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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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, 1997
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)
CALIFORNIA TWO CONCOURSE PARKWAY 94-217019
(State of incorporation) SUITE 800 (I.R.S. Employer
ATLANTA, GEORGIA 30328 Identification No.)
(770) 351-9600
(Address and telephone of
principal executive offices)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NAME OF EACH EXCHANGE ON
TITLE OF EACH CLASS WHICH REGISTERED
None None
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
Common Stock, no par value
(Title of class)
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 12, 1997 in the over-the-counter market as reported by
NASDAQ, was approximately $70,980,352. 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 12, 1997, the Registrant had outstanding 19,248,909 shares
of Common Stock and 107 shares of Series E Redeemable Convertible Preferred
Stock.
DOCUMENTS INCORPORATED BY REFERENCE
Parts of the Proxy Statement for the Registrant's 1997 Annual Meeting of
Shareholders to be held November 19, 1997 are incorporated by reference in Part
III of this Form 10-K Report.
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This is page 1 of 48 pages.
Index to Exhibits on page 22.
ROSS SYSTEMS, INC.
ANNUAL REPORT ON FORM 10-K
YEAR ENDED JUNE 30, 1997
TABLE OF CONTENTS
PAGE NO.
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PART I
Item 1. Business............................................................................... 1
Item 2. Properties............................................................................. 6
Item 3. Legal Proceedings...................................................................... 6
Item 4. Submission of Matters to a Vote of Security Holders.................................... 6
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.................. 7
Item 6. Selected Financial Data................................................................ 8
Item 7. Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................................. 9
Item 7.A. Quantitative and Qualitative Disclosures about Market Risk............................. 16
Item 8. Financial Statements and Supplementary Data............................................ 17
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure... 17
PART III
Item 10. Directors and Executive Officers of the Registrant..................................... 18
Item 11. Executive Compensation................................................................. 19
Item 12. Security Ownership of Certain Beneficial Owners and Management......................... 19
Item 13. Certain Relationships and Related Transactions......................................... 19
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K....................... 20
SIGNATURES 21
PART I
ITEM 1. BUSINESS
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 large companies downsizing their management information systems operations to
reduce costs. The Company licenses its products to customers through a direct
sales force and distributors. As of June 30, 1997, the Company has licensed
approximately 12,000 software products to over 2,900 customers worldwide.
PRODUCTS
The Company markets a broad range of sophisticated business application
software that addresses the financial, manufacturing, distribution, supply chain
management and human resource needs of primarily process manufacturers and
healthcare and not-for-profit institutions. 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 allow 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, transportation
management and human resources. In addition, the Company has delivered
functionality specifically tailored to the unique formula and specifications-
based requirements of process manufacturers, including food, consumer packaged
goods, pharmaceutical and biotech, chemical, primary metals, and pulp and paper
companies, 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 and distribution products
were developed in GEMBASE, customers can easily customize their own
applications.
During fiscal 1997, the Company upgraded the "Strategic Application
Modeler-TM-," a powerful strategic management tool that helps companies define
and map their business processes, speed the
1
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 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") Open VMS and Digital's Alpha architecture and UNIX operating systems, as
well as Hewlett Packard Company ("HP") HP-UX, DEC's Digital UNIX and
International Business Machines Corporation ("IBM") RS/6000, Fujitsu DS-90 UNIX,
Siemens Nixdorf, Microsoft's Windows NT and support for the Intel and Alpha
chips. 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 enables 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 and has delivered support for customers that use
Oracle's Rdb RDBMS. 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 at a reasonable charge.
The Company's migration product, "Classic Plus-TM-," 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.
The Company believes that it continues to match the marketplace in the
growth of new technologies. During 1997, the Company released Renaissance CS for
Windows NT and has seen a large new demand for the product on the NT platform.
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 1997.
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.
2
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.
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, 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
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, 1997, there were 132 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 representatives, both
in field sales and corporate marketing. The Company believes that its sales
force is able to leverage the extensive worldwide DEC, HP and IBM sales forces
through lead sharing, joint marketing and joint sales programs such as
co-operative training, sales seminars and advertising. 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 joint advertising,
seminars and telemarketing campaigns.
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, Redwood City, San Diego, and Toronto. The Company has
subsidiaries in Belgium, France, Germany, the Netherlands, Spain and the United
Kingdom.
3
The Company has distribution arrangements with distributors in the following
countries: Australia (Melbourne and Sydney), Brazil (Rio de Janeiro), Germany
(Gebaude), Hong Kong, Hungry (Budapest), India (New Delhi), Indonesia (Jakarta),
Ireland (Dublin), Italy (Parma), Japan (Tokyo and Yokohama), Jordan (Amman),
Malaysia (Kuala Lumpur), New Zealand (Aukland), Pakistan (Karachi), Poland
(Warsaw), Singapore, 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 39%, 40% and 40% of the Company's revenues in fiscal
1997, 1996 and 1995, respectively. The Company intends to broaden its presence
in international markets by expanding its international sales force and by
entering into additional distribution agreements.
PRODUCT DEVELOPMENT AND ACQUISITIONS
To meet the increasingly sophisticated needs of its customers and address
potential new markets, the Company continually 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. In 1997, the Company released a
Microsoft Windows NT version of its products. Most of the Company's products
operate with UNIX operating systems and POSIX-compliant 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 AND ALLIANCES. In support of its product line expansion
strategy, the company seeks to acquire products or partner with providers of
complementary software to supplement its existing product offerings. The
acquired software components extend the functionality and overall value of the
core product line, while software partner components both enhance the usability
and presentation of the data provided by the system and provide specialized
functional extensions. In 1997, the Company entered into joint marketing
agreements with FRx Software Corporation, Citrix Systems, Inc., Logility, Inc.,
Numetrix Limited, Optical Technology Group, Inc., Raxco Software, Inc.,
Speedware Corporation Inc., and SRC Software Inc.
In addition to these alliances, the Company purchased several applications
from Motherwell Information Systems, Ltd. (formerly CIMDEC), which include
transportation management and customer service, extending the functionality of
the Company's Renaissance CS suite to provide more complete supply chain
management and control for the Company's customers. Motherwell Information
Systems (MIS) has been a long-time partner of the Company and has developed
their products in the same core technology (GEMBASE) as Renaissance CS. The
acquisition of these products continues to extend the seamless integration of
the Renaissance CS product line. MIS brings a strong background in supply chain
implementations for companies world-wide.
Certain software product development costs are capitalized and amortized
over the economic lives of the related products, generally three to five years.
4
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 Company NV, Oracle Corporation, PeopleSoft,
Inc. and SAP AG; 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 Marcam Solutions, Inc. In the human resource market, the Company
competes with various business applications software providers, including
PeopleSoft, Inc. 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 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, 1997, the Company employed a total of 526 full time
employees, including 132 in sales and marketing, 101 in product development, 233
in professional services and client support, and 60 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 32,000
5
square feet. The Company also operates a regional office in Redwood City,
California, which occupies approximately 36,500 square feet, for research and
development, sales and consulting; a regional office in Waltham, Massachusetts,
which occupies approximately 4,300 square feet for research and development and
consulting; and a regional office in Teaneck, New Jersey, which occupies
approximately 15,000 square feet for sales, consulting and support. Space is
also rented by the Company in Alameda, California 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; Barcelona and Madrid,
Spain; and Zaventem, Belgium. Additional North American sales offices are rented
in Newport Beach, 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
As of, and for the fiscal year ended, June 30, 1997, the Company is not a
party to any pending litigation other than ordinary routine litigation that is
incidental to the operations of the business, and the Company is not aware of
any threatened litigation. See "Litigation Settlements and Expenses" in the
Management's Discussion and Analysis section for a further discussion of
significant current and prior years litigation.
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
SHAREHOLDER MATTERS
The following table sets forth the range of high and low sales prices for
the Company's Common Stock, on the NASDAQ National Market, for each of the
quarters of fiscal 1997 and 1996. The Company's Common Stock trades under the
NASDAQ symbol ROSS.
FISCAL 1997 HIGH LOW
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First quarter................................................................................. $ 6-1/4 $ 4-1/8
Second quarter................................................................................ $ 9-5/8 $ 5-3/8
Third quarter................................................................................. $ 9-5/8 $ 4-1/16
Fourth quarter................................................................................ $ 5-3/8 $ 2
FISCAL 1996 HIGH LOW
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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
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 12, 1997, the approximate number of shareholders of record
of the Company's common stock was 444.
7
ITEM 6. SELECTED FINANCIAL DATA
SELECTED CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
YEARS ENDED JUNE 30,
-------------------------------------------------------
1997 1996 1995 1994 1993
--------- --------- ---------- ---------- ---------
STATEMENTS OF OPERATIONS DATA:
Total revenues........................................... $ 78,773 $ 69,790 $ 72,470 $ 76,396 $ 87,304
Operating loss........................................... $ (622) $ (177) $ (15,487) $ (18,173) $ (502)
Net loss................................................. $ (2,353) $ (1,541) $ (15,528) $ (18,714) $ (1,124)
Net loss per share....................................... $ (0.13) $ (0.10) $ (1.28) $ (1.86) $ (0.12)
Shares used in computing net loss per share.............. 18,515 15,089 12,105 10,066 9,733
BALANCE SHEET DATA:
Working capital.......................................... $ (8,273) $ (8,535) $ (16,023) $ (11,569) $ 20,448
Total assets............................................. 69,715 58,049 55,061 60,536 75,033
Long-term debt, less current portion..................... 394 36 228 626 6,662
Redeemable preferred stock............................... 1,053 -- -- -- --
Total shareholders' equity............................... 22,060 18,792 8,922 11,137 28,863
PRIOR YEARS' RESULTS OF OPERATIONS HAVE BEEN RECLASSIFIED TO CONFORM WITH
THE FISCAL 1997 PRESENTATION.
