 0.01
F-19
SCHEDULE II
ROSS SYSTEMS, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
ADDITIONS
------------------------
BALANCE AT CHARGED TO CHARGED
BEGINNING COSTS AND TO OTHER BALANCE AT
DESCRIPTION OF PERIOD EXPENSES ACCOUNTS DEDUCTIONS (1) END OF PERIOD
- ---------------------------------------------- ----------- ----------- ----------- --------------- -------------
Year ended June 30, 1996
allowance for doubtful accounts and
returns..................................... $ 2,780 $ 1,029 $ -- $ 1,175 $ 2,634
----------- ----------- ----------- ------ ------
----------- ----------- ----------- ------ ------
Year ended June 30, 1995
allowance for doubtful accounts and
returns..................................... $ 3,180 $ 2,401 $ -- $ 2,801 $ 2,780
----------- ----------- ----------- ------ ------
----------- ----------- ----------- ------ ------
Year ended June 30, 1994
allowance for doubtful accounts and
returns..................................... $ 1,576 $ 5,614 $ -- $ 4,010 $ 3,180
----------- ----------- ----------- ------ ------
----------- ----------- ----------- ------ ------
- ------------------------
(1) Represents net charge-offs of specific receivables.
S-1