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 resulting in deferral of such revenue to future
periods. Because the Company's operating expenses are based on anticipated
revenue levels and a high percentage of the Company's expenses are relatively
fixed, a small variation in the timing of the recognition of specific revenues
can cause significant variation in operating results from quarter to quarter.
EQUITY FINANCING TRANSACTIONS. The Company recently completed a private
placement of equity securities. Please refer to "Liquidity and Capital
Resources" for a description of this transaction.
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, and a comparison of such statements shown as a percentage
increase or decrease from the prior year's results:
PERCENTAGE
PERCENTAGE OF INCREASE
TOTAL REVENUES (DECREASE)
------------------ ---------------
YEAR ENDED
JUNE 30, 1997 1996
------------------ VERSUS VERSUS
1997 1996 1995 1996 1995
---- ---- ---- ------ ------
Revenues:
Software product licenses... 39% 36% 35% 20.1% 0.7%
Consulting and other
services.................. 29 28 30 18.6 (12.7)
Maintenance................. 32 36 35 1.2 (0.2)
---- ---- ---- ------ ------
Total revenues............ 100% 100% 100% (12.9)% (3.7)%
---- ---- ---- ------ ------
---- ---- ---- ------ ------
Operating expenses:
Costs of software product
licenses.................. 4% 3% 2% 65.3% 24.1%
Costs of consulting,
maintenance and other
services.................. 36 37 38 10.6 (7.4)
Sales and marketing......... 30 30 37 10.3 (21.8)
Product development......... 15 18 17 (6.8) 3.6
General and
administrative............ 10 10 10 10.9 (4.1)
Provision for doubtful
accounts and returns...... 4 1 3 243.1 (57.1)
Litigation settlements and
expenses.................. 1 -- 13 * (100.0)
Amortization of other
assets.................... 1 1 1 64.5 (39.8)
Restructuring charge........ -- -- -- * *
---- ---- ---- ------ ------
Total operating
expenses................ 101 100 121 13.5 (20.5)
---- ---- ---- ------ ------
Operating earnings
(loss).................. (1) -- (21) 251.4 (98.9)
Other expense, net............ (1) (2) -- (24.5) 818.8
---- ---- ---- ------ ------
Earnings (loss) before
income taxes............ (2) (2) (21) 10.4 (91.0)
Income tax expense............ 1 -- -- 469.7 (254.3)
---- ---- ---- ------ ------
Net earnings (loss)....... (3)% (2)% (21)% (52.7)% (90.1)%
---- ---- ---- ------ ------
---- ---- ---- ------ ------
- ------------------------
* Not meaningful
REVENUES. Total revenues increased 13%, to $78,773,000, in fiscal 1997 from
$69,790,000 in 1996. Fiscal 1996 revenues represented a 4% decrease from
revenues of $72,470,000 in 1995. Software product license revenues increased 20%
from fiscal 1996 to 1997 and increased 1% from fiscal 1995 to 1996. Consulting
revenues increased 19% from fiscal 1996 to 1997 and decreased 13% in fiscal 1996
from 1995. Maintenance revenues from first year and renewed maintenance
agreements, both of which are recognized ratably over the maintenance period,
increased 1% from fiscal 1996 to 1997 and remained virtually unchanged from
fiscal 1995 to 1996.
Fiscal 1997 North American and Pacific Rim software product license revenues
increased from fiscal 1996's results by approximately 16% and 214%, or
$2,724,000 and $2,804,000, respectively. This increase was offset by a decrease
in European software product license revenues of approximately 6%, or $419,000.
The Company believes the increase in North American revenues was principally a
result of increased demand for the Company's Renaissance CS Series, sales of
which increased approximately 22% from fiscal 1996's results. The Company
believes this increase in demand was the result of the streamlining and
reorganization of it's sales and marketing structure to focus on three key
market sectors: process
10
manufacturing, healthcare and not-for-profit entities. The Company believes the
increase in Pacific Rim revenues is the result of an overall effort to increase
direct and distributor-related sales and marketing efforts in the region. One
result of this increased effort was the recording of a large contract in the
first quarter of fiscal 1997 that represented approximately 90% of the increase.
Despite the addition of a Spanish subsidiary at the end of the second quarter,
overall European software license revenues decreased in fiscal 1997. This
decrease is primarily related to an overall sluggishness in the European
economy. The Company's open systems/client-server applications represented
approximately 95% of software product license revenues for fiscal 1997 as
compared to 94% in fiscal 1996 and 91% in fiscal 1995. Total open
systems/client-server software product license revenues increased approximately
22% from fiscal 1996 to 1997 offset by a 5% decline in software product license
revenues from the Company's traditional Renaissance product line during the same
period.
Fiscal 1996 North American and Pacific Rim software product license revenues
increased from fiscal 1995's results by approximately 13% and 61%, or $1,972,000
and $499,000, respectively. This increase was offset by a decrease in European
software product license revenues of approximately 25%, or $2,292,000. The
Company believes 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 approximately 35% 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 financial
condition. Fiscal 1996 decreases in European software product license revenues
were primarily related to overall decreases in the European sales personnel
during the year, especially in the United Kingdom, as a result of the Company's
initiative to concentrate its marketing efforts in three main industries:
process manufacturing, healthcare and not-for-profit.
Revenues from consulting and other services (which are recognized as
performed) correlate with software product license revenues (which are
recognized upon delivery), so that when software product license revenues
increase, future period services revenues generally increase as a result. Fiscal
1997 consulting and other services revenues increased 19%, or $3,579,000 from
fiscal 1996 results. For the year, North American and European consulting
revenues increased 12% and 20%, or $1,590,000 and $1,292,000, respectively. The
Company also had consulting services revenue in the Pacific Rim of $697,000 in
fiscal 1997. The Company believes that consulting revenues increased during
fiscal 1997 as a result of the increase in software product license revenue over
fiscal 1996. Consulting and other services revenues declined 13%, or $2,800,000,
from fiscal 1995 to 1996. 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 due to the aforementioned market focus initiative.
Maintenance agreements are renewed annually by most of the Company's
maintenance customers. Maintenance revenues increased 1% from fiscal 1996 to
1997 and decreased less than 1% from fiscal 1995 to 1996. Maintenance revenues
have remained relatively constant as a net result of increases in the Company's
Renaissance CS maintenance revenues and older customers deciding not to renew
their maintenance contracts.
As a percentage of total revenues, the Company's international operations
have remained relatively consistent at 33%, 31%, and 33% in fiscal years 1997,
1996 and 1995, respectively. The increase in fiscal 1997's results is due to the
Company's increased presence in the Pacific Rim, including one large contract in
the first quarter (see details below), combined with relatively unchanged
European results. In fiscal 1996, decreases in total European revenues were only
partially offset by increases in revenues from the Pacific Rim. Fiscal 1996
declines in European revenues were primarily attributable to overall decreases
in European personnel during fiscal 1996, whereas increases in the Pacific Rim
were primarily a result of improved execution by the sales organizations in
these locations.
11
The Company's large Pacific Rim contract represents a distributor agreement
with a Japanese company (the "Distributor") whereby the Distributor has an
exclusive license to reproduce and sell certain Ross products in the Pacific
Rim. In exchange for this distribution right, the agreement, which is renewable
annually, calls for the Company to receive at least a "minimum annual royalty"
equal to $2.5 million in fiscal 1997 and 1998, $4 million in fiscal 1999 and
$4.5 million in fiscal 2000. These royalty payments are based on sales quotas
for the period that the Distributor agrees to meet or exceed in order to keep
its exclusive distributorship. The Distributor met its quota for fiscal 1997,
and in August 1997 the Distributor agreed to renew its exclusive distributor
relationship with the Company for fiscal 1998 by committing to the appropriate
minimum annual royalty payment. Accordingly, the Company will recognize $2.5
million in fiscal 1998, and anticipates receiving at least the minimum annual
royalties in each subsequent year.
In June 1997, the Company entered into a license agreement with another
distributor whereby the distributor received a license, valued at $1.3 million,
to distribute the Company's Renaissance CS product. The Company recognized this
revenue in June 1997. Simultaneously, the Company received certain software
products and components from this distributor in exchange for the aforementioned
license agreement. The value of the license agreement was ascribed to the assets
received in this non-monetary transaction. These assets are included in
capitalized software costs and are being amortized over four years.
Revenues have been derived from a relatively large number of customers. No
single customer accounted for more than 10% of revenues during fiscal 1997, 1996
or 1995.
COSTS OF SOFTWARE PRODUCT LICENSES. Costs of software product licenses
include expenses related to royalties paid to third parties and product
documentation and packaging. Third party royalty expenses will vary from quarter
to quarter based on the mix of products being sold. Many of the Company's newer
products have third party royalty obligations associated with them that had not
existed previously. Costs of software product licenses for fiscal 1997 increased
by 65% to $2,905,000 from $1,757,000 in fiscal 1996. Costs of software product
licenses for fiscal 1996 increased by 24% from $1,416,000 in fiscal 1995. For
fiscal years 1997 and 1996, third party royalty expenses increased over the
prior year by 79% and 22%, respectively. This increase is directly related to
the increase in the Company's software product license revenues for the same
periods. The Company's gross profit margin resulting from software product
license revenues for fiscal 1997 was 90%, down from 93% in fiscal 1996 and 94%
in fiscal 1995. Increases in third party royalty expenses led to the decline in
these margins.
COSTS OF CONSULTING, MAINTENANCE AND OTHER SERVICES. Costs of consulting,
maintenance and other services include expenses related to consulting and
training personnel, personnel providing customer support pursuant to maintenance
agreements, and other costs of sales. The Company also uses outside consultants
to supplement Company personnel in meeting peak customer consulting demands.
Costs of consulting, maintenance and other services increased 11% to $28,511,000
in fiscal 1997 from $25,769,000 in fiscal 1996. The increase was due largely to
increases in personnel-related expenses of approximately $1,220,000, increases
in expenses related to outside consultants of approximately $1,000,000, and
increases in facilities and supplies related expenses of approximately $485,000
compared to the prior year. Total costs of consulting, maintenance and other
services for Ross Spain during fiscal 1997 was approximately $1,670,000. Ross
Spain was purchased at the end of the second quarter of fiscal 1997 and thus its
activity is not included in the prior year results. Costs of consulting,
maintenance and other services decreased 7% to $25,769,000 in fiscal 1996 from
$27,823,000 in fiscal 1995. On a pro forma basis, after excluding results of the
PRO/FIT division, costs of consulting, 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.
12
The Company's gross profit margins resulting from consulting, maintenance
and other services revenues for fiscal 1997, 1996 and 1995 were 41%, 42% and
41%, respectively. The deterioration in the gross profit margin from fiscal 1996
to 1997 was due largely to the increase in personnel expenses related to the
hiring and training of new services and consulting personnel and the time
required until these new personnel begin to generate revenue. The small increase
in the gross profit margin from fiscal 1995 to 1996 was a result of a decline in
consulting and other services revenues, and 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.
SOFTWARE PRODUCT LICENSE SALES AND MARKETING EXPENSES. Software product
license sales and marketing expenses increased 10% in fiscal 1997 over 1996, and
decreased 22% in fiscal 1996 over 1995. The increase in sales and marketing
expenses during fiscal 1997 was largely the result of an increase in
personnel-related expenses, including salaries and commissions, of approximately
$530,000; an increase in travel-related expenses of approximately $930,000; and
an increase of approximately $870,000 in marketing expenses related to the
promotion of the Company's Renaissance CS products. These expense increases were
partially offset by a decrease of approximately $150,000 in facilities expenses
related to the consolidation of several offices during the year. The decrease in
sales and marketing expenses during fiscal 1996 were a result of decreases in
personnel-related expenses, marketing programs and travel expenses from prior
year levels. Also, fiscal 1995 results included approximately $457,000 of costs
for consulting personnel temporarily working in the sales organization. No such
costs were incurred during fiscal 1997 and 1996.
PRODUCT DEVELOPMENT EXPENSES. A summary of the components of product
development expenditures for the past three years follows (in thousands):
YEAR ENDED JUNE 30,
-------------------------------
1997 1996 1995
--------- --------- ---------
Expenses......................................................................... $ 11,628 $ 12,472 $ 12,034
Amortization of previously capitalized software development costs................ (7,112) (5,935) (4,284)
--------- --------- ---------
Expenses, net of amortization.................................................... 4,516 6,537 7,750
Capitalized software development costs........................................... 8,879 8,253 8,325
--------- --------- ---------
Total expenditures............................................................. $ 13,395 $ 14,790 $ 16,075
--------- --------- ---------
--------- --------- ---------
Total expenditures as a percent of total revenues................................ 17% 22% 23%
--------- --------- ---------
--------- --------- ---------
Capitalized software, net of amortization, as a percent of total expenditures.... 13% 16% 25%
--------- --------- ---------
--------- --------- ---------
As a percentage of total revenues, fiscal 1997 product development
expenditures decreased from 1996 expenditures. This decrease is largely
attributable to the downtime related to the relocation of much of the Company's
development functions from its California office to its Atlanta office during
fiscal 1997. Product development expenditures during fiscal 1997 have been
primarily focused on continued enhancements to existing products and developing
new products. During fiscal 1997, software development costs capitalized
included amounts attributable to the development of the Renaissance CS Series,
and developing and enhancing versions of GEMBASE, the Company's fourth
generation language. These projects were continuations of those started in
fiscal 1995 and 1996. Other fiscal 1997 projects included the porting of
Renaissance CS to operate with the Windows NT platform, and the development of
an object-oriented release of Renaissance CS.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
increased 11% to $8,050,000 in fiscal 1997 from $7,258,000 in fiscal 1996.
Fiscal 1996 represented a decrease of 4% from $7,568,000 in fiscal 1995. The
increase in fiscal 1997 is largely the result of personnel, travel, and other
costs related to the move of the Company's finance and administrative
headquarters from California to
13
Georgia. These costs, including payroll, travel, temporary employees and leased
equipment, increased approximately $799,000. 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.
PROVISION FOR DOUBTFUL ACCOUNTS AND RETURNS. In fiscal 1997, 1996 and 1995,
the Company recorded provisions of $3,534,000, $1,029,000, and $2,401,000,
respectively.
The fiscal 1997 provision consisted of the following components: (a)
$2,682,000 for (i) specific customer accounts receivable for which the Company
either promised a credit or identified as being potentially uncollectible, and
(ii) adjustments to the Company's general provision for uncollectible accounts
receivable; and (b) $852,000 for the resolution of other customer issues.
The fiscal 1996 provision consisted of the following components: (a)
$745,000 for (i) specific customer accounts receivable for which the Company
either promised a credit or identified as being potentially uncollectible, and
(ii) adjustments to the Company's general provision for uncollectible accounts
receivable; and (b) $284,000 for the resolution of other customer issues.
LITIGATION SETTLEMENTS AND EXPENSES. During fiscal 1997, the Company
settled a dispute with a customer with the understanding that the settlement and
related legal fees would be covered under the Company's business insurance. The
Company subsequently learned that the insurer took exception to the Company's
settlement with its customer and withheld payment on the claim, pending
arbitration. In June 1997, the Company recorded a charge of $615,000, pending
settlement with its insurer, to cover the potential settlement and legal fees.
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. 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 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 dismissed their lawsuits
with prejudice.
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 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 is 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.
14
The Company recorded all amounts related to the Argonaut and securities
class action settlements in its fiscal 1995 results of operations.
AMORTIZATION OF OTHER ASSETS. Amortization of intangible assets resulted in
charges of $742,000, $451,000, and $749,000 in fiscal 1997, 1996 and 1995,
respectively. These charges related to the purchase of the Company in 1988 and
its subsequent acquisitions of other products and companies. Amortization
amounts declined from fiscal 1995 to 1996 as related balances have become fully
amortized; the amount increased in fiscal 1997 due to the purchase of Ross
System's Spanish distributor in December 1996.
RESTRUCTURING CHARGES. During the second quarter of fiscal 1994, the
Company accrued $1,936,000 in restructuring costs associated with its planned
reduction of staffing levels and to eliminate excess facilities resulting from
the personnel reductions.
During fiscal 1995, the reserve for restructuring charges was reduced to
$496,000 as a result of the following: Costs associated with the termination of
32 employees ($353,000), the elimination of excess facilities ($154,000), and a
re-estimation of the reserve which lowered the balance of the reserve by an
additional $345,000.
During fiscal 1996, the reserve was reduced to $94,000 as a result of the
cost of a lease termination in Bristol, England and continued lease payments for
the Waltham, MA facility. By February 1997, the entire reserve balance was
reversed as a result of the remaining lease payments on the Waltham facility.
OTHER INCOME AND EXPENSE. Fiscal 1997 and 1996 other income is composed
largely of interest income of $110,000 and $86,000, respectively; 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 1997 interest income increased from
1996 as a result of an increase in cash available for investment. Fiscal 1996
interest income decreased from 1995 as a result of the Company having less
available cash to invest in interest bearing investments. Interest expense
decreased from fiscal 1996 to 1997 due to lower average debt balances during the
year and a general decline in interest rates. Interest expense increased 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 $809,000 during
fiscal 1997. This expense relates to foreign withholding taxes expensed during
the year ($722,000), and accruals for other state taxes payable ($87,000). At
June 30, 1997, the Company had net income taxes payable of $199,000, which
related primarily to the aforementioned foreign withholding taxes. The Company
anticipates recording significant future foreign withholding tax expenses
related to the aforementioned Japanese distributorship agreement, representing
10% of future annual royalty payments from this agreement. The Company recorded
income tax expense of $142,000 during fiscal 1996. This expense relates to
foreign withholding taxes paid during the year ($133,000) and accruals for other
state taxes payable ($9,000). At June 30, 1996, the Company had income taxes
recoverable of approximately $670,000, which related to tax prepayments and net
operating losses which had 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. At June
30, 1997, the Company had net operating loss carryforwards of approximately
$42,900,000, $13,900,000, and $11,600,000 for federal, California and foreign
tax purposes, respectively. These carryforwards, if not utilized, will expire
between fiscal 1998 and 2012, with the majority expiring in 2009 and 2010.
LIQUIDITY AND CAPITAL RESOURCES
While the Company required $10,293,000 for investing activities (primarily
capitalized software costs), the Company financed its continuing operations for
the fiscal year ended June 30, 1997 through cash generated from operations and
funds received in private equity financings and available credit facilities.
15
The increased age of the Company's accounts receivable is primarily attributable
to the longer contract terms that are necessitated by the larger sales contracts
that have been entered into during the year.
In March 1997, the Company amended its existing revolving credit facility.
The effects of this amendment included increasing the Company's maximum credit
line from $10,000,000 to $15,000,000, extending the facility's maturity date
from October 31, 1997 to October 31, 2000 and changing the interest rate from
the Prime Rate plus 1/2% to the Prime Rate plus 2%. At June 30, 1997, the
Company had $4,010,000 of cash and cash equivalents and $11,657,000 outstanding
against the $15,000,000 revolving credit facility. Borrowings under the credit
facility are collateralized by substantially all assets of the Company.
On December 29, 1995, the Company entered into a Subscription Agreement (the
"Agreement") with a foreign institutional investor pursuant to which the
investor purchased 500,000 shares of the Company's Series A Preferred Stock for
an aggregate purchase price of $2,000,000. In connection with this transaction,
the investor granted the Company options (the "Options") to require the investor
to purchase shares of the Company's Preferred Stock with an aggregate value of
$4,000,000 during the period from and including July 1, 1996 through and
including December 30, 1998. The Company created and reserved 500,000 shares of
its Series B 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.
Pursuant to the Agreement, the Company exercised its first Option on July 8,
1996. Concurrently, the investor also agreed to invest an additional $2,000,000
under terms similar to those in the Agreement. In exchange for the additional
investment, the Company granted the investor a warrant for an additional 640,000
shares of the Company's Common Stock. This warrant is exercisable during the
period from and including July 1, 1997 through and including December 29, 2000,
and will be exercisable at a maximum price of $8.00 per share. The gross
proceeds from the July 1996 transactions were $4,000,000. The Company exercised
its final Option to require the investor to invest $2,000,000 on January 6, 1997
when the investor purchased 200 shares of the Company's newly created Series E
Redeemable Preferred Stock.
On October 8, 1996 the investor converted all 500,000 shares of their Series
B Preferred Stock into 374,650 shares of the Company's Common Stock; the
conversion price was approximately $5.34 per share. On October 24, 1996 the
investor converted all 500,000 shares of their Series C Preferred Stock into
359,800 shares of the Company's Common Stock; the conversion price was
approximately $5.56 per share. On June 10, 1997 the investor converted 93 shares
of their Series E Redeemable Preferred Stock into 345,339 shares of the
Company's Common Stock; the conversion price was approximately $2.69 per share.
As of June 30, 1997, the investor holds 107 shares of the Company's Series E
Redeemable Preferred Stock. Unless converted earlier, this stock is mandatorily
redeemable by the Company on January 6, 2000 or earlier if certain conditions of
the Agreement are met.
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 line of credit facility, and the
funds received from the private equity financing described above. The Company is
also 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.
ITEM 7.A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
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 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 KPMG Peat Marwick LLP 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, 1997 are as
follows:
NAME AGE POSITION
- ----------------------------------------------------- --- -----------------------------------------------------
Dennis V. Vohs....................................... 53 Chairman of the Board and Chief Executive Officer
J. Patrick Tinley.................................... 49 President, Chief Operating Officer and Director
Joseph L. Southworth................................. 47 Executive Vice President, Product Development and
Support
Donald F. Campbell................................... 46 Vice President, Worldwide Marketing
O. Kent LaRoque III.................................. 52 Vice President, Professional Services
Peter Van Houten..................................... 44 Vice President, North American Sales
James A. Watts....................................... 55 Vice President, Finance and Administration,
Chief Financial Officer and Secretary
Stan F. Stoudenmire (1).............................. 45 Vice President, Finance and Administration, Chief
Financial Officer and Secretary
- ------------------------
(1) In July 1997, Mr. Watts was replaced as Vice President, Finance and
Administration, Chief Financial Officer and Secretary by Mr. Stoudenmire.
The executive officers are elected by and serve at the discretion of the
Board of Directors. There are no family relationships among the executive
officers of the Company.
Section 16(a) of the Securities Exchange Act of 1934 requires the Company's
executive officers and directors to file initial reports of share ownership and
report changes in ownership with the Securities and Exchange Commission (the
"SEC"). Such persons are required by SEC regulations to furnish the Company with
copies of all Section 16(a) forms filed by such persons.
Based solely on the Company's review of such forms furnished to the Company
and written representations from certain reporting persons, the Company believes
that all filing requirements applicable to the Company's executive officers and
directors were complied with.
Mr. Vohs has served as Chairman of the Board and Chief Executive Officer of
the Company since November 1988.
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. Southworth has served as the Company's Senior Vice President,
Development and Support since May 1996. Prior to that time, Mr. Southworth
served as Vice President, Advanced Technology Consulting
18
from September 1994 to May 1996. For the period April 1989 to September 1994,
Mr. Southworth served as Vice President, Worldwide Marketing. From May 1996
through May 1997 Mr. Southworth also served as Vice President, Consulting
Services.
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 Combat Corporation from August 1989 to
April 1994. From April 1994 to November 1994, Mr. Campbell was an independent
consultant.
Mr. LaRoque joined the Company in June 1997 as Vice President, Professional
Services. Prior to joining the Company, Mr. LaRoque served as Vice President of
Professional Services at Software 2000, Inc. from April 1991 to May 1993; Vice
President and later President of Symix Systems, Inc. from May 1993 to May 1995;
and more recently served as CEO of Foresight Software, Inc. from June 1995 to
December 1996.
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. 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.
Mr. Stoudenmire joined the Company in July 1997 as Vice President, Finance
and Administration, Chief Financial Officer and Secretary, replacing Mr. Watts.
Prior to joining the Company, Mr. Stoudenmire served, since April 1991, as Vice
President and Corporate Controller of Policy Management Systems Corporation, a
South Carolina based software company specializing in products for the insurance
industry.
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 1997 Report of Coopers & Lybrand L.L.P., Independent Accountants................ F-1
Fiscal 1996 Report of KPMG, Independent Accountants.................................... F-2
Fiscal 1995 Report of KPMG Peat Marwick LLP, Independent Accountants................... F-3
Consolidated Balance Sheets--June 30, 1997 and 1996.................................... F-4
Consolidated Statements of Operations - Years Ended June 30, 1997, 1996, and 1995...... F-5
Consolidated Statements of Cash Flows - Years Ended June 30, 1997, 1996, and 1995...... F-6
Consolidated Statements of Shareholders' Equity - Years Ended June 30, 1997, 1996, and
1995................................................................................. 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, 1997, 1996, and 1995
is filed as part of this Report and should be read in conjunction with
the Consolidated Financial Statements of Ross Systems, Inc.
SCHEDULE PAGE
- ------------- ---------
II Valuation and Qualifying Accounts........................................... S-1
Schedules not listed above have been omitted because they are not applicable
or are not required, or the information required to be set forth therein is
included in the Consolidated Financial Statements or Notes thereto.
3. EXHIBITS. The Exhibits listed on the accompanying Index to Exhibits
immediately following the financial statement schedules are filed as part
of, or incorporated by reference into, this Report.
(b) REPORTS ON FORM 8-K.
The Company did not file any Reports of Form 8-K during the fourth quarter
of fiscal 1997.
On August 19, 1997 the Company filed a report on Form 8-K which reported
under Item 5, that the Company issued a press release announcing the preliminary
results for the fourth quarter and fiscal year ended June 30, 1997.
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
Atlanta, State of Georgia, on the 25th day of September, 1997.
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 Sep. 25, 1997
Dennis V. Vohs (Principal
Executive Officer)
Vice President, Finance and
Administration, Chief
/s/ STAN F. STOUDENMIRE Financial
- ------------------------------ Officer (Principal Sep. 25, 1997
Stan F. Stoudenmire Financial and
Accounting Officer) and
Secretary
/s/ MARIO M. ROSATI
- ------------------------------ Director Sep. 25, 1997
Mario M. Rosati
/s/ BRUCE J. RYAN
- ------------------------------ Director Sep. 25, 1997
Bruce J. Ryan
/s/ J. PATRICK TINLEY
- ------------------------------ President, Chief Operating Sep. 25, 1997
J. Patrick Tinley Officer and Director
21
ROSS SYSTEMS, INC.
ANNUAL REPORT ON FORM 10-K
YEAR ENDED JUNE 30, 1997
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)
3.4 Certificate of Determination of Rights, Preferences and Privileges of Series E Preferred Stock of Ross
Systems, Inc. (4)
10.1 Subscription Agreement dated December 29, 1995 between Registrant and Fletcher International Limited (5)
10.2 Subscription Agreement dated June 28, 1996 between Registrant and Fletcher International Limited (6)
10.3 Amendment No. 1 dated July 8, 1996 to the December 29, 1995 Subscription Agreement and the June 28, 1996
Subscription Agreement between Registrant and Fletcher International Limited (6)
10.4 Amendment No. 2 dated June 10, 1997 to the December 29, 1995 Subscription Agreement and the June 28, 1996
Subscription Agreement between Registrant and Fletcher International Limited
11.1 Statement regarding Computation of Per Share Earnings
21.1 Listing of Subsidiaries of Registrant
23.1 Consent of Coopers & Lybrand LLP
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 by the Registrant's Current Report on Form 8-K
dated February 13, 1996; and as amended by the exhibit attached to this Form
10-K.
(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.
22
(4) Incorporated by reference to the exhibit filed with the Registrant's
Quarterly Report on Form 10-Q for the period ended December 31, 1996 filed
February 13, 1997.
(5) Incorporated by reference to the exhibit filed with the Registrant's
Quarterly Report on Form 10-Q for the period ended December 31, 1995 filed
February 14, 1996.
(6) Incorporated by reference to the exhibit filed with the Registrant's
Quarterly Report on Form 10-Q for the period ended September 30, 1996 filed
November 8, 1996.
23
REPORT OF COOPERS & LYBRAND L.L.P., INDEPENDENT ACCOUNTANTS
The Board of Directors and Shareholders
Ross Systems, Inc.:
We have audited the consolidated balance sheets of Ross Systems, Inc. and
subsidiaries (the "Company") as of June 30, 1997 and 1996, and the related
consolidated statements of operations, shareholders' equity and cash flows for
the years then ended. In connection with our audits of the consolidated
financial statements, we also have audited the financial statement schedules for
the years ended June 30, 1997 and 1996. These consolidated financial statements
and financial statement schedules are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements and financial statement schedules based on our audits. We
did not audit the combined balance sheets of Ross Systems (UK) Ltd., Ross
Systems France S.A., Ross Systems Deutschland GmbH, Ross Systems Europe N.V.,
and Ross Systems Nederland B.V. (the "foreign entities"), wholly-owned
subsidiaries of the Company, as of June 30, 1996 and the related combined
statements of operations and shareholders' equity for the year then ended, which
statement reflects total assets and revenues constituting 22 percent and 29
percent, respectively, of the related consolidated totals. We also did not audit
the combined foreign entities' financial statement schedule for the year ended
June 30, 1996. Those combined financial statements and financial statement
schedule were audited by other auditors whose report has been furnished to us,
and our opinion, insofar as it relates to the amounts included for the foreign
entities is based solely on the report of the other auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits and the report of the other auditors provide a
reasonable basis for our opinion.
In our opinion, based on our audits and the report of the other auditors,
the consolidated financial statements referred to above present fairly, in all
material respects, the consolidated financial position of Ross Systems, Inc. and
subsidiaries as of June 30, 1997 and 1996, and the results of its operations and
its cash flows for the years then ended in conformity with generally accepted
accounting principles. Also in our opinion, based on our audits and the report
of the other auditors, the related financial statement schedules, when
considered in relation to the basic consolidated financial statements taken as a
whole, presents fairly, in all material respects, the information set forth
therein.
COOPERS & LYBRAND L.L.P.
Atlanta, Georgia
August 21, 1997
F-1
FISCAL 1996 REPORT OF KPMG, INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders
Ross Systems, Inc.:
We have audited the combined balance sheet of Ross Systems (UK) Ltd., Ross
Systems France S.A., Ross Systems Deutschland GmbH, Ross Systems Europe N.V.,
and Ross Systems Nederland B.V. (the "foreign entities") as of June 30, 1996 and
the related combined statements of operations and shareholders' equity for the
year then ended (not presented separately herein). In connection with our audit
of the combined foreign entities' financial statements, we also have audited the
combined foreign entities' financial statement schedule for the year ended June
30, 1996. These combined financial statements and financial statement schedule
are the responsibility of Ross Systems Inc.'s (the "Company") management. Our
responsibility is to express an opinion on these combined financial statements
and financial statement schedule based on our audit.
We conducted our audit in accordance with United States generally accepted
auditing standards. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the overall accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
The Company declined to present a statement of cash flows for the year ended
June 30, 1996. Presentation of such statement summarizing the Company's
operating, investing and financing activities is required by generally accepted
accounting principles.
In our opinion, except that the omission of a statement of cash flows
results in an incomplete presentation as explained in the preceding paragraph,
the combined financial statements referred to above present fairly, in all
material respects, the combined financial position of Ross Systems (UK) Ltd.,
Ross Systems France S.A., Ross Systems Deutschland GmbH, Ross Systems Europe
N.V., and Ross Systems Nederland B.V. as of June 30, 1996, and the results
combined of operations for the year then ended, in conformity with United States
generally accepted accounting principles. Also in our opinion, the related
financial statement schedule, when considered in relation to the basic combined
financial statements taken as a whole, presents fairly, in all material
respects, the information set forth therein.
KPMG
Bristol, United Kingdom
September 26, 1996
F-2
FISCAL 1995 REPORT OF KPMG PEAT MARWICK LLP, INDEPENDENT ACCOUNTANTS
The Board of Directors and Shareholders
Ross Systems, Inc.:
We have audited the consolidated statement of operations, shareholders'
equity and cash flows for the year ended June 30, 1995. In connection with our
audit of the consolidated financial statements, we also have audited the
financial statement schedule for the year ended June 30, 1995. 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 conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated results of operations
and cash flows of Ross Systems, Inc. and subsidiaries for the year 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 14, which
is as of September 18, 1996
F-3
ROSS SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
JUNE 30,
----------------------
1997 1996
---------- ----------
ASSETS
Current assets:
Cash and cash equivalents............................................................... $ 4,010 $ 1,862
Accounts receivable, less allowance for doubtful accounts and returns of $3,495 and
$2,634, respectively.................................................................. 31,700 26,430
Prepaids and other current assets....................................................... 2,225 1,724
Income taxes recoverable................................................................ -- 670
---------- ----------
Total current assets.................................................................. 37,935 30,686
Property and equipment.................................................................... 4,540 4,022
Computer software costs................................................................... 21,666 19,845
Other assets.............................................................................. 5,574 3,496
---------- ----------
$ 69,715 $ 58,049
---------- ----------
---------- ----------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current installments of debt............................................................ $ 12,310 $ 8,743
Accounts payable........................................................................ 9,188 5,406
Accrued expenses........................................................................ 8,393 7,853
Income taxes payable.................................................................... 199 --
Deferred revenues....................................................................... 16,118 17,219
---------- ----------
Total current liabilities............................................................. 46,208 39,221
Long-term debt, less current installments................................................. 394 36
---------- ----------
Total liabilities..................................................................... 46,602 39,257
---------- ----------
Commitments and contingencies (Note7)
Redeemable preferred stock................................................................ 1,053 --
---------- ----------
Shareholders' equity:
Common stock, no par value; authorized 35,000,000 shares; issued and outstanding
19,245,000 and 17,847,000, respectively............................................... 73,756 67,435
Accumulated deficit..................................................................... (50,340) (47,987)
Cumulative translation adjustment....................................................... (1,356) (656)
---------- ----------
Total shareholders' equity............................................................ 22,060 18,792
---------- ----------
$ 69,715 $ 58,049
---------- ----------
---------- ----------
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,
--------------------------------
1997 1996 1995
--------- --------- ----------
Revenues:
Software product licenses..................................................... $ 30,549 $ 25,440 $ 25,261
Consulting and other services................................................. 22,818 19,239 22,039
Maintenance................................................................... 25,406 25,110 25,170
--------- --------- ----------
78,773 69,789 72,470
--------- --------- ----------
Operating expenses:
Costs of software product licenses............................................ 2,905 1,757 1,416
Costs of consulting, maintenance and other services........................... 28,511 25,769 27,823
Software product license sales and marketing.................................. 23,410 21,230 27,157
Product development........................................................... 11,628 12,472 12,034
General and administrative.................................................... 8,050 7,258 7,568
Provision for uncollectible accounts.......................................... 3,534 1,029 2,401
Provision for litigation claim................................................ 615 0 9,154
Amortization of other assets.................................................. 742 451 749
Restructuring charges......................................................... (345)
--------- --------- ----------
79,395 69,966 87,957
--------- --------- ----------
Operating loss.............................................................. (622) (177) (15,487)
Other income (expense):
Other income.................................................................. 110 86 888
Interest expense.............................................................. (1,032) (1,308) (1,021)
--------- --------- ----------
Loss before income taxes.................................................... (1,544) (1,399) (15,620)
Income tax (benefit) expense.................................................... 809 142 (92)
--------- --------- ----------
Net loss.................................................................... $ (2,353) $ (1,541) $ (15,528)
--------- --------- ----------
--------- --------- ----------
Net loss per common share....................................................... $ (0.13) $ (0.10) $ (1.28)
--------- --------- ----------
--------- --------- ----------
Shares used in per share computation............................................ 18,515 15,089 12,105
--------- --------- ----------
--------- --------- ----------
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,
---------------------------------
1997 1996 1995
---------- --------- ----------
Cash flows from operating activities:
Net loss...................................................................... $ (2,353) $ (1,541) $ (15,528)
Adjustments to reconcile net loss to net cash (used for) provided by operating
activities:
Restructuring charges....................................................... -- -- (345)
Litigation settlements and expenses......................................... 615 -- 9,154
Depreciation and amortization of property and equipment..................... 2,220 2,401 2,371
Amortization of computer software costs..................................... 7,112 5,935 4,284
Amortization of other assets................................................ 742 451 749
Provision for uncollectible accounts........................................ 3,534 1,029 2,401
Changes in operating assets and liabilities, net of acquisition:
Accounts receivable....................................................... (8,306) (7,034) 3,157
Prepaids and other current assets......................................... (624) 320 (468)
Income taxes recoverable / payable........................................ 582 430 (443)
Accounts payable.......................................................... 2,025 (1,797) (716)
Accrued expenses.......................................................... (677) (4,855) (2,340)
Deferred revenues......................................................... (1,638) 1,680 (2,451)
Other, net.................................................................. (13) -- (755)
---------- --------- ----------
Net cash provided by (used for) operating activities.................... 3,219 (2,981) (930)
---------- --------- ----------
Cash flows from investing activities:
Purchases of property and equipment........................................... (1,677) (1,480) (1,072)
Computer software costs capitalized........................................... (8,879) (8,253) (8,325)
Acquisitions and divestitures................................................. (48) 220 1,980
Other......................................................................... 311 75 (50)
---------- --------- ----------
Net cash used for investing activities.................................. (10,293) (9,438) (7,467)
---------- --------- ----------
Cash flows from financing activities:
Net line of credit activity................................................... 3,381 4,162 (4,060)
Capital lease payments........................................................ (58) (585) (647)
Proceeds from issuance of common stock........................................ 254 601 703
Proceeds from private equity financings, net.................................. 5,720 6,395 11,279
---------- --------- ----------
Net cash provided by financing activities............................... 9,297 10,573 7,275
---------- --------- ----------
Effect of exchange rate changes on cash......................................... (75) 80 (66)
---------- --------- ----------
Net increase (decrease) in cash and cash equivalents............................ 2,148 (1,766) (1,188)
Cash and cash equivalents at beginning of period................................ 1,862 3,628 4,816
---------- --------- ----------
Cash and cash equivalents at end of period...................................... $ 4,010 $ 1,862 $ 3,628
---------- --------- ----------
---------- --------- ----------
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, 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 stock in private equity financings,
net.............................................. 2,651 6,395 -- -- 6,395
Issuance of stock pursuant to employee stock
purchase plan.................................... 76 204 -- 204
Effect of foreign currency translation............. -- -- -- (170) (170)
Net loss........................................... -- -- (1,541) -- (1,541)
--------- --------- ------------ ----------- ------------
Balances as of June 30, 1996....................... 17,847 $ 67,435 $ (47,987) $ (656) $ 18,792
Exercise of stock options.......................... 44 125 -- -- 125
Issuance of stock for purchase of distributor...... 217 1,297 -- -- 1,297
Issuance of stock in private equity financings,
net.............................................. 1,079 4,667 -- -- 4,667
Issuance of stock pursuant to employee stock
purchase plan.................................... 58 232 -- 232
Effect of foreign currency translation............. -- -- -- (700) (700)
Net loss........................................... -- -- (2,353) -- (2,353)
--------- --------- ------------ ----------- ------------
Balances as of June 30, 1997....................... 19,245 $ 73,756 $ (50,340) $ (1,356) $ 22,060
--------- --------- ------------ ----------- ------------
--------- --------- ------------ ----------- ------------
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
owed. 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
Goodwill..................................................................... 7 to 10 years
Other assets have generally resulted from business combinations accounted
for as purchases and are recorded at the lower of unamortized cost or fair
value. The Company annually reviews the carrying amounts of these assets for
indications of impairment, based on expected undiscounted cash flows related
F-8
ROSS SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(1) ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
to the acquired entities or products. Impairment of value, if any, is recognized
in the period it is determined.
(G) REVENUE RECOGNITION
The Company recognizes revenues from licenses of computer software provided
that a noncancelable license agreement has been signed, the software and related
documentation have been shipped, there are no material uncertainties regarding
customer acceptance, collection of the resulting receivable is deemed probable,
and no significant other vendor obligations exist. The revenue associated with
any license agreements containing cancellation or refund provisions is deferred
until such provisions lapse. Where the Company has future obligations, if such
obligations are insignificant, related costs are accrued immediately. When the
obligations are significant, the software product license revenues are deferred.
Future contractual obligations can include software customization, requirements
to provide additional products in the future and porting products to new
platforms. Contracts which require significant software customization are
accounted for on the percentage of completion basis. Revenues related to
significant obligations to provide future products or to port existing products
are deferred until the new products or ports are completed.
Service revenues generated from professional consulting and training
services are recognized as the services are performed. Maintenance revenues,
including revenues bundled with original software product license revenues, are
deferred and recognized over the related contract period, generally 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 product
life. Where future revenue streams are not expected to cover remaining amounts
to be amortized, the Company either accelerates amortization or expenses
remaining capitalized amounts. Amortization of such costs is computed on a
straight-line basis over the expected economic life of the product (not to
exceed five years). As of June 30, 1997 and 1996 capitalized computer software
costs approximated $47,191,000 and $38,629,000, respectively, and related
accumulated amortization totaled $25,525,000 and $18,784,000, 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 US 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 1996 and 1995 amounts have been reclassified to conform with the
1997 financial statement presentation.
(L) USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the dates of the financial
statements, and the reported amounts of revenues and expenses during the
reporting periods. Actual results could differ from these estimates.
(M) ADVERTISING COSTS
The Company generally expenses advertising costs as incurred. Advertising
costs for the fiscal years ended June 30, 1997, 1996 and 1995 were $1,617,494,
$905,953 and $1,166,342, respectively.
(N) NEW ACCOUNTING PRONOUNCEMENTS
In October 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 123, "ACCOUNTING FOR STOCK-BASED
COMPENSATION" ("Statement 123"). Statement 123 encourages, but does not require,
the recognition of expense for stock-based awards based on their fair value on
the date of grant. Upon adoption of Statement 123 on July 1, 1996, the Company
has continued to account for all employee stock-based compensation, including
stock options, using the "intrinsic value" method under 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)
(1) ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128, "EARNINGS PER SHARE" ("Statement
128") and Statement of Financial Accounting Standards No. 129, "DISCLOSURE OF
INFORMATION ABOUT CAPITAL STRUCTURE" ("Statement 129"). Statement 128 specifies
the computation, presentation and disclosure requirements for Earnings Per Share
("EPS"), and is designed to improve the EPS information provided in financial
statements by simplifying the existing computational guidelines, revising the
disclosure requirements, and increasing the comparability of EPS data on an
international basis. The Company has determined that the adoption of Statement
128 would have no effect on the net loss per common share for the years ended
June 30, 1997, 1996 and 1995. Statement 129 consolidates the existing
requirements to disclose certain information about an entity's capital structure
and is not expected to change the Company's current capital structure
disclosures. Statements 128 and 129 are required to be implemented no later than
the Company's fiscal year 1998.
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131 DISCLOSURES ABOUT SEGMENTS OF AN
ENTERPRISE AND RELATED INFORMATION. This Statement requires that a public
business enterprise report financial and descriptive information about its
reportable operating segments. Generally, financial information is required to
be reported on the basis that it is used internally for evaluating segment
performance and deciding how to allocate resources to segments. The Company has
not yet determined the impact of Statement of Financial Accounting Standards No.
131 on its future financial statement disclosures.
(2) ACQUISITIONS AND DIVESTITURES
On December 30, 1996, the Company acquired a 100% ownership interest in Ross
Iberica, its distributor in Spain and Portugal for the past five years, in
exchange for shares of the Company's common stock valued at approximately
$1,400,000. The acquisition was accounted for as a purchase and, accordingly,
the results of operations of the acquired business have been included in the
Company's results of operations since the date of acquisition. The pro forma
effects on total revenues, net earnings, and net earnings per share of including
this subsidiary in the Company's Consolidated Statement of Operations are not
significant.
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, 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
F-11
ROSS SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(2) ACQUISITIONS AND DIVESTITURES (CONTINUED)
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 dismissed their lawsuits with prejudice. 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,
----------------------
1997 1996
---------- ----------
(IN THOUSANDS)
Computer equipment........................................................................ $ 13,186 $ 11,506
Furniture and fixtures.................................................................... 3,833 3,667
Leasehold improvements.................................................................... 1,935 1,729
---------- ----------
18,954 16,902
Less accumulated depreciation and amortization............................................ (14,414) (12,880)
---------- ----------
$ 4,540 $ 4,022
---------- ----------
---------- ----------
(4) OTHER ASSETS
A summary of other assets follows:
JUNE 30,
--------------------
1997 1996
--------- ---------
(IN THOUSANDS)
Purchased computer software technology...................................................... $ 4,632 $ 3,328
Covenants not to compete.................................................................... 1,005 1,005
Goodwill.................................................................................... 5,393 3,851
Other....................................................................................... 2,236 1,861
--------- ---------
13,266 10,045
Less accumulated amortization............................................................... (7,692) (6,549)
--------- ---------
$ 5,574 $ 3,496
--------- ---------
--------- ---------
The amount of goodwill recorded for the aforementioned Ross Iberica purchase
was approximately $1,541,000 and is being amortized over seven years.
F-12
ROSS SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(4) OTHER ASSETS (CONTINUED)
During fiscal 1996, the Company settled certain of its accounts receivable
from a former distributor by way of assignment of the former distributor's
customer base. The total amount capitalized was approximately $749,000 and is
being amortized over three years.
(5) ACCRUED EXPENSES
A summary of accrued expenses follows:
JUNE 30,
--------------------
1997 1996
--------- ---------
(IN THOUSANDS)
Accrued vacation and other employee benefits................................................... $ 1,075 $ 1,343
Accrued commissions............................................................................ 2,210 1,992
Deferred rent.................................................................................. 140 502
Sales and use taxes payable.................................................................... 1,210 1,483
Restructuring charges.......................................................................... -- 94
Customer settlements........................................................................... 360 214
Royalties...................................................................................... 1,574 843
Other.......................................................................................... 1,824 1,382
--------- ---------
$ 8,393 $ 7,853
--------- ---------
--------- ---------
During fiscal 1997, the Company settled a dispute with a customer with the
understanding that the settlement and related legal fees would be covered under
the Company's business insurance. The Company subsequently learned that the
insurer took exception to the Company's settlement with its customer and
withheld payment on the claim, pending arbitration. Although the Company is
currently arbitrating a settlement with the insurer, the Company has recorded a
charge of $615,000 to cover the potential settlement and legal fees.
(6) DEBT
The Company has a $15,000,000 revolving credit facility which is secured by
substantially all assets of the Company. The revolving credit facility expires
on October 31, 2000; carries an interest rate at the Prime rate plus 2% (10.5%
at June 30, 1997); 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, 1997 and 1996, $11,657,000 and
$8,605,000 were outstanding under the Company's revolving credit facilities,
respectively.
As of June 30, 1997 and 1996, the Company had outstanding capital lease
obligations aggregating $44,000 and $174,000, respectively.
(7) COMMITMENTS AND CONTINGENCIES
During fiscal 1995, the Company settled two significant lawsuits. The first
suit was filed on December 30, 1992 in the Superior Court for Santa Clara County
in California, by Argonaut (see Note 2
F-13
ROSS SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(7) COMMITMENTS AND CONTINGENCIES (CONTINUED)
"Acquisitions and Divestitures"). At June 30, 1995, the Company accrued $4.8
million 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.
No amounts related to either of the above matters have been recorded in the
Company's Statement of Operations for fiscal 1996.
The Company leases facilities and certain equipment under operating leases
which expire at various dates through fiscal 2016. Certain leases include
renewal options and rental escalation clauses to reflect changes in price
indices, real estate taxes, and maintenance costs. As of June 30, 1997, future
minimum lease payments under noncancelable operating leases were as follows (in
thousands):
FISCAL YEAR
- -----------------------------------------------------------------------------------
1998............................................................................... $ 4,284
1999............................................................................... 4,032
2000............................................................................... 3,306
2001............................................................................... 2,441
2002............................................................................... 1,726
Thereafter......................................................................... 2,996
---------
Total future minimum lease payments................................................ $ 18,785
---------
---------
The Company's lease for certain equipment, representing $717,000 of the
total future lease payments, contains a financial covenant requiring it to
achieve a minimum level of earnings after taxes for the fiscal year ended June
30, 1997. Breech of this covenant is considered an event of default under the
lease. Although the Company did not achieve this minimum earnings requirement
for fiscal 1997, the lessor has agreed to accept a Letter of Credit on behalf of
the Company to waive this covenant requirement.
Rent expense approximated $3,084,000, $3,225,000, and $5,063,000 for fiscal
1997, 1996 and 1995, respectively. Included in fiscal 1997 rent expense is
income from certain noncancelable subleases of approximately $905,000.
As of June 30, 1997, future sublease income to be received is as follows (in
thousands):
FISCAL YEAR
- --------------------------------------------------------------------------------------
1998.................................................................................. $ 190
1999.................................................................................. 190
2000.................................................................................. 71
---------
Total future sublease income.......................................................... $ 451
---------
---------
F-14
ROSS SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(8) CAPITAL STOCK
(A) REDEEMABLE PREFERRED STOCK
In fiscal 1991, the Company authorized a new class of no par value preferred
stock consisting of 5,000,000 shares. The Board of Directors is authorized to
issue the preferred stock in one or more series and to fix the rights,
preferences, privileges and restrictions of such stock, including dividend
rights, dividend rates, conversion rights, voting rights, terms of redemption,
redemption prices, liquidation preferences and the number of shares constituting
any series or the designation of such series, without further vote or action by
the shareholders. As of June 30, 1997, the Company had issued, converted and
retired 1,500,593 shares of Preferred Stock. In addition, under a December 29,
1995 subscription agreement between the Company and an investor, which was
subsequently amended on June 28, 1996 and June 10, 1997, the Company has 107
shares of its Series E Redeemable Convertible Preferred Stock outstanding at
June 30, 1997. Unless converted earlier, this stock is mandatorily redeemable by
the Company, for $10,000 per share plus 2% per annum, on January 6, 2000 or
earlier if certain conditions of the Agreement are met.
(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, 1997.
(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.
During fiscal 1997, the Company completed two additional private placements
of equity securities with the same investor who had purchased and converted the
Company's Series A Preferred Stock. On July 8, 1996 the Company received
approximately $3,737,000 in cash proceeds net of offering expenses, for the
issuance of 500,000 shares of the Company's Series B Convertible Preferred Stock
and 500,000 shares of the Company's Series C Convertible Preferred Stock.
Additionally, on January 6, 1997 the Company received approximately $1,983,000
in cash proceeds net of offering expenses, for the issuance of 200 shares of the
Company's aforementioned Series E Redeemable Convertible Preferred Stock. As of
June 30, 1997, 107 shares of the Company's Series E Redeemable Convertible
Preferred Stock remains outstanding.
(D) WARRANTS
In connection with the issuance of the Company's Series A Preferred Stock
and the subsequent issuances of the Company's Series B and Series C Preferred
Stock, the Company granted a warrant to the "investor" to purchase 400,000
shares of the Company's Common Stock at an exercise price of $5.576 per share
during the period from and including July, 1, 1997 through and including
December 29, 2000. Additionally, in connection with the subsequent issuance of
the Company's Series E Preferred Stock, the Company granted another warrant to
the "investor" to purchase 640,000 shares of the Company's Common Stock at a
maximum exercise price of $8.00 per share during the period from and including
July, 1, 1997 through and including December 29, 2000.
F-15
ROSS SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(9) EMPLOYEE STOCK PLANS
At June 30, 1997, the Company has three stock-based compensation plans,
which are described below. The Company applies APB 25 and related
Interpretations in accounting for its plans. Accordingly, no compensation cost
has been recognized for its Stock Option Plan and its Stock Purchase Plan. There
has been no activity in its Other Employee Plan. Had compensation cost for the
Company's Stock Option and Stock Purchase Plans been determined based on the
fair value at the grant dates for awards under those plans consistent with the
method of Statement 123, the Company's net loss and net loss per share would
have been the pro forma amounts indicated below (in thousands, except per share
data):
YEAR ENDED JUNE 30,
--------------------
1997 1996
--------- ---------
Net loss:
As reported.............................................................. $ 2,353 $ 1,541
Pro forma................................................................ $ 4,414 $ 3,634
Net loss per share:
As reported.............................................................. $ 0.13 $ 0.10
Pro forma................................................................ $ 0.24 $ 0.24
For purposes of computing the pro forma amounts above, the Black-Scholes
option pricing model was used. The assumptions used in this model are disclosed
for the individual plans below.
(A) STOCK OPTION PLAN
The Company has reserved 2,100,000 shares of common stock for issuance under
its 1988 Incentive Stock Plan (the "Plan"). Under the Plan, the Company may
issue options to purchase shares of the Company's common stock to eligible
employees, officers, directors, independent contractors and consultants. The
term of the options issued under the Plan cannot exceed ten years from the date
of grant. Options granted to date generally become exercisable over four to five
years based on the grantees continued service with the Company.
F-16
ROSS SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(9) EMPLOYEE STOCK PLANS (CONTINUED)
A summary of the status of the Company's Plan as of June 30, 1997, 1996 and
1995 and activity for the fiscal years then ended is presented below:
WEIGHTED
NUMBER OF AVERAGE
SHARES EXERCISE PRICE EXERCISABLE
----------- --------------- -----------
Balance as of June 30, 1994 1,058,000 $ 7.35
Granted (at fair value) 1,326,000 $ 3.84
Exercised (105,000) $ 3.47
Canceled (1,245,000) $ 6.80
-----------
Balance as of June 30, 1995 1,034,000 $ 4.06 344,000
-----------
-----------
Granted (at fair value) 703,000 $ 4.81
Exercised (128,000) $ 3.09
Canceled (360,000) $ 4.58
-----------
Balance as of June 30, 1996 1,249,000 $ 4.43 421,000
-----------
-----------
Granted (at fair value) 584,000 $ 5.62
Exercised (44,000) $ 3.47
Canceled (239,000) $ 4.56
-----------
Balance as of June 30, 1997 1,550,000 $ 4.88 620,000
----------- -----------
----------- -----------
The weighted average estimated fair value of options granted during fiscal
1997 and 1996 was $3.38 and $2.86, respectively.
The following table summarizes information about the stock options
outstanding at June 30, 1997:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
- ----------------------------------------------------------------------- ------------------------
WEIGHTED AVERAGE WEIGHTED WEIGHTED
REMAINING AVERAGE AVERAGE
RANGE OF SHARES CONTRACTUAL EXERCISE SHARES EXERCISE
EXERCISE PRICES OUTSTANDING LIFE PRICE EXERCISABLE PRICE
- --------------------------- ----------- ---------------- ----------- ----------- -----------
$2.75--$2.81............... 130,000 8.1 years $ 2.79 48,000 $ 2.78
$3.63--$3.63............... 463,000 7.1 years 3.63 377,000 3.63
$3.81--$5.50............... 544,000 8.7 years 5.01 88,000 4.89
$5.88--$12.13.............. 413,000 8.0 years 6.77 107,000 7.55
----------- -------- ----- ----------- -----
Totals..................... 1,550,000 8.0 years $ 4.88 620,000 $ 4.41
----------- -------- ----- ----------- -----
----------- -------- ----- ----------- -----
F-17
ROSS SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(9) EMPLOYEE STOCK PLANS (CONTINUED)
The following weighted average assumptions for the Company's Stock Option
Plan were used to determine the pro forma amounts noted above:
YEAR ENDED JUNE 30,
----------------------
1997 1996
---------- ----------
Expected life......................................................... 3.9 years 3.8 years
Expected volatility................................................... 76.5% 76.5%
Risk-free interest rate............................................... 6.2% 5.8%
Expected dividend yield............................................... * *
- ------------------------
* Not applicable
(B) EMPLOYEE STOCK PURCHASE PLAN
The Company has reserved 650,000 shares of common stock for issuance under
its 1991 Employee Stock Purchase Plan ("ESPP"). Under the ESPP, the Company's
employees may purchase, through payroll deductions of 1% to 10% of compensation,
shares of common stock at a price per share that is the lesser of 85% of its
fair market value as of the beginning or end of the offering period. Under the
ESPP, the Company sold 57,803 shares, 75,907 shares and 94,461 shares to
employees in fiscal 1997, 1996 and 1995, respectively. The weighted average fair
value of those purchase rights granted in fiscal 1997 and 1996 was $1.52 and
$1.07, respectively. As of June 30, 1997, 499,827 shares had been issued under
the ESPP.
The following weighted average assumptions for the Company's ESPP were used
to determine the pro forma amounts noted above:
YEAR ENDED JUNE 30,
----------------------
1997 1996
---------- ----------
Expected life......................................................... 0.5 years 0.5 years
Expected volatility................................................... 76.5% 76.5%
Risk-free interest rate............................................... 5.7% 5.4%
Expected dividend yield............................................... * *
- ------------------------
* Not applicable
(C) OTHER EMPLOYEE PLAN
In June 1992, the Company reserved 200,000 shares of common stock for
issuance to certain employees as payment under compensation agreements. As of
June 30, 1997, 10,000 shares had been issued under the plan.
(10) INCOME TAXES
Earnings (losses) before income taxes include foreign earnings (losses)
before income taxes of approximately ($1,377,000), $4,100,000, and $4,900,000
for fiscal 1997, 1996 and 1995, respectively.
F-18
ROSS SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(10) INCOME TAXES (CONTINUED)
Income tax expense (benefit) for the years ended June 30, 1997, 1996 and
1995 consists of the following (in thousands):
1997 1996 1995
--------- --------- ---------
Current:
Federal.............................................................. $ -- $ -- $ --
Foreign.............................................................. 722 133 (112)
State................................................................ 87 9 20
--------- --------- ---
809 142 (92)
--------- --------- ---
Deferred:
Federal.............................................................. -- -- --
Foreign.............................................................. -- -- --
State................................................................ -- -- --
--------- --------- ---
-- -- --
--------- --------- ---
$ 809 $ 142 $ (92)
--------- --------- ---
--------- --------- ---
For the years ended June 30, 1997, 1996 and 1995, 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):
1997 1996 1995
--------- --------- ---------
Income tax (benefit) expense at statutory rate........................................ $ (525) $ (476) $ (5,311)
State income tax (benefit) expense, net of federal income tax benefit................. 58 9 20
Change in beginning of year valuation allowance....................................... (908) -- --
Losses for which no benefit is recognized............................................. 1,081 305 4,881
Rate differential related to foreign income and foreign tax withholdings.............. 951 133 --
Amortization of other assets.......................................................... 167 132 233
Other................................................................................. (15) 39 85
--------- --------- ---------
$ 809 $ 142 $ (92)
--------- --------- ---------
--------- --------- ---------
F-19
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, 1997
and 1996 were as follows (in thousands):
1997 1996
--------- ---------
Accruals and reserves.................................................... $ 1,597 $ 2,358
Net operating loss carryforward (federal)................................ 14,575 14,317
Net operating loss carryforward (state).................................. 1,293 1,155
Net operating loss carryforward (foreign)................................ 4,142 3,638
Foreign tax and research credit carryforwards............................ 2,802 2,421
--------- ---------
Total gross deferred tax assets........................................ 24,409 23,889
Less valuation allowance............................................... (14,069) (14,977)
--------- ---------
Net deferred tax assets................................................ 10,340 8,912
--------- ---------
Capitalized computer software costs...................................... (9,838) (8,271)
Undistributed earnings of DISC subsidiary................................ (308) (345)
Fixed assets--depreciation differences................................... (194) (296)
--------- ---------
Total gross deferred liabilities....................................... (10,340) (8,912)
--------- ---------
Net deferred taxes....................................................... $ -- $ --
--------- ---------
--------- ---------
The net change in total valuation allowance for the year ended June 30, 1997
was a decrease of $908,000. The valuation allowance has been established to
recognize the uncertainty of utilizing loss and credit carryovers and certain
deferred assets.
At June 30, 1997, the Company had net operating loss carryforwards of
approximately $42,900,000, $13,900,000 and 11,600,000 for federal, California
and foreign tax purposes, respectively. At June 30, 1997, the Company also had
unused research and other credit carryforwards of approximately $300,000 and
$1,900,000 for federal and California tax purposes, respectively. The loss and
research credit carryforwards, if not utilized, will expire between fiscal 1998
and 2012.
The benefit from subsequent usage of approximately $1,466,000 of the loss
carryforwards attributable to stock option compensation will be allocated to
Common Stock.
(11) 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. At June 30, 1996, the remaining
restructuring reserve was approximately $94,000, and was included in accrued
expenses. At June 30, 1997 the reserve had been completely amortized.
F-20
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, 1997, 1996 and 1995
follow (in thousands):
1997 1996 1995
------- ------- --------
Sales to unaffiliated customers:
North America..................................................................................... $57,894 49,753 $ 49,478
Europe............................................................................................ 20,879 20,036 22,992
------- ------- --------
Total........................................................................................... $78,773 $69,789 $ 72,470
------- ------- --------
------- ------- --------
Operating earnings (loss):
North America..................................................................................... $ 732 $ 3,740 $(10,640)
Europe............................................................................................ (1,354) (3,917) (4,847)
------- ------- --------
Total........................................................................................... $ (622) $ (177) $(15,487)
------- ------- --------
------- ------- --------
Total assets:
North America..................................................................................... $53,617 $46,329 $ 41,442
Europe............................................................................................ 16,098 11,720 13,619
------- ------- --------
Total........................................................................................... $69,715 $58,049 $ 55,061
------- ------- --------
------- ------- --------
Export sales........................................................................................ $ 8,239 $ 7,334 $ 5,838
------- ------- --------
------- ------- --------
(13) SUPPLEMENTAL CASH FLOW INFORMATION
Supplemental cash flow information for the years ended June 30, 1997, 1996
and 1995 follows (in thousands):
1997 1996 1995
--------- --------- ---------
Cash payments:
Interest........................................................................... $ 1,013 $ 1,269 $ 1,048
Income taxes....................................................................... $ 435 $ 50 $ 944
Noncash investing and financing activities:
Conversion of preferred stock...................................................... $ 4,667 -- --
Product purchased in exchange for distribution agreement........................... $ 1,300 -- --
Issuance of stock for licensed technology.......................................... -- -- $ 1,000
Acquisition of equipment under capital lease obligations........................... $ 29 $ 308 $ 170
Sale of product line for note receivable........................................... -- -- $ 2,200
Issuance of stock in settlement of litigation...................................... -- $ 3,090 --
Issuance of stock for product/business acquisitions................................ $ 3,727 $ 1,495 --
Acquisition of distributor's customer base......................................... -- $ 759 --
In June 1997, the Company entered into a license agreement with a
distributor whereby the distributor received a license, valued at $1.3 million,
to distribute the Company's Renaissance CS product. The Company recognized this
revenue in June 1997. Simultaneously, the Company received certain software
products and components from this distributor in exchange for the aforementioned
license agreement. The value of the license agreement was ascribed to the assets
received in this non-monetary
F-21
ROSS SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(13) SUPPLEMENTAL CASH FLOW INFORMATION (CONTINUED)
transaction. These assets are included in capitalized software costs and are
being amortized over four years.
(14) RESTATEMENT OF DEFERRED REVENUES
During fiscal 1996, the Company determined that its accounting process for
recognizing renewable maintenance credits issued resulted in an understatement
of its deferred revenue balances in prior years. Accordingly, the Company
restated its deferred revenues and accumulated deficit balances for all prior
periods presented. These adjustments did not change the previously reported
results of operations for any prior periods presented.
(15) SELECTED UNAUDITED QUARTERLY INFORMATION
Selected unaudited quarterly financial information for the years ended June
30, 1997 and 1996 follows (in thousands, except per share data):
JUNE 30, MARCH 31, DEC. 31, SEPT. 30,
1997 1997 1996 1996
--------- ----------- --------- ---------
Total revenues....................................................... $ 23,132 $ 19,016 $ 18,555 $ 18,070
Operating earnings (loss)............................................ $ (2,001) $ (628) $ 1,100 $ 907
Net earnings (loss).................................................. $ (2,667) $ (989) $ 807 $ 496
Net earnings (loss) per common share................................. $ (0.14) $ (0.05) $ 0.04 $ 0.03
JUNE 30, MARCH 31, DEC. 31, SEPT. 30,
1996 1996 1995 1995
--------- ----------- --------- ---------
Total revenues....................................................... $ 20,180 $ 18,131 $ 16,989 $ 14,490
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)
(16) FOURTH QUARTER ADJUSTMENTS
During the fourth quarter of fiscal 1997, the Company recorded a provision
for doubtful accounts and returns of $2,015,000 which included $369,000 relating
to one customer. The remaining increase is due principally to increases in the
Company's general and specific reserves totaling approximately $1 million. The
Company also recorded a charge of $615,000 in the fourth quarter to cover the
potential settlement and related legal fees associated with a dispute with its
insurer. Additionally, the Company reduced its accrual for employee vacations by
$244,000, representing the net present value of the Company's liability at June
30, 1997.
F-22
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, 1997 allowance for doubtful
accounts and returns.......................... $ 2,634 $ 3,534 $ -- $ 2,673 $ 3,495
----------- ----------- ----- ------ ------
----------- ----------- ----- ------ ------
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
----------- ----------- ----- ------ ------
----------- ----------- ----- ------ ------
- ------------------------
(1) Represents net charge-offs of specific receivables.
S-1